Mortgage settlement payments preserve REMIC treatment

Plain-English summary

Residential mortgage securitization trusts expected shares of a settlement resolving claims that mortgages had breached customary representations and warranties. The trusts used a separate trustee to pursue mortgage repurchase claims. The IRS ruled that entering the settlement, calculating each trust's share, and receiving the payment would not cause a trust to fail the REMIC asset test. Each payment would be treated as received on qualified mortgages, and distributing it under the existing waterfall would not disqualify regular or residual interests. The settlement shares also would not be prohibited transactions or contributions subject to the 100 percent post-startup contribution tax.

Ruling snapshot

• Question: Would mortgage-representation settlement payments and their distribution impair the trusts' REMIC status or trigger REMIC penalty taxes?
• Outcome: approved for all four requested rulings, subject to the stated facts and continuing REMIC elections
• Key authorities: IRC §§ 860D(a)(4), 860F(a), and 860G(a) and (d); Treas. Reg. §§ 1.860D-1 and 1.860G-1 through 1.860G-2

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201649006                                              Third Party Communication: None
Release Date: 12/2/2016                                        Date of Communication: Not Applicable
Index Number: 860D.00-00
                                                               Person To Contact:
---------------------------------------------                  --------------------------, ID No. ----------------
------------------------------------------------------         -----------------
-------------------------------------------                    Telephone Number:
------------------------------------------------               ----------------------
                                                               Refer Reply To:
                                                               CC:FIP:B01
                                                               PLR-112142-16
                                                               Date: September 7, 2016




Legend:

Trustee 1A                 =         ---------------------------------------------------------
---------------------------------------------------------------

Trustee 1B                 =         ---------------------------------------------------------------
---------------------------------------------------------------

Trustee 2                  =        ----------------------------------------------------------

Trustee 3                  =        -------------------------------

Trustee 4                  =        -------------------------------------------

State                      =        --------------

Year 1                     =        -------

Year 2                     =        -------

Company                    =        --------------------

Exchange                   =        -------------------------------------

Date 1                     =        -------------------
PLR-112142-16                                      2

Date 2                  =    ------------------------

A                       =    --

B                       =    --

C                       =    ----

D                       =    ----

E                       =    ----

F                       =    --

G                       =    ----

Month                   =    ---------------

Year                    =    -------

Dear -------------------:

       This letter is in reply to a letter dated April 4, 2016, in which Trustees 1A and 1B
(together referred to as “Trustees”) solely in their capacity as trustee and separate
trustee, respectively, of real estate mortgage investment conduits (“REMICs”) identified
in Appendix A (each a “Taxpayer” and, collectively, the “Taxpayers”), requests certain
rulings in connection with each Taxpayer’s qualification as a REMIC under Sections
860A-860G of the Internal Revenue Code. Specifically, you have asked for the
following rulings:

         1. In the case of each Taxpayer for which a timely, valid and continuing REMIC
         election has been made in accordance with the applicable Governing Agreement
         (as defined below), none of (i) the execution of the Settlement Agreement (as
         defined below), (ii) the methodology for determining, and the right to receive, an
         Allocable Share (as defined below) of the Settlement Payment (as defined
         below), or (iii) the receipt of an Allocable Share of the Settlement Payment, will
         cause such Taxpayer to fail to meet the requirements of Section 860D(a)(4).

         2. In the case of each Taxpayer for which a timely, valid and continuing REMIC
         election has been made in accordance with the applicable Governing Agreement,
         the receipt of an Allocable Share of the Settlement Payment will be treated as a
         payment received on qualified mortgages within the meaning of Section 1.860G-
         2(g)(1)(ii) of the Income Tax Regulations.
PLR-112142-16                                3

        3. In the case of each Taxpayer for which a timely, valid and continuing REMIC
        election has been made in accordance with the applicable Governing Agreement,
        the distribution of an Allocable Share amount in accordance with the applicable
        Governing Agreement and the Settlement Agreement will not cause any regular
        interest in such Taxpayer to fail to qualify as a “regular interest” as defined in
        Section 860G(a)(1) or the sole class of residual interest in such Taxpayer to fail
        to qualify as a “residual interest” as defined in Section 860G(a)(2).

