IRS Issues Interim LIBOR Transition Guidance | Practical Law

IRS Issues Interim LIBOR Transition Guidance | Practical Law

On October 9, 2020, the IRS released interim guidance to facilitate the transition from LIBOR and other IBORs to alternative reference rates through the adoption of fallback language recommended by the Alternative Reference Rates Committee and the International Swaps and Derivatives Association.

IRS Issues Interim LIBOR Transition Guidance

Practical Law Legal Update w-027-9473 (Approx. 3 pages)

IRS Issues Interim LIBOR Transition Guidance

by Practical Law Finance
Published on 16 Oct 2020 • USA (National/Federal)
On October 9, 2020, the IRS released interim guidance to facilitate the transition from LIBOR and other IBORs to alternative reference rates through the adoption of fallback language recommended by the Alternative Reference Rates Committee and the International Swaps and Derivatives Association.
The IRS recently released Revenue Procedure 2020-44 providing guidance on the modification of debt instruments and derivatives and other contracts to reflect the transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to alternative reference rates. Under the revenue procedure, a modification to a contract that references an IBOR will not be treated as a taxable exchange if the contract is modified to incorporate:
  • Fallback language adopted by the International Swaps and Derivatives Association (ISDA). The ISDA fallback language is the set of terms provided in any one of the sections numbered one through six in the version of the attachment to the final ISDA 2020 IBOR Fallbacks Protocol posted on October 9, 2020.
  • Fallback language recommended by the Alternative Reference Rates Committee (ARRC). The ARCC fallback language is language recommended by the ARCC and specifically listed in the revenue procedure.
  • The terms of either an ARRC fallback or an ISDA fallback with certain deviations, provided all deviations fall into one or more of the following categories:
    • deviations from the terms of an ARRC fallback or an ISDA fallback that are reasonably necessary to make the terms incorporated into the contract legally enforceable in a relevant jurisdiction or to satisfy legal requirements of that jurisdiction;
    • deviations from the terms of an ISDA fallback that are reasonably necessary to incorporate the ISDA fallback into a contract that is not a "Protocol Covered Document" (as defined in the final ISDA 2020 IBOR Fallbacks Protocol);
    • deviations from the terms of an ARRC fallback or an ISDA fallback to omit terms that cannot under any circumstances affect the operation of the modified contract (for example, in a contract referencing only USD LIBOR, removing the portions of an ISDA fallback relating exclusively to contracts referring to another IBOR); or
    • deviations from the terms of an ARRC fallback or an ISDA fallback to add, revise, or remove technical, administrative, or operational terms (for example, the timing and frequency of determining rates), if the addition, revision, or removal is reasonably necessary to adopt or to implement the ARRC fallback or the ISDA fallback. This category of acceptable deviations does not include the addition of a term that obligates one party to make a one-time payment (or similar payments) as a substitute for any portion of an ARRC fallback or an ISDA fallback or as consideration for the modification.
Contracts covered by the revenue procedure include (but are not limited to):
  • Derivative contracts.
  • Debt instruments.
  • Stock.
  • Insurance contracts.
  • Lease agreements.
The revenue procedure is effective for modifications to contracts occurring on or after October 9, 2020, and before January 1, 2023. However, taxpayers may rely on the revenue procedure for modifications to contracts occurring before October 9, 2020.
The IRS previously provided guidance on contract changes made to reflect the transition from LIBOR in proposed Treasury regulations issued in October 2019. For more information on these proposed regulations, see Legal Update, IRS and Treasury Provide Tax Relief for LIBOR Replacement. For more information on the transition away from LIBOR see Article, Ring in the New: Expert Q&A on LIBOR Replacement and the Secured Overnight Financing Rate (SOFR).