IRS Releases Final Regs on Tax Implications of Post-Libor Modifications

Shortly before the cessation of two U.S. dollar Libor tenors on Dec. 31, the IRS last week issued final regulations on the tax consequences of the transition away from Libor. The final regulations address circumstances when modifying a contract to update its reference rate could result in realization of income or losses for federal tax purposes—which, under existing rules, modifications may in certain circumstances be deemed to create a new contract and trigger a taxable event.

The final rules addressed most concerns raised by commenters—including the Alternative Reference Rates Committee, of which the American Bankers Association is a member—among them concerns about how to determine fair market values at the time a contract is modified. the final rules adopt an alternative approach providing additional definitions regarding covered and non-modifications for determining qualification for avoidance of a tax event.

The final regulations will take effect March 5. ABA will continue to work with its members and the ARRC to evaluate the new guidance.