Guidance on the Transition From Interbank Offered Rates to Other Reference Rates, 54068-54079 [2019-22042]

Download as PDF 54068 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules the Publications and Regulations Branch at (202) 317–6901 (not a toll-free number). Because of access restrictions, the IRS will not admit visitors beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this document. Martin V. Franks, Branch Chief, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel, (Procedure and Administration). [FR Doc. 2019–21884 Filed 10–8–19; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG–118784–18] Background RIN 1545–BO91 This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under sections 860G, 882, 1001, and 1275 of the Internal Revenue Code (Code). Guidance on the Transition From Interbank Offered Rates to Other Reference Rates Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. AGENCY: This document contains proposed regulations that provide guidance on the tax consequences of the transition to the use of reference rates other than interbank offered rates (IBORs) in debt instruments and nondebt contracts. The proposed regulations are necessary to address the possibility that an alteration of the terms of a debt instrument or a modification of the terms of other types of contracts to replace an IBOR to which the terms of the debt instrument or other contract refers with a new reference rate could result in the realization of income, deduction, gain, or loss for Federal income tax purposes or could result in other tax consequences. The proposed regulations will affect parties to debt instruments and other contracts that reference an IBOR. DATES: Written or electronic comments and requests for a public hearing must be received by November 25, 2019. ADDRESSES: Submit electronic submissions via the Federal eRulemaking Portal at https:// www.regulations.gov (indicate IRS and REG–118784–18) by following the online instructions for submitting comments. Once submitted to the SUMMARY: khammond on DSKJM1Z7X2PROD with PROPOSALS Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG–118784–18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–118784– 18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Caitlin Holzem at (202) 317–4391; concerning submissions of comments and requesting a hearing, Regina L. Johnson at (202) 317–6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 1. Elimination of IBORs On July 27, 2017, the U.K. Financial Conduct Authority, the U.K. regulator tasked with overseeing the London interbank offered rate (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. The Financial Stability Board (FSB) and the Financial Stability Oversight Council (FSOC) have publicly acknowledged that in light of the prevalence of USD LIBOR as the reference rate in a broad range of financial instruments, the probable elimination of USD LIBOR has created risks that pose a potential threat to the safety and soundness of not only individual financial institutions, but also to financial stability generally. In its 2014 report ‘‘Reforming Major Interest Rate Benchmarks,’’ the FSB discussed the problems associated with key IBORs and made recommendations to address these problems, including the development and adoption of nearly risk-free reference rates to replace IBORs. The FSB and FSOC have recognized that a sudden cessation of a widely used reference rate could cause considerable disruptions in the marketplace and might adversely affect the normal functioning of a variety of markets in the United States, including PO 00000 Frm 00025 Fmt 4702 Sfmt 4702 business and consumer lending and the derivatives markets. The Alternative Reference Rates Committee (ARRC), whose ex-officio members include the Board of Governors of the Federal Reserve System, the Treasury Department, the Commodity Futures Trading Commission, and the Office of Financial Research, was convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to identify alternative reference rates that would be both more robust than USD LIBOR and that would comply with standards such as the International Organization of Securities Commissions’ ‘‘Principles for Financial Benchmarks.’’ The ARRC was also responsible for developing a plan to facilitate the voluntary acceptance of the alternative reference rate or rates that were chosen. On March 5, 2018, the ARRC published a report that summarizes the work done earlier to select the Secured Overnight Financing Rate (SOFR) as the replacement for USD LIBOR. The Federal Reserve Bank of New York began publishing SOFR daily as of April 3, 2018, in cooperation with the Office of Financial Research. In addition, the Chicago Mercantile Exchange and other entities have launched trading in SOFR futures and have begun clearing for over-the-counter SOFR swaps. Although SOFR is calculated from overnight transactions, it is possible that one or more term rates based on SOFR derivatives may be added in the future. Other jurisdictions have also been working toward replacing the LIBOR associated with their respective currencies. The Working Group on Sterling Risk-Free Reference Rates in the United Kingdom chose the Sterling Overnight Index Average (SONIA) to replace British pound sterling LIBOR; the Study Group on Risk-Free Reference Rates in Japan chose the Tokyo Overnight Average Rate (TONAR) to replace yen LIBOR and to serve as an alternative to the Tokyo Interbank Offered Rate (TIBOR); and the National Working Group in Switzerland selected the Swiss Average Rate Overnight (SARON) to replace Swiss franc LIBOR. Alternatives for the relevant IBOR rate have also been selected for Australia, Canada, Hong Kong, and the Eurozone. Other countries are at various stages of selecting a reference rate to replace their respective versions of IBOR. 2. Letters on the Tax Implications of the Elimination of IBORs on Debt Instruments and Non-Debt Contracts On April 8, 2019, and June 5, 2019, the ARRC submitted to the Treasury E:\FR\FM\09OCP1.SGM 09OCP1 khammond on DSKJM1Z7X2PROD with PROPOSALS Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules Department and the IRS documents that identify various potential tax issues associated with the elimination of IBORs and request tax guidance to address those issues and to facilitate an orderly transition (ARRC letters). The ARRC stated that existing debt instruments and derivatives providing for IBOR-based payments must be amended to address the coming elimination of IBORs. The ARRC indicated that these amendments will likely take one of two forms. First, the parties may alter the instruments to replace the IBOR-referencing rate with another rate, such as one based on SOFR. Second, the parties may alter the instruments to replace an IBORreferencing fallback rate with another fallback rate upon the discontinuance of the IBOR or at some other appropriate time. The ARRC describes fallback provisions as the provisions specifying what is to occur if an IBOR is permanently discontinued or is judged to have deteriorated to an extent that its relevance as a reliable benchmark has been significantly impaired. The ARRC notes that, regardless of which of these two forms the amendment takes, the rate that replaces the IBOR-referencing rate may include ‘‘(i) appropriate adjustments to the spread above the base reference rate in order to account for the expected differences between the two base reference rates (generally representing term premium and credit risk) and/or (ii) a one time, lump-sum payment in lieu of a spread adjustment.’’ The ARRC also stated that newer debt instruments and derivatives may already include fallback provisions that anticipate the elimination of an IBOR and provide a methodology for changing the rate when the relevant IBOR becomes unreliable or ceases to exist. The ARRC letters urged broad and flexible tax guidance in this area. The ARRC letters requested guidance on specific tax issues that arise as a result of these efforts to transition from IBORs to alternative rates. The ARRC first asked that a debt instrument, derivative, or other contract not be treated as exchanged under section 1001 when the terms of the instrument are amended either to replace an IBOR-referencing rate or to include a fallback rate in anticipation of the elimination of the relevant IBOR. The ARRC noted that these same amendments could cause a taxpayer with a synthetic debt instrument under § 1.1275–6 to be treated as legging out of the integrated transaction, and it also sought clarification on the source and character of a one-time payment in lieu of a VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 spread adjustment on a derivative. The ARRC recommended treating SOFR, similar replacement rates for IBORreferencing rates in other currencies, and potentially any qualified floating rate under § 1.1275–5 as permitted alternative reference rates to IBORreferencing rates. The ARRC further requested that alteration of a regular interest in a real estate mortgage investment conduit (REMIC) to replace an IBOR-referencing rate or to change fallback provisions not prevent the regular interest from having fixed terms on the startup day, and that the existence and exercise of a fallback provision not prevent a variable interest rate on a regular interest in a REMIC from being a permitted variable rate under § 1.860G–1. Additionally, the ARRC suggested that, for the purpose of determining the amount and timing of original issue discount (OID) on a debt instrument, an IBOR-referencing qualified floating rate and the fallback rate that replaces the IBOR-referencing rate should be treated as a single qualified floating rate. Finally, the ARRC requested that the reference to 30day LIBOR in § 1.882–5(d)(5)(ii)(B) be amended so that taxpayers may continue to use the simplified method of computing excess interest permitted under that section. The Treasury Department and the IRS received letters from the Structured Finance Industry Group and the Real Estate Roundtable articulating concerns similar to those set forth in the ARRC letters. The comment letters also raised certain issues that are beyond the scope of this regulation. 3. Tax Implications of the Elimination of IBORs on Debt Instruments and NonDebt Contracts The following subsections discuss the primary tax issues raised by changes to the terms of debt instruments and nondebt contracts in anticipation of the elimination of IBORs. A. Section 1001 Section 1001 provides rules for determining the amount and recognition of gain or loss from the sale or other disposition of property. The regulations under section 1001 generally provide that gain or loss is realized upon the exchange of property for other property differing materially either in kind or in extent. See § 1.1001–1(a). In the case of a debt instrument, § 1.1001–3(b) provides that a significant modification of the debt instrument results in an exchange of the original debt instrument for a modified debt instrument that differs materially either in kind or in extent for purposes of § 1.1001–1(a). Under § 1.1001–3(c), a modification is PO 00000 Frm 00026 Fmt 4702 Sfmt 4702 54069 generally any alteration, including any deletion or addition, in whole or in part, of a legal right or obligation of the issuer or a holder of a debt instrument. However, a modification generally does not include an alteration of a legal right or obligation that occurs by operation of the terms of a debt instrument. Section 1.1001–3(a)(1) provides that the rules of § 1.1001–3 apply to any modification of a debt instrument, regardless of whether the modification takes the form of an amendment to the terms of the debt instrument or an exchange of a new debt instrument for an existing debt instrument. An alteration of a legal right or obligation that is treated as a modification must be tested for significance under § 1.1001–3(e). Consequently, changing the interest rate index referenced in a U.S. dollardenominated debt instrument from USD LIBOR to SOFR if no provision has been made in the terms of the debt instrument for such a change is an alteration of the terms of the debt instrument that could be treated as a significant modification and result in a tax realization event, even when USD LIBOR no longer exists. Other than § 1.1001–4, which generally prescribes the tax consequences to the nonassigning counterparty when there is a transfer or assignment of a derivative contract by a dealer or a clearinghouse, and § 1.1001– 5, which addresses the conversion of legacy currencies to the euro, there are no regulations that specifically address when a modification of a derivative or other non-debt contract creates a realization event. This absence of regulations has led to concern that modifying a non-debt contract to reflect the elimination of an IBOR, such as changing the floating rate index referenced in an interest rate swap contract from USD LIBOR to SOFR, could cause a deemed termination of the non-debt contract for tax purposes. Moreover, a modification of the fallback provisions of a debt instrument or non-debt contract to address the possibility of an IBOR being eliminated might require the parties to recognize income, deduction, gain, or loss. For example, if the terms of a derivative provide for payments at an IBORreferencing rate but contain no fallback provision, a modification to the terms of the derivative to add a fallback to the IBOR-referencing rate could cause a deemed termination of the derivative. Likewise, if the terms of a debt instrument provide for an IBORreferencing fallback rate, an alteration of the terms of the debt instrument to replace the IBOR-referencing fallback rate with another fallback rate could E:\FR\FM\09OCP1.SGM 09OCP1 54070 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules cause a deemed exchange of the debt instrument. khammond on DSKJM1Z7X2PROD with PROPOSALS B. Integrated Transactions and Hedges A debt instrument and one or more hedges may be treated in certain circumstances as a single, integrated instrument for certain specified purposes. For example, § 1.1275–6 describes the circumstances under which a debt instrument may be integrated with a hedge for the purpose of determining the amount and timing of the taxpayer’s income, deduction, gain, or loss. Sections 1.988–5(a) (regarding foreign currency transactions) and 1.148–4(h) (regarding arbitrage investment restrictions on tax-exempt bonds issued by State and local governments) similarly provide rules by which a debt instrument may be integrated with a hedge for a specific purpose. In each of these cases, amending an IBOR-referencing debt instrument or hedge to address the elimination of the IBOR may cause a deemed termination or legging out of the integrated hedge that in effect dissolves the integrated instrument into its component parts, which may yield undesirable tax consequences or recognition events for the parties to those instruments. Similarly, § 1.446–4 provides rules by which taxpayers determine the timing of income, deduction, gain, or loss attributable to a hedging transaction. These rules generally state that the method of accounting used by a taxpayer for a hedging transaction must reasonably match the timing of income, deduction, gain, or loss from the hedging transaction with the timing of the income, deduction, gain, or loss from the item or items being hedged. If a taxpayer hedges an item and later terminates the item but keeps the hedge, the taxpayer must match the built-in gain or loss on the hedge to the gain or loss on the terminated item. Accordingly, amending the terms of a debt instrument or hedge to address the elimination of an IBOR could affect the timing of gain or loss under § 1.446–4 if the amendment results in an exchange under section 1001. C. Source and Character of a One-Time Payment The ARRC letters pointed out that, when parties alter the terms of a debt instrument or modify the terms of a non-debt contract to replace a rate referencing an IBOR, the alteration or modification may consist not only of the replacement of the IBOR with a new reference rate such as SOFR but also of an adjustment to the existing spread to account for the differences between the VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 IBOR and the new reference rate. Alternatively, in lieu of (or in addition to) an adjustment to the spread, the parties may agree to a one-time payment as compensation for any reduction in payments attributable to the differences between the IBOR and the new reference rate. In the latter case, questions arise about the source and character of this one-time payment for various purposes of the Internal Revenue Code, such as the withholding rules in sections 1441 and 1442. D. Grandfathered Debt Instruments and Non-Debt Contracts The requirements of certain statutes and regulations do not apply to debt instruments and non-debt contracts issued before a specific date. For example, an obligation issued on or before March 18, 2012, is not a registration-required obligation under section 163(f) if the obligation was issued under certain arrangements reasonably designed to ensure that the obligation was sold only to non-U.S. persons. If such an obligation is modified after March 18, 2012, in a manner that results in an exchange for purposes of § 1.1001–1(a), the modified obligation is treated as reissued and will be a registration-required obligation unless otherwise excepted under section 163(f)(2)(A). Likewise, payments made on certain debt instruments and nondebt contracts outstanding on July 1, 2014, (grandfathered obligations) are exempt from withholding requirements that may otherwise apply under chapter 4 of the Code, subject to any material modification of a grandfathered obligation that results in the obligation not being treated as outstanding on July 1, 2014. Accordingly, if a debt instrument is altered or a non-debt contract is modified to replace an IBORreferencing rate in anticipation of the elimination of the IBOR, the debt instrument or non-debt contract may be treated as reissued as a consequence of the alteration or modification and therefore subject to the statute or regulation from which it was previously exempt. E. OID and Qualified Floating Rate Section 1.1275–5 defines a variable rate debt instrument (VRDI) and provides rules for determining the amount and accrual of qualified stated interest and OID on a VRDI. Under § 1.1275–5(b), a VRDI may provide for stated interest at one or more qualified floating rates. A variable rate is generally a qualified floating rate if variations in the value of the rate can reasonably be expected to measure contemporaneous variations in the cost PO 00000 Frm 00027 Fmt 4702 Sfmt 4702 of newly borrowed funds. The rate may measure contemporaneous variations in borrowing costs for the issuer of the debt instrument or for issuers in general. However, a multiple of a qualified floating rate is not a qualified floating rate, except as permitted within limited parameters. If a debt instrument provides for two or more qualified floating rates that can reasonably be expected to have approximately the same values throughout the term of the instrument, the qualified floating rates together constitute a single qualified floating rate. Under § 1.1275–5(e)(2), if a VRDI provides for stated interest at a single qualified floating rate and certain other requirements are satisfied, the amount of any OID that accrues during an accrual period is determined under the rules applicable to fixed rate debt instruments by assuming that the qualified floating rate is a fixed rate equal to the value, as of the issue date, of the qualified floating rate. Section 1.1275–2(h) describes the treatment under sections 1271 through 1275 and the regulations under those sections of a debt instrument with respect to which one or more payments are subject to a remote contingency. Section 1.1275–2(h)(2) provides that a contingency is remote if there is a remote likelihood that the contingency will occur and that, in such a case, it is assumed that the contingency will not occur. In the event that a remote contingency actually occurs, § 1.1275– 2(h)(6) generally provides that the debt instrument, including a VRDI, that undergoes this ‘‘change in circumstances’’ is treated as retired and then reissued for purposes of sections 1272 and 1273. In general, if a debt instrument provides for a floating rate of interest and the debt instrument does not qualify as a VRDI, the debt instrument is a contingent payment debt instrument (CPDI) that is subject to more complex and less favorable rules under § 1.1275– 4. For example, under § 1.1275–4, all of the stated interest is OID and the holder and issuer recognize interest income or deductions at times other than when cash payments are made. In addition, if a debt instrument that provides for a floating rate of interest is subject to a contingency that is not a remote contingency, the instrument may be a CPDI. Even if the contingency is remote, if the contingency occurs, the debt instrument is treated as retired and reissued for purposes of the OID rules. In both cases, the treatment of the contingency affects whether the debt instrument has OID and, if so, the amount of the OID and the accruals of E:\FR\FM\09OCP1.SGM 09OCP1 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules the OID over the term of the debt instrument. The transition to alternative rates, such as SOFR, in connection with the phase-out of IBORs has raised questions under the OID rules. For example, it is not clear whether certain debt instruments that reference IBOR qualify as VRDIs or whether they are subject to non-remote contingencies that must be taken into account. khammond on DSKJM1Z7X2PROD with PROPOSALS F. REMICs Section 860G(a)(1) provides in part that a regular interest in a REMIC must be issued on the startup day with fixed terms. Section 1.860G–1(a)(4) clarifies that a regular interest has fixed terms on the startup day if, on the startup day, the REMIC’s organizational documents irrevocably specify, among other things, the interest rate or rates used to compute any interest payments on the regular interest. Accordingly, an alteration of the terms of the regular interest to change the rate or fallback provisions in anticipation of the cessation of an IBOR could preclude the interest from being a regular interest. Section 860G(a)(1) also provides in part that interest payments on a regular interest in a REMIC may be payable at a variable rate only to the extent provided in regulations and that a regular interest must unconditionally entitle the holder to receive a specified principal amount. Section 1.860G– 1(a)(3) describes the variable rates permitted for this purpose, and § 1.860G–1(a)(5) confirms that the principal amount of a regular interest generally may not be contingent. Notwithstanding these limitations on the payment of principal and interest on a regular interest in a REMIC, § 1.860G– 1(b)(3) lists certain contingencies affecting the payment of principal and interest that do not prevent an interest in a REMIC from being a regular interest. The list of excepted contingencies does not, however, include a fallback rate that is triggered by an event, such as the elimination of IBOR, that is likely to occur. Nor does the list expressly include the contingent reduction of principal or interest payments to offset costs incurred by amending a regular interest to replace a rate that refers to an IBOR or by adding a fallback rate in anticipation of the elimination of the relevant IBOR. Subject to certain exceptions, section 860G(d) imposes a tax equal to 100 percent of amounts contributed to a REMIC after the startup day. If a party other than the REMIC pays costs incurred by the REMIC after the startup day, that payment could be treated as a VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 contribution to the REMIC subject to the tax under section 860G(d). G. Interest Expense of a Foreign Corporation A foreign corporation applies § 1.882– 5 to determine its interest expense allocable under section 882(c) to income that is effectively connected with the conduct of a trade or business within the United States. If a foreign corporation uses the method described in § 1.882–5(b) through (d), that foreign corporation could have U.S.-connected liabilities that exceed U.S.-booked liabilities (excess U.S.-connected liabilities). When a foreign corporation has excess U.S.-connected liabilities, § 1.882–5(d)(5)(ii)(A) generally provides that the interest rate that applies to the excess U.S.-connected liabilities is the foreign corporation’s average U.S.-dollar borrowing cost on all U.S.-dollar liabilities other than its U.S.-booked liabilities. Alternatively, § 1.882– 5(d)(5)(ii)(B) provides that a foreign corporation that is a bank, may elect to use a published average 30-day LIBOR for the year instead of determining its average U.S.