Proposed regulations under section 704(c) of the Code provide that the section 704(c) anti-abuse rule takes into account the tax liabilities of both the partners in a partnership and certain direct and indirect owners of such partners. The regulations further provide that a section 704(c) allocation method cannot be used to achieve tax results inconsistent with the intent of subchapter K of the Code.

This procedure describes the conditions under which changes to certain residential mortgage loans will not cause the Service to challenge the tax status of certain securitization vehicles holding the loans or to assert that those modifications create a liability for tax on a prohibited transaction.