SECTION 5. FORMULA TEST

.01 The present value of the anticipated tax liabilities associated with holding the residual interest does not exceed the sum of–

(1) The present value of any consideration given to the transferee to acquire the interest;

(2) The present value of the expected future distributions on the interest; and

(3) The present value of the anticipated tax savings associated with holding the interest as the REMIC generates losses.

.02 For purposes of section 5.01 of this revenue procedure, both of the following rules apply:

(1) The transferee is assumed to pay tax at a rate equal to the highest rate of tax specified in § 11(b)(1) of the Internal Revenue Code; and

(2) Present values are computed using a discount rate equal to the applicable Federal rate prescribed by § 1274(d) compounded semiannually. (A lower discount rate may be used if the transferee can demonstrate that it regularly borrows, in the course of its trade or business, substantial funds at such lower rate from unrelated third parties.)