IRS written determination 201425010

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201425010
Release Date: 6/20/2014
Index Number: 7701.26-00, 115.03-00
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[Third Party Communication:
Date of Communication: Month DD, YYYY]
Person To Contact:
---------------------, ID No. ------------------
Telephone Number:
----------------------
Refer Reply To:
CC:FIP:B06
PLR-149387-13
Date:
December 18, 2013
Legend:
Corporation A=----------------------------------------------------------------------------------
Corporation B=-----------------------------------------------------------------------------------------
State=---------------
Area A=--------------------------------------------------------------------------------------------
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Area B=--------------------------------------------------------------------------------------------
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Program=-------------------------------------------------
Target Areas=--------------------------------------------------------------------------------------------
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Entity=------------------------------------
Program LLC=-----------------------
Corporation A
LLC
=---------------------------------
Corporation B
LLC
=-----------------------------------
Date 1=------------------
a=----
b=-----
c=----
d=----
e=--------------

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f=--------------
Dear ---------------:
This responds to a letter dated May 15, 2013, and supplemental correspondence dated
August 29, 2013, and November 4, 2013, submitted on behalf of Corporation B
requesting a ruling under section 7701(i) of the Internal Revenue Code (1986) (the
“Code”) that expansion of Corporation B’s joint non-profit home financing program with
Corporation A to include the issuance of multiple maturity debt financing by an LLC will
not result in treatment of the LLC as a taxable mortgage pool.
FACTS:
Corporation A and Corporation B (collectively, the “Corporations”) are organizations
exempt from taxation under section 501(c)(3) of the Code. The Corporations assist low
and moderate income individuals to obtain adequate and affordable housing within
certain areas in State that have been identified as in moderate or high need for
community stabilization. Corporation A and Corporation B provide assistance in Area A
and Area B, respectively. The Corporations implement various programs intended to
counteract housing deterioration in these communities. The Corporations operate in
cooperation with, or on behalf of, various State and local governmental agencies, and
neighborhood organizations.
As of Date 1, the Corporations jointly operate a home ownership program (the
“Program”) that provides financing directly to low and moderate income borrowers for
the purchase of single-family owner-occupied homes (the “Loans”). To qualify for a
Loan, a borrower must be ineligible for conforming market rate mortgage financing and
must meet certain income requirements. At least a percent of the Loans must be
provided to borrowers with incomes less than b percent of the area median income as
determined by the U.S. Department of Housing and Urban Development (“HUD”). To
date, less than c percent of borrowers had incomes above b percent of HUD area
median income and more than d percent had incomes below a percent. Homes
purchased through the Program are located in one of several Target Areas identified as
in need of community stabilization.
The Loans are currently in the form of contracts for deeds, or land installment contracts,
that are treated as mortgages for federal income tax purposes. The Program might be
expanded in the future to include conventional mortgages. The maximum principal
amount of a Loan is $e, and since inception of the Program, the average principal
amount of a Loan has been $f. The Loans have maturities of 10 years and bear fixed
interest rates. One of the Program’s goals is to assist the borrower in ultimately
refinancing into a 30-year mortgage. The Program has implemented safeguards to
mitigate a borrower’s risk of default on a Loan, including extensive screening, financial
counseling through a non-profit community-based counseling service, education, and

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other assistance in the event that the borrower experiences financial difficulty (including
possible modification of a payment plan).

The Program is funded by charitable contributions and debt financing from the State
housing finance agency, quasi-governmental and other housing non-profit entities,
private sector donors, and investors. Credit enhancement for debt issued to fund the
Program is often provided by several cities and counties in State, as well as nonprofit
organization Entity A.
The Corporations wish to expand the Program to include the issuance of multiple
maturity debt financing (the “Notes”) secured by a pledge of the Loans. The
Corporations have jointly established a special purpose limited liability company
(“Program LLC”) in order to issue the Notes. Program LLC is a nonprofit limited liability
company organized under the law of State, the membership interests in which are
owned by the Corporations through their wholly-owned disregarded entities, Corporation
A LLC and Corporation B LLC. The Corporations represent that they may establish
additional limited liability companies in the future. The Corporations represent that
Program LLC will issue the Notes in multiple tranches with different maturity dates and
interest rates in order to attract a broader base of investors with varied investment
goals, which will expand the capacity of the Program to originate Loans. Under the
related debt financing agreements, the Corporations may be required (or permitted) to
repurchase a Loan in the event of a breach of certain representations, warranties or
covenants in the related debt financing agreement if such breach materially affects the
value of the Loan. In general, the lenders (or their agent) have the right to enforce the
repurchase obligation against the Corporations (or related party). If a Loan is
repurchased, it will have no impact on the ability of the borrower to remain in
possession of her home. The Corporations have the right to exercise various remedies
against the borrower if she is in default under a Loan.
Investors in the Notes are expected to include the State finance agency, quasi-
governmental and other housing non-profit entities, and private sector investors. Credit
enhancement for the Notes is expected to continue to be provided by several cities and
counties in State, as well as nonprofit organization Entity A. The proceeds of the Notes
will be used exclusively for the acquisition of homes eligible for inclusion in the Program,
and the origination or purchase of Loans. The Corporations request a ruling that
Program LLC’s financing of pledged Loans with debt instruments having multiple
maturities does not cause the LLC to be a taxable mortgage pool under section 7701(i)
of the Code.
The Corporations represent that, with respect to any Notes issued by Program LLC that
would cause Program LLC to be a taxable mortgage pool but for the requested ruling,
Program LLC will hold, either directly or indirectly through an indenture trustee or other
custodian who will hold the pledged Loans to satisfy the Notes, the remaining beneficial
interest in all assets that support the Notes until they are retired.

