Secondary Market Tax Amendments of 1986

Secondary Market Tax Amendments of 1986 - Amends the Internal Revenue Code to revise the original issue discount rules concerning mortgage related debt. Provides that the original issue discount of such debt shall be determined by reference to changes in the obligation's adjusted issue price. Sets forth the method of calculating such adjusted issue price.

Authorizes the issuance of collateralized mortgage securities (CMS) as multiple-class mortgage related securities. Provides that the issuance of a CMS shall be treated as a sale of the loans backing the securities. Provides that the holder, not the issuer or issue, shall be subject to tax. Sets forth rules for the taxation of regular interest and residual interests in such CMSs.

Sets forth basis adjustment rules for the holders of a CMS. Provides that the sale or exchange of an interest in a CMS shall be treated as a gain or loss as if the interest were debt obligation. Sets forth definitions and rules for the tax treatment of outside discount and premium related to a CMS.

Specifies prohibited transactions and imposes a penalty tax on such transactions. Permits the sale of an issue's assets, and the distribution of cash to holders of interests, in a qualifying complete liquidation without incurring tax at the issue level. Sets forth compliance and administrative provisions.