166 Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 

that is controversial or contrary to 

Department policy, or would result in 

burdensome repetition of similar 

testimony in subsequent proceedings. 

§ 15.17 Subpoenas and demands served 

upon employees or former employees of 

the Office of the Inspector General. 

Notwithstanding the requirements set 

forth in §§ 15.11 through 15.16, this 

subpart is applicable to demands served 

on employees or former employees of 

the Office of the Inspector General 

(OIG), except that wherever in §§ 15.11 

through 15.16 there appear the phrases 

General Counsel, agency counsel, or 

Assistant General Counsel for 

Employment, Litigation, and 

Information, there shall be substituted 

in lieu thereof the Inspector General or 

Counsel to the Inspector General. In 

addition, the appropriate address for 

notifications specified in § 15.13(b) 

pertaining to employees and former 

employees covered under this section is 

Office of the Inspector General, U.S. 

Department of Commerce, 1401 

Constitution Avenue NW, Room 7896, 

Washington, DC 20230. 

[FR Doc. 2021–27190 Filed 1–3–22; 8:45 am] 

BILLING CODE 3510–BW–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 301 

[TD 9961] 

RIN 1545–BO91 

Guidance on the Transition From 

Interbank Offered Rates to Other 

Reference Rates 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations that provide guidance on the 

tax consequences of the transition away 

from the use of certain interbank offered 

rates in debt instruments, derivative 

contracts, and other contracts. The final 

regulations are necessary to address the 

possibility that a modification of the 

terms of a contract to replace such an 

interbank offered rate with a new 

reference rate could result in the 

realization of income, deduction, gain, 

or loss for Federal income tax purposes 

or could have other tax consequences. 

The final regulations will affect parties 

to contracts that reference certain 

interbank offered rates. 

DATES: 

Effective date: These final regulations 

are effective on March 7, 2022. 

Applicability date: For dates of 

applicability, see §§ 1.860A–1(b)(7), 

1.1001–6(k), and 1.1275–2(m)(5). 

FOR FURTHER INFORMATION CONTACT: 

Spence Hanemann at (202) 317–4554 

(not a toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains amendments 

to the Income Tax Regulations (26 CFR 

part 1) under sections 860A, 860G, 

1001, 1271, 1275, and 7701(l) of the 

Internal Revenue Code (Code) and to the 

Procedure and Administration 

Regulations (26 CFR part 301) under 

section 7701 of the Code. 

1. Discontinuation of LIBOR and Tax 

Implications 

On July 27, 2017, the Financial 

Conduct Authority, the United Kingdom 

regulator tasked with overseeing the 

London Interbank Offered Rate (LIBOR), 

announced that publication of all 

currency and term variants of LIBOR, 

including U.S.-dollar LIBOR (USD 

LIBOR), may cease after the end of 2021. 

The administrator of LIBOR, the ICE 

Benchmark Administration, announced 

on March 5, 2021, that publication of 

overnight, one-month, three-month, sixmonth, and 12-month USD LIBOR will 

cease immediately following the LIBOR 

publication on June 30, 2023, and that 

publication of all other currency and 

tenor variants of LIBOR will cease 

immediately following the LIBOR 

publication on December 31, 2021. 

On September 29, 2021, the Financial 

Conduct Authority announced that it 

will compel the ICE Benchmark 

Administration to continue to publish 

one-month, three-month, and six-month 

sterling LIBOR and Japanese yen LIBOR 

after December 31, 2021, using a 

‘‘synthetic’’ methodology that is not 

based on panel bank contributions 

(synthetic GBP LIBORs and synthetic 

JPY LIBORs, respectively). The 

Financial Conduct Authority has 

indicated that it may also require the 

ICE Benchmark Administration to 

publish one-month, three-month, and 

six-month USD LIBOR after June 30, 

2023, using a similar synthetic 

methodology (synthetic USD LIBORs). 

However, these synthetic GBP LIBORs, 

synthetic JPY LIBORs, and synthetic 

USD LIBORs are expected to be 

published for a limited period of time. 

Various tax issues may arise when 

taxpayers modify contracts in 

anticipation of the discontinuation of 

LIBOR or another interbank offered rate 

(IBOR). For example, such a 

modification may be treated as an 

exchange of property for other property 

differing materially in kind or extent for 

purposes of § 1.1001–1(a), giving rise to 

gain or loss. Such a modification may 

also have consequences under the rules 

for integrated transactions and hedging 

transactions, withholding under chapter 

4 of the Code, fast-pay stock, investment 

trusts, original issue discount, and real 

estate mortgage investment conduits 

(REMICs). To minimize potential market 

disruption and to facilitate an orderly 

transition in connection with the 

discontinuation of LIBOR and other 

IBORs, the Treasury Department and the 

IRS published proposed regulations 

(REG–118784–18) in the Federal 

Register (84 FR 54068) on October 9, 

2019 (Proposed Regulations). The 

Proposed Regulations generally provide 

that modifying a debt instrument, 

derivative, or other contract in 

anticipation of an elimination of an 

IBOR is not treated as an exchange of 

property for other property differing 

materially in kind or extent for purposes 

of § 1.1001–1(a). The Proposed 

Regulations also adjust other tax rules to 

minimize the collateral consequences of 

the transition away from IBORs. 

2. Rev. Proc. 2020–44 

The Alternative Reference Rates 

Committee (ARRC), whose ex officio 

members include the Treasury 

Department, was convened by the Board 

of Governors of the Federal Reserve 

System and the Federal Reserve Bank of 

New York in 2014. To support the 

transition away from USD LIBOR, the 

ARRC has published recommended 

fallback language for inclusion in the 

terms of certain cash products, such as 

syndicated loans and securitizations. 

The ARRC has also been actively 

engaged in work led by the International 

Swaps and Derivatives Association 

(ISDA) to ensure that the contractual 

fallback provisions in derivative 

contracts are sufficiently robust to 

prevent serious market disruptions 

when LIBOR is discontinued or 

becomes unreliable. To that end, ISDA 

developed the ISDA 2020 IBOR 

Fallbacks Protocol by which the parties 

to certain derivative contracts can 

incorporate certain improved fallback 

provisions into the terms of those 

contracts. 

On October 9, 2020, the Treasury 

Department and the IRS released Rev. 

Proc. 2020–44, 2020–45 I.R.B. 991, in 

advance of finalizing the Proposed 

Regulations to support the adoption of 

the ARRC’s recommended fallback 

provisions and the ISDA 2020 IBOR 

Fallbacks Protocol. Rev. Proc. 2020–44 

provides that a modification within the 

scope of the revenue procedure is not 

treated as an exchange of property for 


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Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 167 

other property differing materially in 

kind or extent for purposes of § 1.1001– 

1(a). In addition, Rev. Proc. 2020–44 

generally provides that a modification 

within the scope of the revenue 

procedure will not result in legging out 

of an integrated transaction or 

terminating either leg of a hedging 

transaction. 

3. The Final Regulations 

The Treasury Department and the IRS 

received public comments on the 

Proposed Regulations from eight 

commenters. Copies of these comments 

are available for public inspection at 

https://www.regulations.gov or upon 

request. No public hearing was 

requested, and none was held. After 

consideration of the public comments, 

the Treasury Department and the IRS 

adopt the Proposed Regulations as 

amended by this Treasury decision 

(Final Regulations). 

Summary of Comments and 

Explanation of Revisions 

The Final Regulations are intended to 

provide special rules to help taxpayers 

adjust to the discontinuation of certain 

widely used interest rate benchmarks. 

To achieve this purpose, the Treasury 

Department and the IRS have concluded 

that it is appropriate in this context to 

depart from the ordinary tax rules to the 

degree and in the manner provided in 

the Final Regulations. One commenter 

recommended that the Treasury 

Department and the IRS supplement the 

rules in the Final Regulations with 

‘‘rules of construction’’ based on the 

reasonableness of taxpayers’ actions. 

The Treasury Department and the IRS 

decline to adopt this comment because 

such a principles-based rule would blur 

the carefully circumscribed degree and 

manner in which the Final Regulations 

authorize taxpayers to depart from the 

ordinary tax rules. 

Although the Final Regulations and 

Proposed Regulations share many of the 

same fundamental rules, the structure of 

§ 1.1001–6 in the Final Regulations 

differs from that of the Proposed 

Regulations. These structural changes 

are primarily intended to simplify the 

operative rules, which are in § 1.1001– 

6(b) through (g) of the Final Regulations. 

For example, while the Proposed 

Regulations separately state the rules for 

debt and non-debt contracts, the Final 

Regulations provide a single set of rules 

for all contracts. The Final Regulations 

define contract broadly to include not 

only debt instruments and derivative 

contracts but also insurance contracts, 

stock, leases, and other contractual 

relationships. 

The Final Regulations also make use 

of defined terms, located in § 1.1001– 

6(h), to streamline references to 

concepts that are frequently used in the 

operative rules in § 1.1001–6(b) through 

(g). In particular, the defined term 

‘‘covered modification’’ is the 

cornerstone of these rules and serves to 

restructure several of the fundamental 

rules set forth in the Proposed 

Regulations. For example, § 1.1001–6 of 

the Proposed Regulations generally 

provides certain beneficial tax 

consequences when the parties to a 

contract modify the contract to replace 

an IBOR-based rate with a ‘‘qualified 

rate’’ and make certain ‘‘associated 

modifications,’’ which may include a 

‘‘one-time payment.’’ The Final 

Regulations unite these various 

elements of the Proposed Regulations 

(that is, modification of a contract, an 

IBOR-based rate, a qualified rate, 

associated modifications, and a onetime payment) in the single defined 

term ‘‘covered modification.’’ 

1. Treatment Under Section 1001 

Section 1.1001–6(a) of the Proposed 

Regulations generally provides rules for 

applying section 1001 to a contract that 

is modified to replace an IBOR-based 

rate or IBOR-based fallback provisions 

or to add or amend fallback provisions 

that would replace an IBOR-based rate. 

Section 1.1001–6(a) of the Proposed 

Regulations generally provides that such 

a modification is not treated as an 

exchange of property under section 

1001 and extends this treatment to any 

reasonably necessary conforming 

modifications. When modifications that 

qualify for this special treatment under 

proposed § 1.1001–6(a) occur 

contemporaneously with modifications 

that do not qualify, the non-qualifying 

modifications are subject to the ordinary 

rules under § 1.1001–1(a) or § 1.1001–3 

and the modifications that qualify for 

special treatment under proposed 

§ 1.1001–6(a) are treated as part of the 

existing terms of the contract. Section 

1.1001–6(b) of the Final Regulations 

provides similar rules but makes use of 

the defined terms ‘‘covered 

modification’’ and ‘‘noncovered 

modification.’’ 

a. Treatment of Covered and 

Noncovered Modifications 

Under § 1.1001–6(b)(1) of the Final 

Regulations, a covered modification of a 

contract is not treated as an exchange of 

property for other property differing 

materially in kind or in extent for 

purposes of § 1.1001–1(a). 

Consequently, in the case of a debt 

instrument, a covered modification to 

which § 1.1001–6(b)(1) applies is not 

treated as a significant modification for 

purposes of § 1.1001–3. As defined in 

§ 1.1001–6(h)(1) of the Final 

Regulations, a covered modification is 

generally comprised of four elements: 

(1) A contract with an operative rate or 

fallback provision that references a 

discontinued IBOR; (2) a modification of 

that contract (a) to replace an operative 

rate that refers to a discontinued IBOR 

with a qualified rate and, if the parties 

so choose, to add an obligation for one 

party to make a qualified one-time 

payment, (b) to include a qualified rate 

as a fallback to an operative rate that 

refers to a discontinued IBOR, or (c) to 

replace a fallback rate that refers to a 

discontinued IBOR with a qualified rate; 

(3) any associated modifications with 

respect to those modifications of the 

operative rate or fallback provisions; 

and (4) satisfaction of rules in § 1.1001– 

6(j) of the Final Regulations that exclude 

certain modifications from the 

definition of covered modification. The 

defined terms ‘‘discontinued IBOR,’’ 

‘‘qualified rate,’’ ‘‘qualified one-time 

payment,’’ and ‘‘associated 

modification’’ and the rules in § 1.1001– 

6(j) of the Final Regulations that exclude 

certain modifications are discussed in 

more detail in the sections of this 

preamble entitled Discontinued IBOR, 

Qualified rate, Qualified one-time 

payments, Associated modifications, 

and Fair market value requirement and 

excluded modifications, respectively. A 

modification described in section 4.02 

of Rev. Proc. 2020–44, as supplemented 

by any guidance that may be published 

in the Internal Revenue Bulletin, is also 

treated as a covered modification. Rev. 