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LAW AND ANALYSIS:
Section 7701(i)(1) provides that a taxable mortgage pool shall be treated as a separate
corporation which may not be treated as an includible corporation with any other
corporation for purposes of section 1501.
Section 7701(i)(2)(A) provides that in general, a taxable mortgage pool is any entity
(other than a REMIC) if (i) substantially all of the assets of such entity consists of debt
obligations (or interests therein) and more than 50 percent of such debt obligations (or
interests) consists of real estate mortgages (or interests therein), (ii) such entity is the
obligor under debt obligations with 2 or more maturities, and (iii) under the terms of the
debt obligations referred to in clause (ii) (or underlying arrangement), payments on such
debt obligations bear a relationship to payments on the debt obligations (or interests)
referredto in clause (i).
Section 7701(i)(2)(B) provides that any portion of an entity which meets the definition of
subparagraph (A) shall be treated as a taxable mortgage pool (“TMP”).
Section 301.7701(i)-4(a)(1) of the Procedure and Administration Regulations excludes
certain governmental bond programs from the TMP rules. It provides that regardless of
whether an entity satisfies any of the requirements of section 7701(i)(2)(A), an entity is
not classified as a TMP if - (i) The entity is a State, territory, a possession of the United
States, the District of Columbia, or any political subdivision thereof (within the meaning
of § 1.103-1(b) of this chapter), or is empowered to issue obligations on behalf of one of
the foregoing; (ii) The entity issues the debt obligations in the performance of a
governmental purpose; and (iii) The entity holds the remaining interests in all assets that
support those debt obligations until the debt obligations issued by the entity are retired.
The term “governmental purpose” means an essential governmental function within the
meaning of section 115 and does not include mere packaging of debt obligations for
resale in the secondary market. § 301.7701(i)-4(a)(2).
Section 301.7701(i)-4(a)(3) provides that if an entity is not described in paragraph (a)(1)
of this section, but has a similar purpose, then the Commissioner may determine that
the entity is not classified as a taxable mortgage pool.
Neither of the Corporations nor Program LLC are an entity described in section
301.7701(i)-4(a)(1)(i). Nevertheless Program LLC may qualify for an exemption from
the TMP rules pursuant to section 301.7701(i)-4(a)(3), if it is found that the issuance of
the Notes has a similar purpose as described in section 301.7701(i)-4(a)(1)(ii), that is,
Program LLC’s purpose in issuing Notes is to issue debt obligations in the performance
of a governmental purpose and Program LLC meets the requirements of section

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301.7701(i)-4(a)(1)(iii). In order to meet the requirement of “performance of a
governmental purpose,” Program LLC must satisfy the requirements under section
301.7701(i)-4(a)(2) that the issuance of the Notes (1) is in performance of an essential
governmentalfunction within the meaning of section 115 and (2) is not the mere
packaging of debt obligations for resale in the secondary market.
In providing an exclusion from gross income, section 115 requires, among other things,
that the income be derived in “the exercise of any essential governmental function.”
Rev. Rul. 77-261, 1977-2 C.B. 45, holds, “Income from a fund, established under a
written declaration of trust by a State, for the temporary investment of cash balances of
the State and its political subdivisions . . . is excludable from gross income . . . .” The
ruling reasons that the “investment of positive cash balances . . . in order to receive
some yield on the funds until needed to meet expenses is a necessary incident of the
power of the State or political subdivision to collect taxes and other revenues for use in
meeting governmental expenses.” In addressing the meaning of an “essential
governmental function” for purposes of section 115, the ruling states, “Congress did not
desire in any way to restrict a State’s participation in enterprises that might be useful in
carrying out those projects desirable from the standpoint of the State government which,
on a broad consideration of the question, may be the function of the sovereign to
conduct.”
CONCLUSION:
Based on the information submitted and representations made, we conclude that
Corporation A and Corporation B have satisfied the requirements under section
301.7701(i)-4(a)(1) for Program LLC to be exempt from the TMP rules under the facts
and circumstances. Program LLC will hold, either directly or indirectly through an
indenture trustee or other custodian, the remaining interests in Loans that support Notes
issued by Program LLC until those Notes are retired. The activities of the Corporations
and Program LLC provide funding to enable low and moderate income individuals to
borrow the money they need to purchase housing in communities identified as in need
of stabilization. Neither the Corporations nor Program LLC are in the business of
purchasing and selling of debt obligations on the secondary market, rather Program
LLC will function as the direct issuer of such bonds. Accordingly, Program LLC’s
issuance of Notes is in the performance of a governmental purpose for purposes of
section 301.7701(i)-4(a)(2) because (1) its activities qualify as an “essential
governmental function” under section 115, and (2) its issuance of Notes is not “the mere
packaging of debt obligations for resale on the secondary market.”
This ruling is limited to the exemption of Program LLC’s issuance of Notes from the
TMP rules under section 301.7701(i)-4. This ruling's application is limited to the facts,
representations, Code sections, and regulations cited herein. No opinion is expressed
with regard to whether Program LLC could meet the requirements of a REMIC under

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section 860D(a), whether Program LLC would otherwise be a TMP under section
7701(i), whether it is otherwise exempt under section 501(c)(3), or whether Program
LLC’s issuance of Notes satisfies either the accrual requirement or the private benefit
requirement of section 115.
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.
This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent. In accordance with the
provisions of a Power of Attorney on file, we are sending a copy of this ruling letter to
your authorized representative.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.
Sincerely,
Mary Brewer
Assistant to the Branch Chief
(Office of Chief Counsel, Branch 6 (Financial
Institutions & Products))