-dollar borrowing cost. Because the election provided in § 1.882–5(d)(5)(ii)(B) only permits a foreign corporation that is a bank to elect a rate that references 30-day LIBOR, the current election will not be available when LIBOR is phased out. Explanation of Provisions 1. Proposed Substantive Amendments to the Regulations The Treasury Department and the IRS have determined that it is appropriate to provide guidance on the tax issues discussed earlier in this preamble in order to minimize potential market disruption and to facilitate an orderly transition in connection with the phaseout of IBORs and the attendant need for changes in debt instruments and other non-debt contracts to implement this transition. The Treasury Department and the IRS expect that this guidance will reduce Federal income tax uncertainties and minimize taxpayer burden associated with this transition. A. Section 1001 The proposed regulations under § 1.1001–6(a) generally provide that, if the terms of a debt instrument are altered or the terms of a non-debt contract, such as a derivative, are modified to replace, or to provide a fallback to, an IBOR-referencing rate and the alteration or modification does not change the fair market value of the debt instrument or non-debt contract or the currency of the reference rate, the PO 00000 Frm 00028 Fmt 4702 Sfmt 4702 54071 alteration or modification does not result in the realization of income, deduction, gain, or loss for purposes of section 1001. The Treasury Department and the IRS intend that the proposed rules in § 1.1001–6(a), as with other regulations under section 1001, apply to both the issuer and holder of a debt instrument and to each party to a nondebt contract. The proposed rules in § 1.1001–6(a) also apply regardless of whether the alteration or modification occurs by an amendment to the terms of the debt instrument or non-debt contract or by an exchange of a new debt instrument or non-debt contract for the existing one. Section 1.1001–6(a)(1) of the proposed regulations provides that altering the terms of a debt instrument to replace a rate referencing an IBOR with a qualified rate (qualified rates are discussed in detail later in this preamble) is not treated as a modification and therefore does not result in a deemed exchange of the debt instrument for purposes of § 1.1001–3. This same rule applies to ‘‘associated alterations,’’ which are alterations that are both associated with the replacement of the IBOR-referencing rate and reasonably necessary to adopt or implement that replacement. One example of an associated alteration is the addition of an obligation for one party to make a one-time payment in connection with the replacement of the IBOR-referencing rate with a qualified rate to offset the change in value of the debt instrument that results from that replacement. Section 1.1001–6(a)(2) of the proposed regulations provides that modifying a non-debt contract to replace a rate referencing an IBOR with a qualified rate is not treated as a deemed exchange of property for other property differing materially in kind or extent for purposes of § 1.1001–1(a). The rule also applies to ‘‘associated modifications,’’ which differ from associated alterations only in that they relate to non-debt contracts. The principal example of a non-debt contract for purposes of the proposed regulations is a derivative contract, but the category is also intended to include any other type of contract (such as a lease) that may refer to an IBOR and that is not debt. Thus, for example, if an interest rate swap is modified to change the floating rate leg of the swap from Overnight USD LIBOR plus 25 basis points to an alternative rate referencing SOFR that meets the requirements for a qualified rate under the proposed regulations (including the requirement that the fair market value of the swap contract after the modification is substantially equivalent to the fair E:\FR\FM\09OCP1.SGM 09OCP1 khammond on DSKJM1Z7X2PROD with PROPOSALS 54072 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules market value of the swap contract before the modification), that modification would not be treated as an exchange of property for other property differing materially in kind or extent and would therefore not be an event that results in the realization of income, deduction, gain or loss under § 1.1001–1(a). Section 1.1001–6(a)(3) of the proposed regulations provides that an alteration to the terms of a debt instrument to include a qualified rate as a fallback to an IBOR-referencing rate and any associated alteration are not treated as modifications and therefore do not result in an exchange of the debt instrument for purposes of § 1.1001–3. In addition, an alteration to the terms of a debt instrument by which an IBORbased fallback rate is replaced with a different fallback rate that is a qualified rate and any associated alteration are also not treated as modifications. Similar rules provide that these same changes to a non-debt contract do not result in the exchange of property for other property differing materially in kind or extent for purposes of § 1.1001– 1(a). A coordination rule in § 1.1001– 6(a)(4) of the proposed regulations makes clear that any alteration to the terms of a debt instrument that is not given special treatment under either § 1.1001–6(a)(1) or (3) is subject to the ordinary operation of § 1.1001–3. The proposed regulations provide a similar rule for non-debt contracts. These proposed rules contemplate that when an alteration or modification not described in § 1.1001–6(a)(1), (2), or (3) occurs at the same time as the alteration or modification described in those paragraphs, the alteration or modification described in § 1.1001– 6(a)(1), (2), or (3) is treated as part of the existing terms of the debt instrument or non-debt contract and, consequently, becomes part of the baseline against which the alteration or modification not described in § 1.1001–6(a)(1), (2), or (3) is tested. Section 1.1001–6(b) of the proposed regulations sets forth the rules for determining whether a rate is a qualified rate. Section 1.1001–6(b)(1) lists the rates that may be qualified rates for purposes of § 1.1001–6, provided that they satisfy the requirements set forth in § 1.1001–6(b)(2) and (3). The list of potential qualified rates in § 1.1001– 6(b)(1) includes a qualified floating rate as defined in § 1.1275–5(b), except that for this purpose a multiple of a qualified floating rate is considered a qualified floating rate. This list also includes any rate selected, endorsed or recommended by the central bank, reserve bank, monetary authority or similar institution VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 (including a committee or working group thereof) as a replacement for an IBOR or its local currency equivalent in that jurisdiction. To avoid any uncertainty on the question of whether the rates identified in § 1.1001–6(b)(1)(i) through (viii) may be qualified rates, those rates are individually enumerated even though each is a qualified floating rate, as defined in § 1.1275–5(b), and each has been selected by a central bank, reserve bank, monetary authority or similar institution as a replacement for an IBOR or its local currency equivalent in that jurisdiction. The proposed regulations further provide that a rate that is determined by reference to one of the rates listed in § 1.1001–6(b)(1) may also be a qualified rate. For example, a rate equal to the compound average of SOFR over the past 30 days may be a qualified rate because that rate is determined by reference to SOFR, which is listed in § 1.1001–6(b)(1). To retain the flexibility to respond to future developments, proposed § 1.1001–6(b)(1)(xii) provides authority to add a rate to this list by identifying the new rate in guidance published in the Internal Revenue Bulletin. A rate described in § 1.1001–6(b)(1) of the proposed regulations is not a qualified rate if it fails to satisfy the requirement of § 1.1001–6(b)(2)(i). Section 1.1001–6(b)(2)(i) of the proposed regulations generally requires that the fair market value of the debt instrument or non-debt contract after the relevant alteration or modification must be substantially equivalent to the fair market value before that alteration or modification. The purpose of this requirement is to ensure that the alterations or modifications described in § 1.1001–6(a)(1) through (3) are generally no broader than is necessary to replace the IBOR in the terms of the debt instrument or non-debt contract with a new reference rate. However, the Treasury Department and the IRS recognize that the fair market value of a debt instrument or non-debt contract may be difficult to determine precisely and intend that the proposed regulations broadly facilitate the transition away from IBORs. Accordingly, the proposed regulations provide that the fair market value of a debt instrument or derivative may be determined by any reasonable valuation method, as long as that reasonable valuation method is applied consistently and takes into account any one-time payment made in lieu of a spread adjustment. To further ease compliance with the value equivalence requirement in § 1.1001–6(b)(2)(i), the proposed PO 00000 Frm 00029 Fmt 4702 Sfmt 4702 regulations provide two safe harbors and reserve the authority to provide additional safe harbors in guidance published in the Internal Revenue Bulletin. Under the first safe harbor, the value equivalence requirement is satisfied if at the time of the alteration the historic average of the IBORreferencing rate is within 25 basis points of the historic average of the rate that replaces it. The parties may use any reasonable method to compute an historic average, subject to two limitations. First, the lookback period from which the historic data are drawn must begin no earlier than 10 years before the alteration or modification and end no earlier than three months before the alteration or modification. Second, once a lookback period is established, the historic average must take into account every instance of the relevant rate published during that period. For example, if the lookback period is comprised of the calendar years 2016 through 2020 and the relevant rate is 30day USD LIBOR, the historic average of that rate must take into account each of the 60 published instances of 30-day USD LIBOR over the five-year lookback period. Alternatively, the parties may compute the historic average of a rate in accordance with an industry-wide standard, such as a standard for determining an historic average set forth by the International Swaps and Derivatives Association or the ARRC for this or a similar purpose. In any application of this safe harbor, the parties must use the same methodology and lookback period to compute the historic average for each of the rates to be compared. Under the second safe harbor, the value equivalence requirement of § 1.1001–6(b)(2)(i) is satisfied if the parties to the debt instrument or nondebt contract are not related and, through bona fide, arm’s length negotiations over the alteration or modification, determine that the fair market value of the altered debt instrument or modified non-debt contract is substantially equivalent to the fair market value of the debt instrument or non-debt contract before the alteration or modification. In determining the fair market value of an altered debt instrument or modified non-debt contract, the parties must take into account the value of any one-time payment made in lieu of a spread adjustment. A rate described in § 1.1001–6(b)(1) of the proposed regulations is also not a qualified rate if it fails to satisfy the requirement in § 1.1001–6(b)(3). This paragraph generally requires that any interest rate benchmark included in the E:\FR\FM\09OCP1.SGM 09OCP1 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS replacement rate and the IBOR referenced in the replaced rate are based on transactions conducted in the same currency or are otherwise reasonably expected to measure contemporaneous variations in the cost of newly borrowed funds in the same currency. As is the case with the value equivalence requirement under § 1.1001–6(b)(2)(i), this requirement is intended to ensure that the alterations or modifications described in § 1.1001–6(a)(1) through (3) are no broader than necessary to address the elimination of the relevant IBOR. B. Integrated Transactions and Hedges Section 1.1001–6(c) of the proposed regulations confirms that a taxpayer is permitted to alter the terms of a debt instrument or modify one or more of the other components of an integrated or hedged transaction to replace a rate referencing an IBOR with a qualified rate without affecting the tax treatment of either the underlying transaction or the hedge, provided that the integrated or hedged transaction as modified continues to qualify for integration. For example, a taxpayer that has issued a floating rate debt instrument that pays interest at a rate referencing USD LIBOR and has entered into an interest rate swap contract that permits that taxpayer to create a synthetic fixed rate debt instrument under the integration rules of § 1.1275–6 is not treated as legging out of the integrated transaction if the terms of the debt instrument are altered and the swap is modified to replace the USD LIBOR-referencing interest rate with a SOFR-referencing interest rate, provided that in the transaction as modified the § 1.1275–6 hedge continues to meet the requirements for a § 1.1275–6 hedge. The proposed regulations provide similar rules for a foreign currency hedge integrated with a debt instrument under § 1.988–5(a) and for an interest rate hedge integrated with an issue of tax-exempt bonds under § 1.148–4(h). The proposed regulations also provide that, in the case of a transaction subject to the hedge accounting rules under § 1.446–4, altering the terms of a debt instrument or modifying the terms of a derivative to replace an IBOR-referencing rate with a qualified rate on one or more legs of the transaction is not a disposition or termination of either leg under § 1.446– 4(e)(6). C. Source and Character of a One-Time Payment Section 1.1001–6(d) of the proposed regulations provides that, for all purposes of the Internal Revenue Code, the source and character of a one-time payment that is made by a payor in VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 connection with an alteration or modification described in proposed § 1.1001–6(a)(1), (2), or (3) will be the same as the source and character that would otherwise apply to a payment made by the payor with respect to the debt instrument or non-debt contract that is altered or modified. For example, a one-time payment made by a counterparty to an interest rate swap is treated as a payment with respect to the leg of the swap on which the counterparty making the one-time payment is obligated to perform. Accordingly, under § 1.863–7(b), the source of that one-time payment would likely be determined by reference to the residence of the recipient of the payment. With respect to a lease of real property, a one-time payment made by the lessee to the lessor is treated as a payment of rent and, under sections 861(a)(4) and 862(a)(4), the source of that one-time payment would be the location of the leased real property. The Treasury Department and the IRS expect that parties to debt instruments and non-debt contracts will generally replace the IBOR with an overnight, nearly risk-free rate, such as SOFR. Because of differences in term and credit risk, an overnight, nearly risk-free rate will generally be lower than the IBOR it replaces. Accordingly, the Treasury Department and the IRS expect that, for example, one-time payments with respect to a debt instrument will generally not be paid by the lender to the borrower. However, in the event that it is determined that guidance in respect of such payments is needed, the Treasury Department and the IRS request comments on the source and character of a one-time payment on a debt instrument or non-debt contract received by a party (such as the borrower on a debt instrument or the lessee on a lease) that does not ordinarily receive payments during the term of the debt instrument or non-debt contract. D. Grandfathered Debt Instruments and Non-Debt Contracts The rules in § 1.1001–6(a) of the proposed regulations generally prevent debt instruments and non-debt contracts from being treated as reissued following a deemed exchange under section 1001. Thus, for example, a debt instrument grandfathered under section 163(f), 871(m), or 1471 or a regulation under one of those sections would not lose its grandfathered status as a result of any alterations made in connection with the elimination of an IBOR and described in § 1.1001–6(a)(1) or (3) of the proposed regulations. To provide certainty in treating a non-debt contract as a PO 00000 Frm 00030 Fmt 4702 Sfmt 4702 54073 grandfathered obligation for chapter 4 purposes in the case of the modification of the contract to replace an IBORreferencing rate, § 1.1001–6(e) of the proposed regulations provides that any modification of a non-debt contract to which § 1.1001–6(a)(2) or (3) applies is not a material modification for purposes of § 1.1471–2(b)(2)(iv). E. OID and Qualified Floating Rate Section 1.1275–2(m) of the proposed regulations sets forth three special rules for determining the amount and accrual of OID in the case of a VRDI that provides both for interest at an IBORreferencing qualified floating rate and for a fallback rate that is triggered when the IBOR becomes unavailable or unreliable. Under § 1.1275–2(m)(2), the IBOR-referencing qualified floating rate and the fallback rate are treated as a single qualified floating rate for purposes of § 1.1275–5. Under § 1.1275– 2(m)(3), the possibility that the relevant IBOR will become unavailable or unreliable is treated as a remote contingency for purposes of § 1.1275– 2(h). Under § 1.1275–2(m)(4), the occurrence of the event that triggers activation of the fallback rate is not treated as a change in circumstances. Thus, for example, the VRDI is not treated as retired and reissued under § 1.1275–2(h)(6) when the relevant IBOR becomes unavailable or unreliable and the rate changes to the fallback rate, even if the IBOR becoming unavailable or unreliable was a remote contingency at the time the VRDI was issued. With the exception of these three rules in § 1.1275–2(m) of the proposed regulations, the OID regulations apply to an IBOR-referencing VRDI as they would to any other debt instrument. F. REMICs Section 1.860G–1(e) of the proposed regulations permits an interest in a REMIC to retain its status as a regular interest despite certain alterations and contingencies. Specifically, if the parties to a regular interest alter the terms after the startup day to replace an IBORreferencing rate with a qualified rate, to include a qualified rate as a fallback to an IBOR-referencing rate, or to make any other alteration described in § 1.1001– 6(a)(1) or (3) of the proposed regulations, § 1.860G–1(e)(2) provides that those alterations are disregarded for the purpose of determining whether the regular interest has fixed terms on the startup day. Supplementing the list of disregarded contingencies in § 1.860G–1(b)(3), § 1.860G–1(e)(3) and (4) of the proposed regulations describe certain contingencies affecting the payment of E:\FR\FM\09OCP1.SGM 09OCP1 54074 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules principal and interest that do not prevent an interest in a REMIC from being a regular interest. Under § 1.860G–1(e)(3), an interest in a REMIC does not fail to be a regular interest solely because the terms of the interest permit the rate to change from an IBORreferencing rate to a fallback rate in anticipation of the relevant IBOR becoming unavailable or unreliable. Although this proposed rule permits taxpayers to disregard the contingency in determining whether the rate is a variable rate permitted under § 1.860G– 1(a)(3), both the IBOR-referencing rate and the fallback rate considered individually must be rates permitted under section 860G. Under § 1.860G– 1(e)(4) of the proposed regulations, an interest in a REMIC does not fail to be a regular interest solely because the amount of payments of principal or interest may be reduced by reasonable costs of replacing an IBOR-referencing rate with a qualified rate, of amending fallback provisions to address the elimination of an IBOR, or of modifying a non-debt contract that is associated with the interest in the REMIC, such as a credit enhancement. Section 1.860G– 1(e)(4) further provides that, if a party other than the REMIC pays those reasonable costs after the startup day, that payment is not subject to the tax imposed under section 860G(d). khammond on DSKJM1Z7X2PROD with PROPOSALS G. Interest Expense of a Foreign Corporation Because the election provided in § 1.882–5(d)(5)(ii)(B) only permits a foreign corporation that is a bank to elect a rate that references 30-day LIBOR, the current election will not be available when LIBOR is phased out. To address this change in facts, the proposed regulations amend the election in § 1.882–5(d)(5)(ii)(B) to allow a foreign corporation that is a bank to compute interest expense attributable to excess U.S.-connected liabilities using a yearly average SOFR. The Treasury Department and the IRS have determined that SOFR is an appropriate rate to use in § 1.882–5(d)(5)(ii)(B) to replace LIBOR. Since SOFR is an overnight rate that does not reflect credit risk, the use of SOFR is likely to result in a lower rate than the 30-day LIBOR calculation previously allowed under § 1.882–5(d)(5)(ii)(B). Because of these differences between SOFR and 30day LIBOR, the Treasury Department and the IRS request comments on whether another nearly risk-free rate might be more appropriate in computing interest expense on excess U.S.connected liabilities for purposes of § 1.882–5(d)(5)(ii)(B). VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 2. Proposed Applicability Dates and Reliance on the Proposed Regulations adopting that rule as a final regulation is published in the Federal Register. A. Proposed Applicability Dates of the Final Regulations B. Reliance on the Proposed Regulations This part 2(A) of the Explanation of Provisions section describes the various applicability dates proposed to apply to the final regulations. Under the proposed applicability date in § 1.1001– 6(g), § 1.1001–6 of the final regulations would apply to an alteration of the terms of a debt instrument or a modification to the terms of a non-debt contract that occurs on or after the date of publication of a Treasury decision adopting those rules as final regulations in the Federal Register. However, under proposed § 1.1001–6(g), a taxpayer may choose to apply § 1.1001–6 of the final regulations to alterations and modifications that occur before that date, provided that the taxpayer and its related parties consistently apply the rules before that date. See section 7805(b)(7). Under the proposed applicability date in § 1.1275–2(m)(5), the OID rules in § 1.1275–2(m) of the final regulations would apply to debt instruments issued on or after the date of publication of a Treasury decision adopting those rules as final regulations in the Federal Register. However, under proposed § 1.1275–2(m)(5), a taxpayer may choose to apply § 1.1275–2(m) of the final regulations to debt instruments issued before that date. See section 7805(b)(7). Under the proposed applicability date in § 1.860G–1(e)(5)(i), the REMIC rules in § 1.860G–1(e)(2) and (4) of the final regulations would apply with respect to an alteration or modification that occurs on or after the date of publication of a Treasury decision adopting those rules as final regulations in the Federal Register. However, a taxpayer may choose to apply § 1.860G–1(e)(2) and (4) of the final regulations with respect to an alteration or modification that occurs before that date. See section 7805(b)(7). Under the proposed applicability date in § 1.860G–1(e)(5)(ii), § 1.860G–1(e)(3) of the final regulations would apply to a regular interest in a REMIC issued on or after the date of publication of a Treasury decision adopting that rule as a final regulation in the Federal Register. However, a taxpayer may choose to apply § 1.860G–1(e)(3) of the final regulations to a regular interest in a REMIC issued before that date. See section 7805(b)(7). Under the proposed applicability date in § 1.882–5(f)(3), § 1.882–5(d)(5)(ii)(B) of the final regulations would apply to taxable years ending after the date of publication of a Treasury decision PO 00000 Frm 00031 Fmt 4702 Sfmt 4702 A taxpayer may rely on the proposed regulations to the extent provided in this part 2(B) of the Explanation of Provisions section. A taxpayer may rely on § 1.1001–6 of the proposed regulations for any alteration of the terms of a debt instrument or modification of the terms of a non-debt contract that occurs before the date of publication of a Treasury decision adopting those rules as final regulations in the Federal Register, provided that the taxpayer and its related parties consistently apply the rules of § 1.1001– 6 of the proposed regulations before that date. A taxpayer may rely on § 1.1275– 2(m) or § 1.860G–1(e)(3) of the proposed regulations for any debt instrument or regular interest in a REMIC issued before the date of publication of a Treasury decision adopting those rules as final regulations in the Federal Register. A taxpayer may rely on § 1.860G–1(e)(2) and (4) of the proposed regulations with respect to any alteration or modification that occurs before the date of publication of a Treasury decision adopting that rule as a final regulation in the Federal Register. A taxpayer may rely on § 1.882–5(d)(5)(ii)(B) of the proposed regulations for any taxable year ending after October 9, 2019 but before the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Special Analyses I. Regulatory Planning and Review— Economic Analysis Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including (i) potential economic, environmental, and public health and safety effects, (ii) potential distributive impacts, and (iii) equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. These proposed regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) (MOA) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. The Office of Information and Regulatory Affairs has designated these proposed E:\FR\FM\09OCP1.SGM 09OCP1 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS regulations as economically significant under section 1(c) of the MOA. A. Background, Need for the Proposed Regulations, and Economic Analysis of Proposed Regulations A very large volume of U.S. financial products and contracts include terms or conditions that reference LIBOR or, more generally, IBORs. Concern about manipulation and a decline in the volume of the funding from which the LIBOR is calculated led to recommendations for the development of alternatives to the LIBOR, ones that would be based on transactions in a more robust underlying market. In addition, on July 27, 2017, the U.K. Financial Conduct Authority, the U.K. regulator tasked with overseeing LIBOR, announced that all currency and term variants of LIBOR, including USD LIBOR, may be phased out after 2021 and not be published after that timeframe. The ARRC, a group of stakeholders affected by the cessation of the publication of USD LIBOR, was convened to identify an alternative rate and to facilitate its voluntary adoption. The ARRC recommended the SOFR as a potential replacement for USD LIBOR. Essentially all financial products and contracts that currently contain conditions or legal provisions that rely on LIBOR and IBORs are expected to transition to the SOFR or similar alternatives in the next few years. This transition will involve changes in debt, derivatives, and other financial contracts to adopt the SOFR or other alternative reference rates. The ARRC has estimated that the total exposure to USD LIBOR was close to $200 trillion in 2016, of which approximately 95 percent were in overthe-counter derivatives.1 ARRC further notes that USD LIBOR is also referenced in several trillion dollars of corporate loans, floating-rate mortgages, and similar financial products. In the absence of further tax guidance, the vast majority of expected changes in such contracts could lead to the recognition of gains (or losses) in these contracts for U.S. income tax purposes and to correspondingly potentially large tax liabilities for their holders. To address this issue, the proposed regulations provide that changes in debt instruments, derivative contracts, and other affected contracts to replace reference rates based on IBORs with qualified rates (as defined in the proposed regulations) will not result in 1 See Second Report, The Alternative Reference Rates Committee, March 2018, Table 1 and related discussion, available at https:// www.newyorkfed.org/medialibrary/Microsites/arrc/ files/2018/ARRC-Second-report. VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 tax realization events under section 1001 and relevant regulations thereunder. The proposed regulations require that qualified rates be substantially equivalent in fair market value to the replaced rates based on any reasonable, consistently applied method of valuation. The proposed regulations further provide certain safe harbors for this comparability standard, based on historic average rates and bona fide fair market value negotiations between unrelated parties. The proposed regulations also provide corresponding guidance on hedging transactions and derivatives to the effect that taxpayers may modify the components of hedged or integrated transactions to replace IBORs with qualified rates without affecting the tax treatment of the hedges or underlying transactions. In the absence of these proposed regulations, parties to contracts affected by the cessation of the publication of LIBOR would either suffer tax consequences to the extent that a change to the contract results in a tax realization event under section 1001 or attempt to find alternative contracts that avoid such a tax realization event, which may be difficult as a commercial matter. Both such options would be both costly and highly disruptive to U.S. financial markets. A large number of contracts may end up being breached, leading to bankruptcies or other legal proceedings. The types of actions that contract holders might take in the absence of these proposed regulations are difficult to predict because such an event is outside recent experience in U.S. financial markets. This financial disruption would be particularly unproductive because the economic characteristics of the financial products and contracts under the new rates would be essentially unchanged. Thus, there is no underlying economic rationale for a tax realization event. The Treasury Department and the IRS project that these proposed regulations would avoid this costly and unproductive disruption. The Treasury Department and the IRS further project that these proposed regulations, by implementing the regulatory provisions requested by ARRC and taxpayers, will help facilitate the economy’s adaptation to the cessation of the LIBOR in a leastcost manner. The Treasury Department and the IRS request comments on these proposed regulations. II. Regulatory Planning and Review and Regulatory Flexibility Act Under the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these proposed regulations PO 00000 Frm 00032 Fmt 4702 Sfmt 4702 54075 will not have a significant economic impact on a substantial number of small entities that are directly affected by the proposed regulations. These proposed regulations provide rules to minimize the economic impact of the elimination of IBORs on all taxpayers. Parties to IBOR-referencing financial instruments are generally expected to alter or to modify those instruments in response to the elimination of the relevant IBOR and, in the absence of rules such as those proposed, those alterations and modifications may trigger significant tax consequences for the parties to those instruments. In addition, these proposed regulations do not impose a collection of information on any taxpayers, including small entities. Accordingly, this rule will not have a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. III. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2019, that threshold is approximately $150 million. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. IV. Executive Order 13132: Federalism Executive Order 13132 (titled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This proposed rule does not have federalism implications and does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. E:\FR\FM\09OCP1.SGM 09OCP1 54076 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules Comments and Requests for Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS specifically seek comment on any complications under any section of the Code or existing regulations that may arise from the replacement of an IBOR with a qualified rate and that are not resolved in these proposed regulations. All comments will be available at http:// www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register. Drafting Information The principal authors of these regulations are Caitlin Holzem and Spence Hanemann of the Office of Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order for § 1.1001–6 to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.1001–6 also issued under 26 U.S.C. 148(i), 26 U.S.C. 988(d), and 26 U.S.C. 1275(d). * * * * * Par. 2. Section 1.860A–0 is amended by adding entries for § 1.860G–1(e) to read as follows: khammond on DSKJM1Z7X2PROD with PROPOSALS ■ § 1.860A–0 * * Outline of REMIC provisions. * * * § 1.860G–1 Definition of regular and residual interests. * * * * * (e) Transition from interbank offered rates. (1) In general. VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 (2) Change in reference rate for a regular interest after the startup day. (3) Contingencies of rate on a regular interest. (4) Reasonable expenses incurred to alter a regular interest. (5) Applicability dates. * * * * * ■ Par. 3. Section 1.860G–1 is amended by adding paragraph (e) to read as follows: § 1.860G–1 Definition of regular and residual interests. * * * * * (e) Transition from interbank offered rates—(1) In general. This paragraph (e) applies to certain interests in a REMIC that provide for a rate referencing an interbank offered rate. See § 1.1001–6 for additional rules that may apply to an interest in a REMIC that provides for a rate referencing an interbank offered rate. (2) Change in reference rate for a regular interest after the startup day. An alteration to a regular interest in a REMIC that occurs after the startup day and that is described in § 1.1001–6(a)(1) or (3) is disregarded in determining whether the regular interest has fixed terms on the startup day under paragraph (a)(4) of this section. (3) Contingencies of rate on a regular interest. An interest in a REMIC does not fail to qualify as a regular interest solely because it is subject to a contingency whereby a rate that references an interbank offered rate and is a variable rate permitted under paragraph (a)(3) of this section may change to a fixed rate or a different variable rate permitted under paragraph (a)(3) of this section in anticipation of the interbank offered rate becoming unavailable or unreliable. (4) Reasonable expenses incurred to alter a regular interest. An interest in a REMIC does not fail to qualify as a regular interest solely because it is subject to a contingency whereby the amount of payments of principal or interest (or other similar amounts) with respect to the interest in the REMIC is reduced by reasonable costs incurred to effect an alteration or modification described in § 1.1001–6(a)(1), (2), or (3). In addition, payment by a party other than the REMIC of reasonable costs incurred to effect an alteration or modification described in § 1.1001– 6(a)(1), (2), or (3) is not a contribution to the REMIC for purposes of section 860G(d). (5) Applicability dates. (i) Paragraphs (e)(2) and (4) of this section apply with respect to an alteration or modification that occurs on or after the date of publication of a Treasury decision PO 00000 Frm 00033 Fmt 4702 Sfmt 4702 adopting these rules as final regulations in the Federal Register. However, taxpayers may apply paragraphs (e)(2) and (4) of this section with respect to an alteration or a modification that occurs before the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. See section 7805(b)(7). (ii) Paragraph (e)(3) of this section applies to a regular interest in a REMIC issued on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. However, a taxpayer may apply paragraph (e)(3) of this section to a regular interest in a REMIC issued before the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. See section 7805(b)(7). ■ Par. 4. Section 1.882–5 is amended by: ■ 1. Revising the fourth sentence of paragraph (a)(7)(i). ■ 2. Revising paragraph (d)(5)(ii)(B). ■ 3. Removing the ‘‘(1)’’ from the ‘‘(f)(1)’’ paragraph designation and adding a subject heading to paragraph (f)(1). ■ 4. Adding paragraph (f)(3). The revisions and addition read as follows: § 1.882–5 Determination of interest deduction. (a) * * * (7) * * * (i) * * * An elected method (other than the fair market value method under paragraph (b)(2)(ii) of this section, or the published rate election in paragraph (d)(5)(ii) of this section) must be used for a minimum period of five years before the taxpayer may elect a different method. * * * * * * * * (d) * * * (5) * * * (ii) * * * (B) Published rate election. For each taxable year in which a taxpayer is a bank within the meaning of section 585(a)(2)(B) (without regard to the second sentence thereof or whether any activities are effectively connected with a trade or business within the United States), the taxpayer may elect to compute the interest expense attributable to excess U.S.-connected liabilities by using the yearly average Secured Overnight Financing Rate (SOFR) published by the Federal Bank of New York for the taxable year rather than the interest rate provided in paragraph (d)(5)(ii)(A) of this section. A taxpayer may elect to apply the rate provided in paragraph (d)(5)(ii)(A) of this section or in this paragraph E:\FR\FM\09OCP1.SGM 09OCP1 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules (d)(5)(ii)(B) on an annual basis and the taxpayer does not need the consent of the Commissioner to change this election in a subsequent taxable year. If a taxpayer that is eligible to make the published rate election either does not file a timely return or files a calculation with no excess U.S.-connected liabilities and it is later determined by the Director of Field Operations that the taxpayer has excess U.S.-connected liabilities, then the Director of Field Operations, and not the taxpayer, may choose whether to apply the interest rate provided under either paragraph (d)(5)(ii)(A) or (B) of this section to the taxpayer’s excess U.S.-connected liabilities in determining interest expense. * * * * * (f) * * *— (1) General rule. * * * * * * * * (3) Applicability date for published rate election. Paragraph (d)(5)(ii)(B) of this section applies to taxable years ending after the date of publication of a Treasury decision adopting these rules as final regulations is published in the Federal Register. ■ Par. 5. Section 1.1001–6 is added to read as follows: khammond on DSKJM1Z7X2PROD with PROPOSALS § 1.1001–6 Transition from interbank offered rates. (a) Treatment under section 1001—(1) Debt instruments. An alteration of the terms of a debt instrument to replace a rate referencing an interbank offered rate (IBOR) with a qualified rate as defined in paragraph (b) of this section (qualified rate) and any associated alteration as defined in paragraph (a)(5) of this section (associated alteration) are not treated as modifications and therefore do not result in an exchange of the debt instrument for purposes of § 1.1001–3. For example, if the terms of a debt instrument that pays interest at a rate referencing the U.S.-dollar London Interbank Offered Rate (USD LIBOR) are altered to provide that the instrument pays interest at a qualified rate referencing the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York, that alteration of terms is not treated as a modification and therefore does not result in an exchange for purposes of § 1.1001–3. (2) Non-debt contracts. A modification of the terms of a contract other than a debt instrument (a non-debt contract) to replace a rate referencing an IBOR with a qualified rate and any associated modification as defined in paragraph (a)(5) of this section (associated modification) are not treated as the exchange of property for other VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 property differing materially in kind or extent for purposes of § 1.1001–1(a). A non-debt contract includes but is not limited to a derivative, stock, an insurance contract, and a lease agreement. (3) Fallback rate. An alteration of the terms of a debt instrument to include a qualified rate as a fallback to a rate referencing an IBOR and any associated alteration are not treated as modifications and therefore do not result in an exchange of the debt instrument for purposes of § 1.1001–3. In addition, an alteration of the terms of a debt instrument to substitute a qualified rate in place of a rate referencing an IBOR as a fallback to another rate and any associated alteration are not treated as modifications and therefore do not result in an exchange of the debt instrument for purposes of § 1.1001–3. A modification of the terms of a nondebt contract to include a qualified rate as a fallback to a rate referencing an IBOR and any associated modification are not treated as the exchange of property for other property differing materially in kind or extent for purposes of § 1.1001–1(a). In addition, a modification of the terms of a non-debt contract to substitute a qualified rate in place of a rate referencing an IBOR as a fallback to another rate and any associated modification are not treated as the exchange of property for other property differing materially in kind or extent for purposes of § 1.1001–1(a). (4) Other contemporaneous alterations and modifications. Whether an alteration of the terms of a debt instrument that is not described in paragraph (a)(1) or (3) of this section and that is made contemporaneously with an alteration described in paragraph (a)(1) or (3) of this section results in an exchange of the debt instrument is determined under § 1.1001–3. Similarly, whether a modification of the terms of a non-debt contract that is not described in paragraph (a)(2) or (3) of this section and that is made contemporaneously with a modification described in paragraph (a)(2) or (3) of this section results in an exchange of property for other property differing materially in kind or extent is determined under § 1.1001–1(a). In applying § 1.1001–3 or § 1.1001–1(a) for this purpose, the altered or modified terms described in paragraph (a)(1), (2), or (3) of this section are treated as part of the terms of the debt instrument or non-debt contract prior to any alteration or modification that is not so described. For example, if the parties to a debt instrument change the interest rate from PO 00000 Frm 00034 Fmt 4702 Sfmt 4702 54077 a rate referencing USD LIBOR to a qualified rate and at the same time increase the interest rate to account for deterioration of the issuer’s credit since the issue date, the qualified rate is treated as a term of the instrument prior to the alteration and only the addition of the risk premium is analyzed under § 1.1001–3. (5) Associated alteration or modification. For purposes of this section, associated alteration or associated modification means any alteration of a debt instrument or modification of a non-debt contract that is associated with the alteration or modification by which a qualified rate replaces, or is included as a fallback to, the IBOR-referencing rate and that is reasonably necessary to adopt or to implement that replacement or inclusion. An associated alteration or associated modification may be a technical, administrative, or operational alteration or modification, such as a change to the definition of interest period or a change to the timing and frequency of determining rates and making payments of interest (for example, delaying payment dates on a debt instrument by two days to allow sufficient time to compute and pay interest at a qualified rate computed in arrears). An associated alteration or associated modification may also be the addition of an obligation for one party to make a one-time payment in connection with the replacement of the IBOR-referencing rate with a qualified rate to offset the change in value of the debt instrument or non-debt contract that results from that replacement (a one-time payment). (b) Qualified rate—(1) In general. For purposes of this section, a qualified rate is any one of the following rates, provided that the rate satisfies the fair market value requirement of paragraph (b)(2) of this section and the currency requirement of paragraph (b)(3) of this section: (i) The Secured Overnight Financing Rate published by the Federal Reserve Bank of New York (SOFR); (ii) The Sterling Overnight Index Average (SONIA); (iii) The Tokyo Overnight Average Rate (TONAR or TONA); (iv) The Swiss Average Rate Overnight (SARON); (v) The Canadian Overnight Repo Rate Average (CORRA); (vi) The Hong Kong Dollar Overnight Index (HONIA); (vii) The interbank overnight cash rate administered by the Reserve Bank of Australia (RBA Cash Rate); E:\FR\FM\09OCP1.SGM 09OCP1 khammond on DSKJM1Z7X2PROD with PROPOSALS 54078 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules (viii) The euro short-term rate administered by the European Central Bank (ÖSTR); (ix) Any alternative, substitute or successor rate selected, endorsed or recommended by the central bank, reserve bank, monetary authority or similar institution (including any committee or working group thereof) as a replacement for an IBOR or its local currency equivalent in that jurisdiction; (x) Any qualified floating rate, as defined in § 1.1275–5(b) (but without regard to the limitations on multiples set forth in § 1.1275–5(b)), that is not described in paragraphs (b)(1)(i) through (ix) of this section; (xi) Any rate that is determined by reference to a rate described in paragraphs (b)(1)(i) through (x) of this section, including a rate determined by adding or subtracting a specified number of basis points to or from the rate or by multiplying the rate by a specified number; or (xii) Any rate identified as a qualified rate in guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(a) of this chapter) for purposes of this section. (2) Substantial equivalence of fair market value—(i) In general. Notwithstanding paragraph (b)(1) of this section, a rate is a qualified rate only if the fair market value of the debt instrument or non-debt contract after the alteration or modification described in paragraph (a)(1), (2), or (3) of this section is substantially equivalent to the fair market value of the debt instrument or non-debt contract before the alteration or modification. In determining fair market value for this purpose, the parties may use any reasonable, consistently applied valuation method and must take into account the value of any one-time payment that is made in connection with the alteration or modification. A reasonable valuation method may (but need not) be based in whole or in part on past or projected values of the relevant rate. The requirements of this paragraph (b)(2)(i) are deemed to be satisfied if the rate meets the safe harbor set forth in paragraph (b)(2)(ii)(A) of this section or if the parties satisfy the safe harbor set forth in paragraph (b)(2)(ii)(B) of this section. (ii) Safe harbors—(A) Historic average of rates. Paragraph (b)(2)(i) of this section is satisfied if, on the date of the alteration or modification described in paragraph (a)(1), (2), or (3) of this section, the historic average of the relevant IBOR-referencing rate does not differ by more than 25 basis points from the historic average of the replacement rate, taking into account any spread or VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 other adjustment to the rate, and adjusted to take into account the value of any one-time payment that is made in connection with the alteration or modification. For this purpose, an historic average may be determined by using an industry-wide standard, such as a method of determining an historic average recommended by the International Swaps and Derivatives Association for the purpose of computing the spread adjustment on a rate included as a fallback to an IBORreferencing rate on a derivative or a method of determining an historic average recommended by the Alternative Reference Rates Committee (or a comparable non-U.S. organization or non-U.S. regulator) for the purpose of computing the spread adjustment for a rate that replaces an IBOR-referencing rate on a debt instrument. An historic average may also be determined by any reasonable method that takes into account every instance of the relevant rate published during a continuous period beginning no earlier than 10 years before the alteration or modification and ending no earlier than three months before the alteration or modification. For purposes of this safe harbor, the historic average must be determined for both rates using the same method and historical data from the same timeframes and must be determined in good faith by the parties with the goal of making the fair market value of the debt instrument or non-debt contract after the alteration or modification substantially equivalent to the fair market value of the debt instrument or non-debt contract before the alteration or modification. (B) Arm’s length negotiations. Paragraph (b)(2)(i) of this section is satisfied if the parties to the debt instrument or non-debt contract are not related (within the meaning of section 267(b) or section 707(b)(1)) and the parties determine, based on bona fide, arm’s length negotiations between the parties, that the fair market value of the debt instrument or non-debt contract before the alteration or modification described in paragraph (a)(1), (2), or (3) of this section is substantially equivalent to the fair market value after the alteration or modification. For this purpose, the fair market value of the debt instrument or non-debt contract after the alteration or modification must take into account the value of any onetime payment that is made in connection with the alteration or modification. (C) Published in the Internal Revenue Bulletin. In guidance published in the Internal Revenue Bulletin, the Commissioner may set forth additional PO 00000 Frm 00035 Fmt 4702 Sfmt 4702 circumstances in which a rate is treated as satisfying the requirement of paragraph (b)(2)(i) of this section (see § 601.601(d)(2)(ii)(a) of this chapter). (3) Currency of the interest rate benchmark. Notwithstanding paragraph (b)(1) of this section, a rate is a qualified rate only if the interest rate benchmark to which the rate refers after the alteration or modification described in paragraph (a)(1), (2), or (3) of this section and the IBOR to which the debt instrument or non-debt contract referred before that alteration or modification are based on transactions conducted in the same currency or are otherwise reasonably expected to measure contemporaneous variations in the cost of newly borrowed funds in the same currency. (c) Effect of an alteration of the terms of a debt instrument or a modification of the terms of a derivative on integrated transactions and hedges. An alteration of the terms of a debt instrument or a modification of the terms of a derivative to replace a rate referencing an IBOR with a qualified rate on one or more legs of a transaction that is integrated under § 1.988–5 or § 1.1275–6 is not treated as legging-out of the transaction, provided that the § 1.1275–6 hedge (as defined in § 1.1275–6(b)(2)) or the § 1.988–5(a) hedge (as defined in § 1.988–5(a)(4)) as modified continues to meet the requirements for a § 1.1275–6 hedge or § 1.988–5(a) hedge, whichever is applicable. Similarly, an alteration of the terms of a debt instrument or a modification of the terms of a derivative to replace an interest rate referencing an IBOR with a qualified rate on one or more legs of a transaction that is subject to the hedge accounting rules described in § 1.446–4 will not be treated as a disposition or termination (within the meaning of § 1.446–4(e)(6)) of either leg of the transaction. In addition, a modification to replace an interest rate referencing an IBOR with a qualified rate on a hedging transaction for bonds that is integrated as a qualified hedge under § 1.148–4(h) for purposes of the arbitrage investment restrictions applicable to State and local tax-exempt bonds and other tax-advantaged bonds (as defined in § 1.150–1(b)) is not treated as a termination of that qualified hedge under § 1.148–4(h)(3)(iv)(B), provided that the hedge as modified continues to meet the requirements for a qualified hedge under § 1.148–4(h), as determined by applying the special rules for certain modifications of qualified hedges under § 1.148– 4(h)(3)(iv)(C). (d) Source and character of a onetime payment. For all purposes of the Internal Revenue Code, the source and E:\FR\FM\09OCP1.SGM 09OCP1 Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Proposed Rules character of a one-time payment that is made by a payor in connection with the alteration or modification described in paragraph (a)(1), (2), or (3) of this section is the same as the source and character that would otherwise apply to a payment made by the payor with respect to the debt instrument or nondebt contract that is altered or modified. (e) Coordination with provision for grandfathered obligations under chapter 4. A non-debt contract that is modified only as described in paragraph (a)(2) or (3) of this section is not materially modified for purposes of § 1.1471– 2(b)(2)(iv). (f) Coordination with the OID and REMIC rules. For rules regarding original issue discount on certain debt instruments that provide for a rate referencing an IBOR, see § 1.1275–2(m). For rules regarding certain interests in a REMIC that provide for a rate referencing an IBOR, see § 1.860G–1(e). (g) Applicability date. This section applies to an alteration of the terms of a debt instrument or a modification of the terms of a non-debt contract that occurs on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Taxpayers and their related parties, within the meaning of sections 267(b) and 707(b)(1), may apply this section to an alteration of the terms of a debt instrument or a modification of the terms of a non-debt contract that occurs before the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register, provided that the taxpayers and their related parties consistently apply the rules of this section before that date. See section 7805(b)(7). ■ Par. 6. Section 1.1271–0 is amended by adding a reserved entry for § 1.1275– 2(l) and by adding entries for § 1.1275– 2(m) to read as follows: § 1.1271–0 Original issue discount; effective date; table of contents. * * * * * § 1.1275–2 Special rules relating to debt instruments. khammond on DSKJM1Z7X2PROD with PROPOSALS * * * * * (l) [Reserved] (m) Transition from interbank offered rates. (1) In general. (2) Single qualified floating rate. (3) Remote contingency. (4) Change in circumstances. (5) Applicability date. * * * * * ■ Par. 7. Section 1.1275–2, as proposed to be amended at 84 FR 47210, September 9, 2019, is further amended by adding paragraph (m) to read as follows: VerDate Sep<11>2014 16:30 Oct 08, 2019 Jkt 250001 54079 § 1.1275–2 Special rules relating to debt instruments. DEPARTMENT OF THE TREASURY * Internal Revenue Service * * * * (m) Transition from interbank offered rates—(1) In general. This paragraph (m) applies to a variable rate debt instrument (as defined in § 1.1275–5(a)) that provides both for a qualified floating rate that references an interbank offered rate (IBOR) and for a methodology to change the IBORreferencing rate to a different rate in anticipation of the IBOR becoming unavailable or unreliable. See § 1.1001– 6 for additional rules that may apply to a debt instrument that provides for a rate referencing an IBOR. (2) Single qualified floating rate. If a debt instrument is described in paragraph (m)(1) of this section, the IBOR-referencing rate and the different rate are treated as a single qualified floating rate for purposes of § 1.1275–5. (3) Remote contingency. If a debt instrument is described in paragraph (m)(1) of this section, the possibility that the IBOR will become unavailable or unreliable is treated as a remote contingency for purposes of paragraph (h) of this section. (4) Change in circumstances. If a debt instrument is described in paragraph (m)(1) of this section, the fact that the IBOR has become unavailable or unreliable is not treated as a change in circumstances for purposes of paragraph (h)(6) of this section. (5) Applicability date. Paragraph (m) of this section applies to debt instruments issued on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. However, a taxpayer may apply paragraph (m) of this section to debt instruments issued before the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. See section 7805(b)(7). Sunita Lough, Deputy Commissioner for Services and Enforcement. [FR Doc. 2019–22042 Filed 10–8–19; 8:45 am] BILLING CODE 4830–01–P PO 00000 Frm 00036 Fmt 4702 Sfmt 4702 26 CFR Part 1 [REG–104870–18] RIN 1545–BO68 Taxable Year of Income Inclusion Under an Accrual Method of Accounting; Correction Internal Revenue Service (IRS), Treasury. ACTION: Correction to a notice of proposed rulemaking. AGENCY: This document contains a correction to a notice of proposed rulemaking (REG–104870–18) that was published in the Federal Register on September 9, 2019. The proposed regulations are regarding the timing of income inclusion under section 451 of the Internal Revenue Code. The proposed regulations reflect changes made by the Tax Cuts and Jobs Act. DATES: Written or electronic comments and requests for a public hearing are still being accepted and must be received by November 8, 2019. ADDRESSES: Send submissions to Internal Revenue Service, CC:PA:LPD:PR (REG–104870–18), Room 5205, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to Courier’s Desk, Internal Revenue Service, CC:PA:LPD:PR (REG–104870–18), 1111 Constitution Avenue NW, Washington, DC 20224. Alternatively, persons may submit comments electronically via the Federal eRulemaking Portal at http:// www.regulations.gov (IRS REG–104870– 18). FOR FURTHER INFORMATION CONTACT: Concerning §§ 1.446–2, 1.451–3(d)(2), 1.451–3(i), 1.1275–2(l), and any other provisions within the jurisdiction of the Associate Chief Counsel (Financial Institutions and Products), Charles Culmer, (202) 317–4528; concerning the rest of the proposed regulations, Charles Gorham, (202) 317–5091; concerning submissions of comments and requests for a public hearing, Regina L. Johnson, (202) 317–6091 (not toll-free numbers). FOR FURTHER INFORMATION CONTACT: Send submissions to Internal Revenue Service, CC:PA:LPD:PR (REG–104870– 18), Room 5205, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. SUMMARY: E:\FR\FM\09OCP1.SGM 09OCP1