Proc. 2020–44 is discussed in more 

detail in the section of this preamble 

entitled Rev. Proc. 2020–44. For 

purposes of the definition of a covered 

modification, the term ‘‘modification’’ is 

broadly construed to include any 

modification, regardless of its form. For 

example, a holding corporation that 

issued preferred stock may modify that 

stock for purposes of the Final 

Regulations by means of an exchange 

offer conducted by the corporation’s 

subsidiary. The term also includes any 

modification regardless of whether the 

modification is evidenced by an express 

agreement (oral or written), conduct of 

the parties, or otherwise. For example, 

any agreement to make additional 

payments with respect to a contract is 

a modification of that contract, 

regardless of whether the parties 

memorialize the obligation to make 

those payments in an amendment to the 

original contract or in a new, standalone 

contract. 


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168 Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 

Although § 1.1001–6(b)(1) of the Final 

Regulations generally provides that a 

covered modification of a contract is not 

treated as an exchange of property for 

other property differing materially in 

kind or in extent for purposes of 

§ 1.1001–1(a), whether a noncovered 

modification that occurs 

contemporaneously with the covered 

modification is an exchange of property 

for other property differing materially in 

kind or in extent is determined under 

the ordinary rules in § 1.1001–1(a) or 

§ 1.1001–3. The Final Regulations 

define a noncovered modification as any 

modification or portion of a 

modification of a contract that is not a 

covered modification. Two commenters 

asked whether pairing a modification 

that would otherwise qualify for 

beneficial treatment under the Proposed 

Regulations with a contemporaneous 

modification that does not so qualify 

prevents both modifications from 

benefitting from the Proposed 

Regulations. The reference to a ‘‘portion 

of a modification’’ in the definitions of 

covered modification and noncovered 

modification in the Final Regulations 

indicates that a modification is a 

noncovered modification only to the 

extent that it fails to be a covered 

modification. 

Two commenters requested that the 

Treasury Department and the IRS clarify 

whether, following a covered 

modification by which the parties add 

or amend fallback provisions, the 

change to the terms of the contract that 

results from the activation of the new 

fallback provisions must be tested 

separately at the time of activation to 

determine whether that change is an 

exchange of property for other property 

differing materially in kind or in extent 

for purposes of § 1.1001–1(a). As is 

ordinarily the case, a change to the 

terms of the contract that results from 

the activation of a fallback provision 

must be tested at the time of activation 

to determine whether that change 

results in such an exchange under 

§ 1.1001–1(a). If the change resulting 

from the activation of a fallback is a 

covered modification under § 1.1001– 

6(h)(1) of the Final Regulations, then the 

special rules provided in the Final 

Regulations for covered modifications 

apply to that change. Otherwise, 

whether that change is an exchange of 

property for other property differing 

materially in kind or in extent is 

generally determined under § 1.1001–3 

for debt instruments and under 

§ 1.1001–1(a) for other kinds of 

contracts. 

b. Discontinued IBOR 

Section 1.1001–6(h)(4) of the Final 

Regulations defines ‘‘discontinued 

IBOR,’’ a term not used in the Proposed 

Regulations. Sections 1.860G–1(e) and 

1.1275–2(m) of the Final Regulations 

also incorporate this definition. Under 

this new definition, a discontinued 

IBOR is generally an IBOR that will be 

discontinued, and an IBOR ceases to be 

a discontinued IBOR a year after the 

IBOR’s discontinuation. The purpose of 

this new definition is to tailor the relief 

provided in the Final Regulations to 

better match the problem that the Final 

Regulations are intended to address. 

One commenter requested that the 

Final Regulations apply when the 

parties to a contract modify the terms of 

the contract after the existing fallback 

provisions have already replaced all 

references to the IBOR with another 

rate. The commenter noted that, in the 

case of some widely held debt 

instruments, securing the consent of 

enough holders to modify the terms of 

the debt instrument may delay the 

modification so that the existing 

fallback provisions are triggered before 

the modification is complete. In such 

cases, the Proposed Regulations would 

not apply to the modification because 

the qualified rate would not be 

replacing an IBOR-based rate. The 

purpose of the Final Regulations is to 

facilitate the transition away from 

discontinued IBORs in order to avoid 

the market disruption that may occur if 

parties to contracts referencing 

discontinued IBORs fail to transition 

before the discontinued IBOR ceases. 

The change suggested by the commenter 

is not necessary to achieve this purpose. 

Moreover, the discontinuation of the 

most commonly used tenors of USD 

LIBOR has been deferred until June 30, 

2023, giving parties to contracts such as 

those described by the commenter an 

additional 18 months to act. 

Accordingly, the Final Regulations do 

not adopt this comment. 

As discussed in the section of this 

preamble entitled Discontinuation of 

LIBOR and Tax Implications, the ICE 

Benchmark Administration will 

continue to publish synthetic GBP 

LIBORs and synthetic JPY LIBORs for a 

limited time after December 31, 2021, 

and may publish synthetic USD LIBORs 

for a limited time after June 30, 2023. 

The Treasury Department and the IRS 

have determined that, for purposes of 

the Final Regulations, these synthetic 

LIBORs are a continuation of the 

currency and tenor variant of LIBOR 

that they succeed. Thus, for example, 

three-month sterling LIBOR became a 

discontinued IBOR on March 5, 2021, 

the date on which the ICE Benchmark 

Administration announced that it would 

permanently cease to publish threemonth sterling LIBOR, and will cease to 

be a discontinued IBOR one year after 

the date on which the ICE Benchmark 

Administration ceases to publish the 

three-month tenor of synthetic GBP 

LIBOR. 

c. Qualified Rate 

The definition of ‘‘qualified rate’’ in 

§ 1.1001–6(b) of the Proposed 

Regulations generally includes three 

elements: (1) The putative qualified rate 

must appear on a list of rates eligible to 

be a qualified rate in § 1.1001–6(b)(1); 

(2) the fair market values of the contract 

before and after the modification 

involving the putative qualified rate 

must be substantially equivalent under 

§ 1.1001–6(b)(2); and (3) the interest rate 

benchmark to which the putative 

qualified rate refers and the relevant 

IBOR generally must be based on the 

same currency under § 1.1001–6(b)(3). 

The fair market value requirement is 

addressed in more detail in the section 

of this preamble entitled Fair market 

value requirement and excluded 

modifications. 

One commenter recommended 

streamlining the list of rates that are 

eligible to be a ‘‘qualified rate’’ in 

§ 1.1001–6(b)(1) of the Proposed 

Regulations. The commenter pointed 

out that § 1.1001–6(b)(1)(x) of the 

Proposed Regulations generally includes 

qualified floating rates without regard to 

the limitations on multiples and that the 

interest rate benchmarks listed in 

§ 1.1001–6(b)(1)(i) through (viii) of the 

Proposed Regulations are merely 

examples of qualified floating rates. In 

response, the Treasury Department and 

the IRS have merged § 1.1001–6(b)(1)(i) 

through (viii) and (x) of the Proposed 

Regulations into a single entry in 

§ 1.1001–6(h)(3)(ii)(A) of the Final 

Regulations, which includes a nonexclusive list of rates that are generally 

qualified floating rates, such as the 

Secured Overnight Financing Rate 

published by the Federal Reserve Bank 

of New York (SOFR), the Sterling 

Overnight Index Average, the Tokyo 

Overnight Average Rate, the Swiss 

Average Rate Overnight, and the euro 

short-term rate administered by the 

European Central Bank. 

This commenter also suggested that 

§ 1.1001–6(b)(1)(xi) of the Proposed 

Regulations, which describes any rate 

determined by reference to another rate 

included in the list of eligible rates, is 

unnecessary because any rate described 

in that paragraph is also described in 

§ 1.1001–6(b)(1)(x) of the Proposed 

Regulations, which is any qualified 


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Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 169 

floating rate without regard to the 

limitations on multiples. However, 

certain IBOR-based objective rates (as 

defined in § 1.1275–5(c)) and certain 

IBOR-based rates on contingent 

payment debt instruments (within the 

meaning of § 1.1275–4) may not be 

described in § 1.1001–6(b)(1)(x) of the 

Proposed Regulations. Accordingly, the 

Final Regulations do not adopt this 

comment and retain both § 1.1001– 

6(b)(1)(x) and (xi) of the Proposed 

Regulations in the list of eligible rates at 

§ 1.1001–6(h)(3)(ii)(A) and (D) of the 

Final Regulations, respectively. 

Other commenters suggested that the 

list of rates that are eligible to be 

qualified rates in the Proposed 

Regulations be expanded to include any 

rate identified by the ARRC or ISDA as 

a replacement for an IBOR. The 

Treasury Department and the IRS have 

concluded that allowing any purely 

private organizations the authority to 

add to the list of rates eligible to be 

qualified rates would be inconsistent 

with the carefully circumscribed degree 

and manner in which the Final 

Regulations authorize taxpayers to 

depart from the ordinary tax rules. 

Accordingly, the Final Regulations 

extend such authority only to the ARRC 

and only for as long as the Federal 

Reserve Bank of New York continues to 

be an ex officio member of the ARRC. 

One commenter recommended that 

the currency element of the definition of 

qualified rate in § 1.1001–6(b)(3) of the 

Proposed Regulations be removed. After 

stating that a qualified rate under the 

Proposed Regulations must generally be 

a qualified floating rate, the commenter 

reasoned that the currency requirement 

in the definition of qualified rate is 

unnecessary because that requirement is 

already built into the definition of 

qualified floating rate under § 1.1275– 

5(b). The Final Regulations do not adopt 

this comment because a qualified rate 

under the Final Regulations is not 

required to be a qualified floating rate. 

For example, an objective rate based on 

a qualified floating rate may be 

described in § 1.1001–6(h)(3)(ii)(D) of 

the Final Regulations but not in 

§ 1.1001–6(h)(3)(ii)(A) of the Final 

Regulations. Also, although the 

currency requirements in § 1.1001– 

6(h)(3)(i) of the Final Regulations and 

§ 1.1275–5(b) may overlap in many 

cases, these requirements are not 

identical. The currency requirement for 

qualified rates in the Final Regulations 

requires that the discontinued IBOR and 

the interest rate benchmark included in 

the qualified rate be based on the same 

currency, whereas the currency 

requirement for qualified floating rates 

in § 1.1275–5(b) requires that the 

currency on which the qualified floating 

rate is based match the currency in 

which the debt instrument is 

denominated. 

The definition of qualified rate has 

also been amended in the Final 

Regulations in response to public 

comments that identify gaps in how the 

definition of qualified rate in the 

Proposed Regulations applies to covered 

modifications that involve the addition 

or amendment of fallback provisions. In 

particular, commenters asked how the 

definition of qualified rate applies when 

a contract is modified to include a 

waterfall of fallback rates, the individual 

tiers of which may not independently 

satisfy the definition of qualified rate. 

Commenters also asked how the 

definition of qualified rate applies to a 

fallback rate that will be determined on 

the date that the fallback rate is 

triggered and cannot be determined on 

the date of the modification by which 

that fallback rate is added to the 

contract. 

The Final Regulations address these 

comments by providing a series of rules 

in sect; 1.1001–6(h)(3)(i) and (iii) for 

determining whether a fallback rate or a 

collection of fallback rates meet the 

definition of a qualified rate. Section 

1.1001–6(h)(3)(i) of the Final 

Regulations provides that a single 

qualified rate may be comprised of more 

than one fallback rate, such as when the 

parties add a fallback waterfall. In other 

words, this rule treats a waterfall of 

fallbacks as a unit and evaluates that 

unit to determine if it is a qualified rate. 

Thus, if the waterfall is designed so that 

each tier replaces the preceding tier 

when triggered (for example, when USD 

LIBOR ceases, USD LIBOR is replaced 

by the first tier of the waterfall and, if 

the first tier of the waterfall ceases, that 

first tier is replaced by the second tier), 

the entire waterfall is treated as a 

fallback to a discontinued IBOR even 

though, as a technical matter, only the 

first tier of the waterfall is a fallback to 

the discontinued IBOR. Section 1.1001– 

6(h)(3)(iii)(A) of the Final Regulations 

generally provides that, when a 

collection of fallback rates is added to 

the contract (for example, a fallback 

waterfall), that collection of fallback 

rates is a qualified rate only if each 

individual fallback rate in the collection 

meets the requirements to be a qualified 

rate. Sections 1.1001–6(h)(3)(iii)(B) and 

(C) of the Final Regulations apply for 

purposes of determining whether an 

individual fallback rate (regardless of 

whether that fallback rate was added to 

the contract individually or the fallback 

rate was added as a collection of 

fallback rates and is being tested 

individually under § 1.1001– 

6(h)(3)(iii)(A) of the Final Regulations) 

meets the requirements to be a qualified 

rate. Under § 1.1001–6(h)(3)(iii)(B) of 

the Final Regulations, a fallback rate is 

treated as not meeting the requirements 

to be a qualified rate if the contractual 

terms that comprise the fallback rate do 

not ensure at the time of the 

modification that the fallback rate will 

meet the requirements to be a qualified 

rate identified in the first sentence of 

§ 1.1001–6(h)(3)(i) of the Final 

Regulations when the fallback rate is 

triggered. Under § 1.1001–6(h)(3)(iii)(C) 

of the Final Regulations, a fallback rate 

is treated as meeting the requirements to 

be a qualified rate if the likelihood that 

it will ever be triggered is remote. If 

§ 1.1001–6(h)(3)(iii)(B) and (C) of the 

Final Regulations both apply to a given 

fallback rate, the rule in § 1.1001– 

6(h)(3)(iii)(C) takes priority over the rule 

in § 1.1001–6(h)(3)(iii)(B). Examples in 

§ 1.1001–6(h)(3)(iv) of the Final 

Regulations illustrate the operation of 

these rules for fallback rates. 

d. Associated Modifications 

The Proposed Regulations generally 

define an associated modification as a 

modification that is both associated 

with the replacement of an IBOR-based 

rate or the inclusion of fallbacks to an 

IBOR-based rate and that is reasonably 

necessary to adopt or to implement that 

replacement or inclusion. Section 

1.1001–6(h)(5) of the Final Regulations 

generally defines an associated 

modification similarly but eliminates 

the requirement that an associated 

modification be ‘‘associated with’’ such 

a replacement or inclusion because any 

modification that is reasonably 

necessary to adopt or to implement the 

replacement or inclusion is necessarily 

associated with that replacement or 

inclusion. 

