IRS Concludes That Partner in Dealer Partnership Is Not a Dealer for Section 475 Mark-to-Market Purposes

In its Chief Counsel Advice (CCA 201423019), the IRS concluded that a holding company with ownership of the majority interest in a partnership that originated and purchased mortgage loans was not a dealer even though the partnership itself was a dealer under Section 475.

According to the IRS, although the ordinary character of the marked securities held by the partnership flowed through to the holding company, the dealer activity of the partnership was not attributable to, and did not flow through to, the holding company. Further, modifications of mortgage loans that were held by trusts as sub-servicers in which the holding company held residual interests did not make the holding company a dealer. The IRS stipulated that this is because such loans had been acquired by the trusts prior to the holding company's becoming the owner of the residual interests and because, in the IRS's view, the modifications, while possibly constituting exchanges for purposes of Section 1001, did not rise to the level of dealer activity under Section 475. The trusts were not in the business of originating loans, and the fact that they might occasionally do some loan modifications which resulted in a "new" loan (for purposes of Section 1001) did not make the trusts mortgage loan originators.

Finally, the IRS argued, the borrowers were not customers of the trusts, but rather customers of the originators; therefore, the trusts were not acting as agents for the holding company in modifying the loans.

The IRS did not address whether the holding company could have made a trader election under Section 475(f) because such election was not timely made.

See: CCA 201423019.