Agencies

[Federal Register Volume 84, Number 196 (Wednesday, October 9, 2019)]
[Proposed Rules]
[Pages 54068-54079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22042]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-118784-18]
RIN 1545-BO91


Guidance on the Transition From Interbank Offered Rates to Other 
Reference Rates

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations that provide 
guidance on the tax consequences of the transition to the use of 
reference rates other than interbank offered rates (IBORs) in debt 
instruments and non-debt contracts. The proposed regulations are 
necessary to address the possibility that an alteration of the terms of 
a debt instrument or a modification of the terms of other types of 
contracts to replace an IBOR to which the terms of the debt instrument 
or other contract refers with a new reference rate could result in the 
realization of income, deduction, gain, or loss for Federal income tax 
purposes or could result in other tax consequences. The proposed 
regulations will affect parties to debt instruments and other contracts 
that reference an IBOR.

DATES: Written or electronic comments and requests for a public hearing 
must be received by November 25, 2019.

ADDRESSES: Submit electronic submissions via the Federal eRulemaking 
Portal at https://www.regulations.gov (indicate IRS and REG-118784-18) 
by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment received to 
its public docket, whether submitted electronically or in hard copy. 
Send hard copy submissions to: CC:PA:LPD:PR (REG-118784-18), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
118784-18), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Caitlin Holzem at (202) 317-4391; concerning submissions of comments 
and requesting a hearing, Regina L. Johnson at (202) 317-6901 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under sections 860G, 882, 1001, and 1275 of 
the Internal Revenue Code (Code).