The definition of ‘‘associated 

modification’’ in the Proposed 

Regulations also includes a ‘‘one-time 

payment,’’ which is generally defined as 

a payment to offset the change in value 

of the contract that results from 

replacing an IBOR-based rate with a 

qualified rate. One commenter asked 

whether certain cash payments can 

qualify as associated modifications even 

if they do not qualify as one-time 

payments. For example, if the parties to 

an interest rate swap agree to replace 

USD LIBOR with a replacement rate 

comprised of a compounded average of 

SOFR (computed in arrears using a twoday observation period shift without 

payment lag) and a fixed adjustment 

spread, one party might also agree to 

make an incidental cash payment to 

compensate the counterparty for small 

valuation differences between the preVerDate Sep<11>2014 18:00 Jan 03, 2022 Jkt 256001 PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 E:\FR\FM\04JAR1.SGM 04JAR1

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modification LIBOR-based contract and 

the post-modification SOFR-based 

contract, such as the valuation 

differences resulting from the difference 

in observation period. The Treasury 

Department and the IRS have concluded 

that including such limited payments 

within the definition of an associated 

modification would further the policy 

goal of the Final Regulations to facilitate 

the transition away from discontinued 

IBORs. Accordingly, the definition of 

‘‘associated modification’’ in § 1.1001– 

6(h)(5) of the Final Regulations includes 

an incidental cash payment intended to 

compensate a counterparty for small 

valuation differences resulting from a 

modification of the administrative terms 

of a contract, such as the valuation 

differences resulting from a change in 

observation period. The Treasury 

Department and the IRS caution, 

however, that a payment of an amount 

that is not incidental cannot qualify as 

an associated modification. 

e. Qualified One-Time Payments 

The Proposed Regulations provide 

that a ‘‘one-time payment,’’ generally 

defined as a payment to offset the 

change in value of the contract that 

results from replacing an IBOR-based 

rate with a qualified rate, may be an 

associated modification. To improve 

readability and clarity, the Final 

Regulations redesignate ‘‘one-time 

payments’’ as ‘‘qualified one-time 

payments’’ and define the new term in 

a standalone definition rather than as a 

kind of associated modification. 

Commenters asked whether the 

Proposed Regulations cap the amount of 

a one-time payment and described 

certain abuses that may result if the 

amount of the payment is not limited in 

some way. To clarify the intent of the 

Proposed Regulations and to prevent 

excessive payments from satisfying the 

definition of qualified one-time 

payments, the Final Regulations 

generally limit a qualified one-time 

payment to the amount intended to 

compensate for the basis difference 

between the discontinued IBOR and the 

interest rate benchmark to which the 

qualified rate refers. Any portion in 

excess of that cap is a noncovered 

modification. 

f. Fair Market Value Requirement and 

Excluded Modifications 

The Proposed Regulations generally 

require that the fair market value of the 

modified contract be substantially 

equivalent before and after the 

modification. The Proposed Regulations 

provide two safe harbors to the fair 

market value requirement: The 

historical average safe harbor and the 

arm’s length safe harbor. Under the 

historical average safe harbor, the fair 

market value requirement is generally 

satisfied if, on the date of the 

modification, the historical average of 

the IBOR-based rate is within 25 basis 

points of the historical average of the 

putative qualified rate. To qualify for 

the arm’s length safe harbor, the parties 

to the contract generally must not be 

related under § 267(b) or § 707(b)(1), 

must conduct bona fide, arm’s length 

negotiations, and must determine based 

on those negotiations that the fair 

market value requirement is satisfied. 

The Treasury Department and the IRS 

received many public comments 

identifying practical problems and 

technical issues with the fair market 

value requirement and its two safe 

harbors. In response to these public 

comments, the Treasury Department 

and the IRS have replaced the fair 

market value requirement with rules 

that describe specific modifications (the 

excluded modifications) and exclude 

those modifications from the definition 

of covered modification. These 

excluded modifications are described in 

§ 1.1001–6(j)(1) through (5) of the Final 

Regulations. 

One significant purpose of the fair 

market value requirement in the 

Proposed Regulations is to ensure that 

the modifications to the cash flows of an 

IBOR-referencing contract are intended 

to address the replacement of the IBORbased rate in the contract. Because the 

excluded modifications replace the fair 

market value requirement, each of the 

excluded modifications described in 

§ 1.1001–6(j)(1) through (5) of the Final 

Regulations involves modifying the 

contract in a way that changes the 

amount or timing of contractual cash 

flows. 

In addition to a change in cash flows, 

each of the excluded modifications also 

describes a particular purpose or intent 

of the parties making the modification. 

Section 1.1001–6(j)(1) of the Final 

Regulations generally describes a 

situation in which the parties to a 

contract change the contractual cash 

flows to induce one or more of the 

parties to perform any act necessary to 

consent to a covered modification of the 

contract. Example 3 in § 1.1001– 

6(j)(6)(iii) illustrates the operation of 

§ 1.1001–6(j)(1). Section 1.1001–6(j)(2) 

of the Final Regulations generally 

describes a situation in which the 

parties to a contract agree to a 

contemporaneous noncovered 

modification of that contract that does 

not necessarily change contractual cash 

flows and, in consideration for that 

change, also agree to change contractual 

cash flows. Example 5 in § 1.1001– 

6(j)(6)(v) illustrates the operation of 

§ 1.1001–6(j)(2). Section 1.1001–6(j)(3) 

of the Final Regulations generally 

describes a situation in which one party 

to a contract is experiencing financial 

distress and another party either makes 

a concession to or secures a concession 

from the distressed party in the form of 

a change in contractual cash flows. 

Example 6 in § 1.1001–6(j)(6)(vi) 

illustrates the operation of § 1.1001– 

6(j)(3). Section 1.1001–6(j)(4) of the 

Final Regulations generally describes a 

situation in which the parties to a 

contract agree to change contractual 

cash flows on that contract as 

consideration for some extra-contractual 

arrangement. Example 7 in § 1.1001– 

6(j)(6)(vii) illustrates the operation of 

§ 1.1001–6(j)(4). Section 1.1001–6(j)(4) 

of the Final Regulations also includes a 

special rule that applies when the 

parties make an aggregate qualified onetime payment on a portfolio of modified 

contracts. In that case, the portion of the 

qualified one-time payment allocable to 

any one contract in the portfolio is 

treated as not intended to compensate 

for any changes in rights or obligations 

under any other contract in the 

portfolio. 

In § 1.1001–6(j)(5) of the Final 

Regulations, the Treasury Department 

and the IRS reserve the authority to 

expand this list of excluded 

modifications in guidance published in 

the Internal Revenue Bulletin. To 

exercise this authority, the Treasury 

Department and the IRS must conclude 

that the modification to be described in 

such guidance has a principal purpose 

of achieving a result that is 

unreasonable in light of the purpose of 

§ 1.1001–6. The Treasury Department 

and the IRS have concluded that this 

reservation of authority is necessary to 

prevent any unforeseen abuses of the 

significant flexibility granted to 

taxpayers in the Final Regulations. 

However, the Treasury Department and 

the IRS anticipate that any such 

guidance would be prospective in effect. 

g. Rev. Proc. 2020–44 

In Rev. Proc. 2020–44, the Treasury 

Department and the IRS provided rules 

that overlap with certain of the rules in 

the Final Regulations. Like § 1.1001– 

6(b)(1) of the Final Regulations, section 

5.01 of Rev. Proc. 2020–44 provides that 

a modification within the scope of the 

revenue procedure is not treated as an 

exchange of property for other property 

differing materially in kind or extent for 

purposes of § 1.1001–1(a). And like 

§ 1.1001–6(c)(1)(iii) and (c)(2) of the 

Final Regulations, section 5.02 of Rev. 

Proc. 2020–44 generally provides that a 

modification within the scope of the 


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revenue procedure will not result in 

legging out of an integrated transaction 

or terminating either leg of a hedging 

transaction. Section 4.02 of Rev. Proc. 

2020–44 generally limits the scope of 

the revenue procedure to modifications 

to a contract to incorporate certain 

fallback provisions published by the 

ARRC or ISDA, labeled the ‘‘ARRC 

Fallbacks’’ and the ‘‘ISDA Fallbacks’’ by 

the revenue procedure. The parties 

modifying a contract under Rev. Proc. 

2020–44 may also deviate in certain 

limited ways from the ARRC and ISDA 

Fallbacks. The Treasury Department and 

the IRS noted that the scope of the 

revenue procedure may be expanded in 

subsequent guidance published in the 

Internal Revenue Bulletin to address 

developments in the transition away 

from IBORs. The revenue procedure 

applies to modifications that occur on or 

after October 9, 2020, and before 

January 1, 2023, although the parties to 

a contract may rely on the revenue 

procedure for modifications that occur 

before October 9, 2020. 

In the definition of covered 

modification in § 1.1001–6(h)(1), the 

Final Regulations generally provide that 

a modification described in section 4.02 

of Rev. Proc. 2020–44 is treated as a 

covered modification. A modification 

described in section 4.02 of Rev. Proc. 

2020–44 is treated as a covered 

modification even if the revenue 

procedure does not apply to that 

modification, for example, because the 

modification occurs after the revenue 

procedure’s sunset date of December 31, 

2022. The effect of this provision is that 

the rules in §§ 1.1001–6(b) through (g) 

and 1.860G–1(e), which rely on the 

definition of covered modification in 

§ 1.1001–6(h)(1), apply to modifications 

described in section 4.02 of Rev. Proc. 

2020–44. Because of the substantive 

overlap between the rules in § 1.1001– 

6(b) and (c) of the Final Regulations and 

the rules in section 5 of Rev. Proc. 

2020–44, it is possible for a single 

modification to be subject to both sets 

of rules. As a practical matter, however, 

the rules in § 1.1001–6(b) and (c) of the 

Final Regulations are consistent with 

the rules in section 5 of Rev. Proc. 

2020–44, so no conflict is expected to 

arise. 

Prior to the release of Rev. Proc. 

2020–44, several commenters 

recommended that the Final Regulations 

accommodate the fallback provisions 

published by the ARRC and ISDA. For 

example, one commenter recommended 

that the Final Regulations provide that 

a modification to incorporate the 

ARRC’s or ISDA’s fallback provisions or 

fallback provisions substantially similar 

to the ARRC’s or ISDA’s fallback 

provisions is not an exchange of 

property under section 1001. Rev. Proc. 

2020–44 and its incorporation into the 

definition of covered modification in 

the Final Regulations address these 

comments. 

2. Integrated Transactions and Hedging 

Transactions 

Section 1.1001–6(c) of the Proposed 

Regulations generally provides that the 

modification of a contract to replace an 

IBOR-based rate with a qualified rate is 

not treated as legging out of a 

transaction integrated under § 1.1275–6, 

§ 1.988–5(a), or § 1.148–4(h), provided 

that the components of the transaction 

continue to qualify for integration after 

the modification. That section also 

generally provides that the modification 

of a contract to replace an IBOR-based 

rate with a qualified rate is not treated 

as a disposition or termination of either 

leg of a hedging transaction under 

§ 1.446–4(e)(6). One commenter stated 

that, because § 1.446–4 refers to 

§ 1.1221–2(b) for the definition of 

‘‘hedging transaction’’ and because a 

hedging transaction and the hedged 

item must be identified as provided in 

§ 1.1221–2(f), the inclusion in the 

Proposed Regulations of a rule for 

§ 1.446–4 may justify a negative 

inference that a similar rule is required 

to avoid reidentification under 

§ 1.1221–2(f). The Treasury Department 

and the IRS have concluded that 

§ 1.1001–6(b)(1) of the Final 

Regulations, which provides that a 

covered modification of either a hedging 

transaction or the hedged item is not 

treated as an exchange of property for 

other property differing materially in 

kind or in extent for purposes of 

§ 1.1001–1(a), is sufficient to ensure that 

neither the hedging transaction nor the 

hedged item, as modified by the covered 

modification, needs to be reidentified 

under § 1.1221–2(f). 

