SECTION 2. BACKGROUND

.01 Nonrecognition of Gain on Invol- untary Conversion of Livestock . Section 1033(a) generally provides for nonrecognition of gain when property is involuntarily converted and replaced with property that is similar or related in service or use. Section 1033(e)(1) provides that a sale or exchange of livestock (other than poultry) held by a taxpayer for draft, breeding, or dairy purposes in excess of the number that would be sold following the taxpayer’s usual business practices is treated as an involuntary conversion if the livestock is sold or exchanged solely on account of drought, flood, or other weather-related conditions.

.02 Replacement Period . Section 1033(a)(2)(A) generally provides that gain from an involuntary conversion is recognized only to the extent the amount realized on the conversion exceeds the

the value of the trust assets by preserving the credit rating of the obligations. Rev. Rul. 90–63 concludes that this power to change the credit support, exercisable only if needed to preserve the value of the trust assets, is not a power to vary.

A “power to vary” was found to be present, however, in Rev. Rul. 78–149, 1978–1 C.B. 448. Rev. Rul. 78–149 involves a municipal bond trust in which the trustee has a limited power to reinvest in certain types of municipal bonds. The trust agreement provides that in the case of early redemption by a bond issuer, the trustee is permitted to reinvest the proceeds in similarly rated bonds that mature no later than the last maturity date of municipal bonds originally deposited in the trust. The trustee may also choose to distribute the proceeds to the trust certificate holders. In holding that the trust is an association taxable as a corporation for federal tax purposes, Rev. Rul. 78–149 concludes that “the power in the trust agreement permitting reinvestment of the proceeds of obligations redeemed prior to maturity, even though limited to reinvestment of the proceeds of redemptions over which the trust has no control, is a managerial power that enables the trust to take advantage of variations in the market to improve the investment of the investors.”

A power to vary does not exist as a result of reinvestments that occur outside of the original investment trust. In Rev. Rul. 81–238, 1981–2 C.B. 248, the sponsor of the initial investment trust, prior to each semiannual distribution, creates a new investment trust in which certificate holders can invest their distributions. With regard to each specific investment trust, neither the trustee nor any other person has a power to vary the investments of the trust. Certificate holders in the original investment trust may choose to have all of their distributions invested in the newlycreated investment trusts under an automatic reinvestment plan or may choose to receive cash. Further, certificate holders may choose to participate in or terminate the reinvestment plan at any time, may withdraw from the reinvestment plan with respect to particular distributions, or may withdraw from the reinvestment plan with respect to only some of the certificates they own. Rev. Rul. 81–238 concludes that the reinvestment plan does not create a power to vary, because there is no change

in, or addition to, the assets of the original trust and the investment of each certificate holder in the original trust remains fixed.

Request for Comments

The IRS and the Treasury Department welcome further comments regarding what additional guidance, if any, is needed regarding modifications of commercial mortgage loans held by investment trusts. To be most useful, the comments should also analyze the extent to which the modifications at issue are consistent with existing case law and administrative pronouncements that govern whether an investment trust is classified as a trust for federal income tax purposes. Answers to the following questions would be particularly helpful:

1. Is it common business practice to hold commercial mortgage loans through an investment trust? If so, please describe the structure of an investment trust that holds commercial mortgage loans. Also, if commercial mortgages are held by a REMIC through an investment trust, please explain the utility of this structure and its business purpose.

2. Are there fact patterns which are not described in § 1.860G–2(b)(3)(i) and in which one or more modifications permitted to REMICs under § 1.860G–2(b)(3)(ii) through (vi) would be consistent with the case law and prior administrative pronouncements if carried out by an investment trust?

3. Are there alternative structures that would be consistent with the case law and prior administrative pronouncements and would allow the modified mortgage loans to be held by an investment trust? Are there any changes or additions to the REMIC rules that would be needed to facilitate these alternative structures?

Interested parties are invited to submit comments on this notice by November 14, 2009. Comments should be submitted in writing, and should include a reference to Notice 2009–79. Send submissions to: CC:PA:LPD:PR (Notice 2009–79), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2009–79), Courier’s Desk, Internal Revenue Service,

October 5, 2009 455 2009–40 I.R.B.

U.S. Drought Monitor maps to determine whether exceptional, extreme, or severe drought has been reported for any location in the applicable region.

The Appendix to this notice contains the list of counties for which exceptional, extreme, or severe drought was reported during the 12-month period ending August 31, 2009. Under Notice 2006–82, the 12-month period ending on August 31, 2009, is not a drought-free year for an applicable region that includes any county on this list. Accordingly, for a taxpayer who qualified for a four-year replacement period for livestock sold or exchanged on account of drought and whose replacement period is scheduled to expire at the end of 2009 (or, in the case of a fiscal year taxpayer, at the end of the taxable year that includes August 31, 2009), the replacement period will be extended under § 1033(e)(2) and Notice 2006–82 if the applicable region includes any county on this list. This extension will continue until the end of the taxpayer’s first taxable year ending after a drought-free year for the applicable region.