1. Elimination of IBORs

    On July 27, 2017, the U.K. Financial Conduct Authority, the U.K. 
regulator tasked with overseeing the London interbank offered rate 
(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. The Financial Stability Board (FSB) and the Financial 
Stability Oversight Council (FSOC) have publicly acknowledged that in 
light of the prevalence of USD LIBOR as the reference rate in a broad 
range of financial instruments, the probable elimination of USD LIBOR 
has created risks that pose a potential threat to the safety and 
soundness of not only individual financial institutions, but also to 
financial stability generally. In its 2014 report ``Reforming Major 
Interest Rate Benchmarks,'' the FSB discussed the problems associated 
with key IBORs and made recommendations to address these problems, 
including the development and adoption of nearly risk-free reference 
rates to replace IBORs. The FSB and FSOC have recognized that a sudden 
cessation of a widely used reference rate could cause considerable 
disruptions in the marketplace and might adversely affect the normal 
functioning of a variety of markets in the United States, including 
business and consumer lending and the derivatives markets.
    The Alternative Reference Rates Committee (ARRC), whose ex-officio 
members include the Board of Governors of the Federal Reserve System, 
the Treasury Department, the Commodity Futures Trading Commission, and 
the Office of Financial Research, was convened by the Board of 
Governors of the Federal Reserve System and the Federal Reserve Bank of 
New York to identify alternative reference rates that would be both 
more robust than USD LIBOR and that would comply with standards such as 
the International Organization of Securities Commissions' ``Principles 
for Financial Benchmarks.'' The ARRC was also responsible for 
developing a plan to facilitate the voluntary acceptance of the 
alternative reference rate or rates that were chosen. On March 5, 2018, 
the ARRC published a report that summarizes the work done earlier to 
select the Secured Overnight Financing Rate (SOFR) as the replacement 
for USD LIBOR. The Federal Reserve Bank of New York began publishing 
SOFR daily as of April 3, 2018, in cooperation with the Office of 
Financial Research. In addition, the Chicago Mercantile Exchange and 
other entities have launched trading in SOFR futures and have begun 
clearing for over-the-counter SOFR swaps. Although SOFR is calculated 
from overnight transactions, it is possible that one or more term rates 
based on SOFR derivatives may be added in the future.
    Other jurisdictions have also been working toward replacing the 
LIBOR associated with their respective currencies. The Working Group on 
Sterling Risk-Free Reference Rates in the United Kingdom chose the 
Sterling Overnight Index Average (SONIA) to replace British pound 
sterling LIBOR; the Study Group on Risk-Free Reference Rates in Japan 
chose the Tokyo Overnight Average Rate (TONAR) to replace yen LIBOR and 
to serve as an alternative to the Tokyo Interbank Offered Rate (TIBOR); 
and the National Working Group in Switzerland selected the Swiss 
Average Rate Overnight (SARON) to replace Swiss franc LIBOR. 
Alternatives for the relevant IBOR rate have also been selected for 
Australia, Canada, Hong Kong, and the Eurozone. Other countries are at 
various stages of selecting a reference rate to replace their 
respective versions of IBOR.

2. Letters on the Tax Implications of the Elimination of IBORs on Debt 
Instruments and Non-Debt Contracts

    On April 8, 2019, and June 5, 2019, the ARRC submitted to the 
Treasury

[[Page 54069]]

Department and the IRS documents that identify various potential tax 
issues associated with the elimination of IBORs and request tax 
guidance to address those issues and to facilitate an orderly 
transition (ARRC letters). The ARRC stated that existing debt 
instruments and derivatives providing for IBOR-based payments must be 
amended to address the coming elimination of IBORs. The ARRC indicated 
that these amendments will likely take one of two forms. First, the 
parties may alter the instruments to replace the IBOR-referencing rate 
with another rate, such as one based on SOFR. Second, the parties may 
alter the instruments to replace an IBOR-referencing fallback rate with 
another fallback rate upon the discontinuance of the IBOR or at some 
other appropriate time. The ARRC describes fallback provisions as the 
provisions specifying what is to occur if an IBOR is permanently 
discontinued or is judged to have deteriorated to an extent that its 
relevance as a reliable benchmark has been significantly impaired. The 
ARRC notes that, regardless of which of these two forms the amendment 
takes, the rate that replaces the IBOR-referencing rate may include 
``(i) appropriate adjustments to the spread above the base reference 
rate in order to account for the expected differences between the two 
base reference rates (generally representing term premium and credit 
risk) and/or (ii) a one time, lump-sum payment in lieu of a spread 
adjustment.'' The ARRC also stated that newer debt instruments and 
derivatives may already include fallback provisions that anticipate the 
elimination of an IBOR and provide a methodology for changing the rate 
when the relevant IBOR becomes unreliable or ceases to exist.
    The ARRC letters urged broad and flexible tax guidance in this 
area. The ARRC letters requested guidance on specific tax issues that 
arise as a result of these efforts to transition from IBORs to 
alternative rates. The ARRC first asked that a debt instrument, 
derivative, or other contract not be treated as exchanged under section 
1001 when the terms of the instrument are amended either to replace an 
IBOR-referencing rate or to include a fallback rate in anticipation of 
the elimination of the relevant IBOR. The ARRC noted that these same 
amendments could cause a taxpayer with a synthetic debt instrument 
under Sec.  1.1275-6 to be treated as legging out of the integrated 
transaction, and it also sought clarification on the source and 
character of a one-time payment in lieu of a spread adjustment on a 
derivative. The ARRC recommended treating SOFR, similar replacement 
rates for IBOR-referencing rates in other currencies, and potentially 
any qualified floating rate under Sec.  1.1275-5 as permitted 
alternative reference rates to IBOR-referencing rates. The ARRC further 
requested that alteration of a regular interest in a real estate 
mortgage investment conduit (REMIC) to replace an IBOR-referencing rate 
or to change fallback provisions not prevent the regular interest from 
having fixed terms on the startup day, and that the existence and 
exercise of a fallback provision not prevent a variable interest rate 
on a regular interest in a REMIC from being a permitted variable rate 
under Sec.  1.860G-1. Additionally, the ARRC suggested that, for the 
purpose of determining the amount and timing of original issue discount 
(OID) on a debt instrument, an IBOR-referencing qualified floating rate 
and the fallback rate that replaces the IBOR-referencing rate should be 
treated as a single qualified floating rate. Finally, the ARRC 
requested that the reference to 30-day LIBOR in Sec.  1.882-
5(d)(5)(ii)(B) be amended so that taxpayers may continue to use the 
simplified method of computing excess interest permitted under that 
section. The Treasury Department and the IRS received letters from the 
Structured Finance Industry Group and the Real Estate Roundtable 
articulating concerns similar to those set forth in the ARRC letters. 
The comment letters also raised certain issues that are beyond the 
scope of this regulation.

3. Tax Implications of the Elimination of IBORs on Debt Instruments and 
Non-Debt Contracts

    The following subsections discuss the primary tax issues raised by 
changes to the terms of debt instruments and non-debt contracts in 
anticipation of the elimination of IBORs.
A. Section 1001
    Section 1001 provides rules for determining the amount and 
recognition of gain or loss from the sale or other disposition of 
property. The regulations under section 1001 generally provide that 
gain or loss is realized upon the exchange of property for other 
property differing materially either in kind or in extent. See Sec.  
1.1001-1(a). In the case of a debt instrument, Sec.  1.1001-3(b) 
provides that a significant modification of the debt instrument results 
in an exchange of the original debt instrument for a modified debt 
instrument that differs materially either in kind or in extent for 
purposes of Sec.  1.1001-1(a). Under Sec.  1.1001-3(c), a modification 
is generally any alteration, including any deletion or addition, in 
whole or in part, of a legal right or obligation of the issuer or a 
holder of a debt instrument. However, a modification generally does not 
include an alteration of a legal right or obligation that occurs by 
operation of the terms of a debt instrument. Section 1.1001-3(a)(1) 
provides that the rules of Sec.  1.1001-3 apply to any modification of 
a debt instrument, regardless of whether the modification takes the 
form of an amendment to the terms of the debt instrument or an exchange 
of a new debt instrument for an existing debt instrument. An alteration 
of a legal right or obligation that is treated as a modification must 
be tested for significance under Sec.  1.1001-3(e). Consequently, 
changing the interest rate index referenced in a U.S. dollar-
denominated debt instrument from USD LIBOR to SOFR if no provision has 
been made in the terms of the debt instrument for such a change is an 
alteration of the terms of the debt instrument that could be treated as 
a significant modification and result in a tax realization event, even 
when USD LIBOR no longer exists.
    Other than Sec.  1.1001-4, which generally prescribes the tax 
consequences to the nonassigning counterparty when there is a transfer 
or assignment of a derivative contract by a dealer or a clearinghouse, 
and Sec.  1.1001-5, which addresses the conversion of legacy currencies 
to the euro, there are no regulations that specifically address when a 
modification of a derivative or other non-debt contract creates a 
realization event. This absence of regulations has led to concern that 
modifying a non-debt contract to reflect the elimination of an IBOR, 
such as changing the floating rate index referenced in an interest rate 
swap contract from USD LIBOR to SOFR, could cause a deemed termination 
of the non-debt contract for tax purposes.
    Moreover, a modification of the fallback provisions of a debt 
instrument or non-debt contract to address the possibility of an IBOR 
being eliminated might require the parties to recognize income, 
deduction, gain, or loss. For example, if the terms of a derivative 
provide for payments at an IBOR-referencing rate but contain no 
fallback provision, a modification to the terms of the derivative to 
add a fallback to the IBOR-referencing rate could cause a deemed 
termination of the derivative. Likewise, if the terms of a debt 
instrument provide for an IBOR-referencing fallback rate, an alteration 
of the terms of the debt instrument to replace the IBOR-referencing 
fallback rate with another fallback rate could

[[Page 54070]]

cause a deemed exchange of the debt instrument.
B. Integrated Transactions and Hedges
    A debt instrument and one or more hedges may be treated in certain 
circumstances as a single, integrated instrument for certain specified 
purposes. For example, Sec.  1.1275-6 describes the circumstances under 
which a debt instrument may be integrated with a hedge for the purpose 
of determining the amount and timing of the taxpayer's income, 
deduction, gain, or loss. Sections 1.988-5(a) (regarding foreign 
currency transactions) and 1.148-4(h) (regarding arbitrage investment 
restrictions on tax-exempt bonds issued by State and local governments) 
similarly provide rules by which a debt instrument may be integrated 
with a hedge for a specific purpose. In each of these cases, amending 
an IBOR-referencing debt instrument or hedge to address the elimination 
of the IBOR may cause a deemed termination or legging out of the 
integrated hedge that in effect dissolves the integrated instrument 
into its component parts, which may yield undesirable tax consequences 
or recognition events for the parties to those instruments.
    Similarly, Sec.  1.446-4 provides rules by which taxpayers 
determine the timing of income, deduction, gain, or loss attributable 
to a hedging transaction. These rules generally state that the method 
of accounting used by a taxpayer for a hedging transaction must 
reasonably match the timing of income, deduction, gain, or loss from 
the hedging transaction with the timing of the income, deduction, gain, 
or loss from the item or items being hedged. If a taxpayer hedges an 
item and later terminates the item but keeps the hedge, the taxpayer 
must match the built-in gain or loss on the hedge to the gain or loss 
on the terminated item. Accordingly, amending the terms of a debt 
instrument or hedge to address the elimination of an IBOR could affect 
the timing of gain or loss under Sec.  1.446-4 if the amendment results 
in an exchange under section 1001.
C. Source and Character of a One-Time Payment
    The ARRC letters pointed out that, when parties alter the terms of 
a debt instrument or modify the terms of a non-debt contract to replace 
a rate referencing an IBOR, the alteration or modification may consist 
not only of the replacement of the IBOR with a new reference rate such 
as SOFR but also of an adjustment to the existing spread to account for 
the differences between the IBOR and the new reference rate. 
Alternatively, in lieu of (or in addition to) an adjustment to the 
spread, the parties may agree to a one-time payment as compensation for 
any reduction in payments attributable to the differences between the 
IBOR and the new reference rate. In the latter case, questions arise 
about the source and character of this one-time payment for various 
purposes of the Internal Revenue Code, such as the withholding rules in 
sections 1441 and 1442.
D. Grandfathered Debt Instruments and Non-Debt Contracts
    The requirements of certain statutes and regulations do not apply 
to debt instruments and non-debt contracts issued before a specific 
date. For example, an obligation issued on or before March 18, 2012, is 
not a registration-required obligation under section 163(f) if the 
obligation was issued under certain arrangements reasonably designed to 
ensure that the obligation was sold only to non-U.S. persons. If such 
an obligation is modified after March 18, 2012, in a manner that 
results in an exchange for purposes of Sec.  1.1001-1(a), the modified 
obligation is treated as reissued and will be a registration-required 
obligation unless otherwise excepted under section 163(f)(2)(A). 
Likewise, payments made on certain debt instruments and non-debt 
contracts outstanding on July 1, 2014, (grandfathered obligations) are 
exempt from withholding requirements that may otherwise apply under 
chapter 4 of the Code, subject to any material modification of a 
grandfathered obligation that results in the obligation not being 
treated as outstanding on July 1, 2014. Accordingly, if a debt 
instrument is altered or a non-debt contract is modified to replace an 
IBOR-referencing rate in anticipation of the elimination of the IBOR, 
the debt instrument or non-debt contract may be treated as reissued as 
a consequence of the alteration or modification and therefore subject 
to the statute or regulation from which it was previously exempt.
E. OID and Qualified Floating Rate
    Section 1.1275-5 defines a variable rate debt instrument (VRDI) and 
provides rules for determining the amount and accrual of qualified 
stated interest and OID on a VRDI. Under Sec.  1.1275-5(b), a VRDI may 
provide for stated interest at one or more qualified floating rates. A 
variable rate is generally a qualified floating rate if variations in 
the value of the rate can reasonably be expected to measure 
contemporaneous variations in the cost of newly borrowed funds. The 
rate may measure contemporaneous variations in borrowing costs for the 
issuer of the debt instrument or for issuers in general. However, a 
multiple of a qualified floating rate is not a qualified floating rate, 
except as permitted within limited parameters. If a debt instrument 
provides for two or more qualified floating rates that can reasonably 
be expected to have approximately the same values throughout the term 
of the instrument, the qualified floating rates together constitute a 
single qualified floating rate. Under Sec.  1.1275-5(e)(2), if a VRDI 
provides for stated interest at a single qualified floating rate and 
certain other requirements are satisfied, the amount of any OID that 
accrues during an accrual period is determined under the rules 
applicable to fixed rate debt instruments by assuming that the 
qualified floating rate is a fixed rate equal to the value, as of the 
issue date, of the qualified floating rate.
    Section 1.1275-2(h) describes the treatment under sections 1271 
through 1275 and the regulations under those sections of a debt 
instrument with respect to which one or more payments are subject to a 
remote contingency. Section 1.1275-2(h)(2) provides that a contingency 
is remote if there is a remote likelihood that the contingency will 
occur and that, in such a case, it is assumed that the contingency will 
not occur. In the event that a remote contingency actually occurs, 
Sec.  1.1275-2(h)(6) generally provides that the debt instrument, 
including a VRDI, that undergoes this ``change in circumstances'' is 
treated as retired and then reissued for purposes of sections 1272 and 
1273.
    In general, if a debt instrument provides for a floating rate of 
interest and the debt instrument does not qualify as a VRDI, the debt 
instrument is a contingent payment debt instrument (CPDI) that is 
subject to more complex and less favorable rules under Sec.  1.1275-4. 
For example, under Sec.  1.1275-4, all of the stated interest is OID 
and the holder and issuer recognize interest income or deductions at 
times other than when cash payments are made. In addition, if a debt 
instrument that provides for a floating rate of interest is subject to 
a contingency that is not a remote contingency, the instrument may be a 
CPDI. Even if the contingency is remote, if the contingency occurs, the 
debt instrument is treated as retired and reissued for purposes of the 
OID rules. In both cases, the treatment of the contingency affects 
whether the debt instrument has OID and, if so, the amount of the OID 
and the accruals of

[[Page 54071]]

the OID over the term of the debt instrument.
    The transition to alternative rates, such as SOFR, in connection 
with the phase-out of IBORs has raised questions under the OID rules. 
For example, it is not clear whether certain debt instruments that 
reference IBOR qualify as VRDIs or whether they are subject to non-
remote contingencies that must be taken into account.
F. REMICs
    Section 860G(a)(1) provides in part that a regular interest in a 
REMIC must be issued on the startup day with fixed terms. Section 
1.860G-1(a)(4) clarifies that a regular interest has fixed terms on the 
startup day if, on the startup day, the REMIC's organizational 
documents irrevocably specify, among other things, the interest rate or 
rates used to compute any interest payments on the regular interest. 
Accordingly, an alteration of the terms of the regular interest to 
change the rate or fallback provisions in anticipation of the cessation 
of an IBOR could preclude the interest from being a regular interest.
    Section 860G(a)(1) also provides in part that interest payments on 
a regular interest in a REMIC may be payable at a variable rate only to 
the extent provided in regulations and that a regular interest must 
unconditionally entitle the holder to receive a specified principal 
amount. Section 1.860G-1(a)(3) describes the variable rates permitted 
for this purpose, and Sec.  1.860G-1(a)(5) confirms that the principal 
amount of a regular interest generally may not be contingent. 
Notwithstanding these limitations on the payment of principal and 
interest on a regular interest in a REMIC, Sec.  1.860G-1(b)(3) lists 
certain contingencies affecting the payment of principal and interest 
that do not prevent an interest in a REMIC from being a regular 
interest. The list of excepted contingencies does not, however, include 
a fallback rate that is triggered by an event, such as the elimination 
of IBOR, that is likely to occur. Nor does the list expressly include 
the contingent reduction of principal or interest payments to offset 
costs incurred by amending a regular interest to replace a rate that 
refers to an IBOR or by adding a fallback rate in anticipation of the 
elimination of the relevant IBOR.
    Subject to certain exceptions, section 860G(d) imposes a tax equal 
to 100 percent of amounts contributed to a REMIC after the startup day. 
If a party other than the REMIC pays costs incurred by the REMIC after 
the startup day, that payment could be treated as a contribution to the 
REMIC subject to the tax under section 860G(d).
G. Interest Expense of a Foreign Corporation
    A foreign corporation applies Sec.  1.882-5 to determine its 
interest expense allocable under section 882(c) to income that is 
effectively connected with the conduct of a trade or business within 
the United States. If a foreign corporation uses the method described 
in Sec.  1.882-5(b) through (d), that foreign corporation could have 
U.S.-connected liabilities that exceed U.S.-booked liabilities (excess 
U.S.-connected liabilities). When a foreign corporation has excess 
U.S.-connected liabilities, Sec.  1.882-5(d)(5)(ii)(A) generally 
provides that the interest rate that applies to the excess U.S.-
connected liabilities is the foreign corporation's average U.S.-dollar 
borrowing cost on all U.S.-dollar liabilities other than its U.S.-
booked liabilities. Alternatively, Sec.  1.882-5(d)(5)(ii)(B) provides 
that a foreign corporation that is a bank, may elect to use a published 
average 30-day LIBOR for the year instead of determining its average 
U.S.-dollar borrowing cost. Because the election provided in Sec.  
1.882-5(d)(5)(ii)(B) only permits a foreign corporation that is a bank 
to elect a rate that references 30-day LIBOR, the current election will 
not be available when LIBOR is phased out.