The same commenter noted that 

§ 1.1001–6(c) of the Proposed 

Regulations does not include 

modifications to add or amend fallback 

provisions and recommended that the 

Final Regulations clarify whether the 

rules in that section apply to such 

modifications. The commenter further 

stated that, if a debt instrument and a 

hedge that reference the same ceasing 

IBOR are integrated under § 1.1275–6 

and the parties’ covered modifications 

of the two instruments result in the 

fallback provisions being slightly 

mismatched either in timing (that is, the 

fallbacks have slightly different triggers) 

or amount (that is, the fallback rates are 

slightly different), that mismatch of the 

fallback provisions could cause a leg out 

of the integrated transaction even before 

either fallback provision is triggered. 

The commenter recommended that such 

mismatched fallback provisions not 

cause a leg out of an integrated 

transaction under § 1.1275–6, § 1.988– 

5(a), or § 1.148–4(h). In response to 

these comments, § 1.1001–6(c) of the 

Final Regulations applies to a covered 

modification, which is generally defined 

to include the addition or amendment of 

fallback provisions. Also, § 1.1001– 

6(c)(2) of the Final Regulations generally 

provides that a covered modification 

that adds or amends fallback provisions 

is treated as not legging out of a 

transaction integrated under § 1.1275–6, 

§ 1.988–5(a), or § 1.148–4(h). The 

Treasury Department and the IRS 

caution, however, that any mismatch in 

the fallback provisions of the 

components of a transaction integrated 

under § 1.1275–6, § 1.988–5(a), or 

§ 1.148–4(h) may result in legging out 

when one or more of those fallback 

provisions are triggered. In that case, a 

taxpayer would first determine whether 

the rules in § 1.1001–6(c)(1) of the Final 

Regulations apply to any modification 

that results from the triggered fallback 

provisions. 

Several commenters raised questions 

about the Proposed Regulations’ 

requirement that, to avoid legging out 

under § 1.1275–6, § 1.988–5(a), or 

§ 1.148–4(h), the integrated hedge must 

continue to qualify as a § 1.1275–6 

hedge, a § 1.988–5(a) hedge, or a 

qualified hedge, respectively, after the 

modification. Two commenters asserted 

that certain minor mismatches between 

the modified terms of the components 

will inevitably arise (either because of 

minor differences in the modified terms 

or because the components are not 

modified at the same time) and that 

such mismatches may prevent the 

modified contracts from qualifying for 

continued integration under § 1.1001– 

6(c) of the Proposed Regulations. These 

commenters recommended that, if 

under the Final Regulations a 

modification is not treated as an 

exchange of property for purposes of 

section 1001, that modification also not 

be treated as legging out of an integrated 

transaction under § 1.1275–6 or § 1.988– 

5(a), regardless of whether the modified 

contracts would otherwise continue to 

qualify for integration. Alternatively, 

these commenters recommended that 

the Final Regulations provide a grace 

period during which the modified 

components of the integrated 

transaction do not have to meet the 

qualifications for integration. The Final 

Regulations adopt these commenters’ 

alternative recommendation. Sections 

1.1001–6(c)(1)(i), (ii), and (iv) of the 


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172 Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 

Final Regulations provide a grace period 

during which a covered modification of 

a component of a transaction integrated 

under § 1.1275–6, § 1.988–5(a), or 

§ 1.148–4(h) does not result in legging 

out of that integrated transaction, 

notwithstanding any mismatch in 

timing or amount of payments that 

results from the covered modification 

during the grace period. The grace 

period lasts 90 days and starts on the 

date of the first covered modification of 

any component of the integrated 

transaction. If, however, the hedge 

component of the integrated transaction 

does not qualify as a § 1.1275–6 hedge, 

a § 1.988–5(a) hedge, or a qualified 

hedge under § 1.148–4(h), as 

appropriate, by the end of the grace 

period, the covered modification is a 

legging out as of the date of the covered 

modification. 

These commenters also observed that 

taxpayers may enter into temporary 

hedges, such as basis swaps, to manage 

the economic risk posed by temporary 

mismatches between the terms of the 

components of a transaction integrated 

under § 1.1275–6 or § 1.988–5(a). The 

commenters recommended that the 

Final Regulations accommodate the 

temporary integration of these hedges. 

The Final Regulations adopt this 

comment and provide that temporary 

hedges entered into to mitigate the 

economic effect of such temporary 

mismatches may be integrated during 

the 90-day grace period without 

disruption to a transaction integrated 

under § 1.1275–6 or § 1.988–5(a). 

One commenter offered several 

comments that are specific to the rules 

in the Proposed Regulations on 

integration of tax-advantaged bonds 

under § 1.148–4(h). This commenter 

recommended that the Final Regulations 

clarify that the rules in § 1.1001–6(c) for 

integration of tax-advantaged bonds 

apply to a qualified hedge that is superintegrated under § 1.148–4(h)(4). 

Section 1.148–4(h)(4) generally permits 

only negligible mismatches in timing 

and amount of payments on superintegrated hedges and bonds, and superintegration of taxable-index hedges, 

such as hedges based on IBORs, is even 

more strictly limited. Accordingly, the 

Treasury Department and the IRS do not 

adopt this comment, and the Final 

Regulations clarify that § 1.1001– 

6(c)(1)(iv) does not apply to hedges and 

bonds integrated under § 1.148–4(h)(4). 

This commenter also requested that 

the Final Regulations provide that a 

one-time payment does not cause a 

hedge to fail to meet the requirements 

for qualification under § 1.148– 

4(h)(3)(iv)(C), as required by § 1.1001– 

6(c) of the Proposed Regulations. The 

nonperiodic nature of a one-time 

payment could prevent qualification 

under several of the requirements 

identified in § 1.148–4(h)(3)(iv)(C), such 

as the requirement that the contract 

contain no significant investment 

element and the requirement that the 

payments on the hedge correspond 

closely in time to the payments on the 

hedged bonds. The Treasury 

Department and the IRS have 

determined that, in each case, the 

obstacle to qualification can be 

eliminated by treating the qualified onetime payment as a series of periodic 

payments spread over time. 

Accordingly, § 1.1001–6(c)(1)(iv) of the 

Final Regulations provides that, solely 

for purposes of applying the 

qualification requirements identified in 

§ 1.148–4(h)(3)(iv)(C), a qualified onetime payment on the hedge or the 

hedged bonds is allocated in a manner 

consistent with the way in which a 

termination payment on a variable yield 

issue is allocated under § 1.148– 

4(h)(3)(iv)(H) and the qualification 

requirements under § 1.148– 

4(h)(3)(iv)(C) are applied as if the 

qualified one-time payment were a 

series of periodic payments. 

3. Fast-Pay Stock 

Section 1.7701(l)–3 provides rules 

that prevent the avoidance of tax by 

persons participating in fast-pay 

arrangements. A fast-pay arrangement is 

defined in § 1.7701(l)–3(b)(1) as any 

arrangement in which a corporation has 

fast-pay stock outstanding for any part 

of its taxable year. Fast-pay stock is 

defined in § 1.7701(l)–3(b)(2)(i) as stock 

structured so that dividends (as defined 

in section 316) paid by the corporation 

with respect to the stock are 

economically (in whole or in part) a 

return of the holder’s investment (as 

opposed to only a return on the holder’s 

investment). Section 1.7701(l)–3(b)(2)(ii) 

provides that the determination of 

whether stock is fast-pay stock is based 

on all facts and circumstances. Stock is 

examined when it is issued to determine 

if it is fast-pay stock and, ‘‘for stock that 

is not fast-pay stock when issued, when 

there is a significant modification in the 

terms of the stock or the related 

agreements or a significant change in 

the relevant facts and circumstances.’’ 

Id. 

One commenter stated that, in certain 

circumstances, a covered modification 

of preferred stock could cause the stock 

to satisfy the definition of fast-pay stock 

despite the fact that the parties modified 

the stock not for the purpose of avoiding 

tax, but rather for the purpose of 

addressing the discontinuation of an 

IBOR. Because stock is re-examined to 

determine if it is fast-pay stock upon the 

occurrence of either ‘‘a significant 

modification in the terms of the stock or 

the related agreements’’ or ‘‘a significant 

change in the relevant facts and 

circumstances,’’ the commenter 

recommended that the Final Regulations 

provide that a covered modification is 

neither a significant modification nor a 

significant change for this purpose. 

The Treasury Department and the IRS 

have determined that such a rule would 

further the purpose of the Final 

Regulations to facilitate the transition 

away from IBORs that will be 

discontinued. In addition, the scope and 

operation of the recommended rule are 

generally consistent with the scope and 

operation of the rules in §§ 1.1001– 

6(b)(1) and (d) of the Final Regulations 

(treatment of covered modifications 

under section 1001 and under chapter 4, 

respectively). Accordingly, the Final 

Regulations adopt this comment and 

provide in § 1.1001–6(e) that a covered 

modification of stock is not a significant 

modification in the terms of the stock or 

the related agreements or a significant 

change in the relevant facts and 

circumstances for purposes of 

§ 1.7701(l)–3(b)(2)(ii). Unlike §§ 1.1001– 

6(b)(1) and (d) of the Final Regulations, 

however, § 1.1001–6(e) of the Final 

Regulations further provides that, if a 

covered modification and a noncovered 

modification are made at the same time 

or as part of the same plan and the 

noncovered modification is a significant 

modification in the terms of the stock or 

the related agreements or a significant 

change in the relevant facts and 

circumstances, then § 1.7701(l)– 

3(b)(2)(ii) applies and all of the facts and 

circumstances, including the covered 

modification and the noncovered 

modification, are considered in 

determining whether the stock is fastpay stock. 

4. Investment Trusts Under § 301.7701– 

4(c)(1) 

Under § 301.7701–4(c)(1), an 

investment trust is not classified as a 

trust if there is a power under the trust 

agreement to vary the investment of the 

certificate holders. One commenter 

recommended that a covered 

modification of the incomeapportioning terms of an ownership 

interest be treated as not manifesting a 

power to vary the investment of 

certificate holders in a trust under 

§ 301.7701–4(c)(1). The Final 

Regulations adopt this comment, 

providing in § 1.1001–6(f) that neither a 

covered modification of a contract held 

by an investment trust nor a covered 

modification of an ownership interest in 

the investment trust manifest a power to 


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Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 173 

vary the investment of the certificate 

holder for this purpose. 

5. Rules Regarding Qualified One-Time 

Payments 

The Proposed Regulations generally 

provide in § 1.1001–6(d) that the 

character and source of a one-time 

payment made by a given payor is the 

same as the source and character of a 

payment under the contract by that 

payor. For example, a one-time payment 

by a lessee on a lease is characterized 

as a payment of rent and sourced 

accordingly. The Treasury Department 

and the IRS received several comments 

requesting clarification on how this rule 

applies to certain financial contracts. 

Several commenters also requested 

clarification on the timing of tax items 

associated with a one-time payment. 

One commenter requested guidance on 

how a one-time payment is treated for 

purposes of the arbitrage investment 

restrictions and private use restrictions 

that apply to tax-advantaged bonds. The 

Treasury Department and the IRS are 

still considering how best to address 

these issues relating to qualified onetime payments. Until the Treasury 

Department and the IRS publish further 

guidance, taxpayers may continue to 

rely on the rule in § 1.1001–6(d) of the 

Proposed Regulations to determine 

source and character of a qualified onetime payment under the Final 

Regulations. 

6. REMICs 

Section 1.860G–1(e) of the Proposed 

Regulations provides special rules 

applicable to REMICs that have issued 

interests with an IBOR-based rate or that 

hold obligations with an IBOR-based 

rate. Section 1.860G–1(e)(4) of the 

Proposed Regulations provides certain 

rules addressing the treatment of 

reasonable costs incurred to effect a 

modification that qualifies for special 

treatment under § 1.1001–6(a)(1), (2), or 

(3) of the Proposed Regulations. One 

commenter noted that the governing 

documents for a REMIC may require tax 

opinions and rating agency 

confirmations in connection with the 

modifications contemplated in the 

Proposed Regulations and 

recommended that the Treasury 

Department and the IRS confirm that the 

costs of obtaining these materials are 

‘‘reasonable costs’’ within the meaning 

of § 1.860G–1(e)(4) of the Proposed 

Regulations. Whether a cost is 

reasonable depends upon the facts and 

circumstances relating both to the 

nature of the cost and the amount of the 

cost. However, the Treasury Department 

and the IRS generally agree that the 

costs of obtaining tax opinions and 

rating agency confirmations required by 

the governing documents for a REMIC 

are reasonable in nature. 