        4. In the case of each Taxpayer for which a timely, valid and continuing REMIC
        election has been made in accordance with the applicable Governing Agreement,
        the receipt of an Allocable Share amount will not be treated as a “prohibited
        transaction” within the meaning of Section 860F(a)(2) or as a contribution that is
        subject to the tax imposed under Section 860G(d)(1).

Facts

Background

        Trustee 1B acts as a separate trustee for A residential mortgage-backed
securitization (“RMBS”) trusts (each an “LD Trust” and together, the “LD Trusts”), both
of which comprise A or more Taxpayers, each of which has elected to be treated as a
REMIC within the meaning of Section 860D. Trustee 1A is the trustee of the LD Trusts.
Trustee 1B was appointed as a separate trustee of the LD Trusts on Date 1 for the
purpose of pursuing mortgage loan repurchase claims for the LD Trusts. Each of the
LD Trusts is evidenced by a separate pooling and servicing agreement (“PSA”). In
addition to the PSAs, each Taxpayer also entered into the related mortgage loan
purchase agreements and assignment and assumption agreements, and the
agreements and orders appointing Trustee 1B as the separate trustee for the LD Trusts
(each a “Governing Agreement” and collectively, the “Governing Agreements”). The
laws of State govern the rights and obligations of the parties to the Governing
Agreements that are applicable to the LD Trusts. The annual accounting period for
each Taxpayer is the calendar year and each Taxpayer utilizes the accrual method of
accounting for maintaining its accounting books and filing its U.S. federal income tax
return.

       Company is a bank holding company whose shares of common stock are traded
on Exchange. Company and its subsidiaries (collectively, “Bank”) constitute a banking
and financial services organization.

      Taxpayers function as residential mortgage loan securitization vehicles. The
Taxpayers were established during the period of Year 1 through Year 2 for the primary
purpose of raising financing in the securitization market with respect to pools of
residential real estate mortgage loans originated or acquired by Bank, the sponsor of
the mortgage securitizations.
PLR-112142-16                                 4

       The securitization process for each Taxpayer generally occurred as follows:

       (1) One or more Bank entities (the “Seller”), sold portfolios of residential
       mortgage loans (the “Mortgage Loans”) to another Bank entity (the “Depositor”).

       (2) The Depositor conveyed the Mortgage Loans to the related trustee to be held
       in trust.

       (3) Several classes of RMBS certificates or notes representing various
       entitlements to the underlying mortgage pool’s cash flows then were issued and
       sold through an underwriter or underwriters to investors (“Investors”).

       (4) In certain instances, all or part of a class of issued certificates or notes may
       have been retained by Bank.

       (5) For each RMBS trust, a master servicer, servicer, or both (“Master Servicer”)
       was charged with responsibility for, among other things, collecting debt service
       payments on the Mortgage Loans, taking any necessary enforcement action
       against borrowers, and remitting payments on a monthly basis for distribution to
       the Investors.

       In each securitization, an election was made to treat the Mortgage Loans and
certain related assets held by the applicable trust as one or more REMICs under the
Code.

       The Governing Agreements for the securitizations contain a series of
representations and warranties made for the benefit of each RMBS trust. In general,
these include representations that the Mortgage Loans were underwritten in all material
respects in accordance with certain underwriting guidelines, that the Mortgage Loans
conform in all material respects to their descriptions in the investor disclosure
documents, and that the origination, underwriting and collection practices of the Seller
have been lawful and customary in the mortgage lending and servicing business.

