IRS Releases Guidance On LIBOR Transition – Finance and Banking


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IRS Releases Guidance On LIBOR Transition


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IRS Releases Guidance on LIBOR Transition

The IRS, in Revenue Procedure 2020-44, provides guidance on
the market’s transition from the London Interbank Offered Rate
(LIBOR) and other rates to alternative reference rates. The Revenue
Procedure states that (i) certain modifications to a contract with
terms referencing an IBOR (defined below) will not be treated as an
exchange of property for other property differing materially in
kind or extent for purposes of Section 1.1001-1(a) of the Treasury
Regulations; and (ii) such modifications will not be treated as a
legging out of an integrated transaction, a termination of a
qualified hedge, or as a disposition or termination of either leg
of a hedging transaction. (Section references are to the Internal
Revenue Code of 1986, as amended and the related Treasury
Regulations, as the context requires.)

On July 27, 2017, the U.K. Financial Conduct Authority, the U.K.
regulator tasked with overseeing the LIBOR, announced that all
currency and term variants of LIBOR, including U.S.-dollar LIBOR
(USD LIBOR), may be phased out after the end of 2021. These
interbank offered rates (IBORs) are frequently referred to in the
terms of debt instruments and non-debt contracts. The IRS has
issued proposed reliance regulations (REG-118784-18 – see our prior coverage
here) that provide guidance on the tax
consequences of the transition to the use of reference rates other
than IBORs in debt instruments and non-debt contracts.

The Alternative Reference Rates Committee (ARRC) was charged
with finding an alternative reference rate to USD LIBOR and
facilitating its implementation. To support the transition from USD
LIBOR, the ARRC published recommended fallback language,
to be included in the terms of certain products, which describes
the circumstances under which references to the current benchmark
rate are replaced (ARRC Fallbacks). The ARRC has also worked with
the International Swaps and Derivatives Association (ISDA) to
ensure that the contractual fallback provisions in derivatives
contracts are sufficiently robust to prevent serious market
disruptions if LIBOR is permanently discontinued. ISDA has issued
guidance (most recently, the ISDA Protocol) related to relevant terms and
definitions intended to facilitate the inclusion of fallback
provisions for IBORs in derivative transactions (ISDA
Fallbacks).

In response to several comment letters written by ARRC, the IRS
and Treasury Department issued Revenue Procedure 2020-44 (which is
interim guidance meant to address issues prior to the finalization
of the proposed reliance regulations discussed above) to support
the adoption of the ARRC Fallbacks and ISDA Fallbacks. Revenue
Procedure 2020-44 applies to any contract (e.g., a derivative
contract, a debt instrument, stock, or an insurance contract, etc.)
with terms that reference an IBOR and that are modified to
incorporate (a) an ISDA Fallback, regardless of whether that
modification results from adherence to the ISDA Protocol or a
bilateral agreement between the parties to the contract, (b) an
ARRC Fallback, or (c) the terms of either an ARRC Fallback or an
ISDA Fallback with certain deviations. The Revenue Procedure states
that:

  1. The above modifications to such a contract are not treated as
    the exchange of property for other property differing materially in
    kind or extent for purposes of Section 1.1001-1(a).

  2. If such a contract is one leg of a transaction integrated under
    Sections 1.1275-6 or 1.988-5(a), the modification of that contract
    is not treated as legging out of the integrated transaction under
    Sections 1.1275-6 or 1.988-5(a).

  3. If such a contract is integrated under Section 1.148-4(h), the
    modification is not treated as terminating the qualified hedge
    under Section 1.148-4(h).

  4. If such a contract is part of a hedging transaction under
    Section 1.446-4, the modification is not treated as a disposition
    or termination of either leg of the transaction under Section
    1.446-4.

Lastly, the Revenue Procedure also provides guidance for
contracts that are contemporaneously modified as described above
and not modified in a manner as described above. Revenue Procedure
2020-44 is effective for modifications to contracts occurring on or
after Oct. 9, 2020, and before Jan. 1, 2023, but may be relied on
for modifications to contracts occurring before Oct. 9, 2020.

IRS Issues Final Regulations on Consolidation Net Operating
Losses

The IRS has issued final regulations (TD 9927) implementing the application of recent
changes to the Section 172 net operating loss (NOL) deduction to
consolidated groups. Section 172(a)(2) was amended by the 2017 Tax
Cuts and Jobs Act and the Coronavirus Aid, Relief, and Economic
Security Act (CARES Act) to provide for an 80% limitation on the
NOL deduction. These regulations provide guidance relating to the
implementation of the above changes to Section 172(a), the
absorption of consolidated net operating loss (CNOL) carryovers and
carrybacks, and also update regulations applicable to consolidated
groups that include both life insurance companies and other
companies to reflect statutory changes.

SBA and Treasury Clarify Certain PPP Requirements

The Small Business Administration (SBA) and the U.S. Department
of Treasury have provided additional information regarding the
Paycheck Protection Program (PPP). The PPP was established by the
CARES Act (as modified by the Paycheck Protection Program
Flexibility Act of 2020) and authorized the SBA to issue forgivable
loans to qualified businesses to cover payroll expenses and certain
other expenses during the COVID-19 crisis. SBA and Treasury announced the release of a streamlined loan
forgiveness application for loans of $50,000 or less. Additionally,
the SBA and Treasury have updated the PPP Loan Forgiveness FAQs. Borrowers are
permitted to defer payments of principal, interest, and fees to 10
months after the last day of the covered period (the earlier of 24
weeks or Dec. 31, 2020). The SBA began approving PPP forgiveness
applications and remitting forgiveness payments to PPP lenders on
Oct. 2, 2020. The FAQs are updated to provide that the deadline for
borrowers to apply for forgiveness of a loan is not Oct. 31, 2020;
rather, the borrower must apply for forgiveness no later than 10
months after the last day of the borrower’s loan forgiveness
covered period. The FAQs explain that the date, Oct. 31, 2020, is
on the form for administrative purposes and will be updated when a
new form is approved.

IRS Temporarily Allows Fax Filing of Form 8886

The IRS has announced that it will allow taxpayers to
temporarily fax in the Office of Tax Shelter Analysis (OTSA) copy
of the initial year filing of Form 8886, Reportable Transaction
Disclosure Statement, until further notice. Taxpayers also must
continue to file Form 8886 with their tax return.

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