An editorial in the New York Times’ DealBook by University of Colorado Law School Professor Victor Fleischer, references recent scholarship by Professors Bradley T. Borden and David J. Reiss, “Wall Street Rules Applied to REMIC Classification,” an excerpt of which was recently published in Thomson Reuters News and Insights.
In response to an IRS review of the tax treatment of REMICs (real estate mortgage investment conduits), Professor Fleischer argues that, rather than going after old, failed Remics, additional IRS resources would be better put to use in policing rules for securitization vehicles going forward. Professor Fleischer cites Professors Borden’s and Reiss’s discussions of the tax classification of REMICs and the so-called “Wall Street Rule” that protects many REMICs from IRS enforcement actions.
|Prof. Bradley Borden|
“Two professors at Brooklyn Law School, Bradley T. Borden and David J. Reiss, have argued that many purported REMICs may not in fact qualify as such. In many cases, they explain, mortgage originators failed to legally transfer mortgages into the trust. Instead, they argue, the failed REMICs were probably taxable mortgage pools or perhaps publicly traded partnerships. This means that Remic investors would be subject to additional taxes and penalties.
The Internal Revenue Service began a review of the tax status of REMICs last year, but it is unclear whether additional enforcement action is forthcoming. Mr. Borden and Mr. Reiss attribute this apparent nonenforcement to the so-called Wall Street Rule, part of the lore among tax lawyers that holds that after X million dollars of securities have been issued (and no one knows exactly what X is) and enough tax lawyers take the same position, the IRS will not intervene and blow up the deals.”
Read the full article.