The Dispute

       In a letter dated Date 2 to Bank, a group of institutional investors (“Institutional
Investors”) alleged that a significant number of the Mortgage Loans, with respect to
which the Institutional Investors held investment certificates or notes, had been sold or
deposited into the trusts based on false and/or fraudulent representations and
warranties by the mortgage originators, the Seller, and/or the Depositor. These
assertions were based in part on the alleged excessive early default and foreclosure
rates on and in respect to the Mortgage Loans.

       Bank and the Institutional Investors engaged in extensive negotiations over a
period of more than B years in an effort to reach a settlement relating to the alleged
PLR-112142-16                                5

breaches of the Governing Agreements. The negotiations resulted in a settlement (the
“Settlement”) memorialized in a Settlement Agreement (the “Settlement Agreement”)
between the Institutional Investors and Bank. Under the terms of the Settlement
Agreement, the Institutional Investors then submitted a letter to Trustee 1A, as a party
to the underlying Governing Agreements, expressing their support for the Settlement
and requesting that Trustee1A accept it. The Settlement Agreement involves a total of C
RMBS trusts. Trustees act as trustee for A of the RMBS trusts. Trustee 2, Trustee 3,
and Trustee 4 (collectively with Trustee, the “Settlement Trustees”) act as trustee,
indenture trustee, or separate trustee for a total of D RMBS Trusts, E of which are
structured as one or more REMICs.

       The Settlement Agreement defines “Accepting Trustee” as a trustee that has
accepted the Settlement Agreement on behalf of an RMBS trust, or on behalf of only
one or more separate Mortgage Loan groups contained within an RMBS trust. Each
Trustee constitutes an Accepting Trustee under the Settlement Agreement.

       The Settlement Agreement defines “Settlement Trust” as each RMBS trust,
including each Taxpayer, for which the applicable Settlement Trustee accepted and
signed the Settlement Agreement with respect to all Mortgage Loans held by the trust
and in the case where the applicable Settlement Trustee accepted and signed the
Settlement Agreement on behalf of one or more, but not all of the Mortgage Loan
groups contained within an RMBS trust, each such separate Mortgage Loan group for
which the applicable Settlement Trustee accepted and signed the Settlement
Agreement.

       Under the Settlement Agreement, any RMBS trust or specific Mortgage Loan
group contained within an RMBS trust for which the Settlement Agreement was not
accepted is referred to as a “Non-Settling Trust”. None of the RMBS trusts, in their
entirety, constitute a Non-Settling Trust. F separate Mortgage Loan groups contained
within certain RMBS trusts are Non-Settling Trusts. Each RMBS trust, and each Non-
Settling Trust, is treated as a separate “trust” for purposes of determining payment
under the Settlement Agreement.

       In Month, Year, Trustee accepted and signed the Settlement Agreement on
behalf of the Taxpayers.

The Settlement Agreement

       The Settlement Agreement has two principal terms. One, a settlement payment
to be allocated among all of the Settlement Trusts (the “Settlement Payment”), and two,
a release of claims against Bank that arise under or are based upon the Governing
Agreements or that relate to the origination, sale, delivery, servicing, and/or
administration of Mortgage Loans to or in the Taxpayers. The Settlement Agreement
does not contain releases regarding the servicing of Mortgage Loans within any of the
Settlement Trusts, except as it pertains to alleged failures by any Bank entity to provide
PLR-112142-16                                 6

notice of representation and warranty violations or to otherwise enforce claims for
breaches of representations and warranties.

        The Settlement Payment will be allocated among the Settlement Trusts in
accordance with an agreed allocation formula that is based on the past and expected
future losses associated with the Mortgage Loans held in all of the RMBS trusts. An
independent financial advisor (the “Expert”) retained by the Accepting Trustees will
perform any calculations required in connection with the allocation formula, and those
allocation calculations will be treated as final and accepted by the parties, absent bad
faith or manifest error.