Explanation of Provisions

1. Proposed Substantive Amendments to the Regulations

    The Treasury Department and the IRS have determined that it is 
appropriate to provide guidance on the tax issues discussed earlier in 
this preamble in order to minimize potential market disruption and to 
facilitate an orderly transition in connection with the phase-out of 
IBORs and the attendant need for changes in debt instruments and other 
non-debt contracts to implement this transition. The Treasury 
Department and the IRS expect that this guidance will reduce Federal 
income tax uncertainties and minimize taxpayer burden associated with 
this transition.
A. Section 1001
    The proposed regulations under Sec.  1.1001-6(a) generally provide 
that, if the terms of a debt instrument are altered or the terms of a 
non-debt contract, such as a derivative, are modified to replace, or to 
provide a fallback to, an IBOR-referencing rate and the alteration or 
modification does not change the fair market value of the debt 
instrument or non-debt contract or the currency of the reference rate, 
the alteration or modification does not result in the realization of 
income, deduction, gain, or loss for purposes of section 1001. The 
Treasury Department and the IRS intend that the proposed rules in Sec.  
1.1001-6(a), as with other regulations under section 1001, apply to 
both the issuer and holder of a debt instrument and to each party to a 
non-debt contract. The proposed rules in Sec.  1.1001-6(a) also apply 
regardless of whether the alteration or modification occurs by an 
amendment to the terms of the debt instrument or non-debt contract or 
by an exchange of a new debt instrument or non-debt contract for the 
existing one.
    Section 1.1001-6(a)(1) of the proposed regulations provides that 
altering the terms of a debt instrument to replace a rate referencing 
an IBOR with a qualified rate (qualified rates are discussed in detail 
later in this preamble) is not treated as a modification and therefore 
does not result in a deemed exchange of the debt instrument for 
purposes of Sec.  1.1001-3. This same rule applies to ``associated 
alterations,'' which are alterations that are both associated with the 
replacement of the IBOR-referencing rate and reasonably necessary to 
adopt or implement that replacement. One example of an associated 
alteration is the addition of an obligation for one party to make a 
one-time payment in connection with the replacement of the IBOR-
referencing rate with a qualified rate to offset the change in value of 
the debt instrument that results from that replacement.
    Section 1.1001-6(a)(2) of the proposed regulations provides that 
modifying a non-debt contract to replace a rate referencing an IBOR 
with a qualified rate is not treated as a deemed exchange of property 
for other property differing materially in kind or extent for purposes 
of Sec.  1.1001-1(a). The rule also applies to ``associated 
modifications,'' which differ from associated alterations only in that 
they relate to non-debt contracts. The principal example of a non-debt 
contract for purposes of the proposed regulations is a derivative 
contract, but the category is also intended to include any other type 
of contract (such as a lease) that may refer to an IBOR and that is not 
debt. Thus, for example, if an interest rate swap is modified to change 
the floating rate leg of the swap from Overnight USD LIBOR plus 25 
basis points to an alternative rate referencing SOFR that meets the 
requirements for a qualified rate under the proposed regulations 
(including the requirement that the fair market value of the swap 
contract after the modification is substantially equivalent to the fair

[[Page 54072]]

market value of the swap contract before the modification), that 
modification would not be treated as an exchange of property for other 
property differing materially in kind or extent and would therefore not 
be an event that results in the realization of income, deduction, gain 
or loss under Sec.  1.1001-1(a).
    Section 1.1001-6(a)(3) of the proposed regulations provides that an 
alteration to the terms of a debt instrument to include a qualified 
rate as a fallback to an IBOR-referencing rate and any associated 
alteration are not treated as modifications and therefore do not result 
in an exchange of the debt instrument for purposes of Sec.  1.1001-3. 
In addition, an alteration to the terms of a debt instrument by which 
an IBOR-based fallback rate is replaced with a different fallback rate 
that is a qualified rate and any associated alteration are also not 
treated as modifications. Similar rules provide that these same changes 
to a non-debt contract do not result in the exchange of property for 
other property differing materially in kind or extent for purposes of 
Sec.  1.1001-1(a).
    A coordination rule in Sec.  1.1001-6(a)(4) of the proposed 
regulations makes clear that any alteration to the terms of a debt 
instrument that is not given special treatment under either Sec.  
1.1001-6(a)(1) or (3) is subject to the ordinary operation of Sec.  
1.1001-3. The proposed regulations provide a similar rule for non-debt 
contracts. These proposed rules contemplate that when an alteration or 
modification not described in Sec.  1.1001-6(a)(1), (2), or (3) occurs 
at the same time as the alteration or modification described in those 
paragraphs, the alteration or modification described in Sec.  1.1001-
6(a)(1), (2), or (3) is treated as part of the existing terms of the 
debt instrument or non-debt contract and, consequently, becomes part of 
the baseline against which the alteration or modification not described 
in Sec.  1.1001-6(a)(1), (2), or (3) is tested.
    Section 1.1001-6(b) of the proposed regulations sets forth the 
rules for determining whether a rate is a qualified rate. Section 
1.1001-6(b)(1) lists the rates that may be qualified rates for purposes 
of Sec.  1.1001-6, provided that they satisfy the requirements set 
forth in Sec.  1.1001-6(b)(2) and (3). The list of potential qualified 
rates in Sec.  1.1001-6(b)(1) includes a qualified floating rate as 
defined in Sec.  1.1275-5(b), except that for this purpose a multiple 
of a qualified floating rate is considered a qualified floating rate. 
This list also includes any rate selected, endorsed or recommended by 
the central bank, reserve bank, monetary authority or similar 
institution (including a committee or working group thereof) as a 
replacement for an IBOR or its local currency equivalent in that 
jurisdiction. To avoid any uncertainty on the question of whether the 
rates identified in Sec.  1.1001-6(b)(1)(i) through (viii) may be 
qualified rates, those rates are individually enumerated even though 
each is a qualified floating rate, as defined in Sec.  1.1275-5(b), and 
each has been selected by a central bank, reserve bank, monetary 
authority or similar institution as a replacement for an IBOR or its 
local currency equivalent in that jurisdiction. The proposed 
regulations further provide that a rate that is determined by reference 
to one of the rates listed in Sec.  1.1001-6(b)(1) may also be a 
qualified rate. For example, a rate equal to the compound average of 
SOFR over the past 30 days may be a qualified rate because that rate is 
determined by reference to SOFR, which is listed in Sec.  1.1001-
6(b)(1). To retain the flexibility to respond to future developments, 
proposed Sec.  1.1001-6(b)(1)(xii) provides authority to add a rate to 
this list by identifying the new rate in guidance published in the 
Internal Revenue Bulletin.
    A rate described in Sec.  1.1001-6(b)(1) of the proposed 
regulations is not a qualified rate if it fails to satisfy the 
requirement of Sec.  1.1001-6(b)(2)(i). Section 1.1001-6(b)(2)(i) of 
the proposed regulations generally requires that the fair market value 
of the debt instrument or non-debt contract after the relevant 
alteration or modification must be substantially equivalent to the fair 
market value before that alteration or modification. The purpose of 
this requirement is to ensure that the alterations or modifications 
described in Sec.  1.1001-6(a)(1) through (3) are generally no broader 
than is necessary to replace the IBOR in the terms of the debt 
instrument or non-debt contract with a new reference rate. However, the 
Treasury Department and the IRS recognize that the fair market value of 
a debt instrument or non-debt contract may be difficult to determine 
precisely and intend that the proposed regulations broadly facilitate 
the transition away from IBORs. Accordingly, the proposed regulations 
provide that the fair market value of a debt instrument or derivative 
may be determined by any reasonable valuation method, as long as that 
reasonable valuation method is applied consistently and takes into 
account any one-time payment made in lieu of a spread adjustment.
    To further ease compliance with the value equivalence requirement 
in Sec.  1.1001-6(b)(2)(i), the proposed regulations provide two safe 
harbors and reserve the authority to provide additional safe harbors in 
guidance published in the Internal Revenue Bulletin. Under the first 
safe harbor, the value equivalence requirement is satisfied if at the 
time of the alteration the historic average of the IBOR-referencing 
rate is within 25 basis points of the historic average of the rate that 
replaces it. The parties may use any reasonable method to compute an 
historic average, subject to two limitations. First, the lookback 
period from which the historic data are drawn must begin no earlier 
than 10 years before the alteration or modification and end no earlier 
than three months before the alteration or modification. Second, once a 
lookback period is established, the historic average must take into 
account every instance of the relevant rate published during that 
period. For example, if the lookback period is comprised of the 
calendar years 2016 through 2020 and the relevant rate is 30-day USD 
LIBOR, the historic average of that rate must take into account each of 
the 60 published instances of 30-day USD LIBOR over the five-year 
lookback period. Alternatively, the parties may compute the historic 
average of a rate in accordance with an industry-wide standard, such as 
a standard for determining an historic average set forth by the 
International Swaps and Derivatives Association or the ARRC for this or 
a similar purpose. In any application of this safe harbor, the parties 
must use the same methodology and lookback period to compute the 
historic average for each of the rates to be compared.
    Under the second safe harbor, the value equivalence requirement of 
Sec.  1.1001-6(b)(2)(i) is satisfied if the parties to the debt 
instrument or non-debt contract are not related and, through bona fide, 
arm's length negotiations over the alteration or modification, 
determine that the fair market value of the altered debt instrument or 
modified non-debt contract is substantially equivalent to the fair 
market value of the debt instrument or non-debt contract before the 
alteration or modification. In determining the fair market value of an 
altered debt instrument or modified non-debt contract, the parties must 
take into account the value of any one-time payment made in lieu of a 
spread adjustment.
    A rate described in Sec.  1.1001-6(b)(1) of the proposed 
regulations is also not a qualified rate if it fails to satisfy the 
requirement in Sec.  1.1001-6(b)(3). This paragraph generally requires 
that any interest rate benchmark included in the

[[Page 54073]]

replacement rate and the IBOR referenced in the replaced rate are based 
on transactions conducted in the same currency or are otherwise 
reasonably expected to measure contemporaneous variations in the cost 
of newly borrowed funds in the same currency. As is the case with the 
value equivalence requirement under Sec.  1.1001-6(b)(2)(i), this 
requirement is intended to ensure that the alterations or modifications 
described in Sec.  1.1001-6(a)(1) through (3) are no broader than 
necessary to address the elimination of the relevant IBOR.
B. Integrated Transactions and Hedges
    Section 1.1001-6(c) of the proposed regulations confirms that a 
taxpayer is permitted to alter the terms of a debt instrument or modify 
one or more of the other components of an integrated or hedged 
transaction to replace a rate referencing an IBOR with a qualified rate 
without affecting the tax treatment of either the underlying 
transaction or the hedge, provided that the integrated or hedged 
transaction as modified continues to qualify for integration. For 
example, a taxpayer that has issued a floating rate debt instrument 
that pays interest at a rate referencing USD LIBOR and has entered into 
an interest rate swap contract that permits that taxpayer to create a 
synthetic fixed rate debt instrument under the integration rules of 
Sec.  1.1275-6 is not treated as legging out of the integrated 
transaction if the terms of the debt instrument are altered and the 
swap is modified to replace the USD LIBOR-referencing interest rate 
with a SOFR-referencing interest rate, provided that in the transaction 
as modified the Sec.  1.1275-6 hedge continues to meet the requirements 
for a Sec.  1.1275-6 hedge. The proposed regulations provide similar 
rules for a foreign currency hedge integrated with a debt instrument 
under Sec.  1.988-5(a) and for an interest rate hedge integrated with 
an issue of tax-exempt bonds under Sec.  1.148-4(h). The proposed 
regulations also provide that, in the case of a transaction subject to 
the hedge accounting rules under Sec.  1.446-4, altering the terms of a 
debt instrument or modifying the terms of a derivative to replace an 
IBOR-referencing rate with a qualified rate on one or more legs of the 
transaction is not a disposition or termination of either leg under 
Sec.  1.446-4(e)(6).
C. Source and Character of a One-Time Payment
    Section 1.1001-6(d) of the proposed regulations provides that, for 
all purposes of the Internal Revenue Code, the source and character of 
a one-time payment that is made by a payor in connection with an 
alteration or modification described in proposed Sec.  1.1001-6(a)(1), 
(2), or (3) will be the same as the source and character that would 
otherwise apply to a payment made by the payor with respect to the debt 
instrument or non-debt contract that is altered or modified. For 
example, a one-time payment made by a counterparty to an interest rate 
swap is treated as a payment with respect to the leg of the swap on 
which the counterparty making the one-time payment is obligated to 
perform. Accordingly, under Sec.  1.863-7(b), the source of that one-
time payment would likely be determined by reference to the residence 
of the recipient of the payment. With respect to a lease of real 
property, a one-time payment made by the lessee to the lessor is 
treated as a payment of rent and, under sections 861(a)(4) and 
862(a)(4), the source of that one-time payment would be the location of 
the leased real property.
    The Treasury Department and the IRS expect that parties to debt 
instruments and non-debt contracts will generally replace the IBOR with 
an overnight, nearly risk-free rate, such as SOFR. Because of 
differences in term and credit risk, an overnight, nearly risk-free 
rate will generally be lower than the IBOR it replaces. Accordingly, 
the Treasury Department and the IRS expect that, for example, one-time 
payments with respect to a debt instrument will generally not be paid 
by the lender to the borrower. However, in the event that it is 
determined that guidance in respect of such payments is needed, the 
Treasury Department and the IRS request comments on the source and 
character of a one-time payment on a debt instrument or non-debt 
contract received by a party (such as the borrower on a debt instrument 
or the lessee on a lease) that does not ordinarily receive payments 
during the term of the debt instrument or non-debt contract.
D. Grandfathered Debt Instruments and Non-Debt Contracts
    The rules in Sec.  1.1001-6(a) of the proposed regulations 
generally prevent debt instruments and non-debt contracts from being 
treated as reissued following a deemed exchange under section 1001. 
Thus, for example, a debt instrument grandfathered under section 
163(f), 871(m), or 1471 or a regulation under one of those sections 
would not lose its grandfathered status as a result of any alterations 
made in connection with the elimination of an IBOR and described in 
Sec.  1.1001-6(a)(1) or (3) of the proposed regulations. To provide 
certainty in treating a non-debt contract as a grandfathered obligation 
for chapter 4 purposes in the case of the modification of the contract 
to replace an IBOR-referencing rate, Sec.  1.1001-6(e) of the proposed 
regulations provides that any modification of a non-debt contract to 
which Sec.  1.1001-6(a)(2) or (3) applies is not a material 
modification for purposes of Sec.  1.1471-2(b)(2)(iv).
E. OID and Qualified Floating Rate
    Section 1.1275-2(m) of the proposed regulations sets forth three 
special rules for determining the amount and accrual of OID in the case 
of a VRDI that provides both for interest at an IBOR-referencing 
qualified floating rate and for a fallback rate that is triggered when 
the IBOR becomes unavailable or unreliable. Under Sec.  1.1275-2(m)(2), 
the IBOR-referencing qualified floating rate and the fallback rate are 
treated as a single qualified floating rate for purposes of Sec.  
1.1275-5. Under Sec.  1.1275-2(m)(3), the possibility that the relevant 
IBOR will become unavailable or unreliable is treated as a remote 
contingency for purposes of Sec.  1.1275-2(h). Under Sec.  1.1275-
2(m)(4), the occurrence of the event that triggers activation of the 
fallback rate is not treated as a change in circumstances. Thus, for 
example, the VRDI is not treated as retired and reissued under Sec.  
1.1275-2(h)(6) when the relevant IBOR becomes unavailable or unreliable 
and the rate changes to the fallback rate, even if the IBOR becoming 
unavailable or unreliable was a remote contingency at the time the VRDI 
was issued. With the exception of these three rules in Sec.  1.1275-
2(m) of the proposed regulations, the OID regulations apply to an IBOR-
referencing VRDI as they would to any other debt instrument.
F. REMICs
    Section 1.860G-1(e) of the proposed regulations permits an interest 
in a REMIC to retain its status as a regular interest despite certain 
alterations and contingencies. Specifically, if the parties to a 
regular interest alter the terms after the startup day to replace an 
IBOR-referencing rate with a qualified rate, to include a qualified 
rate as a fallback to an IBOR-referencing rate, or to make any other 
alteration described in Sec.  1.1001-6(a)(1) or (3) of the proposed 
regulations, Sec.  1.860G-1(e)(2) provides that those alterations are 
disregarded for the purpose of determining whether the regular interest 
has fixed terms on the startup day.
    Supplementing the list of disregarded contingencies in Sec.  
1.860G-1(b)(3), Sec.  1.860G-1(e)(3) and (4) of the proposed 
regulations describe certain contingencies affecting the payment of