7. Interest Expense of a Foreign 

Corporation 

The Proposed Regulations provide in 

§ 1.882–5(d)(5)(ii)(B) that a foreign 

corporation that is a bank may elect to 

compute interest expense attributable to 

excess U.S.-connected liabilities using a 

yearly average of SOFR. One commenter 

stated that a yearly average of SOFR is 

not an equitable substitute for 30-day 

USD LIBOR, the rate that foreign banks 

are permitted to elect for this purpose 

under the existing regulations, because 

30-day USD LIBOR is typically a higher 

rate than a yearly average of SOFR. This 

commenter recommended that, in lieu 

of SOFR, the Final Regulations either 

refer to a widely accepted interest rate 

benchmark that is more similar than 

SOFR to 30-day USD LIBOR or add a 

fixed adjustment spread to the yearly 

average of SOFR. 

The Treasury Department and the IRS 

continue to study the appropriate rate to 

replace 30-day USD LIBOR for purposes 

of the published rate election under 

§ 1.882–5(d)(5)(ii)(B). In evaluating the 

appropriate replacement rate, the 

Treasury Department and the IRS will 

continue to balance the administrative 

convenience of providing taxpayers an 

election to use the annual published 

rate with the need for a replacement rate 

that more accurately reflects the 

taxpayer’s borrowing costs. In providing 

taxpayers with an election to use a 

published rate, the Treasury Department 

and the IRS must ensure that the 

replacement rate does not overstate the 

amount of interest expense allocable to 

income that is effectively connected 

with the conduct of a U.S. trade or 

business. Until final regulations are 

published that replace the 30-day USD 

LIBOR election provided in § 1.882– 

5(d)(5)(ii)(B), taxpayers may continue to 

apply either the general rule or the 

annual published rate election provided 

under § 1.882–5(d)(5)(ii) to calculate 

interest on excess U.S.-connected 

liabilities. Taxpayers may also continue 

to rely on the rule in § 1.882– 

5(d)(5)(ii)(B) of the Proposed 

Regulations and compute interest on 

excess U.S.-connected liabilities by 

computing a yearly average SOFR based 

on the rates published by the Federal 

Bank of New York for the taxable year. 

Although commenters provided some 

ideas on a rate that could be closer to 

a replacement for 30-day LIBOR (for 

example, a widely accepted interest rate 

benchmark or adding a fixed adjustment 

spread to the yearly average of SOFR), 

the Treasury Department and the IRS 

continue to request recommendations 

for a specific rate that would be an 

appropriate replacement to 30-day 

LIBOR for computing interest expense 

on excess U.S.-connected liabilities for 

purposes of § 1.882–5(d)(5)(ii)(B). The 

Treasury Department and the IRS 

anticipate issuing additional guidance 

addressing § 1.882–5(d)(5)(ii)(B) before 

30-day USD LIBOR is discontinued in 

2023. 

8. Change of Accounting Method 

One commenter asked the Treasury 

Department and the IRS to address 

whether changing from an IBOR-based 

discount rate to a discount rate based on 

a different interest rate benchmark for 

the purpose of valuing securities under 

the mark-to-market rules in section 475 

is a change in method of accounting that 

requires the consent of the Secretary 

under section 446(e). The commenter 

noted that this change may occur either 

at the time when the relevant IBOR is 

discontinued or in advance of that time 

in anticipation of the IBOR’s 

discontinuation. To facilitate an orderly 

transition in connection with the 

discontinuation of IBORs and to treat 

changes from an IBOR-based discount 

rate in a consistent manner, the 

Treasury Department and the IRS will 

not treat a change from a discount rate 

that is based on a discontinued IBOR (as 

defined in § 1.1001–6(h)(4) of the Final 

Regulations) to a discount rate that is a 

qualified rate for the purpose of valuing 

securities under the mark-to-market 

rules in section 475 as a change in 

method of accounting under section 

446(e). 

9. Applicability Dates 

The Proposed Regulations under 

§§ 1.860G–1(e), 1.1001–6, and 1.1275– 

2(m) generally propose that the Final 

Regulations permit taxpayers to apply 

the Final Regulations retroactively, as 

authorized under section 7805(b)(7). 

However, the Proposed Regulations 

under § 1.1001–6 propose that the Final 

Regulations require as a condition of a 

taxpayer’s retroactive application that 

all the taxpayer’s related parties also 

apply § 1.1001–6 retroactively. One 

commenter requested that this 

requirement be more clearly stated, and 

the Final Regulations do so in § 1.1001– 

6(k). 

Another commenter observed that 

sections 267(b) and 707(b)(1), under 

which relatedness is determined for 

purposes of the applicability dates in 

the Proposed Regulations, do not 

effectively address governmental 

entities or tax-exempt entities described 

in section 501(c)(3). This commenter 

recommended that relatedness be 


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174 Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 

determined for such entities under 

§ 1.150–1(b) and (e). The Treasury 

Department and the IRS agree with this 

comment and adopt the commenter’s 

recommendation in §§ 1.1001–6(k) and 

1.1275–2(m)(5) of the Final Regulations. 

Effect on Other Documents 

Rev. Proc. 2020–44, 2020–45 I.R.B. 

991, is amplified. 

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 final 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 final 

regulations as economically significant 

under section 1(c) of the MOA. 

A. Background, Need for the Final 

Regulations, and Economic Analysis of 

Final 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 

LIBOR is calculated led to 

recommendations for the development 

of alternatives to LIBOR 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 administrator of 

LIBOR, the ICE Benchmark 

Administration, announced on March 5, 

2021, that publication of overnight, onemonth, three-month, six-month, and 12- 

month USD LIBOR will cease 

immediately following the LIBOR 

publication on June 30, 2023, and that 

publication of all other currency and 

tenor variants of LIBOR will cease 

immediately following the LIBOR 

publication on December 31, 2021. 

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 voluntary adoption of 

that alternative rate. The ARRC 

recommended 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 other 

IBORs are expected to transition to 

SOFR or similar alternatives in the next 

few years. This transition will involve 

changes in debt, derivatives, and other 

financial contracts to adopt 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. 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 final regulations provide 

that changes in debt instruments, 

derivative contracts, and other affected 

contracts to replace reference rates 

based on discontinued IBORs in a 

covered modification (both as defined in 

the final regulations) will not result in 

tax realization events under section 

1001 and relevant regulations 

thereunder. For this purpose, a covered 

modification is generally the 

replacement of a discontinued IBOR 

with a qualified rate, provided that the 

replacement is not excluded under 

§ 1.1001–6(j)(1) through (5) of these final 

regulations (the excluded 

modifications). The excluded 

modifications ensure that a covered 

modification includes only 

modifications to the cash flows of an 

IBOR-referencing contract intended to 

address the replacement of the IBORbased rate in the contract and that 

modifications of contracts in a manner 

that is intended to change the amount 

or timing of contractual cash flows for 

other reasons or purposes remain 

subject to the general rules in section 

1001 and the regulations thereunder. 

The final 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 discontinued 

IBORs in a covered modification 

without affecting the tax treatment of 

the hedges or underlying transactions. 

In the absence of these final 

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, 

which may lead to bankruptcies or other 

legal proceedings. The types of actions 

that contract holders might take in the 

absence of these final 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 final regulations 

would avoid this costly and 

unproductive disruption. The Treasury 

Department and the IRS further project 

that these final regulations, by 

implementing the regulatory provisions 

requested by ARRC and taxpayers, will 

help facilitate the economy’s adaptation 

to the cessation of LIBOR in a least-cost 

manner. 

II. Regulatory Flexibility Act 

It is hereby certified that the Final 

Regulations will not have a significant 

economic impact on a substantial 

number of small entities within the 

meaning of section 601(6) of the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6). 

As discussed elsewhere in this 

preamble, the administrator of all 

currency and tenor variants of LIBOR 

has announced that publication of 

overnight, one-month, three-month, sixmonth, and 12-month USD LIBOR will 

cease on June 30, 2023, and that 

publication of all other currency and 

tenor variants of LIBOR will cease on 

December 31, 2021. Many contracts, 

including financial contracts such as 

debt instruments and derivative 

contracts, refer to LIBOR or another 

IBOR to determine the parties’ rights 


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Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 175 

and obligations under the contract. 

When parties to IBOR-referencing 

contracts modify those contracts in 

anticipation of the discontinuation of 

the referenced IBOR, that modification 

can be a tax realization event, giving rise 

to gain, loss, income, or deduction. That 

modification can also cause other 

unintended tax consequences. 

The number of small entities 

potentially affected by the Final 

Regulations is unknown but could be 

substantial because entities of all sizes 

are parties to contracts that reference a 

discontinued IBOR. Although a 

substantial number of small entities is 

potentially affected by the Final 

Regulations, the Treasury Department 

and the IRS have concluded that the 

Final Regulations will not have a 

significant economic impact on a 

substantial number of small entities. 

This is because the purpose and effect 

of the Final Regulations is to minimize 

the economic impact of the transition 

away from LIBOR and other 

discontinued IBORs by preventing many 

of the tax consequences that might 

otherwise flow when taxpayers modify 

IBOR-referencing contracts in 

anticipation of the cessation of a 

discontinued IBOR. Furthermore, the 

Final Regulations do not impose a 

collection of information on any 

taxpayers, including small entities. 

Accordingly, the Final Regulations will 

not have a significant economic impact 

on a substantial number of small 

entities. 

III. Unfunded Mandates Reform Act 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 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. The Final 

Regulations do 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 (entitled 

‘‘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. The 

Final Regulations do not have 

federalism implications and do not 

impose substantial direct compliance 

costs on state and local governments or 

preempt state law within the meaning of 

the Executive Order. 

V. Congressional Review Act 

The Administrator of the Office of 

Information and Regulatory Affairs of 

the OMB has determined that this 

Treasury decision is a major rule for 

purposes of the Congressional Review 

Act (5 U.S.C. 801 et seq.) (‘‘CRA’’). 

Under section 801(3) of the CRA, a 

major rule takes effect 60 days after the 

rule is published in the Federal 

Register. Accordingly, the Treasury 

Department and IRS are adopting the 

Final Regulations with the delayed 

effective date generally prescribed 

under the Congressional Review Act. 

Drafting Information 

The principal authors of these final 

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. 

Availability of IRS Documents 

The revenue procedure cited in this 

preamble is published in the Internal 

Revenue Bulletin (or Cumulative 

Bulletin) and is available from the 

Superintendent of Documents, U.S. 

Government Publishing Office, 

Washington, DC 20402, or by visiting 

the IRS website at https://www.irs.gov. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 301 

Employment taxes, Estate taxes, 

Excise taxes, Gift taxes, Income taxes, 

Penalties, Reporting and recordkeeping 

requirements. 

Adoption of Amendments to the 

Regulations 

Accordingly, 26 CFR parts 1 and 301 

are amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by revising the 

entry for § 1.860G–1 and adding an 

entry in numerical order for § 1.1001–6 

to read in part as follows: 

Authority: 26 U.S.C. 7805 * * * 

Section 1.860G–1 also issued under 26 

U.S.C. 860G(a)(1)(B), (d)(2)(E), and (e). 

* * * * * 

Section 1.1001–6 also issued under 26 

U.S.C. 148(i), 26 U.S.C. 988(d), 26 U.S.C. 

1275(d), and 26 U.S.C. 7701(l). 

* * * * * 

■ Par. 2. Section 1.860A–0 is amended 

by adding entries for § 1.860A–1(b)(6) 

and (7) and § 1.860G–1(e) to read as 

follows: 

§ 1.860A–0 Outline of REMIC provisions. 

* * * * * 

§ 1.860A1–1 Effective dates and transition 

rules. 

* * * * * 

(b) * * * 

(6) Exceptions for certain modified 

obligations. 

(7) Exceptions for certain 

modifications of obligations that refer to 

certain interbank offered rates. 

* * * * * 

§ 1.860G1 1 Definition of regular and 

residual interests. 

* * * * * 

(e) Transition from certain 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 

make covered modifications. 

* * * * * 

■ Par. 3. Section 1.860A–1 is amended 

by adding paragraph (b)(7) to read as 

follows: 

§ 1.860A1 –1 Effective dates and transition 

rules. 

* * * * * 

(b) * * * 

(7) Exceptions for certain 

modifications of obligations that refer to 

certain interbank offered rates—(i) 

Paragraphs (e)(2) and (4) of § 1.860G–1 

apply with respect to a covered 

modification that occurs on or after 

March 7, 2022. However, paragraphs 

(e)(2) and (4) of § 1.860G–1 may be 

applied with respect to a covered 

modification that occurs before March 7, 

2022. See section 7805(b)(7). 

(ii) Paragraph (e)(3) of § 1.860G–1 

applies to a regular interest in a REMIC 

issued on or after March 7, 2022. 

However, paragraph (e)(3) of § 1.860G– 

1 may be applied to a regular interest in 

a REMIC issued before March 7, 2022. 

See section 7805(b)(7). 

