On October 9, the Internal Revenue Service (IRS) proposed regulations to eliminate tax issues that might otherwise arise due to the modification of instruments and transactions as a result of discontinuation of interbank offered rates (IBORs) used in debt instruments and non-debt contracts (such as derivatives). Under current rules, material alteration of the terms of instruments and contracts can result in tax events, including the realization of gain or loss for income tax purposes.

The proposal will allow parties to amend documents to replace an IBOR with a “qualified rate,” to add a back-up qualified rate (for use if an IBOR is discontinued or deteriorates to the point that it is not useful) or to change a back-up rate to a qualified rate, with associated modifications to the instrument without causing a taxable reissuance of the debt obligation or a deemed disposition or termination of a swap. The proposal will allow the foregoing, so long as the fair market value of the instrument/transaction after the modification is substantially equivalent to the fair market value of the instrument/transaction before the alteration. Subject to certain conditions, a taxpayer may rely on the proposed rules prior to their final adoption.

The comment period ends on November 25.

The text of the proposed rule is available here.