Rev. Rul. 74-300

Advice has been requested whether the conclusions of Rev. Rul. 70-544, 1970-2 C.B. 6, and Rev. Rul. 70-545, 1970-2 C.B. 7, concerning mortgage-backed certificates guaranteed by the Government National Mortgage Association (GNMA) that are purchased by a real estate investment trust are also applicable to the participation certificates issued by the Federal Home Loan Mortgage Corporation (FHLMC) that are purchased by a real estate investment trust.

Rev. Rul. 70-544 and Rev. Rul. 70-545 hold, in part, that interest income from mortgage participation certificates guaranteed by the GNMA is interest on obligations secured by mortgages on real property under section 856(c)(3)(B) of the Internal Revenue Code of 1954, and that such certificates qualify as "real estate assets" within the meaning of section 856(c)(5)(A).

Rev. Rul. 71-399, 1971-2 C.B. 433, as amplified by Rev. Rul. 72-376, 1972-2 C.B. 647, and Rev. Rul. 74-221, page 365, sets forth the tax consequences of the purchase of mortgage participation certificates by the FHLMC and the sale of corresponding certificates to other savings and loan associations and exempt employees' trusts. Rev. Rul. 71-399 holds, in part, that FHLMC is a fiduciary and the sale of a certificate transfers equitable ownership in the underlying mortgages to the purchaser of the certificate. However, neither Rev. Rul. 71-399, Rev. Rul. 72-376, nor Rev. Rul. 74-221, set forth the tax consequences where a real estate investment trust owns such certificates.

In the case of both the FHLMC and the GNMA participating certificates, processing is commenced by an insured savings and loan association which assembles a "list" or "pool" of mortgages which are both "loans secured by an interest in real property" within the meaning of section 7701(a)(19)(C)(v) of the Code and "qualifying real property loans" within the meaning of section 593(e).

FHLMC purchases mortgage participation certificates representing fractional undivided interests aggregating 85 percent in each mortgage contained on the list of residential real estate mortgages prepared by the originating savings and loan association. For each such mortgage participation certificate purchased from the originating savings and loan association, FHLMC issues a corresponding certificate bearing its guarantee of principal and interest payment by the mortgagor and sells these corresponding certificates at par to other savings and loan associations, exempt employees' pension and profit sharing trusts, and real estate investment trusts.

GNMA does not purchase participations but instead issues to the originating savings and loan association, or other eligible mortgage institution a commitment to guarantee certificates representing an undivided interest in the pool of mortgages to be established by the originating savings and loan association. Based on this commitment the originating savings and loan association places the pool of mortgages with a commercial bank acting as custodian and then arranges for the sale of "pass-through" certificates backed by the mortgage pool in minimum denominations of $25,000 to other savings and loan associations, real estate investment trusts, exempt employees' pension and profit sharing trusts, and individuals. In the case of "straight pass-through" certificates, GNMA guarantees to the certificates holders only the proper performance of the mortgage servicing and the payment only of that interest and principal actually collected or collectable through due diligence by the originating association. In the case of "modified pass-through" certificates, GNMA guarantees the timely payment of principal and interest, whether or not collected by the originating association.

Based on the foregoing facts the conclusions of Rev. Rul. 70-544 and Rev. Rul. 70-545, as applied to the GNMA certificates owned by a real estate investment trust, also apply to FHLMC certificates owned by a real estate investment trust. Accordingly, the interest income on such certificates is considered "interest on obligations secured by mortgages on real property or on interests in real property" within the meaning of section 856(c)(3)(B) of the Code, and a real estate investment trust which owns participation certificates is considered as owning "real estate assets" within the meaning of section 856(c)(5)(A).

Rev. Rul. 71-399, as amplified by Rev. Rul. 72-376 and Rev. Rul. 74-221, is further amplified.