Final Regulations Issued on Potential Tax Consequences of Shift Away from LIBOR
At the end of December, the Treasury and the IRS released final regulations providing guidance on the tax consequences of the transition away the use of certain interbank offered rates such as the London Inter-bank Offer Rate (LIBOR) in debt instruments, derivative contracts, and other contracts. The final regulations were needed to address the possibility that a modification to the terms of a contract that replaces an interbank offered rate with a new reference rate could result in the realization of income, deduction, gain, or loss for Federal income tax purposes. Thankfully, the Treasury Department and the IRS concluded that it is appropriate within this context to depart from the ordinary tax rules to the degree and in the manner provided in the final regulations. The Treasury and the IRS originally issued proposed regulations on the subject in October 2019.
Although the final regulations and proposed regulations contain many of the same fundamental rules, the structure of Internal Revenue Code Section 1.1001-6 in the final regulations differs from that of the proposed regulations. These changes are primarily intended to simplify the operative rules.
Noteworthy structural changes to this code section include:
- The final regulations provide a single set of rules for all contracts (as compared to the proposed regulations which separately stated the rules for debt and non-debt contracts).
- The final regulations define a contract broadly to include debt instruments, derivative contracts, insurance contracts, stock, leases, and other contractual relationships.
- The final regulations also make use of defined terms to streamline references to concepts that are frequently used in the operative rules. The defined term “covered modification” is the foundation of these rules and serves to restructure several of the fundamental rules that were in the proposed regulations.
Source: FederalRegister.gov, Bloomberg Tax
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
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