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IRS Proposes LIBOR Transition Rules

mark.howe@cwt.com's picture
Commentary by Mark Howe

The IRS proposed regulations to address the transition from interbank offered rates ("IBORs") to other reference rates for debt instruments and non-debt contracts.

Cadwalader attorneys previously discussed the potentially adverse tax consequences of modifying - in the absence of regulations - an instrument to reflect the transition from an IBOR (providing that it is not a "significant modification" for federal income tax purposes).

Comments on the proposed amendments must be submitted within 45 days of their publication in the Federal Register.

Commentary

As expected, these proposed regulations would help avoid a tax "Armageddon" for existing debt and other financial instruments that will transition from IBORs to replacement rates. Under the proposed regulations, modification of a financial instrument replacing an IBOR rate will not be a taxable event (or lose grandfather status) where (i) the replacement rate is a qualified rate, such as SOFR, (ii) the currency of the reference rate does not change and (iii) the value of the before and after instruments does not change (i.e., are substantially equivalent). While the proposed regulations may not cover every instance where the transition is tax-sensitive, the regulations provide a clear and sensible answer to what would otherwise be a vexing, technical tax issue.

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