FASITs — Arkansas Code § 26-51-440

# (a) Subchapter M — Arkansas Code § 26-51-440

(a) Subchapter M — Arkansas Code § 26-51-440. Subchapter M of the Internal Revenue Code of 1986, 26 U.S.C. § 851 et seq., as in effect on January 1, 1997, has been adopted for the purpose of computing Arkansas income tax liability with respect to:

(1) Regulated investment companies (RICs);

(2) Real estate investment trusts (REITs); and

(3) Financial asset securitization investment trusts (FASITs).

# (b) Subchapter M — FASITs — Definition — Arkansas Code § 26-51-440

(b) Subchapter M — FASITs — Definition — Arkansas Code § 26-51-440.

(1) A new type of statutory entity called a financial asset securitization investment trust (FASIT) has been created to facilitate the securitization of debt obligations such as:

(A) Credit card receivables;

(B) Home equity loans; and

(C) Auto loans.

(2) An entity that qualifies as a FASIT can issue instruments that are treated as debt for federal income tax purposes (and interest on which is therefore deductible) whether or not they would be so treated under normal tax principles.

(3) In addition, a FASIT itself generally is not taxable, and any taxable income or net loss that it has (after taking into account deductions for interest on the debt) flows through to the equity owner of the FASIT.

# (c) Subchapter M — FASITs — Qualification requirements — Arkansas Code § 26-51-440

(c) Subchapter M — FASITs — Qualification requirements — Arkansas Code § 26-51-440.
(1)(A) To qualify for status as a FASIT, an entity must meet several requirements, which are specifically set forth at I.R.C. § 860L(a)(1) [repealed].

(B) Any entity, including a corporation, partnership, or trust may be treated as a FASIT.
(2)(A) The ownership of a FASIT (i.e., the "ownership interest") must be held directly by an eligible corporation.

(B) I.R.C. § 860L(a)(1)(C) [repealed].

(C) An eligible corporation is a nonexempt domestic Subchapter C corporation that does not qualify as a:

(i) RIC;

(ii) REIT;

(iii) REMIC; or

(iv) Cooperative.
(D)(i) Moreover, the ownership interest of a FASIT must generally be entirely held by a single domestic Subchapter C corporation.

(ii) I.R.C. § 860L(a)(2) [repealed].
(3)(A) The FASIT issues debt instruments called "regular interests", which are in the nature of bonds.

(B) These regular interests would normally be purchased by investors and feature the following characteristics:

(i) The investor is unconditionally entitled to receive a specified amount of principal;

(ii) Interest is paid on the principal;

(iii) A stated term to maturity of usually no more than thirty (30) years; and
(iv)(a) In some cases, a FASIT may issue a high-yield interest rather than a regular interest.

(b) The tax treatment to investors of a high-yield interest is different from a regular interest.

(c) I.R.C. § 860L(b)(1)(B) [repealed].
(4)(A) For an entity to qualify as a FASIT, substantially all of its assets must consist of "permitted assets" as defined at I.R.C. § 860L(c)(1) [repealed].

(B) The assets of a FASIT are considered to be owned directly by the holder of the ownership interest.

# (d) Subchapter M — FASITs — Taxation of FASITs — Arkansas Code § 26-51-440

(d) Subchapter M — FASITs — Taxation of FASITs — Arkansas Code § 26-51-440.
(1)(A) A FASIT is not subject to income tax and is not treated as a:

(i) Trust;

(ii) Partnership; or

(iii) Corporation.

(B) Instead, all of the FASIT's assets and liabilities are treated as the assets and liabilities of the FASIT's owner.

(C) Any income, gain, deduction, credit, or loss of the FASIT is allocable directly to its owner.
(2)(A) Any FASIT income subject to Arkansas income tax shall be taxed at the corporate rates set forth in Arkansas Code § 26-51-205.

(B) No special Arkansas income tax return has been created specifically for FASITs that are located within Arkansas.

(C) As noted above, FASIT income passes through to the FASIT's owner.

(D) The FASIT's owner is responsible for:

(i) Reporting any such income on the owner's return; and

(ii) Paying any Arkansas individual income tax due.

(E) Once an election to be a FASIT is made, the election applies for that tax year and all subsequent years until such time that the election is revoked with the consent of the Internal Revenue Service.
(3)(A) All members of an affiliated group filing a consolidated return are to be treated as one (1) taxpayer.

(B) I.R.C. § 860J(d) [repealed].

(C) Specifically, the provision that the taxable income of a holder of a FASIT ownership interest cannot be less than the taxable income with respect to the FASIT interest applies to any consolidated group of corporations of which the holder is a member as if the group were a single taxpayer.
(4)(A) The holder of a FASIT ownership interest cannot offset income or gain from the FASIT ownership interest with non-FASIT losses.

(B) I.R.C. § 860J [repealed].
(5)(A) The taxable income of a FASIT (in determining the taxable income of the holder of an ownership interest) should be calculated using an accrual method of accounting.

(B) I.R.C. § 860H(b)(2) [repealed].

# (e) Subchapter M — FASITs — Taxation of regular interests — Arkansas Code § 26-51-440

(e) Subchapter M — FASITs — Taxation of regular interests — Arkansas Code § 26-51-440.

(1) The holder of a regular or high-yield interest in a FASIT (normally an investor) is generally taxed in the same manner as a holder of any other debt instrument.

(2) I.R.C. § 860H(c)(1) [repealed].

# (f) Subchapter M — FASITs — Prohibited transactions— Arkansas Code § 26-51-440

(f) Subchapter M — FASITs — Prohibited transactions — Arkansas Code § 26-51-440.

(1) In order to ensure that FASITs are not used for purposes other than securitization, a one hundred percent (100%) federal excise tax is imposed on any income not related to securitization (that is, income derived from prohibited transactions).

(2) Prohibited transactions are specifically set forth at I.R.C. § 860L(e)(1) and (2) [repealed].

# (g) Subchapter M — FASITs — Transfers of assets to FASITs — Arkansas Code § 26-51-440

(g) Subchapter M — FASITs — Transfers of assets to FASITs — Arkansas Code § 26-51-440.
(1)(A) Where the holder of the ownership interest in a financial asset securitization investment trust (FASIT) or a related person sells or contributes property to the FASIT, gain is recognized immediately in an amount equal to the excess (if any) of the property's value on the date of the contribution over its adjusted basis on that date.

(B) This gain is recognized notwithstanding any other income tax code provision, and the basis of any property is increased by the amount of gain recognized.

(C) I.R.C. § 860I [repealed].

(2) Losses on assets contributed to the FASIT are not allowed upon their contribution but may be allowed to the FASIT owner upon their disposition by the FASIT.