The IRS issued Rev. Proc. 2020-44 to provide additional guidance to taxpayers that are affected by the phase-out of the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs).
The IRS released proposed regulations in October 2019 providing guidance on the tax consequences related to the transition away from IBORs to alternative reference rates in debt instruments and other financial contracts that are not debt instruments (non-debt contracts). For more details on the proposed regulations, see our story, “Proposed regs offer LIBOR transition guidance.”
The proposed regulations provided that an alteration of the terms of a debt or a non-debt contract to replace a rate referencing an IBOR with a qualified rate are generally not treated as a modification, and therefore, do not result in an exchange under Section 1001 and other tax consequences. However, the tax consequences of an alteration that is not covered by the proposed regulations, which is made contemporaneously with an alteration covered by the proposed regulations, may still result in tax consequences under Section 1001 and other provisions.
The new guidance provides specific modifications of contracts that are not treated as a taxable transaction under Section 1001 and other provisions. This generally includes any contract with terms that reference an IBOR that are modified as described in Section 4.02 of Rev. Proc. 2020-44. A contract subject to the Rev Proc. 2020-44 may include a derivative, debt instrument, stock, insurance contract and a lease agreement.
If a contract is modified as described in Section 4.02 of Rev. Proc. 2020-44, the modification is not treated as an exchange under Section 1001 and does not result in other tax consequences specified in the guidance. However, if a contract is modified under Section 4.02, and is also contemporaneously modified in a manner not described in Section 4.02, tax consequences may still apply.
Rev. Proc. 2020-44 is effective for modifications to contracts occurring on or after Oct. 9, 2020, and before Jan. 1, 2023, however, a taxpayer may rely on the guidance for modifications occurring before Oct. 9, 2020.
Jeff Borghino is a partner in the corporate tax group of Grant Thornton’s Washington National Tax Office in Washington, D.C. He focuses primarily on the taxation of corporate and financial transactions, including taxable and tax-free acquisitions, general corporate tax matters, recapitalizations and debt workouts, and financial instruments. Prior to joining the Washington National Tax Office, Borghino worked in Grant Thornton’s San Francisco office as part of the federal tax group.
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