[[Page 54074]]

principal and interest that do not prevent an interest in a REMIC from 
being a regular interest. Under Sec.  1.860G-1(e)(3), an interest in a 
REMIC does not fail to be a regular interest solely because the terms 
of the interest permit the rate to change from an IBOR-referencing rate 
to a fallback rate in anticipation of the relevant IBOR becoming 
unavailable or unreliable. Although this proposed rule permits 
taxpayers to disregard the contingency in determining whether the rate 
is a variable rate permitted under Sec.  1.860G-1(a)(3), both the IBOR-
referencing rate and the fallback rate considered individually must be 
rates permitted under section 860G. Under Sec.  1.860G-1(e)(4) of the 
proposed regulations, an interest in a REMIC does not fail to be a 
regular interest solely because the amount of payments of principal or 
interest may be reduced by reasonable costs of replacing an IBOR-
referencing rate with a qualified rate, of amending fallback provisions 
to address the elimination of an IBOR, or of modifying a non-debt 
contract that is associated with the interest in the REMIC, such as a 
credit enhancement. Section 1.860G-1(e)(4) further provides that, if a 
party other than the REMIC pays those reasonable costs after the 
startup day, that payment is not subject to the tax imposed under 
section 860G(d).
G. Interest Expense of a Foreign Corporation
    Because the election provided in Sec.  1.882-5(d)(5)(ii)(B) only 
permits a foreign corporation that is a bank to elect a rate that 
references 30-day LIBOR, the current election will not be available 
when LIBOR is phased out. To address this change in facts, the proposed 
regulations amend the election in Sec.  1.882-5(d)(5)(ii)(B) to allow a 
foreign corporation that is a bank to compute interest expense 
attributable to excess U.S.-connected liabilities using a yearly 
average SOFR. The Treasury Department and the IRS have determined that 
SOFR is an appropriate rate to use in Sec.  1.882-5(d)(5)(ii)(B) to 
replace LIBOR. Since SOFR is an overnight rate that does not reflect 
credit risk, the use of SOFR is likely to result in a lower rate than 
the 30-day LIBOR calculation previously allowed under Sec.  1.882-
5(d)(5)(ii)(B). Because of these differences between SOFR and 30-day 
LIBOR, the Treasury Department and the IRS request comments on whether 
another nearly risk-free rate might be more appropriate in computing 
interest expense on excess U.S.-connected liabilities for purposes of 
Sec.  1.882-5(d)(5)(ii)(B).

2. Proposed Applicability Dates and Reliance on the Proposed 
Regulations

A. Proposed Applicability Dates of the Final Regulations
    This part 2(A) of the Explanation of Provisions section describes 
the various applicability dates proposed to apply to the final 
regulations. Under the proposed applicability date in Sec.  1.1001-
6(g), Sec.  1.1001-6 of the final regulations would apply to an 
alteration of the terms of a debt instrument or a modification to the 
terms of a non-debt contract that occurs on or after the date of 
publication of a Treasury decision adopting those rules as final 
regulations in the Federal Register. However, under proposed Sec.  
1.1001-6(g), a taxpayer may choose to apply Sec.  1.1001-6 of the final 
regulations to alterations and modifications that occur before that 
date, provided that the taxpayer and its related parties consistently 
apply the rules before that date. See section 7805(b)(7).
    Under the proposed applicability date in Sec.  1.1275-2(m)(5), the 
OID rules in Sec.  1.1275-2(m) of the final regulations would apply to 
debt instruments issued on or after the date of publication of a 
Treasury decision adopting those rules as final regulations in the 
Federal Register. However, under proposed Sec.  1.1275-2(m)(5), a 
taxpayer may choose to apply Sec.  1.1275-2(m) of the final regulations 
to debt instruments issued before that date. See section 7805(b)(7).
    Under the proposed applicability date in Sec.  1.860G-1(e)(5)(i), 
the REMIC rules in Sec.  1.860G-1(e)(2) and (4) of the final 
regulations would apply with respect to an alteration or modification 
that occurs on or after the date of publication of a Treasury decision 
adopting those rules as final regulations in the Federal Register. 
However, a taxpayer may choose to apply Sec.  1.860G-1(e)(2) and (4) of 
the final regulations with respect to an alteration or modification 
that occurs before that date. See section 7805(b)(7). Under the 
proposed applicability date in Sec.  1.860G-1(e)(5)(ii), Sec.  1.860G-
1(e)(3) of the final regulations would apply to a regular interest in a 
REMIC issued on or after the date of publication of a Treasury decision 
adopting that rule as a final regulation in the Federal Register. 
However, a taxpayer may choose to apply Sec.  1.860G-1(e)(3) of the 
final regulations to a regular interest in a REMIC issued before that 
date. See section 7805(b)(7).
    Under the proposed applicability date in Sec.  1.882-5(f)(3), Sec.  
1.882-5(d)(5)(ii)(B) of the final regulations would apply to taxable 
years ending after the date of publication of a Treasury decision 
adopting that rule as a final regulation is published in the Federal 
Register.
B. Reliance on the Proposed Regulations
    A taxpayer may rely on the proposed regulations to the extent 
provided in this part 2(B) of the Explanation of Provisions section. A 
taxpayer may rely on Sec.  1.1001-6 of the proposed regulations for any 
alteration of the terms of a debt instrument or modification of the 
terms of a non-debt contract that occurs before the date of publication 
of a Treasury decision adopting those rules as final regulations in the 
Federal Register, provided that the taxpayer and its related parties 
consistently apply the rules of Sec.  1.1001-6 of the proposed 
regulations before that date. A taxpayer may rely on Sec.  1.1275-2(m) 
or Sec.  1.860G-1(e)(3) of the proposed regulations for any debt 
instrument or regular interest in a REMIC issued before the date of 
publication of a Treasury decision adopting those rules as final 
regulations in the Federal Register. A taxpayer may rely on Sec.  
1.860G-1(e)(2) and (4) of the proposed regulations with respect to any 
alteration or modification that occurs before the date of publication 
of a Treasury decision adopting that rule as a final regulation in the 
Federal Register. A taxpayer may rely on Sec.  1.882-5(d)(5)(ii)(B) of 
the proposed regulations for any taxable year ending after October 9, 
2019 but before the date of publication of a Treasury decision adopting 
these rules as final regulations in the Federal Register.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 12866 and 13563 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including (i) potential economic, environmental, and public health and 
safety effects, (ii) potential distributive impacts, and (iii) equity). 
Executive Order 13563 emphasizes the importance of quantifying both 
costs and benefits, reducing costs, harmonizing rules, and promoting 
flexibility.
    These proposed regulations have been designated as subject to 
review under Executive Order 12866 pursuant to the Memorandum of 
Agreement (April 11, 2018) (MOA) between the Treasury Department and 
the Office of Management and Budget (OMB) regarding review of tax 
regulations. The Office of Information and Regulatory Affairs has 
designated these proposed

[[Page 54075]]

regulations as economically significant under section 1(c) of the MOA.
A. Background, Need for the Proposed Regulations, and Economic Analysis 
of Proposed Regulations
    A very large volume of U.S. financial products and contracts 
include terms or conditions that reference LIBOR or, more generally, 
IBORs. Concern about manipulation and a decline in the volume of the 
funding from which the LIBOR is calculated led to recommendations for 
the development of alternatives to the LIBOR, ones that would be based 
on transactions in a more robust underlying market. In addition, on 
July 27, 2017, the U.K. Financial Conduct Authority, the U.K. regulator 
tasked with overseeing LIBOR, announced that all currency and term 
variants of LIBOR, including USD LIBOR, may be phased out after 2021 
and not be published after that timeframe. The ARRC, a group of 
stakeholders affected by the cessation of the publication of USD LIBOR, 
was convened to identify an alternative rate and to facilitate its 
voluntary adoption. The ARRC recommended the SOFR as a potential 
replacement for USD LIBOR. Essentially all financial products and 
contracts that currently contain conditions or legal provisions that 
rely on LIBOR and IBORs are expected to transition to the SOFR or 
similar alternatives in the next few years. This transition will 
involve changes in debt, derivatives, and other financial contracts to 
adopt the SOFR or other alternative reference rates.
    The ARRC has estimated that the total exposure to USD LIBOR was 
close to $200 trillion in 2016, of which approximately 95 percent were 
in over-the-counter derivatives.\1\ ARRC further notes that USD LIBOR 
is also referenced in several trillion dollars of corporate loans, 
floating-rate mortgages, and similar financial products.
---------------------------------------------------------------------------

    \1\ See Second Report, The Alternative Reference Rates 
Committee, March 2018, Table 1 and related discussion, available at 
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
---------------------------------------------------------------------------

    In the absence of further tax guidance, the vast majority of 
expected changes in such contracts could lead to the recognition of 
gains (or losses) in these contracts for U.S. income tax purposes and 
to correspondingly potentially large tax liabilities for their holders. 
To address this issue, the proposed regulations provide that changes in 
debt instruments, derivative contracts, and other affected contracts to 
replace reference rates based on IBORs with qualified rates (as defined 
in the proposed regulations) will not result in tax realization events 
under section 1001 and relevant regulations thereunder. The proposed 
regulations require that qualified rates be substantially equivalent in 
fair market value to the replaced rates based on any reasonable, 
consistently applied method of valuation. The proposed regulations 
further provide certain safe harbors for this comparability standard, 
based on historic average rates and bona fide fair market value 
negotiations between unrelated parties. The proposed regulations also 
provide corresponding guidance on hedging transactions and derivatives 
to the effect that taxpayers may modify the components of hedged or 
integrated transactions to replace IBORs with qualified rates without 
affecting the tax treatment of the hedges or underlying transactions.
    In the absence of these proposed regulations, parties to contracts 
affected by the cessation of the publication of LIBOR would either 
suffer tax consequences to the extent that a change to the contract 
results in a tax realization event under section 1001 or attempt to 
find alternative contracts that avoid such a tax realization event, 
which may be difficult as a commercial matter. Both such options would 
be both costly and highly disruptive to U.S. financial markets. A large 
number of contracts may end up being breached, leading to bankruptcies 
or other legal proceedings. The types of actions that contract holders 
might take in the absence of these proposed regulations are difficult 
to predict because such an event is outside recent experience in U.S. 
financial markets. This financial disruption would be particularly 
unproductive because the economic characteristics of the financial 
products and contracts under the new rates would be essentially 
unchanged. Thus, there is no underlying economic rationale for a tax 
realization event.
    The Treasury Department and the IRS project that these proposed 
regulations would avoid this costly and unproductive disruption. The 
Treasury Department and the IRS further project that these proposed 
regulations, by implementing the regulatory provisions requested by 
ARRC and taxpayers, will help facilitate the economy's adaptation to 
the cessation of the LIBOR in a least-cost manner.
    The Treasury Department and the IRS request comments on these 
proposed regulations.

II. Regulatory Planning and Review and Regulatory Flexibility Act

    Under the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is 
hereby certified that these proposed regulations will not have a 
significant economic impact on a substantial number of small entities 
that are directly affected by the proposed regulations. These proposed 
regulations provide rules to minimize the economic impact of the 
elimination of IBORs on all taxpayers. Parties to IBOR-referencing 
financial instruments are generally expected to alter or to modify 
those instruments in response to the elimination of the relevant IBOR 
and, in the absence of rules such as those proposed, those alterations 
and modifications may trigger significant tax consequences for the 
parties to those instruments. In addition, these proposed regulations 
do not impose a collection of information on any taxpayers, including 
small entities. Accordingly, this rule will not have a significant 
economic impact on a substantial number of small entities.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

III. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2019, that threshold is approximately $150 million. This 
rule does not include any Federal mandate that may result in 
expenditures by state, local, or tribal governments, or by the private 
sector in excess of that threshold.

IV. Executive Order 13132: Federalism

    Executive Order 13132 (titled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. This proposed rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

[[Page 54076]]

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS specifically seek comment on any 
complications under any section of the Code or existing regulations 
that may arise from the replacement of an IBOR with a qualified rate 
and that are not resolved in these proposed regulations. All comments 
will be available at http://www.regulations.gov or upon request. A 
public hearing will be scheduled if requested in writing by any person 
that timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register.

Drafting Information

    The principal authors of these regulations are Caitlin Holzem and 
Spence Hanemann of the Office of Associate Chief Counsel (Financial 
Institutions and Products). However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order for Sec.  1.1001-6 to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Section 1.1001-6 also issued under 26 U.S.C. 148(i), 26 U.S.C. 
988(d), and 26 U.S.C. 1275(d).
* * * * *
0
Par. 2. Section 1.860A-0 is amended by adding entries for Sec.  1.860G-
1(e) to read as follows:


Sec.  1.860A-0  Outline of REMIC provisions.

* * * * *


Sec.  1.860G-1  Definition of regular and residual interests.

* * * * *
    (e) Transition from interbank offered rates.
    (1) In general.
    (2) Change in reference rate for a regular interest after the 
startup day.
    (3) Contingencies of rate on a regular interest.
    (4) Reasonable expenses incurred to alter a regular interest.
    (5) Applicability dates.
* * * * *
0
Par. 3. Section 1.860G-1 is amended by adding paragraph (e) to read as 
follows:


Sec.  1.860G-1  Definition of regular and residual interests.

* * * * *
    (e) Transition from interbank offered rates--(1) In general. This 
paragraph (e) applies to certain interests in a REMIC that provide for 
a rate referencing an interbank offered rate. See Sec.  1.1001-6 for 
additional rules that may apply to an interest in a REMIC that provides 
for a rate referencing an interbank offered rate.
    (2) Change in reference rate for a regular interest after the 
startup day. An alteration to a regular interest in a REMIC that occurs 
after the startup day and that is described in Sec.  1.1001-6(a)(1) or 
(3) is disregarded in determining whether the regular interest has 
fixed terms on the startup day under paragraph (a)(4) of this section.
    (3) Contingencies of rate on a regular interest. An interest in a 
REMIC does not fail to qualify as a regular interest solely because it 
is subject to a contingency whereby a rate that references an interbank 
offered rate and is a variable rate permitted under paragraph (a)(3) of 
this section may change to a fixed rate or a different variable rate 
permitted under paragraph (a)(3) of this section in anticipation of the 
interbank offered rate becoming unavailable or unreliable.
    (4) Reasonable expenses incurred to alter a regular interest. An 
interest in a REMIC does not fail to qualify as a regular interest 
solely because it is subject to a contingency whereby the amount of 
payments of principal or interest (or other similar amounts) with 
respect to the interest in the REMIC is reduced by reasonable costs 
incurred to effect an alteration or modification described in Sec.  
1.1001-6(a)(1), (2), or (3). In addition, payment by a party other than 
the REMIC of reasonable costs incurred to effect an alteration or 
modification described in Sec.  1.1001-6(a)(1), (2), or (3) is not a 
contribution to the REMIC for purposes of section 860G(d).
    (5) Applicability dates. (i) Paragraphs (e)(2) and (4) of this 
section apply with respect to an alteration or modification that occurs 
on or after the date of publication of a Treasury decision adopting 
these rules as final regulations in the Federal Register. However, 
taxpayers may apply paragraphs (e)(2) and (4) of this section with 
respect to an alteration or a modification that occurs before the date 
of publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register. See section 7805(b)(7).
    (ii) Paragraph (e)(3) of this section applies to a regular interest 
in a REMIC issued on or after the date of publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register. However, a taxpayer may apply paragraph (e)(3) of this 
section to a regular interest in a REMIC issued before the date of 
publication of a Treasury decision adopting these rules as final 
regulations in the Federal Register. See section 7805(b)(7).
0
Par. 4. Section 1.882-5 is amended by:
0
1. Revising the fourth sentence of paragraph (a)(7)(i).
0
2. Revising paragraph (d)(5)(ii)(B).
0
3. Removing the ``(1)'' from the ``(f)(1)'' paragraph designation and 
adding a subject heading to paragraph (f)(1).
0
4. Adding paragraph (f)(3).
    The revisions and addition read as follows:


Sec.  1.882-5  Determination of interest deduction.

