[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.856-5]

[Page 62-63]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec.  1.856-5  Interest.

    (a) In general. In computing the percentage requirements in section 
856(c) (2)(B) and (3)(B), the term ``interest'' includes only an amount 
which constitutes compensation for the use or forbearance of money. For 
example, a fee received or accrued by a lender which is in fact a charge 
for services performed for a borrower rather than a charge for the use 
of borrowed money is not includable as interest.
    (b) Where amount depends on income or profits of any person. Except 
as provided in paragraph (d) of this section, any amount received or 
accrued, directly or indirectly, with respect to an obligation is not 
includable as interest for purposes of section 856(c) (2)(B) and (3)(B) 
if, under the principles set forth in paragraphs (b)(3) and (6)(i) of 
Sec.  1.856-4, the determination of the amount depends in whole or in 
part on the income or profits of any person (whether or not derived from 
property secured by the obligation). Thus, for example, if in accordance 
with a loan agreement an amount is received or accrued by the trust with 
respect to an obligation which includes both a fixed amount of interest 
and a percentage of the borrower's income or profits, neither the fixed 
interest nor the amount based upon the percentage will qualify as 
interest for purposes of section 856(c) (2)(B) and (3)(B). This 
paragraph and paragraph (d) of this section apply only to amounts 
received or accrued in taxable years beginning after October 4, 1976, 
pursuant to loans made after May 27, 1976. For purposes of the preceding 
sentence, a loan is considered to be made before May 28, 1976, if it is 
made pursuant to a binding commitment entered into before May 28, 1976.
    (c) Apportionment of interest--(1) In general. Where a mortgage 
covers both real property and other property, an apportionment of the 
interest income must be made for purposes of the 75-percent requirement 
of section 856(c)(3). For purposes of the 75-percent requirement, the 
apportionment shall be made as follows:
    (i) If the loan value of the real property is equal to or exceeds 
the amount of the loan, then the entire interest income shall be 
apportioned to the real property.
    (ii) If the amount of the loan exceeds the loan value of the real 
property, then the interest income apportioned to the real property is 
an amount equal to the interest income multiplied by a fraction, the 
numerator of which is the loan value of the real property, and the 
denominator of which is the amount of the loan. The interest income 
apportioned to the other property is an amount equal to the excess of 
the total interest income over the interest income apportioned to the 
real property.
    (2) Loan value. For purposes of this paragraph, the loan value of 
the real property is the fair market value of the property, determined 
as of the date on which the commitment by the trust to

[[Page 63]]

make the loan becomes binding on the trust. In the case of a loan 
purchased by the trust, the loan value of the real property is the fair 
market value of the property, determined as of the date on which the 
commitment by the trust to purchase the loan becomes binding on the 
trust. However, in the case of a construction loan or other loan made 
for purposes of improving or developing real property, the loan value of 
the real property is the fair market value of the land plus the 
reasonably estimated cost of the improvements or developments (other 
than personal property) which will secure the loan and which are to be 
constructed from the proceeds of the loan. The fair market value of the 
land and the reasonably estimated cost of improvements or developments 
shall be determined as of the date on which a commitment to make the 
loan becomes binding on the trust. If the trust does not make the 
construction loan but commits itself to provide long-term financing 
following completion of construction, the loan value of the real 
property is determined by using the principles for determining the loan 
value for a construction loan. Moreover, if the mortgage on the real 
property is given as additional security (or as a substitute for other 
security) for the loan after the trust's commitment is binding, the real 
property loan value is its fair market value when it becomes security 
for the loan (or, if earlier, when the borrower makes a binding 
commitment to add or substitute the property as security).
    (3) Amount of loan. For purposes of this paragraph, the amount of 
the loan means the highest principal amount of the loan outstanding 
during the taxable year.
    (d) Exception. Section 856(f)(2) provides an exception to the 
general rule that amounts received, directly or indirectly, with respect 
to an obligation do not qualify as ``interest'' where the determination 
of the amounts depends in whole or in part on the income or profits of 
any person. The exception applies where the trust receives or accrues, 
with respect to the obligation of its debtor, an amount that is based in 
whole or in part on a fixed percentage or percentages of receipts or 
sales of the debtor, and the amount would not qualify as interest solely 
because the debtor has receipts or sale proceeds that are based on the 
income or profits of any person. Under this exception only a 
proportionate part of the amount received or accrued by the trust fails 
to qualify as interest for purposes of the percentage-of-income 
requirements of section 856(c) (2) and (3). The proportionate part of 
the amount received or accrued by the trust that is non-qualified is the 
lesser of the following two amounts:
    (1) The amount received or accrued by the trust from the debtor with 
respect to the obligation that is based on a fixed percentage or 
percentages of receipts or sales, or
    (2) The product determined by multiplying by a fraction the total 
amount received or accrued by the trust from the debtor with respect to 
the obligation. The numerator of the fraction is the amount of receipts 
or sales of the debtor that is based, in whole or in part, on the income 
or profits of any person and the denominator is the total amount of the 
receipts or sales of the debtor. For purposes of the preceding sentence, 
the only receipts or sales to be taken into account are those taken into 
account in determining the payment to the trust pursuant to the loan 
agreement.

(Sec. 856(d)(4) (90 Stat. 1750; 26 U.S.C. 856(d)(4)); sec. 856(e)(5) (88 
Stat. 2113; 26 U.S.C. 856(e)(5)); sec. 856(f)(2) (90 Stat. 1751; 26 
U.S.C. (856(f)(2)); sec. 856(g)(2) (90 Stat. 1753; 26 U.S.C. 856(g)(2)); 
sec. 858(a) (74 Stat. 1008; 26 U.S.C. 858(a)); sec. 859(c) (90 Stat. 
1743; 26 U.S.C. 859(c)); sec. 859(e) (90 Stat. 1744; 26 U.S.C. 859(e)); 
sec. 6001 (68A Stat. 731; 26 U.S.C. 6001); sec. 6011 (68A Stat. 732; 26 
U.S.C. 6011); sec. 6071 (68A Stat. 749, 26 U.S.C. 6071); sec. 6091 (68A 
Stat. 752; 26 U.S.C. 6091); sec. 7805 (68A Stat. 917; 26 U.S.C. 7805), 
Internal Revenue Code of 1954)

[T.D. 7767, 46 FR 11268, Feb. 6, 1981]