■ Par. 4. Section 1.860G–1 is amended 

by: 


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■ 1. Removing ‘‘paragraph (b)(3)’’ in 

paragraph (a)(5) and adding in its place 

‘‘paragraphs (b)(3) and (e)(4)’’. 

■ 2. Adding paragraph (e). 

The addition reads as follows: 

§ 1.860G1–1 Definition of regular and 

residual interests. 

* * * * * 

(e) Transition from certain interbank 

offered rates—(1) In general. This 

paragraph (e) provides rules relating to 

the modification of the terms of a 

regular interest in a REMIC or the terms 

of an asset held by a REMIC as part of 

the transition away from the London 

Interbank Offered Rate and certain other 

interbank offered rates. For purposes of 

this paragraph (e), covered modification 

and discontinued IBOR have the 

meanings provided in § 1.1001–6(h)(1) 

and (4), respectively. See § 1.1001–6 for 

additional rules that may apply to an 

interest in a REMIC that provides for a 

rate referencing a discontinued IBOR. 

(2) Change in reference rate for a 

regular interest after the startup day. A 

covered modification of a regular 

interest in a REMIC that occurs after the 

startup day is disregarded in 

determining whether the modified 

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 a discontinued IBOR 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 

discontinued IBOR becoming 

unavailable or unreliable. 

(4) Reasonable expenses incurred to 

make covered modifications. 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 a covered modification. In 

addition, payment by a party other than 

the REMIC of reasonable costs incurred 

to effect a covered modification is not a 

contribution to the REMIC for purposes 

of section 860G(d). 

■ Par. 5. Section 1.1001–6 is added to 

read as follows: 

§ 1.10011–6 Transition from certain 

interbank offered rates. 

(a) In general. This section provides 

rules relating to the modification of the 

terms of a contract as part of the 

transition away from the London 

Interbank Offered Rate and certain other 

interbank offered rates. In general, 

paragraphs (b) through (g) of this section 

provide the operative rules for a covered 

modification. Paragraph (h) of this 

section defines certain terms that are 

used in these operative rules, such as 

covered modification, qualified rate, 

discontinued IBOR, associated 

modification, and qualified one-time 

payment. Paragraph (j) of this section 

describes certain modifications that are 

not covered modifications and provides 

examples that illustrate the operation of 

the rules in paragraph (j) of this section. 

For rules regarding original issue 

discount on certain debt instruments 

that provide for a rate referencing a 

discontinued IBOR, see § 1.1275–2(m). 

For rules regarding certain interests in a 

REMIC that provide for a rate 

referencing a discontinued IBOR, see 

§ 1.860G–1(e). 

(b) Treatment under section 1001—(1) 

Covered modifications. A covered 

modification of a contract is not treated 

as the exchange of property for other 

property differing materially in kind or 

in extent for purposes of § 1.1001–1(a). 

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 

modified to provide that the debt 

instrument pays interest at a qualified 

rate referencing the Secured Overnight 

Financing Rate published by the Federal 

Reserve Bank of New York (SOFR) and 

the modification is not described in 

paragraph (j) of this section, the 

modification is not treated as the 

exchange of property for other property 

differing materially in kind or in extent 

for purposes of § 1.1001–1(a). 

(2) Contemporaneous noncovered 

modifications. If a covered modification 

is made at the same time as a 

noncovered modification, § 1.1001–1(a) 

or § 1.1001–3, as appropriate, applies to 

determine whether the noncovered 

modification results in the exchange of 

property for other property differing 

materially in kind or in extent. In 

applying § 1.1001–1(a) or § 1.1001–3 for 

this purpose, the covered modification 

is treated as part of the terms of the 

contract prior to the noncovered 

modification. For example, if the parties 

to a debt instrument modify the interest 

rate in a manner that is a covered 

modification and contemporaneously 

extend the final maturity date of the 

debt instrument, which is a noncovered 

modification, only the extension of the 

final maturity date is analyzed under 

§ 1.1001–3 and, for purposes of that 

analysis, the modified interest rate is 

treated as a term of the instrument prior 

to the extension of the final maturity 

date. 

(c) Effect of a covered modification on 

integrated transactions and hedging 

transactions—(1) In general. Except as 

otherwise provided in paragraph (c)(2) 

of this section, the rules in paragraphs 

(c)(1)(i) through (iv) of this section 

determine the effect of a covered 

modification on an integrated 

transaction under § 1.1275–6, a 

qualified hedging transaction under 

§ 1.988–5(a), a hedging transaction 

under § 1.446–4, or a qualified hedging 

transaction under § 1.148–4(h). 

(i) A covered modification of one or 

more contracts that are part of an 

integrated transaction under § 1.1275–6 

is treated as not legging out of the 

integrated transaction, provided that, no 

later than the end of the 90-day period 

beginning on the date of the first 

covered modification of any such 

contract, the financial instrument that 

results from any such covered 

modifications satisfies the requirements 

to be a § 1.1275–6 hedge (as defined in 

§ 1.1275–6(b)(2)) with respect to the 

qualifying debt instrument that results 

from any such covered modification. If 

a taxpayer enters into a financial 

instrument intended to mitigate the 

economic effect of a temporary 

mismatch of the legs of the integrated 

transaction during that 90-day period (a 

§ 1.1275–6 interim hedge), the 

integration of the § 1.1275–6 interim 

hedge with the other components of the 

integrated transaction during the 90-day 

period is treated as not legging into a 

new integrated transaction and the 

termination of the § 1.1275–6 interim 

hedge before the end of the 90-day 

period is treated as not legging out of 

the existing integrated transaction. 

(ii) A covered modification of one or 

more contracts that are part of a 

qualified hedging transaction under 

§ 1.988–5(a) is treated as not legging out 

of the qualified hedging transaction, 

provided that, no later than the end of 

the 90-day period beginning on the date 

of the first covered modification of any 

such contract, the financial instrument 

or series or combination of financial 

instruments that results from any such 

covered modifications satisfies the 

requirements to be a § 1.988–5(a) hedge 

(as defined in § 1.988–5(a)(4)) with 

respect to the qualifying debt 

instrument that results from any such 

covered modification. If a taxpayer 

enters into a financial instrument 

intended to mitigate the economic effect 

of a temporary mismatch of the legs of 

the qualified hedging transaction during 

that 90-day period (a § 1.988–5(a) 

interim hedge), the integration of the 


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Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 177 

§ 1.988–5(a) interim hedge with the 

other components of the qualified 

hedging transaction during the 90-day 

period is treated as not legging into a 

new qualified hedging transaction and 

the termination of the § 1.988–5(a) 

interim hedge before the end of the 90- 

day period is treated as not legging out 

of the existing qualified hedging 

transaction. 

(iii) A covered modification of one leg 

of a transaction subject to the hedge 

accounting rules in § 1.446–4 is not 

treated as a disposition or termination 

(within the meaning of § 1.446–4(e)(6)) 

of either leg of the transaction. 

(iv) A covered modification of a 

qualified hedge or of the tax-advantaged 

bonds with which the qualified hedge is 

integrated under § 1.148–4(h)(1) is 

treated as not terminating the qualified 

hedge under § 1.148–4(h)(3)(iv)(B), 

provided that, no later than the end of 

the 90-day period beginning on the date 

of the first covered modification of 

either the qualified hedge or the hedged 

bonds, the qualified hedge that results 

from any such covered modification 

satisfies the requirements to be a 

qualified hedge (determined by 

applying the special rules for certain 

modifications of qualified hedges under 

§ 1.148–4(h)(3)(iv)(C)) with respect to 

the hedged bonds that result from any 

such covered modification. Solely for 

purposes of determining whether the 

qualified hedge that results from a 

covered modification satisfies the 

requirements to be a qualified hedge 

with respect to the hedged bonds that 

result from any such covered 

modification in the preceding sentence, 

a qualified one-time payment with 

respect to the hedge or the hedged 

bonds (or both) is allocated in a manner 

consistent with the allocation of a 

termination payment for a variable yield 

issue under § 1.148–4(h)(3)(iv)(H) and 

treated as a series of periodic payments. 

This paragraph (c)(1)(iv) does not apply 

if, prior to any covered modifications, 

the qualified hedge and the taxadvantaged bond are integrated under 

§ 1.148–4(h)(4). 

(2) Fallback rates. If a covered 

modification of a contract that is part of 

an integrated transaction under 

§ 1.1275–6 is described in paragraph 

(h)(1)(ii) or (iii) of this section, that 

covered modification is treated as not 

legging out of the integrated transaction. 

If a covered modification of a contract 

that is part of a qualified hedging 

transaction under § 1.988–5(a) is 

described in paragraph (h)(1)(ii) or (iii) 

of this section, that covered 

modification is treated as not legging 

out of the qualified hedging transaction. 

If a covered modification of a qualified 

hedge or of the tax-advantaged bonds 

with which the qualified hedge is 

integrated under § 1.148–4(h) is 

described in paragraph (h)(1)(ii) or (iii) 

of this section, that covered 

modification is treated as not 

terminating the qualified hedge under 

§ 1.148–4(h)(3)(iv)(B). 

(d) Coordination with provision for 

existing obligations under chapter 4. A 

modification of a contract is not a 

material modification of that contract 

for purposes of § 1.1471–2(b)(2)(iv) to 

the extent the modification is a covered 

modification. See paragraph (b)(2) of 

this section for rules that apply for 

purposes of § 1.1471–2(b)(2)(iv) when a 

modification to a contract includes both 

a covered modification and a 

contemporaneous noncovered 

modification. 

(e) Coordination with fast-pay stock 

rules. A covered modification of stock is 

not a significant modification in the 

terms of the stock or the related 

agreements or a significant change in 

the relevant facts and circumstances for 

purposes of § 1.7701(l)–3(b)(2)(ii). If a 

covered modification is made at the 

same time as, or as part of a plan that 

includes, a noncovered modification 

and the noncovered modification is a 

significant modification in the terms of 

the stock or the related agreements or a 

significant change in the relevant facts 

and circumstances, then § 1.7701(l)– 

3(b)(2)(ii) applies to determine whether 

the stock is fast-pay stock, taking into 

account all the facts and circumstances 

(including both the covered and 

noncovered modification). 

(f) Coordination with rules for 

investment trusts. A covered 

modification of a contract held by an 

investment trust does not manifest a 

power to vary the investment of the 

certificate holders for purposes of 

§ 301.7701–4(c)(1) of this chapter. 

Further, a covered modification of an 

ownership interest in an investment 

trust does not manifest a power to vary 

the investment of the certificate holder 

for purposes of § 301.7701–4(c)(1) of 

this chapter. 

(g) [Reserved] 

(h) Definitions—(1) Covered 

modification. A covered modification is 

a modification or portion of a 

modification of the terms of a contract 

that is described in one or more of 

paragraphs (h)(1)(i) through (iii) of this 

section and that is not described in any 

of paragraphs (j)(1) through (5) of this 

section. Any modification of the terms 

of a contract described in section 4.02 

of Rev. Proc. 2020–44, 2020–45 I.R.B. 

991, or described in other guidance 

published in the Internal Revenue 

Bulletin that supplements the list of 

modifications described in section 4.02 

of Rev. Proc. 2020–44 or the definitions 

on which that section relies (see 

§ 601.601(d)(2)(ii)(a) of this chapter) is 

treated as a covered modification. For 

purposes of this section, a modification 

of the terms of a contract includes any 

modification of the terms of the 

contract, regardless of the form of the 

modification (for example, a 

modification may be an exchange of one 

contract for another, an amendment to 

the existing contract, or a modification 

accomplished indirectly through one or 

more transactions with third parties) 

and regardless of whether the 

modification is evidenced by an express 

agreement (oral or written), conduct of 

the parties, or otherwise. For purposes 

of this section, a contract includes but 

is not limited to a debt instrument, a 

derivative contract, stock, an insurance 

contract, and a lease agreement. 

(i) The terms of the contract are 

modified to replace an operative rate 

that references a discontinued IBOR 

with a qualified rate, to add an 

obligation for one party to make a 

qualified one-time payment (if any), and 

to make associated modifications (if 

any). 

(ii) The terms of the contract are 

modified to include a qualified rate as 

a fallback to an operative rate that 

references a discontinued IBOR and to 

make associated modifications (if any). 

(iii) The terms of the contract are 

modified to replace a fallback rate that 

references a discontinued IBOR with a 

qualified rate and to make associated 

modifications (if any). 

(2) Noncovered modification. A 

noncovered modification is any 

modification or portion of a 

modification of the terms of a contract 

that is not a covered modification. 

(3) Qualified rate—(i) In general. A 

qualified rate is any of the rates 

described in paragraph (h)(3)(ii) of this 

section, provided that the interest rate 

benchmark to which the rate refers and 

the discontinued IBOR identified in 

paragraph (h)(1)(i), (ii), or (iii) of this 

section 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. For purposes of 

paragraphs (h)(1)(ii) and (iii) of this 

section, a single qualified rate may be 

comprised of one or more fallback rates 

(for example, a waterfall of fallback 

rates). Paragraph (h)(3)(iii) of this 

section provides additional rules for 

determining whether one or more 

fallback rates constitute a qualified rate, 

and paragraph (h)(3)(iv) of this section 


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provides examples illustrating the 

operation of those rules. 