        The Settlement Payment allocations are determined by reference to the amount
of “net losses” incurred by each Settlement Trust and each Non-Settling Trust. The
Expert will calculate the amount of net losses for each Settlement Trust and for each
Non-Settling Trust that have been incurred and are estimated to be incurred from each
trust’s inception to its expected termination. The amount will be expressed as a
percentage of the sum of the net losses that are estimated to be borne by the
Settlement Trusts and Non-Settling Trusts (the “Net Loss Percentage”).

       The Expert will calculate the allocable share of the Settlement Payment for each
Settlement Trust and for each Non-Settling Trust by multiplying the amount of the
Settlement Payment by the Net Loss Percentage for each Settlement Trust and Non-
Settling Trust (the “Allocable Share”).

       Within G days of the completion of the Expert’s calculation of each Settlement
Trust’s Allocable Share, and at the direction of the Settlement Trustees, Bank will wire
each Settlement Trust’s Allocable Share into the related trust’s collection or distribution
account for further distribution to Investors.

         Taxpayers represent that the distribution provisions of the Settlement Agreement
do not alter the rights or obligations of any of REMIC trust or REMIC interests therein
and that the distribution of Allocable Shares to Investors is consistent with the
distribution provisions contained in the Governing Agreements that provide for the
distribution of subsequent recoveries or unscheduled principal amounts received. The
Settlement Agreement requires that the distribution of a REMIC trust’s Allocable Share
to its Investors be consistent with the applicable provisions contained in the Settlement
Trust’s Governing Agreement that provide for the distribution of subsequent recoveries
or unscheduled principal amounts received, as the case may be. The Settlement
Agreement provides that each Settlement Trust’s distribution of Allocable Share
amounts to Investors be characterized as distributions of principal in respect of REMIC
regular interest classes entitled to receive such distributions. Distributions to the
Investors who hold regular interest classes entitled to receive principal will be made
either in the order of seniority of such classes or on a pro-rata basis in accordance with
applicable senior-subordinate principal distribution priority rules.
PLR-112142-16                                 7

        In the event a REMIC’s distribution waterfall provisions and its current Allocable
Share amount available for distribution would combine to result in a distribution of any
amount on or in respect of any trust’s residual interest class, whether on the date of the
distribution of an Allocable Share or on any subsequent distribution date that is not the
final distribution date under the Governing Agreement, such amount shall not be paid on
or distributed to such residual class. Instead, the affected Settlement Trustee would
retain this amount in the applicable trust’s distribution account, and on the next
distribution date, the Settlement Trustee would distribute the retained amount to the
applicable regular interest Investors entitled to receive a principal distribution of
subsequent recoveries or unscheduled payments of principal.

        Consistent with the Governing Agreements, the Settlement Agreement provides
for the allocation of a notional amount to each REMIC’s issued certificates or notes
equal to the REMIC’s distributed Allocable Share, in order to restore the outstanding
principal balance of such certificates or notes attributable to the prior write down of
previously incurred realized losses on Mortgage Loans. Specifically, a notional amount
equal to a REMIC’s Allocable Share will be applied in the reverse order of previously
allocated realized losses to increase, on a pro rata basis within each class, the class
certificate balance, component balance, component principal balance, or note principal
balance of each class of certificates or notes (other than any class of REMIC residual
interests) to which realized losses have been previously allocated. An increase to the
principal balance of any class of certificates or notes shall not exceed the aggregate
amount of realized losses previously allocated to such class under the Governing
Agreements. In addition, holders of certificates or notes whose class principal balances
are restored will not be entitled to any payment in respect of interest on the restored
amount for any interest accrual period relating to the distribution date on which such
increase occurs or on any prior distribution date.

Law and Analysis

Issue #1 and #2: Qualified Mortgages, Permitted Investments, and Payments Received
on Qualified Mortgages

       Section 860D(a) provides that the terms “real estate mortgage investment
conduit” and “REMIC” mean any entity that meets several requirements including that
as of the close of the third month beginning after the startup day and at all times
thereafter, substantially all of the assets of the entity consist of qualified mortgages and
permitted investments.

