Approved: June 8, 1989

RAB-89-54. The purpose of this Bulletin is to describe the single business tax treatment of Real Estate Mortgage Investment Conduits (REMICs).

REMICs were created by the Tax Reform Act of 1986 and are specifically authorized under Section 860D of the Internal Revenue Code. [26 USC 860D] As described below, a REMIC is treated as a separate entity for federal income tax purposes [26 USC 860A], although it is not subject to entity-level taxation as long as it qualifies under the REMIC provisions of Code Section 860D.

In general, a REMIC holds a fixed pool of real estate mortgages and issues multiple classes of interests to its investors. A REMIC can, in form and for state law purposes, be a corporation, a partnership or a trust. In addition, a REMIC can be an "asset pool."

Although treated as a separate entity, the REMIC is generally not subject to entity-level taxation. [26 USC 860A] A limited exception is a 100% tax that applies to net income derived from certain "prohibited transactions," including impermissible substitutions or dispositions of mortgages. [26 USC 860F(a)] The REMIC must file information returns as if it were a partnership and the holders of residual interests were partners.

Holders of REMIC residual interests generally take into account all of the net income of the REMIC that is not taken into account as gross income by the holders of the regular interests. This amount, which is taken into account as ordinary income or loss, is apportioned on a daily, ratable basis among the holders of residual interest, without regard to REMIC distributions and reserve accumulation. [26 USC 860B] Income calculations must be made quarterly for residual interest holders. [26 USC 860C]

The REMIC determines its net income or net loss, to be taken into account by the residual interest holders, under an accrual method of accounting and in the same manner as in the case of an individual, with certain adjustments. [26 USC 860C(b)] In general, the net income or net loss of the REMIC will be the difference between:

1. The gross income produced by the assets of the REMIC, included stated interest, original issue discount and market discount, if any, with respect to its mortgage assets, and income from reinvestment of payments received under such assets and amounts on deposit in any reserve fund, and
   

2. Stated interest and original issue discount accrued on the regular interests, amortization premium, if any, on the mortgage assets and various expenses.

REMICs, in whatever form (i.e. corporation, partnership, trust, or asset pool) will, in general, have the following additional characteristics:

1. 1. At least 90% of their assets will consist of intangible personal property; and
   

2. 2. At least 90% of their gross receipts income will consist of interest.

REMICs receive the following treatment under Michigan's Single Business Tax Act. [MCL 208.1-.145] In calculating the tax base of a REMIC, its tax status as a REMIC under the Internal Revenue Code will be honored. Specifically:

1. Where an election under 26 USC 860D is in place to treat a corporation, a partnership, a trust or an asset pool as the REMIC, that election will be honored for single business tax purposes.
   

2. Regular interests in the REMIC will be treated as debt instruments for single business tax purposes, and interest payments or accruals with respect to such regular interests will be deductible at the REMIC level in determining the REMIC's business income. [MCL 208.3(3)]
   

3. Only the net income of the REMIC, that part which will be passed through to holders of residual interests, constitutes its business income for single business tax purposes.
   

4. Where the 26 USC 860D election is to treat a partnership, a trust or an asset pool as the REMIC, the REMIC will not be regarded as a financial organization for single business tax purposes. [MCL 208.10]
   

5. If the REMIC is a corporation, association, or other entity within the definition of MCL 208.10(4), and meets the criteria under MCL 208.10(4), such corporation or association (or other entity) shall be regarded as a "financial organization" and shall be required to file for single business tax.
   

6. In the case of an asset pool REMIC, the income derived on the assets of the REMIC will not be included in determining the tax base of any other entity that is subject to single business tax. [MCL 208.6(l), .9, .31]
   

7. Neither the holders of regular or residual interest will be subject to single business tax solely as a result of the interests they hold in a REMIC, whether the REMIC is a corporation, a partnership, a trust, or an asset pool.