The IRS recently released Income procedure 2020-44 (“Rev. Proc. 2020-44“) which provides useful relief to taxpayers by providing that if a contract referencing an IBOR is amended to incorporate ISDA or AARC specific fallback language for replacing IBORs, such amendment will not result in certain adverse tax consequences, such as the exchange processing under article 1001. of the General Tax Code, or the lengthening or termination of integrated transactions under articles 1.1275-6, 1.988-5 (c) or 1.148-4 ( h) of the Treasury Regulations.
This is particularly important for tax-exempt debt securities with an interest rate based on LIBOR that might otherwise be treated as “reissued” for federal income tax purposes due to the addition of such wording, and all derivative transactions (such as interest rate swaps) that are considered “embedded” in a debt obligation for tax purposes.
As we wrote on here, to support the transition from IBORs to AARC published fallback language to be included in the terms of certain newly issued and outstanding treasury products, including floating rate notes, bilateral commercial loans, syndicated loans, securitizations, variable rate mortgages and student loans private variable rate (the “”AARC Emergency Solutions“). Fallback language typically provides a mechanism to determine the replacement benchmark rate which supersedes the current benchmark rate.
Likewise, on October 9, 2020, ISDA published its Supplement number 70 to the 2006 ISDA Definitions (the “ISDA supplement”) To facilitate the inclusion of new transitional IBOR fallback provisions in derivative transactions concluded as of January 25, 2021, and its final version ISDA IBOR backup protocol to facilitate the adoption of the ISDA supplement by the parties to the old derivative contracts (the “”ISDA protocol“). A “ISDA fallbackIs the set of terms provided in one of sections one through six of the ISDA Protocol Attachment.
On October 9, 2019, the Treasury Department and IRS released proposed regulation on the tax consequences of modifying debt instruments, derivative contracts and other contracts to replace IBORs or add fallback provisions to IBORs (the “”Proposed regulations“). The ARRC then recommended guidelines on the tax consequences of changing a contract, as provided in the ISDA protocol and the AARC fallback solutions, and the Treasury Department and IRS accepted these recommendations in publishing the provisional guidelines in Rev. Proc. 2020-44.
Under Rev. Proc. 2020-44, certain technical and reasonably necessary deviations from the specific conditions of an AARC withdrawal or an ISDA withdrawal are authorized.
Rev. Proc. 2020-44 is in effect for changes to contracts occurring on or after October 9, 2020 and before January 1, 2023. A taxpayer may, however, rely on Rev. Proc. 2020-44 for changes occurring before October 9, 2020.
While these tips are very helpful in providing taxpayers with certainty when adding fallback wording to a new or existing contract, they do not exempt the parties from analyzing the tax consequences of an actual transition from business to business. an IBOR at a new rate. At this point, taxpayers will need to consult the draft regulation guidelines (or some other form of guidance at this point) to determine the tax consequences. The proposed regulations currently require that a new rate be one of many rates listed in the proposed regulations (including SOFR) and if an AARC or ISDA fallback solution results in a new rate that is not on the list. , it might results.