       Section 860G(a)(3)(A) defines qualified mortgage to include any obligation
(including any participation or certificate of beneficial ownership therein) which is
principally secured by an interest in real property and which (i) is transferred to the
REMIC on the startup day in exchange for regular or residual interests in the REMIC, (ii)
is purchased by the REMIC within the 3-month period beginning on the startup day if,
except as provided in regulations, such purchase is pursuant to a fixed-price contract in
PLR-112142-16                                 8

effect on the startup day, or (iii) represents an increase in the principal amount under
the original terms of an obligation described in clause (i) or (ii) if such increase—(I) is
attributable to an advance made to the obligor pursuant to the original terms of a
reverse mortgage loan or other obligation, (II) occurs after the startup day, and (III) is
purchased by the REMIC pursuant to a fixed price contract in effect on the startup day.

       Section 860G(a)(5) defines “permitted investments” to mean any cash flow
investment, qualified reserve asset, or foreclosure property. Section 860G(a)(6) defines
“cash flow investment” to mean any investment of amounts received under qualified
mortgages for a temporary period before distribution to holders of interests in the
REMIC.

        Section 1.860D-1(b)(3)(i) provides that, for purposes of the asset test of section
860D(a)(4), substantially all of a qualified entity’s assets are qualified mortgages and
permitted investments if the qualified entity owns no more than a de minimis amount of
other assets. Section 1.860D-1(b)(3)(ii) provides that the amount of assets other than
qualified mortgages and permitted investments is de minimis if the aggregate of the
adjusted bases of those assets is less than one percent of the aggregate of the adjusted
bases of all of the REMIC’s assets.

       Section 1.860G-2(g)(1)(ii) states that, in determining what is a cash flow
investment, the term “payments received on qualified mortgages” includes, among other
payments, payments by a sponsor or prior owner in lieu of the sponsor's or prior
owner's repurchase of a defective obligation, as defined in Section 1.860G-2(g)(1)(ii)(f),
that was transferred to the REMIC in breach of a customary warranty.

       Section 1.860G-2(f)(1) defines a defective obligation as a mortgage subject to
certain defects including that the mortgage does not conform to a customary
representation or warranty given by the sponsor or prior owner of the mortgage
regarding the characteristics of the mortgage, or the characteristics of the pool of
mortgages of which the mortgage is a part.

       Each Taxpayer’s right to receive its Allocable Share under the Settlement
Agreement arises from the Mortgage Loans. The Allocable Share for each Taxpayer is
a contract claim that stems directly from the rights held by the Trustee on behalf of each
Taxpayer and its status as a REMIC. Therefore, a Taxpayer’s right to receive an
Allocable Share does not constitute an asset that is newly acquired by a REMIC after its
startup date. The execution of the Settlement Agreement, the methodology used to
determine a Taxpayer’s Allocable Share, and the receipt of the Allocable Share by a
Taxpayer, arise from each Taxpayer’s interest in the Mortgage Loans and its status as a
REMIC, and, therefore, will not cause any Taxpayer to fail to meet the requirements
under Section 860D(a)(4).

      The Allocable Share under the Settlement Agreement is the result of a dispute
between the Institutional Investors and Bank regarding whether the Mortgage Loans
PLR-112142-16                                 9

conveyed to each Taxpayer violated customary representations and warranties under
the respective Governing Agreements. For purposes of the REMIC rules, a defective
obligation includes mortgages that do not conform to a customary representation or
warranty given by the sponsor or prior owner of the mortgage regarding the
characteristics of the mortgage, or the characteristics of the pool of mortgages of which
the mortgage is a part. Each Taxpayer’s right to the Allocable Share under the
Settlement Agreement is akin to a payment received by such Taxpayer from a sponsor
or prior owner in lieu of the sponsor or prior owner’s repurchase of such a defective
obligation. Therefore, pursuant to Section 1.860G-2(g)(1)(ii), the Allocable Share will be
considered a payment received on a qualified mortgage pursuant to Section 1.860G-
2(g)(1)(ii).

