[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2005]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.446-6]

[Page 80-81]
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.446-6  REMIC inducement fees.

    (a) Purpose. This section provides specific timing rules for the 
clear reflection of income from an inducement fee received in connection 
with becoming the holder of a noneconomic REMIC residual interest. An 
inducement fee must be included in income over a period reasonably 
related to the period during which the applicable REMIC is expected to 
generate taxable income or net loss allocable to the holder of the 
noneconomic residual interest.
    (b) Definitions. For purposes of this section:
    (1) Applicable REMIC. The applicable REMIC is the REMIC that issued 
the noneconomic residual interest with respect to which the inducement 
fee is paid.
    (2) Inducement fee. An inducement fee is the amount paid to induce a 
person to become the holder of a noneconomic residual interest in an 
applicable REMIC.
    (3) Noneconomic residual interest. A REMIC residual interest is a 
noneconomic residual interest if it is a noneconomic residual interest 
within the meaning of Sec. 1.860E-1(c)(2).
    (4) Remaining anticipated weighted average life. The remaining 
anticipated weighted average life is the anticipated weighted average 
life determined using the methodology set forth in Sec. 1.860E-
1(a)(3)(iv) applied as of the date of acquisition of the noneconomic 
residual interest.
    (5) REMIC. The term REMIC has the same meaning in this section as 
given in Sec. 1.860D-1.
    (c) General rule. All taxpayers, regardless of their overall method 
of accounting, must recognize an inducement fee over the remaining 
expected life of the applicable REMIC in a manner that reasonably 
reflects, without regard to this paragraph, the after-tax costs and 
benefits of holding that noneconomic residual interest.
    (d) Special rule on disposition of a residual interest. If any 
portion of an inducement fee received with respect to becoming the 
holder of a noneconomic residual interest in an applicable REMIC has not 
been recognized in full by the holder as of the time the holder 
transfers, or otherwise ceases to be the holder for Federal tax purposes 
of, that residual interest in the applicable REMIC, then the holder must 
include the unrecognized portion of the inducement fee in income at that 
time. This rule does not apply to a transaction to which section 
381(c)(4) applies.
    (e) Safe harbors. If inducement fees are recognized in accordance 
with a method described in this paragraph (e),

[[Page 81]]

that method complies with the requirements of paragraph (c) of this 
section.
    (1) The book method. Under the book method, an inducement fee is 
recognized in accordance with the method of accounting, and over the 
same period, used by the taxpayer for financial reporting purposes 
(including consolidated financial statements to shareholders, partners, 
beneficiaries, and other proprietors and for credit purposes), provided 
that the inducement fee is included in income for financial reporting 
purposes over a period that is not shorter than the period during which 
the applicable REMIC is expected to generate taxable income.
    (2) The modified REMIC regulatory method. Under the modified REMIC 
regulatory method, the inducement fee is recognized ratably over the 
remaining anticipated weighted average life of the applicable REMIC as 
if the inducement fee were unrecognized gain being included in gross 
income under Sec. 1.860F-2(b)(4)(iii).
    (3) Additional safe harbor methods. The Commissioner, by revenue 
ruling or revenue procedure (see Sec. 1.601(d)(2) of this chapter), may 
provide additional safe harbor methods for recognizing inducement fees 
relating to noneconomic REMIC residual interests.
    (f) Method of accounting. The treatment of inducement fees is a 
method of accounting to which the provisions of sections 446 and 481 and 
the regulations thereunder apply. A taxpayer is generally permitted to 
adopt a method of accounting for inducement fees that satisfies the 
requirements of paragraph (c) of this section. Once a taxpayer adopts a 
method of accounting for inducement fees, that method must be applied 
consistently to all inducement fees received in connection with 
noneconomic REMIC residual interests and may be changed only with the 
consent of the Commissioner, as provided by section 446(e) and the 
regulations and procedures thereunder.
    (g) Effective date. This section is applicable for taxable years 
ending on or after May 11, 2004.

[T.D. 9128, 69 FR 26041, May 11, 2004]