The IRS and Treasury on 4 January 2022 published final regulations under Sections 860A, 860G, 1001, 1271, 1275, and 7701(1). These regulations provide tax guidance with respect to alterations to debt instruments, derivative contracts, and other contracts that replace interbank offered rates (IBORs) - e.g., London Interbank Offered Rate (LIBOR) - with qualified replacement rates or provide fallback replacement rate provisions.
The final regulations generally adopt proposed regulations (REG-118784-18) issued in October 2019, with some modifications in response to public comments received by Treasury and the IRS.
Like the proposed regulations, the final regulations generally provide that a change in the reference rate of a financial instrument to a “qualified rate” is not considered a modification resulting in a current taxation event under Section 1001. However, the final regulations contain various technical changes from the proposed regulations, including eliminating the requirements, often difficult to apply in practice, that the modified instrument be substantially equivalent in fair market value to the unmodified instrument — instead replacing this requirement with a list of excluded modifications that do not qualify for relief.