(ii) Rates. The following rates are 

described in this paragraph (h)(3)(ii): 

(A) A 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) (examples of 

qualified floating rates generally include 

SOFR, the Sterling Overnight Index 

Average, the Tokyo Overnight Average 

Rate, the Swiss Average Rate Overnight, 

and the euro short-term rate 

administered by the European Central 

Bank); 

(B) An 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 a discontinued IBOR 

or its local currency equivalent in that 

jurisdiction; 

(C) A rate selected, endorsed, or 

recommended by the Alternative 

Reference Rates Committee as a 

replacement for USD LIBOR, provided 

that the Federal Reserve Bank of New 

York is an ex officio member of the 

Alternative Reference Rates Committee 

at the time of the selection, 

endorsement, or recommendation; 

(D) A rate that is determined by 

reference to a rate described in 

paragraph (h)(3)(ii)(A), (B), or (C) 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; and 

(E) A rate identified for purposes of 

this section as a qualified rate in 

guidance published in the Internal 

Revenue Bulletin (see 

§ 601.601(d)(2)(ii)(a) of this chapter). 

(iii) Rules for fallback rates—(A) 

Multiple fallback rates. If the rate being 

tested as a qualified rate is comprised of 

more than one fallback rate, the rate is 

a qualified rate only if each individual 

fallback rate separately satisfies the 

requirements to be a qualified rate. 

(B) Indeterminable fallback rate. 

Except as provided in paragraph 

(h)(3)(iii)(C) of this section, if it is not 

possible to determine at the time of the 

modification being tested as a covered 

modification whether a fallback rate 

satisfies the requirements set forth in 

the first sentence of paragraph (h)(3)(i) 

of this section (for example, the 

calculation agent will determine the 

fallback rate at the time that the fallback 

rate is triggered based on factors that are 

not guaranteed to produce a rate 

described in paragraph (h)(3)(ii) of this 

section), the fallback rate is treated as 

not satisfying the requirements to be a 

qualified rate. 

(C) Fallback rate is a remote 

contingency. If the likelihood that any 

value will ever be determined under the 

contract by reference to a fallback rate 

is remote (determined at the time of the 

modification being tested as a covered 

modification), that fallback rate is 

treated as satisfying the requirements to 

be a qualified rate. 

(iv) Examples. The following 

examples illustrate the application of 

the rules in paragraphs (h)(3)(i) through 

(iii) of this section to qualified rates 

comprised of one or more fallback rates. 

(A) Example 1: Addition of a single 

fallback rate—(1) Facts. B is the issuer 

and L is the holder of a debt instrument 

that pays interest semiannually in U.S. 

dollars at a rate of six-month USD 

LIBOR and that contains no fallback 

provisions to address the pending 

discontinuation of six-month USD 

LIBOR. On July 1, 2022, B and L modify 

the debt instrument to add such fallback 

provisions (the new fallbacks). The new 

fallbacks provide that, upon the 

discontinuation of six-month USD 

LIBOR, six-month USD LIBOR will be 

replaced by a fallback rate equal to CME 

Group’s forward-looking SOFR term rate 

of a six-month tenor (six-month CME 

Term SOFR) plus a fixed spread that 

will be determined at the time of sixmonth USD LIBOR’s discontinuation. 

Six-month USD LIBOR will be 

discontinued on June 30, 2023. 

(2) Analysis. The fallback rate is a 

qualified floating rate and is, therefore, 

described in paragraph (h)(3)(ii)(A) of 

this section. Moreover, because both sixmonth USD LIBOR and six-month CME 

Term SOFR are based on transactions 

conducted in U.S. dollars, the fallback 

rate satisfies the currency requirement 

in paragraph (h)(3)(i) of this section. As 

further provided in paragraph (h)(3)(i) of 

this section, B and L must also apply the 

rules in paragraph (h)(3)(iii)(A), (B), and 

(C) of this section to determine if the 

fallback rate is a qualified rate. Because 

the rate being tested as a qualified rate 

(i.e., the fallback rate) is comprised of 

only one fallback rate, paragraph 

(h)(3)(iii)(A) of this section has no effect. 

As discussed elsewhere in this 

paragraph (h)(3)(iv)(A)(2), it is evident 

at the time of the fallback rate’s addition 

that the fallback rate satisfies the 

requirements set forth in the first 

sentence of paragraph (h)(3)(i) of this 

section, so paragraph (h)(3)(iii)(B) of this 

section has no effect. Because it appears 

likely at the time of the modification 

that the fallback rate will be used to 

determine interest on the debt 

instrument, paragraph (h)(3)(iii)(C) of 

this section has no effect. In summary, 

the fallback rate is described in 

paragraph (h)(3)(ii)(A) of this section 

and satisfies the currency requirement 

in paragraph (h)(3)(i) of this section, and 

none of the rules in paragraph (h)(3)(iii) 

of this section affect the analysis. 

Therefore, the fallback rate is a qualified 

rate. 

(B) Example 2: Addition of a single 

indeterminable fallback rate—(1) Facts. 

The facts are the same as in paragraph 

(h)(3)(iv)(A)(1) of this section (Example 

1), except that the new fallbacks provide 

that, upon the discontinuation of sixmonth USD LIBOR, B will select a 

replacement for six-month USD LIBOR 

based on the industry standard at the 

time of selection. 

(2) Analysis. As provided in 

paragraph (h)(3)(i) of this section, B and 

L must apply the rule in paragraph 

(h)(3)(iii)(B) of this section to determine 

whether the fallback rate is a qualified 

rate. Because it is not possible to 

determine at the time of the fallback 

rate’s addition in 2022 whether the 

fallback rate (i.e., the replacement rate 

that B will select in 2023) satisfies the 

requirements set forth in the first 

sentence of paragraph (h)(3)(i) of this 

section, the fallback rate is treated as not 

satisfying the requirements to be a 

qualified rate under paragraph 

(h)(3)(iii)(B) of this section. Therefore, 

the fallback rate is not a qualified rate. 

(C) Example 3: Addition of a fallback 

waterfall that is a qualified rate—(1) 

Facts. The facts are the same as in 

paragraph (h)(3)(iv)(A)(1) of this section 

(Example 1), except that the new 

fallbacks provide for a fallback 

waterfall. The first tier of the fallback 

waterfall provides that, upon the 

discontinuation of six-month USD 

LIBOR, six-month USD LIBOR will be 

replaced by a fallback rate equal to sixmonth CME Term SOFR plus a fixed 

spread that will be determined at the 

time of six-month USD LIBOR’s 

discontinuation. The second tier of the 

fallback waterfall provides that, upon 

the discontinuation of six-month CME 

Term SOFR, B will select a replacement 

for the fallback rate in the first tier of the 

fallback waterfall based on the industry 

standard at the time of selection. At the 

time of the fallback waterfall’s addition, 

the likelihood that six-month CME Term 

SOFR will be discontinued is remote. 

(2) Analysis of the fallback waterfall. 

As provided in paragraph (h)(3)(i) of 

this section, B and L must apply the 

rules in paragraphs (h)(3)(iii)(A), (B) and 

(C) of this section to determine whether 

the fallback waterfall is a qualified rate. 

Under paragraph (h)(3)(iii)(A) of this 

section, because the rate being tested as 

a qualified rate (i.e., the fallback 

waterfall) is comprised of more than one 


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fallback rate, the fallback waterfall is a 

qualified rate only if each individual 

fallback rate (i.e., fallback rates in the 

first and second tiers of the fallback 

waterfall) separately satisfies the 

requirements to be a qualified rate. As 

concluded in paragraphs (h)(3)(iv)(C)(3) 

and (4) of this section, the fallback rates 

in the first and second tiers of the 

fallback waterfall separately satisfy the 

requirements to be a qualified rate. 

Therefore, the fallback waterfall is a 

qualified rate. 

(3) Analysis of the first tier of the 

fallback waterfall. Because the fallback 

rate in the first tier of the fallback 

waterfall is the same as the fallback rate 

in paragraph (h)(3)(iv)(A)(1) of this 

section (Example 1), the analysis of the 

fallback rate in the first tier of the 

fallback waterfall is the same as the 

analysis of the fallback rate in paragraph 

(h)(3)(iv)(A)(2) of this section (Example 

1). Accordingly, the fallback rate in the 

first tier of the fallback waterfall 

separately satisfies the requirements to 

be a qualified rate. 

(4) Analysis of the second tier of the 

fallback waterfall. The fallback rate in 

the second tier of the fallback waterfall 

is the same as the fallback rate in 

paragraph (h)(3)(iv)(B)(1) of this section 

(Example 2). However, unlike the 

fallback rate in paragraph (h)(3)(iv)(B)(1) 

of this section (Example 2), the 

likelihood that the amount of interest on 

the debt instrument will ever be 

determined by reference to the fallback 

rate in the second tier of the fallback 

waterfall is remote. Accordingly, under 

paragraph (h)(3)(iii)(C) of this section, 

the fallback rate in the second tier of the 

fallback waterfall is treated as satisfying 

the requirements to be a qualified rate. 

(D) Example 4: Addition of a fallback 

waterfall that is not a qualified rate—(1) 

Facts. The facts are the same as in 

paragraph (h)(3)(iv)(A)(1) of this section 

(Example 1), except that the new 

fallbacks provide for a fallback 

waterfall. The first tier of the fallback 

waterfall provides that, upon the 

discontinuation of six-month USD 

LIBOR, six-month USD LIBOR will be 

replaced by a stated fallback rate 

(Fallback Rate X). Fallback Rate X, 

which is equal to an interest rate 

benchmark (Benchmark X) plus a fixed 

spread, satisfies the requirements set 

forth in the first sentence of paragraph 

(h)(3)(i) of this section. The second tier 

of the fallback waterfall provides that, 

upon the discontinuation of Benchmark 

X, B will select a replacement for 

Fallback Rate X based on the industry 

standard at the time of selection. At the 

time of the fallback waterfall’s addition, 

the likelihood that Benchmark X will be 

discontinued is not remote. 

(2) Analysis of the fallback waterfall. 

As provided in paragraph (h)(3)(i) of 

this section, B and L must apply the 

rules in paragraphs (h)(3)(iii)(A), (B) and 

(C) of this section to determine whether 

the fallback waterfall is a qualified rate. 

Under paragraph (h)(3)(iii)(A) of this 

section, because the rate being tested as 

a qualified rate (i.e., the fallback 

waterfall) is comprised of more than one 

fallback rate, the fallback waterfall is a 

qualified rate only if each individual 

fallback rate (i.e., the fallback rates in 

the first and second tiers of the fallback 

waterfall) separately satisfies the 

requirements to be a qualified rate. As 

concluded in paragraph (h)(3)(iv)(D)(3) 

of this section, the fallback rate in the 

second tier of the fallback waterfall is 

treated as not satisfying the 

requirements to be a qualified rate. 

Therefore, the fallback waterfall is not a 

qualified rate. 

(3) Analysis of the second tier of the 

fallback waterfall. As provided in 

paragraphs (h)(3)(i) and (h)(3)(iii)(A) of 

this section, B and L must apply the 

rules in paragraphs (h)(3)(iii)(B) and (C) 

of this section to determine whether the 

fallback rate in the second tier of the 

fallback waterfall is a qualified rate. 

Because the likelihood that Benchmark 

X will be discontinued is not remote, 

paragraph (h)(3)(iii)(C) of this section 

has no effect on the analysis of the 

fallback rate in the second tier of the 

fallback waterfall. Under paragraph 

(h)(3)(iii)(B) of this section, because it is 

not possible to determine at the time of 

the fallback waterfall’s addition in 2022 

whether the fallback rate in the second 

tier of the fallback waterfall (i.e., the 

replacement rate that B will select in 

2023) satisfies the requirements set forth 

in the first sentence of paragraph 

(h)(3)(i) of this section, the fallback rate 

in the second tier of the fallback 

waterfall is treated as not satisfying the 

requirements to be a qualified rate. 

(4) Discontinued IBOR. A 

discontinued IBOR is any interbank 

offered rate described in paragraph 

(h)(4)(i) or (ii) of this section but only 

during the period beginning on the date 

of the announcement described in 

paragraph (h)(4)(i) or (ii) of this section 

and ending on the date that is one year 

after the date on which the 

administrator of the interbank offered 

rate ceases to provide the interbank 

offered rate. 

