SECTION 5. INTERIM GUIDANCE

The Treasury Department and the Service have concluded that, although the issuance of regulations may be appropriate to provide detailed guidance on certain issues identified by concerned parties, sections 860E(d) and 7701(i)(3) establish basic principles that are applicable even in the absence of regulations. Pending the issuance of further guidance, in administering sections 860E(d), 860E(e)(6), and 7701(i), the IRS will apply the following principles, which are applicable to all excess inclusion income, whether from TMPs or from REMIC residual interests:

ified REIT subsidiary (or a portion of either) is a TMP, and if so, calculate the excess inclusion income of the TMP under a reasonable method.

November 13, 2006 905 2006–46 I.R.B.

are not disqualified organizations of the amount and character of their excess inclusion income.

860E(e)(6) on the excess inclusion income of beneficial owners that are disqualified organizations.

860G(b)(2), apply the withholding tax provisions to the excess inclusion portion of the payments made to foreign persons without regard to any treaty exemption or reduction in tax rate.

come to its shareholders in proportion to dividends paid (determined without regard to any special allocation of the expense for any tax paid under section 860E(e)(6)).

inees of the amount and character of the excess inclusion income that has been allocated to them.

860E(e)(6) on excess inclusion income that is allocable to record shareholders that are disqualified organizations.

860G(b)(2), apply the withholding tax provisions to the excess inclusion portion of dividends paid to foreign shareholders without regard to any exemption or reduction in tax rate.

ance, except as provided in this paragraph, a RIC is not required to report the amount and character of the excess inclusion income allocated to its shareholders who are not nominees. For RIC taxable years beginning on or after January 1, 2007—

holders that are not nominees re

garding the amount and character of the excess inclusion income allocated to those shareholders if the excess inclusion income received by the RIC from all sources (including investments in REMIC residual interests) exceeds one percent of the gross income of the RIC.

reporting requirement in the preceding bullet must inform all of its shareholders that are not nominees regarding the amount and character of excess inclusion income allocated to those shareholders, taking into account only excess inclusion income allocated to the RIC from REITs described in the following sentence. A REIT is described in this sentence if it reported to its shareholders for the most recent REIT taxable year ending not later than nine months before the first day of the RIC’s taxable year that—

1. A portion of the REIT’s dividends for the year was excess inclusion income, and

2. This excess inclusion income exceeded three percent of the REIT’s total dividends for the year.

As an example, the reporting obligation described in this bullet applies to a fiscal year RIC for its taxable year beginning February 1, 2007, with respect to excess inclusion income allocated to the RIC by that REIT for the REIT’s taxable year ending December 31, 2007, if the REIT had reported for its taxable year ending December 31, 2005, that its excess inclusion income exceeded three percent of its total dividends for that year.