[Code of Federal Regulations]
[Title 26, Volume 18]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR301.7701(i)-2]

[Page 679]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 301_PROCEDURE AND ADMINISTRATION--Table of Contents
 
                               Definitions
 
Sec. 301.7701(i)-2  Special rules for portions of entities.

    (a) Portion defined. Except as provided in paragraph (b) of this 
section and Sec. 301.7701(i)-1, a portion of an entity includes all 
assets that support one or more of the same issues of debt obligations. 
For this purpose, an asset supports a debt obligation if, under the 
terms of the debt obligation (or underlying arrangement), the timing and 
amount of payments on the debt obligation are in large part determined, 
either directly or indirectly, by the timing and amount of payments or 
projected payments on the asset or a group of assets that includes the 
asset. Indirect payment arrangements include, for example, a swap or 
other hedge, or arrangements where the timing and amount of payments on 
the debt obligations are determined by reference to a group of assets 
(or an index or other type of model) that has an expected payment 
experience similar to that of the assets. For purposes of this 
paragraph, the term payments includes all proceeds and receipts from an 
asset.
    (b) Certain assets and rights to assets disregarded--(1) Credit 
enhancement assets. An asset that qualifies as a credit enhancement 
contract (as defined in Sec. 301.7701(i)-1(c)(4)(ii)) is not included 
in a portion as a separate asset, but is treated as part of the assets 
in the portion to which it relates under Sec. 301.7701(i)-1(c)(4)(i). 
An asset that does not qualify as a credit enhancement contract (as 
defined in Sec. 301.7701(i)-1(c)(4)(ii)), but that nevertheless serves 
the same function as a credit enhancement contract, is not included in a 
portion as a separate asset or otherwise.
    (2) Assets unlikely to service obligations. A portion does not 
include assets that are unlikely to produce any significant cash flows 
for the holders of the debt obligations. This paragraph applies even if 
the holders of the debt obligations are legally entitled to cash flows 
from the assets. Thus, for example, even if the sale of a building would 
cause a series of debt obligations to be redeemed, the building is not 
included in a portion if it is not likely to be sold.
    (3) Recourse. An asset is not included in a portion solely because 
the holders of the debt obligations have recourse to the holder of that 
asset.
    (c) Portion as obligor--(1) In general. For purposes of section 
7701(i)(2)(A)(ii), a portion of an entity is treated as the obligor of 
all debt obligations supported by the assets in that portion.
    (2) Example. The following example illustrates the principles of 
this section:

    Example. (i) Corporation Z owns $1,000,000,000 in assets including 
an office complex and $90,000,000 of real estate mortgages.
    (ii) On November 30, 1998, Corporation Z issues eight classes of 
bonds, Class A through Class H. Each class is secured by a separate 
letter of credit and by a lien on the office complex. One group of the 
real estate mortgages supports Class A through Class D, another group 
supports Class E through Class G, and a third group supports Class H. It 
is anticipated that the cash flows from each group of mortgages will 
service its related bonds.
    (iii) Each of the following constitutes a separate portion of 
Corporation Z: the group of mortgages supporting Class A through Class 
D; the group of mortgages supporting Class E through Class G; and the 
group of mortgages supporting Class H. No other asset is included in any 
of the three portions notwithstanding the lien of the bonds on the 
office complex and the fact that Corporation Z is the issuer of the 
bonds. The letters of credit are treated as incidents of the mortgages 
to which they relate.
    (iv) For purposes of section 7701(i)(2)(A)(ii), each portion 
described above is treated as the obligor of the bonds of that portion, 
notwithstanding the fact that Corporation Z is the legal obligor with 
respect to the bonds.

[T.D. 8610, 60 FR 40091, Aug. 7, 1995]