The Internal Revenue Service has issued a new revenue procedure that aims to clear up some of the murkiness surrounding subprime loans and the tax treatment of securitized versions of those loans, though the murkiness is likely to remain for the majority of those loans anyway.

Revenue Procedure 2008-47 describes conditions under which changes to certain subprime mortgage loans will not cause the IRS to challenge the tax status of some of the securitization vehicles holding the loans or assert that those modifications create a tax liability on a prohibited transaction.

The IRS has already provided guidance on fast-track loan modifications according to guidelines released by the American Securitization Forum on Dec. 6, 2007. But this week the ASF released an updated framework covering additional fast-track loan modifications. Thus, the IRS has come out with this latest revenue procedure amplifying and superseding the old revenue procedure, Rev. Proc. 2007-72, by extending its provisions to cover additional loan modifications.

The purpose of the revenue procedure, according to the IRS, is “to provide certainty in the current economic environment with respect to certain potential tax issues that may be implicated by fast track loan modifications.” However, the IRS cautioned, “no inference should be drawn about whether similar consequences would obtain if a transaction falls outside the limited scope of this revenue procedure. Furthermore, there should be no inference that, in the absence of this revenue procedure, transactions within its scope would have impaired the tax status of securitization vehicles or would have created liability for tax on a prohibited transaction.”

As far as it goes, the new guidance will be helpful with the tax treatment of some of the securitized versions of some of the loans that have been modified, and whether the IRS will consider them real estate mortgage investment conduits. But the criteria seem to apply to a small subset of the subprime loans that are currently in trouble and causing headaches in the broader market where those loans are traded.

Still, it is encouraging that the IRS is working on providing guidance for how to treat the small proportion of adjustable rate loans that have a chance of being “fast-tracked” into fixed-rate loans. Getting a handle on the subprime mess is likely to be a process that will require the issuance of a lot more revenue procedures and frameworks than the ones we’ve seen so far.

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