REVENUE RULE 91-3

1991-1 C.B. 31, 1991-3 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

MORTGAGE REVENUE BONDS

Published: January 4, 1991

Section 143. Mortgage Revenue Bonds: Qualified Mortgage Bond and Qualified Veterans' Mortgage Bond

(See Also Section 103; 1.103-1.)

Mortgage revenue bonds. Clarification is provided regarding the effective date of section 143(m) of the Code as applied to loan assumptions and loan recycling, and regarding the testing date under section 143(m)(4)(D) for loans initially made by a lending institution and later sold to the issuer.

ISSUES

1. What is the "testing date" under section 143(m)(4)(D) of the Internal Revenue Code for a loan initially made by a lending institution out of moneys other than qualified mortgage bond proceeds and subsequently purchased by an issuer of qualified mortgage bonds with bond proceeds pursuant to a pre- existing agreement?

2. To what extent do the federal subsidy recapture provisions of section 143(m) of the Code apply to a post-1990 assumption of a loan that was originally made from the proceeds of a qualified mortgage bond?

3. To what extent do the federal subsidy recapture provisions of section 143(m) of the Code apply to a post-1990 loan made from the re-lending of proceeds derived from repayments of any prior loan or loans originally made from qualified mortgage bond proceeds?

FACTS

SITUATION 1

A, an individual taxpayer, applied to X, a lending institution, for a federally subsidized loan to finance a principal residence located in city CI. A satisfied all the requirements imposed by section 143 of the Code in order for A's residence to qualify for financing from proceeds of qualified mortgage bonds.

On January 2, 1991, X loaned money to A which A used to purchase the residence. On April 1, 1991, X sold A's loan to CI pursuant to an agreement between X and CI that had been entered into on or prior to January 2, 1991. CI financed the purchase of the loan with the proceeds of qualified mortgage bonds described in section 143(a)(1) of the Code. The bonds were issued by CI on December 15, 1988.

SITUATION 2

The facts are the same as in Situation 1, except as stated below. The loan to A from X was closed on January 2, 1989 and sold to CI on April 3, 1989. On January 2, 1991, A sold the residence to B, another individual taxpayer, and B assumed A's loan with no change in terms. B satisfied all the requirements set forth in section 143(i)(2) of the Code for the assumption of a loan financed from the proceeds of qualified mortgage bonds.

SITUATION 3

The facts are the same as in Situation 2, except that on January 2, 1991, A repaid A's loan, and B received a new loan funded from CI's re-lending of the proceeds of A's repayment of the prior loan.

LAW AND ANALYSIS

GENERAL

Section 103(a) of the Code provides that, except as provided in section 103(b), gross income does not include interest on any state or local bond.

Section 103(b)(1) of the Code provides that section 103(a) does not apply to any private activity bond that is not a qualified bond within the meaning of section 141. Section 141(e) provides that the term "qualified bond" includes any private activity bond if the bond is a qualified mortgage bond that meets the volume cap requirements under section 146 and the applicable requirements under section 147.

Section 143(m)(1) of the Code provides that if during the taxable year any taxpayer disposes of an interest in a residence with respect to which there is or was any federally subsidized indebtedness for the payment of which the taxpayer was liable in whole or in part, then the taxpayer's tax for the taxable year is increased by the lesser of (A) the recapture amount with respect to the indebtedness, or (B) 50 percent of the gain (if any) on the disposition of the interest. Section 143(m)(3)(A) of the Code provides that the term "federally-subsidized indebtedness" includes any indebtedness the financing for which was provided in whole or in part from the proceeds of any tax-exempt qualified mortgage bond.

ISSUE 1: TESTING DATE

Section 143(m)(2)(B) of the Code provides that recapture under section 143(m)(1) does not apply to any disposition that is more than 9 years after the "testing date." Section 143(m)(4)(D) of the Code provides that the term "testing date" means the earliest date on which both (i) the indebtedness is federally subsidized indebtedness, and (ii) the taxpayer is liable in whole or in part for payment of the indebtedness. Regarding the measurement of the recapture period, the legislative history states that the "recapture period is measured from the earliest date when both of the following requirements are satisfied: (a) the assisted loan is closed (i.e., the date funds are disbursed to or for the benefit of the mortgagor) and (b) the mortgagor is liable for payment of the loan." H.R. Rep. No. 795, 100th Cong., 2d Sess. 440 n.133 (1988).