Issue #3: Regular and Residual Interests

       Section 860G(a)(1) defines a “regular interest” in a REMIC to mean any interest
in a REMIC which is issued on the startup day with fixed terms and which is designated
as a regular interest if (A) such interest unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), and (B) interest payments (or other
similar amount), if any, with respect to such interest at or before maturity (i) are payable
based on a fixed rate (or to the extent provided in regulations, at a variable rate), or (ii)
consist of a specified portion of the interest payments on qualified mortgages and such
portion does not vary during the period such interest is outstanding.

       Section 860G(a)(2) defines a “residual interest” in a REMIC to mean an interest
in a REMIC which is issued on the startup day, which is not a regular interest, and
which is designated as a residual interest.

     Section 860G(a)(9) defines the term “startup day” to mean the day on which the
REMIC issues all of its regular and residual interests.

       Section 1.860G-1(a)(1) provides that, for purposes of Section 860G(a)(1), a
REMIC designates an interest as a regular interest by providing to the Internal Revenue
Service the information specified in Section 1.860D-1(d)(2)(ii) in the time and manner
specified in Section 1.860D-1(d)(2). Section 1.860G-1(c) provides that a residual
interest is an interest in a REMIC that is issued on the startup day and that is
designated as a residual interest by providing the information specified in Section
1.860D-1(d)(2)(ii) at the time and in the manner provided in Section 1.860D-1(d)(2). A
residual interest need not entitle the holder to any distributions from the REMIC.

       Section 1.860G-1(a)(4) provides that, for purposes of Section 860G(a)(1), a
regular interest in a REMIC has fixed terms on the startup day if, on the startup day, the
REMIC's organizational documents irrevocably specify (i) the principal amount (or other
similar amount) of the regular interest, (ii) the interest rate or rates used to compute any
interest payments (or other similar amounts) on the regular interest, and (iii) the latest
possible maturity date of the interest.
PLR-112142-16                                  10


       A REMIC regular interest must be issued on the startup date with fixed terms. A
REMIC residual interest is an interest in the REMIC issued on the startup date that is
not a regular interest. Taxpayers represent that the distribution provisions of the
Settlement Agreement do not alter the rights or obligations of any of the Taxpayers or
the Investors’ interests therein and that the distribution of Allocable Shares to Investors
is consistent with the distribution provisions contained in the Governing Agreements that
provide for the distribution of subsequent recoveries or unscheduled principal amounts
received. Distributions that are made pursuant to these provisions are treated as and
constitute distributions of underlying Mortgage loan principal collections. The
Settlement Agreement also provides that should a principal payment become payable to
a class of REMIC residual interests, such payment will be maintained in the distribution
account and the Trustee shall distribute the retained amount to the applicable regular
interest Investors entitled to receive a principal distribution of subsequent recoveries or
unscheduled payments of principal. Accordingly, the distribution of an Allocable Share
to Investors will not cause any regular interest in a Taxpayer to fail to qualify as a
regular interest or the sole class of residual interest in the Taxpayer to fail to qualify as a
residual interest.

Issue #4: Tax on Contributions after Startup Date and Prohibited Transaction

        Except as provided in Section 860G(d)(2), Section 860G(d)(1) imposes on any
amount that is contributed to a REMIC after the startup day a tax equal to 100 percent
of the amount contributed. Section 860G(d)(2) provides that the tax on contributions
after the startup date shall not apply to any contribution which is made in cash and is (A)
a contribution to facilitate a cleanup call (as defined in regulations) or a qualified
liquidation, (B) a payment in the nature of a guarantee, (C) a contribution during the 3-
month period beginning on the startup day, (D) a contribution to a qualified reserve fund
by any holder of a residual interest in the REMIC, or (E) any other contribution permitted
in regulations.