    (a) * * *
    (7) * * *
    (i) * * * An elected method (other than the fair market value 
method under paragraph (b)(2)(ii) of this section, or the published 
rate election in paragraph (d)(5)(ii) of this section) must be used for 
a minimum period of five years before the taxpayer may elect a 
different method. * * *
* * * * *
    (d) * * *
    (5) * * *
    (ii) * * *
    (B) Published rate election. For each taxable year in which a 
taxpayer is a bank within the meaning of section 585(a)(2)(B) (without 
regard to the second sentence thereof or whether any activities are 
effectively connected with a trade or business within the United 
States), the taxpayer may elect to compute the interest expense 
attributable to excess U.S.-connected liabilities by using the yearly 
average Secured Overnight Financing Rate (SOFR) published by the 
Federal Bank of New York for the taxable year rather than the interest 
rate provided in paragraph (d)(5)(ii)(A) of this section. A taxpayer 
may elect to apply the rate provided in paragraph (d)(5)(ii)(A) of this 
section or in this paragraph

[[Page 54077]]

(d)(5)(ii)(B) on an annual basis and the taxpayer does not need the 
consent of the Commissioner to change this election in a subsequent 
taxable year. If a taxpayer that is eligible to make the published rate 
election either does not file a timely return or files a calculation 
with no excess U.S.-connected liabilities and it is later determined by 
the Director of Field Operations that the taxpayer has excess U.S.-
connected liabilities, then the Director of Field Operations, and not 
the taxpayer, may choose whether to apply the interest rate provided 
under either paragraph (d)(5)(ii)(A) or (B) of this section to the 
taxpayer's excess U.S.-connected liabilities in determining interest 
expense.
* * * * *
    (f) * * *--
    (1) General rule. * * *
* * * * *
    (3) Applicability date for published rate election. Paragraph 
(d)(5)(ii)(B) of this section applies to taxable years ending after the 
date of publication of a Treasury decision adopting these rules as 
final regulations is published in the Federal Register.
0
Par. 5. Section 1.1001-6 is added to read as follows:


Sec.  1.1001-6  Transition from interbank offered rates.

    (a) Treatment under section 1001--(1) Debt instruments. An 
alteration of the terms of a debt instrument to replace a rate 
referencing an interbank offered rate (IBOR) with a qualified rate as 
defined in paragraph (b) of this section (qualified rate) and any 
associated alteration as defined in paragraph (a)(5) of this section 
(associated alteration) are not treated as modifications and therefore 
do not result in an exchange of the debt instrument for purposes of 
Sec.  1.1001-3. For example, if the terms of a debt instrument that 
pays interest at a rate referencing the U.S.-dollar London Interbank 
Offered Rate (USD LIBOR) are altered to provide that the instrument 
pays interest at a qualified rate referencing the Secured Overnight 
Financing Rate published by the Federal Reserve Bank of New York, that 
alteration of terms is not treated as a modification and therefore does 
not result in an exchange for purposes of Sec.  1.1001-3.
    (2) Non-debt contracts. A modification of the terms of a contract 
other than a debt instrument (a non-debt contract) to replace a rate 
referencing an IBOR with a qualified rate and any associated 
modification as defined in paragraph (a)(5) of this section (associated 
modification) are not treated as the exchange of property for other 
property differing materially in kind or extent for purposes of Sec.  
1.1001-1(a). A non-debt contract includes but is not limited to a 
derivative, stock, an insurance contract, and a lease agreement.
    (3) Fallback rate. An alteration of the terms of a debt instrument 
to include a qualified rate as a fallback to a rate referencing an IBOR 
and any associated alteration are not treated as modifications and 
therefore do not result in an exchange of the debt instrument for 
purposes of Sec.  1.1001-3. In addition, an alteration of the terms of 
a debt instrument to substitute a qualified rate in place of a rate 
referencing an IBOR as a fallback to another rate and any associated 
alteration are not treated as modifications and therefore do not result 
in an exchange of the debt instrument for purposes of Sec.  1.1001-3. A 
modification of the terms of a non-debt contract to include a qualified 
rate as a fallback to a rate referencing an IBOR and any associated 
modification are not treated as the exchange of property for other 
property differing materially in kind or extent for purposes of Sec.  
1.1001-1(a). In addition, a modification of the terms of a non-debt 
contract to substitute a qualified rate in place of a rate referencing 
an IBOR as a fallback to another rate and any associated modification 
are not treated as the exchange of property for other property 
differing materially in kind or extent for purposes of Sec.  1.1001-
1(a).
    (4) Other contemporaneous alterations and modifications. Whether an 
alteration of the terms of a debt instrument that is not described in 
paragraph (a)(1) or (3) of this section and that is made 
contemporaneously with an alteration described in paragraph (a)(1) or 
(3) of this section results in an exchange of the debt instrument is 
determined under Sec.  1.1001-3. Similarly, whether a modification of 
the terms of a non-debt contract that is not described in paragraph 
(a)(2) or (3) of this section and that is made contemporaneously with a 
modification described in paragraph (a)(2) or (3) of this section 
results in an exchange of property for other property differing 
materially in kind or extent is determined under Sec.  1.1001-1(a). In 
applying Sec.  1.1001-3 or Sec.  1.1001-1(a) for this purpose, the 
altered or modified terms described in paragraph (a)(1), (2), or (3) of 
this section are treated as part of the terms of the debt instrument or 
non-debt contract prior to any alteration or modification that is not 
so described. For example, if the parties to a debt instrument change 
the interest rate from a rate referencing USD LIBOR to a qualified rate 
and at the same time increase the interest rate to account for 
deterioration of the issuer's credit since the issue date, the 
qualified rate is treated as a term of the instrument prior to the 
alteration and only the addition of the risk premium is analyzed under 
Sec.  1.1001-3.
    (5) Associated alteration or modification. For purposes of this 
section, associated alteration or associated modification means any 
alteration of a debt instrument or modification of a non-debt contract 
that is associated with the alteration or modification by which a 
qualified rate replaces, or is included as a fallback to, the IBOR-
referencing rate and that is reasonably necessary to adopt or to 
implement that replacement or inclusion. An associated alteration or 
associated modification may be a technical, administrative, or 
operational alteration or modification, such as a change to the 
definition of interest period or a change to the timing and frequency 
of determining rates and making payments of interest (for example, 
delaying payment dates on a debt instrument by two days to allow 
sufficient time to compute and pay interest at a qualified rate 
computed in arrears). An associated alteration or associated 
modification may also be the addition of an obligation for one party to 
make a one-time payment in connection with the replacement of the IBOR-
referencing rate with a qualified rate to offset the change in value of 
the debt instrument or non-debt contract that results from that 
replacement (a one-time payment).
    (b) Qualified rate--(1) In general. For purposes of this section, a 
qualified rate is any one of the following rates, provided that the 
rate satisfies the fair market value requirement of paragraph (b)(2) of 
this section and the currency requirement of paragraph (b)(3) of this 
section:
    (i) The Secured Overnight Financing Rate published by the Federal 
Reserve Bank of New York (SOFR);
    (ii) The Sterling Overnight Index Average (SONIA);
    (iii) The Tokyo Overnight Average Rate (TONAR or TONA);
    (iv) The Swiss Average Rate Overnight (SARON);
    (v) The Canadian Overnight Repo Rate Average (CORRA);
    (vi) The Hong Kong Dollar Overnight Index (HONIA);
    (vii) The interbank overnight cash rate administered by the Reserve 
Bank of Australia (RBA Cash Rate);

[[Page 54078]]

    (viii) The euro short-term rate administered by the European 
Central Bank ([euro]STR);
    (ix) Any alternative, substitute or successor rate selected, 
endorsed or recommended by the central bank, reserve bank, monetary 
authority or similar institution (including any committee or working 
group thereof) as a replacement for an IBOR or its local currency 
equivalent in that jurisdiction;
    (x) Any qualified floating rate, as defined in Sec.  1.1275-5(b) 
(but without regard to the limitations on multiples set forth in Sec.  
1.1275-5(b)), that is not described in paragraphs (b)(1)(i) through 
(ix) of this section;
    (xi) Any rate that is determined by reference to a rate described 
in paragraphs (b)(1)(i) through (x) of this section, including a rate 
determined by adding or subtracting a specified number of basis points 
to or from the rate or by multiplying the rate by a specified number; 
or
    (xii) Any rate identified as a qualified rate in guidance published 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(a) of 
this chapter) for purposes of this section.
    (2) Substantial equivalence of fair market value--(i) In general. 
Notwithstanding paragraph (b)(1) of this section, a rate is a qualified 
rate only if the fair market value of the debt instrument or non-debt 
contract after the alteration or modification described in paragraph 
(a)(1), (2), or (3) of this section is substantially equivalent to the 
fair market value of the debt instrument or non-debt contract before 
the alteration or modification. In determining fair market value for 
this purpose, the parties may use any reasonable, consistently applied 
valuation method and must take into account the value of any one-time 
payment that is made in connection with the alteration or modification. 
A reasonable valuation method may (but need not) be based in whole or 
in part on past or projected values of the relevant rate. The 
requirements of this paragraph (b)(2)(i) are deemed to be satisfied if 
the rate meets the safe harbor set forth in paragraph (b)(2)(ii)(A) of 
this section or if the parties satisfy the safe harbor set forth in 
paragraph (b)(2)(ii)(B) of this section.
    (ii) Safe harbors--(A) Historic average of rates. Paragraph 
(b)(2)(i) of this section is satisfied if, on the date of the 
alteration or modification described in paragraph (a)(1), (2), or (3) 
of this section, the historic average of the relevant IBOR-referencing 
rate does not differ by more than 25 basis points from the historic 
average of the replacement rate, taking into account any spread or 
other adjustment to the rate, and adjusted to take into account the 
value of any one-time payment that is made in connection with the 
alteration or modification. For this purpose, an historic average may 
be determined by using an industry-wide standard, such as a method of 
determining an historic average recommended by the International Swaps 
and Derivatives Association for the purpose of computing the spread 
adjustment on a rate included as a fallback to an IBOR-referencing rate 
on a derivative or a method of determining an historic average 
recommended by the Alternative Reference Rates Committee (or a 
comparable non-U.S. organization or non-U.S. regulator) for the purpose 
of computing the spread adjustment for a rate that replaces an IBOR-
referencing rate on a debt instrument. An historic average may also be 
determined by any reasonable method that takes into account every 
instance of the relevant rate published during a continuous period 
beginning no earlier than 10 years before the alteration or 
modification and ending no earlier than three months before the 
alteration or modification. For purposes of this safe harbor, the 
historic average must be determined for both rates using the same 
method and historical data from the same timeframes and must be 
determined in good faith by the parties with the goal of making the 
fair market value of the debt instrument or non-debt contract after the 
alteration or modification substantially equivalent to the fair market 
value of the debt instrument or non-debt contract before the alteration 
or modification.
    (B) Arm's length negotiations. Paragraph (b)(2)(i) of this section 
is satisfied if the parties to the debt instrument or non-debt contract 
are not related (within the meaning of section 267(b) or section 
707(b)(1)) and the parties determine, based on bona fide, arm's length 
negotiations between the parties, that the fair market value of the 
debt instrument or non-debt contract before the alteration or 
modification described in paragraph (a)(1), (2), or (3) of this section 
is substantially equivalent to the fair market value after the 
alteration or modification. For this purpose, the fair market value of 
the debt instrument or non-debt contract after the alteration or 
modification must take into account the value of any one-time payment 
that is made in connection with the alteration or modification.
    (C) Published in the Internal Revenue Bulletin. In guidance 
published in the Internal Revenue Bulletin, the Commissioner may set 
forth additional circumstances in which a rate is treated as satisfying 
the requirement of paragraph (b)(2)(i) of this section (see Sec.  
601.601(d)(2)(ii)(a) of this chapter).
    (3) Currency of the interest rate benchmark. Notwithstanding 
paragraph (b)(1) of this section, a rate is a qualified rate only if 
the interest rate benchmark to which the rate refers after the 
alteration or modification described in paragraph (a)(1), (2), or (3) 
of this section and the IBOR to which the debt instrument or non-debt 
contract referred before that alteration or modification are based on 
transactions conducted in the same currency or are otherwise reasonably 
expected to measure contemporaneous variations in the cost of newly 
borrowed funds in the same currency.
    (c) Effect of an alteration of the terms of a debt instrument or a 
modification of the terms of a derivative on integrated transactions 
and hedges. An alteration of the terms of a debt instrument or a 
modification of the terms of a derivative to replace a rate referencing 
an IBOR with a qualified rate on one or more legs of a transaction that 
is integrated under Sec.  1.988-5 or Sec.  1.1275-6 is not treated as 
legging-out of the transaction, provided that the Sec.  1.1275-6 hedge 
(as defined in Sec.  1.1275-6(b)(2)) or the Sec.  1.988-5(a) hedge (as 
defined in Sec.  1.988-5(a)(4)) as modified continues to meet the 
requirements for a Sec.  1.1275-6 hedge or Sec.  1.988-5(a) hedge, 
whichever is applicable. Similarly, an alteration of the terms of a 
debt instrument or a modification of the terms of a derivative to 
replace an interest rate referencing an IBOR with a qualified rate on 
one or more legs of a transaction that is subject to the hedge 
accounting rules described in Sec.  1.446-4 will not be treated as a 
disposition or termination (within the meaning of Sec.  1.446-4(e)(6)) 
of either leg of the transaction. In addition, a modification to 
replace an interest rate referencing an IBOR with a qualified rate on a 
hedging transaction for bonds that is integrated as a qualified hedge 
under Sec.  1.148-4(h) for purposes of the arbitrage investment 
restrictions applicable to State and local tax-exempt bonds and other 
tax-advantaged bonds (as defined in Sec.  1.150-1(b)) is not treated as 
a termination of that qualified hedge under Sec.  1.148-4(h)(3)(iv)(B), 
provided that the hedge as modified continues to meet the requirements 
for a qualified hedge under Sec.  1.148-4(h), as determined by applying 
the special rules for certain modifications of qualified hedges under 
Sec.  1.148-4(h)(3)(iv)(C).
    (d) Source and character of a one-time payment. For all purposes of 
the Internal Revenue Code, the source and

[[Page 54079]]

character of a one-time payment that is made by a payor in connection 
with the alteration or modification described in paragraph (a)(1), (2), 
or (3) of this section is the same as the source and character that 
would otherwise apply to a payment made by the payor with respect to 
the debt instrument or non-debt contract that is altered or modified.
    (e) Coordination with provision for grandfathered obligations under 
chapter 4. A non-debt contract that is modified only as described in 
paragraph (a)(2) or (3) of this section is not materially modified for 
purposes of Sec.  1.1471-2(b)(2)(iv).
    (f) Coordination with the OID and REMIC rules. For rules regarding 
original issue discount on certain debt instruments that provide for a 
rate referencing an IBOR, see Sec.  1.1275-2(m). For rules regarding 
certain interests in a REMIC that provide for a rate referencing an 
IBOR, see Sec.  1.860G-1(e).
    (g) Applicability date. This section applies to an alteration of 
the terms of a debt instrument or a modification of the terms of a non-
debt contract that occurs on or after the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register. Taxpayers and their related parties, within the 
meaning of sections 267(b) and 707(b)(1), may apply this section to an 
alteration of the terms of a debt instrument or a modification of the 
terms of a non-debt contract that occurs before the date of publication 
of a Treasury decision adopting these rules as final regulations in the 
Federal Register, provided that the taxpayers and their related parties 
consistently apply the rules of this section before that date. See 
section 7805(b)(7).
0
Par. 6. Section 1.1271-0 is amended by adding a reserved entry for 
Sec.  1.1275-2(l) and by adding entries for Sec.  1.1275-2(m) to read 
as follows:


Sec.  1.1271-0  Original issue discount; effective date; table of 
contents.

* * * * *


Sec.  1.1275-2  Special rules relating to debt instruments.

* * * * *
    (l) [Reserved]
    (m) Transition from interbank offered rates.
    (1) In general.
    (2) Single qualified floating rate.
    (3) Remote contingency.
    (4) Change in circumstances.
    (5) Applicability date.
* * * * *
0
Par. 7. Section 1.1275-2, as proposed to be amended at 84 FR 47210, 
September 9, 2019, is further amended by adding paragraph (m) to read 
as follows:


Sec.  1.1275-2  Special rules relating to debt instruments.

* * * * *
    (m) Transition from interbank offered rates--(1) In general. This 
paragraph (m) applies to a variable rate debt instrument (as defined in 
Sec.  1.1275-5(a)) that provides both for a qualified floating rate 
that references an interbank offered rate (IBOR) and for a methodology 
to change the IBOR-referencing rate to a different rate in anticipation 
of the IBOR becoming unavailable or unreliable. See Sec.  1.1001-6 for 
additional rules that may apply to a debt instrument that provides for 
a rate referencing an IBOR.
    (2) Single qualified floating rate. If a debt instrument is 
described in paragraph (m)(1) of this section, the IBOR-referencing 
rate and the different rate are treated as a single qualified floating 
rate for purposes of Sec.  1.1275-5.
    (3) Remote contingency. If a debt instrument is described in 
paragraph (m)(1) of this section, the possibility that the IBOR will 
become unavailable or unreliable is treated as a remote contingency for 
purposes of paragraph (h) of this section.
    (4) Change in circumstances. If a debt instrument is described in 
paragraph (m)(1) of this section, the fact that the IBOR has become 
unavailable or unreliable is not treated as a change in circumstances 
for purposes of paragraph (h)(6) of this section.
    (5) Applicability date. Paragraph (m) of this section applies to 
debt instruments issued on or after the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register. However, a taxpayer may apply paragraph (m) of this 
section to debt instruments issued before the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register. See section 7805(b)(7).

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-22042 Filed 10-8-19; 8:45 am]
BILLING CODE 4830-01-P