In Situation 1, A became liable for payment of the indebtedness on January 2, 1991, the date the loan was closed with X. The loan also became federally subsidized indebtedness on January 2, 1991, because (1) there was a pre- existing agreement at the time the loan was originated that if A's loan satisfied certain conditions, such as the eligibility requirements of section 143, CI would use qualified mortgage bond proceeds ultimately to purchase the loan from X, and (2) the purchase occurred. Accordingly, the testing date in Situation 1 is January 2, 1991, the date that the loan became a federally subsidized indebtedness and that A became liable for payment of the loan.

ISSUE 2: LOAN ASSUMPTIONS

Section 143(i)(2) of the Code provides that in order for an issue to maintain its status as qualified mortgage bonds, an assumption of a loan that was financed with proceeds of the issue must satisfy certain mortgage eligibility requirements provided in sections 143(c), (d), (e), and either (f)(1) or (f)(3)(B), whichever applies.

Section 1311(a) of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 576, provides that section 143 generally applies to bonds issued after August 15, 1986. Section 4005(h)(3)(A) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), 1988-3 C.B. 1, 311, provides that section 143(m) of the Code generally applies to "financing provided" after December 31, 1990. The Conference Report on TAMRA indicates that, for purposes of this effective date provision, Congress intended the term "financing provided" to mean "loans originating" after December 31, 1990. H.R. Conf. Rep. No. 100-1104, 1988-3 C.B. 473, 575. As section 143(m)(7) of the Code implies, the date a loan is originated is the date it is closed. Thus, the recapture provisions of section 143(m) generally apply to loans originating (i.e., loans closing) after December 31, 1990, from proceeds of qualified mortgage bonds issued under section 143 of the Code after August 15, 1986.

Regarding the application of section 143(m) to loan assumptions generally, the TAMRA House report states:

A disposition that is accompanied by a mortgage assumption . . . is a recapture event in the same manner as any other disposition. Additionally, an individual who assumes a OMB-financed mortgage . . . is liable for recapture in the same manner as an initial borrower . . ., and a new . . . recapture period begins with respect to that person.

H.R. Rep. No. 100-795 at 441. This legislative history does not specifically address the assumption of a loan originated prior to January 1, 1991, the effective date of section 143(m). Because section 143(m) is applicable only to "loans originating" after that date, however, the mere assumption of a loan originated prior to that date, with no change in the terms of the loan, should not cause section 143(m) to apply to the loan.

In Situation 2, the loan to A originated prior to January 1, 1991. Accordingly, A is not subject to recapture under section 143(m) on the sale of the residence to B. Additionally, B is not subject to the recapture provisions of section 143(m) because A's loan assumed by B was originated prior to December 31, 1990. On the other hand, if A's loan had been originated after December 31, 1990, then upon B's subsequent assumption of A's loan, B would be treated as an initial borrower receiving federally-subsidized financing on the date of assumption. B would therefore be subject to the recapture provisions of section 143(m) and would receive a new recapture period beginning on the date of the loan assumption.

ISSUE 3: LOAN RECYCLING

In Situation 3, B actually received a new loan from CI on January 2, 1991. Although the loan was ultimately funded from CI's re-lending of the proceeds of A's repayment of A's loan, the relending is an origination of a new loan for purposes of section 143(m). Accordingly, B is treated as an initial borrower receiving federally-subsidized financing on the closing date of the new loan and is subject to the recapture provisions of section 143(m), regardless of whether A's loan originated after December 31, 1990.

HOLDING

ISSUE 1

If a loan is initially made by a lending institution out of moneys other than qualified mortgage bond proceeds and is subsequently purchased by an issuer of qualified mortgage bonds with bond proceeds pursuant to a pre-existing agreement, the "testing date" for the loan under section 143(m)(4)(D) of the Code is the closing date of the loan from the lending institution to the mortgagor.

ISSUE 2

The federal subsidy recapture provisions of section 143(m) of the Code apply to any assumption of a loan originated after December 31, 1990 from proceeds of qualified mortgage bonds issued under section 143 of the Code after August 15, 1986.

ISSUE 3

The federal subsidy recapture provisions of section 143(m) of the Code apply to any loan originated after December 31, 1990 from the re-lending of proceeds derived from repayments of any prior loan or loans originally made from proceeds of qualified mortgage bonds issued under section 143 of the Code after August 15, 1986.

DRAFTING INFORMATION

The principal author of this revenue ruling is Scott R. Lilienthal of the Office of Assistant Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling contact Mr. Lilienthal at (202) 566-3347 (not a toll-free call).

Rev. Rul. 91-3, 1991-1 C.B. 31, 1991-3 I.R.B.