        Section 860F(a)(1) imposes a tax equal to 100 percent of the net income derived
from prohibited transactions. Section 860F(a)(2) defines prohibited transaction to mean
one of the following: (A) disposition of any qualified mortgage transferred to the REMIC
other than a disposition pursuant to (i) the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution of a
defective obligation), (ii) a disposition incident to the foreclosure, default, or imminent
default of the mortgage, (iii) the bankruptcy or insolvency of the REMIC, or (iv) a
qualified liquidation, (B) the receipt of any income attributable to any asset which is
neither a qualified mortgage nor a permitted investment, (C) the receipt by the REMIC
of any amount representing a fee or other compensation for services, or (D) gain from
the disposition of any cash flow investment other than pursuant to any qualified
liquidation.
PLR-112142-16                                 11

       As discussed above, the receipt of the Allocable Share by a Taxpayer arises
from the Mortgage Loans and each Taxpayer’s status as a REMIC. The Allocable
Share arises in connection with each Taxpayer’s interest in the Mortgage Loans and is
neither a contribution of cash to the REMIC nor is it listed as a prohibited transaction in
Section 860F(a)(2). As a result, the receipt of the Allocable Share by a Taxpayer will
not be treated as a prohibited transaction within the meaning of Section 860F(a)(2) or
as a contribution subject to tax under Section 860G(d)(1).


Conclusion

       We hereby rule as follows:

       1. In the case of each Taxpayer for which a timely, valid and continuing REMIC
       election has been made in accordance with the applicable Governing Agreement,
       none of (i) the execution of the Settlement Agreement, (ii) the methodology for
       determining, and the right to receive, an Allocable Share of the Settlement
       Payment, or (iii) the receipt of an Allocable Share of the Settlement Payment will
       cause the Taxpayer to fail to meet the requirements of Section 860D(a)(4).

       2. In the case of each Taxpayer for which a timely, valid and continuing REMIC
       election has been made in accordance with the applicable Governing Agreement,
       the receipt of an Allocable Share of the Settlement Payment will be treated as a
       payment received on qualified mortgages within the meaning of Section 1.860G-
       2(g)(1)(ii).

       3. In the case of each Taxpayer for which a timely, valid and continuing REMIC
       election has been made in accordance with the applicable Governing Agreement,
       the distribution of an Allocable Share amount in accordance with the applicable
       Governing Agreement and the Settlement Agreement will not cause any regular
       interest in such Taxpayer to fail to qualify as a “regular interest” as defined in
       Section 860G(a)(1) or the sole class of residual interest in such Taxpayer to fail
       to qualify as a “residual interest” as defined in Section 860G(a)(2).

       4. In the case of each Taxpayer for which a timely, valid and continuing REMIC
       election has been made in accordance with the applicable Governing Agreement,
       the receipt of an Allocable Share amount will not be treated as a “prohibited
       transaction” within the meaning of Section 860F(a)(2) or as a contribution that is
       subject to the tax imposed under Section 860G(d)(1).

      This ruling's application is limited to the facts, representations, Code sections,
and regulations cited herein. Except as specifically ruled upon above, no opinion is
expressed concerning any federal income tax consequences related to the facts herein
under any other provisions of the Code. Specifically, we do not rule whether any
PLR-112142-16                                12

Taxpayer qualifies as a REMIC under Sections 860A-860G or whether any Mortgage
Loan qualifies as a qualified mortgage as defined in Section 860G(a)(3).

       This ruling is directed only to the taxpayers that requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent. In accordance with the
provisions of a Power of Attorney on file, we are sending a copy of this ruling letter to
your authorized representative.

      The rulings contained in this letter are based upon information and
representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

                                      Sincerely,


                                      ________________________________________
                                      Jason Kurth
                                      Assistant to the Branch Chief, Branch 1
                                      Office of Associate Chief Counsel
                                      (Financial Institutions & Products)