IRS issues final regulations on IBORs transition


The IRS released final regulations on Dec. 31 (TD 9961) providing guidance on the transition from interbank offered rates, or IBORs (e.g., the London Interbank Offered Rate (LIBOR)), that are used in debt instruments and other financial contracts. The final regulations are effective on March 7, 2022, and replace existing proposed regulations.

A broad range of financial transactions reference IBORs, including over-the-counter and exchange-traded derivatives, loans, taxable and tax-exempt bonds, floating-rate notes, and securitized products. However, the regulator that oversees LIBORs previously announced that the LIBOR may be phased out after the end of 2021. More recently, the administrator of the LIBOR announced that the publication of the overnight, one-month, three-month, six-month and 12-month USD-LIBORs will cease immediately following the publication on June 30, 2023. After June 30, 2023, the regulator may compel publishing of certain variants of LIBOR using a “synthetic” methodology, but these synthetic LIBORs are expected to be published for a limited period of time.

Various tax issues may arise when contracts, including debt instruments, are modified in anticipation of the discontinuation of the LIBOR.

The new regulations apply to contracts including debt instruments, derivative contracts, stock, insurance contracts, and lease agreements. Specifically, the regulations provide rules relating to the modification of the terms of a contract as part of the transition from the LIBOR and certain other interbank offered rates. Generally, a “covered modification,” as defined in the regulations, is not treated as the exchange of property for other property differing materially in kind under Section 1001.

A covered modification includes certain a modification, or a portion of a modification, of the terms of a contract that:

  • Replaces an operative rate that references a discontinued IBOR with a qualified rate, to add an obligation for one party to make a qualified one-time payment (if any), and to make associated modifications (if any)
  • Includes a qualified rate as a fallback rate to an operative rate that references a discontinued IBOR and to make associated modifications (if any)
  • Replaces a fallback rate that references a discontinued IBOR with a qualified rate and to make associated modifications (if any)

The regulations also define key terms including: “qualified rate,” “discontinued IBOR,” “associated modification,” and “qualified one-time payment.”

If a covered modification is made at the same time as a noncovered modification, the regulations under Section 1001 still apply to determine whether the noncovered modification results in an exchange under Section 1001.

The final regulations also provide a list of specific modifications that are excluded from the definition of covered modification. They also provide guidance for ancillary issues related to hedging transactions, withholding, fast-pay stock, REMICs, and investment trusts.



Grant Thornton Insight: The new regulations are generally intended to minimize the impact of the transition away from the use of certain IBORs used in debt instruments, derivatives and other contracts. However, it is highly recommended that taxpayers consult their tax advisors related to any modification to an existing debt instrument or contract.



Tax professional standards statement

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.


More tax hot topics