(i) The administrator of the interbank 

offered rate announces that the 

administrator has ceased or will cease to 

provide the interbank offered rate 

permanently or indefinitely, and no 

successor administrator is expected as 

of the time of the announcement to 

continue to provide the interbank 

offered rate; or 

(ii) The regulatory supervisor for the 

administrator of the interbank offered 

rate, the central bank for the currency of 

the interbank offered rate, an insolvency 

official with jurisdiction over the 

administrator for the interbank offered 

rate, a resolution authority with 

jurisdiction over the administrator for 

the interbank offered rate, a court, or an 

entity with similar insolvency or 

resolution authority over the 

administrator for the interbank offered 

rate announces that the administrator of 

the interbank offered rate has ceased or 

will cease to provide the interbank 

offered rate permanently or indefinitely, 

and no successor administrator is 

expected as of the time of the 

announcement to continue to provide 

the interbank offered rate. 

(5) Associated modification. An 

associated modification is a 

modification of the technical, 

administrative, or operational terms of a 

contract that is reasonably necessary to 

adopt or to implement the modifications 

described in paragraph (h)(1)(i), (ii), or 

(iii) of this section other than associated 

modifications. An associated 

modification also includes an incidental 

cash payment intended to compensate a 

counterparty for small valuation 

differences resulting from a 

modification of the administrative terms 

of a contract, such as the valuation 

differences resulting from a change in 

observation period. Examples of 

associated modifications include 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). 

(6) Qualified one-time payment. A 

qualified one-time payment is a single 

cash payment that is intended to 

compensate the other party or parties for 

all or part of the basis difference 

between the discontinued IBOR 

identified in paragraph (h)(1)(i), (ii), or 

(iii) of this section and the interest rate 

benchmark to which the qualified rate 

refers. 

(i) [Reserved] 

(j) Modifications excluded from the 

definition of covered modification. A 

modification or portion of a 

modification described in any of 

paragraphs (j)(1) through (5) of this 

section is excluded from the definition 

of covered modification in paragraph 

(h)(1) of this section and therefore is a 

noncovered modification. 


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(1) The terms of the contract are 

modified to change the amount or 

timing of contractual cash flows and 

that change is intended to induce one or 

more parties to perform any act 

necessary to consent to a modification 

to the contract described in paragraph 

(h)(1)(i), (ii), or (iii) of this section. See 

paragraph (j)(6)(iii) of this section 

(Example 3). 

(2) The terms of the contract are 

modified to change the amount or 

timing of contractual cash flows and 

that change is intended to compensate 

one or more parties for a modification 

to the contract not described in 

paragraph (h)(1)(i), (ii), or (iii) of this 

section. See paragraph (j)(6)(v) of this 

section (Example 5). 

(3) The terms of the contract are 

modified to change the amount or 

timing of contractual cash flows and 

that change is either a concession 

granted to a party to the contract 

because that party is experiencing 

financial difficulty or a concession 

secured by a party to the contract to 

account for the credit deterioration of 

another party to the contract. See 

paragraph (j)(6)(vi) of this section 

(Example 6). 

(4) The terms of the contract are 

modified to change the amount or 

timing of contractual cash flows and 

that change is intended to compensate 

one or more parties for a change in 

rights or obligations that are not derived 

from the contract being modified. See 

paragraph (j)(6)(vii) of this section 

(Example 7). If each contract in a given 

portfolio of contracts has the same 

parties, those parties modify more than 

one contract in the portfolio (each such 

contract is a modified portfolio 

contract), and those modifications 

provide for a single, aggregate qualified 

one-time payment with respect to all 

modified portfolio contracts, then the 

portion of the qualified one-time 

payment allocable to any one modified 

portfolio contract is treated for purposes 

of this paragraph (j)(4) as not intended 

to compensate for a change in rights or 

obligations derived from any other 

modified portfolio contract. 

(5) The terms of the contract are 

modified to change the amount or 

timing of contractual cash flows and the 

modification is identified for purposes 

of this paragraph (j)(5) in guidance 

published in the Internal Revenue 

Bulletin (see § 601.601(d)(2)(ii)(a) of this 

chapter) as having a principal purpose 

of achieving a result that is 

unreasonable in light of the purpose of 

this section. 

(6) Examples. The following examples 

illustrate the operation of the rules in 

paragraphs (j)(1) through (4) of this 

section. 

(i) Example 1: Covered modification— 

(A) Facts. B is the issuer and L is the 

holder of a debt instrument that pays 

interest semiannually at a rate of sixmonth USD LIBOR plus 100 basis 

points. On July 1, 2022, B and L modify 

the debt instrument to replace that 

original rate with CME Group’s forwardlooking SOFR term rate of a six-month 

tenor (six-month CME Term SOFR) plus 

an adjustment spread of 42.826 basis 

points plus 100 basis points (the whole 

modification is the LIBOR replacement 

modification with basis adjustment 

spread). B and L chose the adjustment 

spread of 42.826 basis points because 

that is the adjustment spread used or 

recommended by the International 

Swaps and Derivatives Association and 

the Alternative Reference Rates 

Committee for similar substitutions or 

replacements of six-month USD LIBOR 

with a tenor-adjusted variant of SOFR. 

(B) Analysis. The parties have 

modified the terms of the debt 

instrument to replace a rate referencing 

a discontinued IBOR (i.e., six-month 

USD LIBOR plus 100 basis points) with 

a qualified rate (i.e., six-month CME 

Term SOFR plus 142.826 basis points). 

The LIBOR replacement modification 

with basis adjustment spread is 

described in paragraph (h)(1)(i) of this 

section and not described in any of 

paragraphs (j)(1) through (5) of this 

section. Therefore, the LIBOR 

replacement modification with basis 

adjustment spread is a covered 

modification of the debt instrument. 

(ii) Example 2: Covered modification 

with qualified one-time payment—(A) 

Facts. The facts are the same as in 

paragraph (j)(6)(i)(A) of this section 

(Example 1), except that, instead of the 

LIBOR replacement modification with 

basis adjustment spread, B and L modify 

the debt instrument by replacing the 

original rate of six-month USD LIBOR 

plus 100 basis points with six-month 

CME Term SOFR plus 100 basis points 

and by obligating B to make a cash 

payment to L equal to the present value 

of the adjustment spread of 42.826 basis 

points with respect to the debt 

instrument (this payment is the basis 

adjustment payment, and the whole 

modification is the LIBOR replacement 

modification with basis adjustment 

payment). 

(B) Analysis. The parties have 

modified the terms of the debt 

instrument to replace a rate referencing 

a discontinued IBOR (i.e., six-month 

USD LIBOR plus 100 basis points) with 

a qualified rate (i.e., six-month CME 

Term SOFR plus 100 basis points) and 

have added an obligation for B to make 

the basis adjustment payment, which is 

a single cash payment that is intended 

to compensate L for the basis difference 

between the discontinued IBOR 

identified in paragraph (h)(1)(i) of this 

section (i.e., six-month USD LIBOR) and 

the interest rate benchmark to which the 

qualified rate refers (i.e., six-month CME 

Term SOFR). Accordingly, the basis 

adjustment payment is a qualified onetime payment as defined in paragraph 

(h)(6) of this section, and the LIBOR 

replacement modification with basis 

adjustment payment is described in 

paragraph (h)(1)(i) of this section. 

Because it is described in paragraph 

(h)(1)(i) of this section and not 

described in any of paragraphs (j)(1) 

through (5) of this section, the LIBOR 

replacement modification with basis 

adjustment payment is a covered 

modification of the debt instrument. 

(iii) Example 3: Inducement spread— 

(A) Facts. The facts are the same as in 

paragraph (j)(6)(i)(A) of this section 

(Example 1), except that the debt 

instrument is part of a widely held issue 

of debt with identical terms. Under the 

trust indenture applicable to the debt 

instrument, if B proposes a modification 

of the terms of the debt and all holders 

of the debt consent to that modification, 

the terms of the debt are modified as B 

proposed. In accordance with the trust 

indenture, B proposes the LIBOR 

replacement modification with basis 

adjustment spread on January 1, 2022. 

To induce holders such as L to perform 

the acts necessary to consent to the 

LIBOR replacement modification with 

basis adjustment spread, B also 

proposes to increase the interest rate 

paid to each consenting holder by an 

additional spread of 10 basis points (the 

inducement spread). All holders, 

including L, consent to B’s proposed 

modifications by June 1, 2022. On July 

1, 2022, the debt instrument is modified 

to implement the LIBOR replacement 

modification with basis adjustment 

spread and to increase the interest rate 

by the inducement spread. Once all 

modifications are effective, the debt 

instrument pays interest at a rate of sixmonth CME Term SOFR plus 152.826 

basis points. 

(B) Analysis. As concluded in 

paragraph (j)(6)(i)(B) of this section 

(Example 1), the portion of these 

modifications that implements the 

LIBOR replacement modification with 

basis adjustment spread is a covered 

modification of L’s debt instrument. 

However, the portion of these 

modifications that increases the interest 

rate by the inducement spread changes 

the amount of cash flows on L’s debt 

instrument, and that change is intended 

to induce L to perform the acts 


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necessary to consent to a modification 

to the debt instrument described in 

paragraph (h)(1)(i) of this section (i.e., 

the LIBOR replacement modification 

with basis adjustment spread). 

Therefore, the portion of the 

modification that increases the interest 

rate by the inducement spread is 

described in paragraph (j)(1) of this 

section and, consequently, is a 

noncovered modification of L’s debt 

instrument. See paragraph (b)(2) of this 

section for the treatment of a 

contemporaneous noncovered 

modification. 

(iv) Example 4: Consent fee—(A) 

Facts. The facts are the same as in 

paragraph (j)(6)(iii)(A) of this section 

(Example 3), except that, instead of 

proposing to increase the interest rate 

paid to each consenting holder by the 

inducement spread, B proposes to make 

a cash payment to each consenting 

holder (the consent fee) at the time of 

the modification. Thus, when the 

proposed modification occurs on July 1, 

2022, B pays all holders, including L, 

the consent fee. Once all modifications 

are effective, the debt instrument pays 

interest at a rate of six-month CME Term 

SOFR plus 142.826 basis points. 

(B) Analysis. As concluded in 

paragraph (j)(6)(i)(B) of this section 

(Example 1), the LIBOR replacement 

modification with basis adjustment 

spread is a covered modification of L’s 

debt instrument. However, B’s 

obligation to pay the consent fee is also 

a modification of L’s debt instrument 

but is not a covered modification 

because it is not described in paragraph 

(h)(1)(i) of this section. In particular, B’s 

obligation to pay the consent fee is not 

an associated modification because it is 

not a modification of the technical, 

administrative, or operational terms of 

L’s debt instrument and is not intended 

to compensate for valuation differences 

resulting from a modification of the 

administrative terms of L’s contract. Nor 

is the consent fee a qualified one-time 

payment because it is not intended to 

compensate L for any part of the basis 

difference between the discontinued 

IBOR identified in paragraph (h)(1)(i) of 

this section (i.e., six-month USD LIBOR) 

and the interest rate benchmark to 

which the qualified rate refers (i.e., sixmonth CME Term SOFR). See paragraph 

(b)(2) of this section for the treatment of 

a contemporaneous noncovered 

modification. 

(v) Example 5: Compensation for a 

modification to a customary financial 

covenant—(A) Facts. The facts are the 

same as in paragraph (j)(6)(i)(A) of this 

section (Example 1), except that, at the 

same time as and for reasons unrelated 

to the LIBOR replacement modification 

with basis adjustment spread, B and L 

also modify customary financial 

covenants in the debt instrument in a 

manner that benefits B. In exchange for 

the modification of customary financial 

covenants, B agrees to add another 30 

basis points to the rate such that, once 

all modifications are effective, the debt 

instrument pays interest at a rate of sixmonth CME Term SOFR plus 172.826 

basis points. 

(B) Analysis. As concluded in 

paragraph (j)(6)(i)(B) of this section 

(Example 1), the portion of these 

modifications that implements the 

LIBOR replacement modification with 

basis adjustment spread is a covered 

modification of the debt instrument. 

However, the portion of these 

modifications that modifies customary 

financial covenants is not related to the 

replacement of LIBOR and, therefore, is 

not described in any of paragraphs 

(h)(1)(i), (ii), or (iii) of this section and, 

therefore, is a noncovered modification 

of the debt instrument. Moreover, the 

portion of these modifications that adds 

30 basis points to the rate changes the 

amount of cash flows on the debt 

instrument, and the parties intend that 

change to compensate L for a 

modification to the debt instrument not 

described in paragraph (h)(1)(i), (ii), or 

(iii) of this section (i.e., the modification 

of customary financial covenants). 

Therefore, the portion of these 

modifications that adds those 30 basis 

points to the rate is described in 

paragraph (j)(2) of this section and, 

consequently, is a noncovered 

modification of the debt instrument. See 

paragraph (b)(2) of this section for the 

treatment of a contemporaneous 

noncovered modification. 

(vi) Example 6: Workout of distressed 

debt—(A) Facts. The facts are the same 

as in paragraph (j)(6)(i)(A) of this section 

(Example 1), except that B’s financial 

condition has deteriorated since the 

issue date of the debt instrument and, to 

decrease the risk of B’s default or 

bankruptcy, L agrees to subtract 50 basis 

points from the rate such that, once all 

modifications are effective, the debt 

instrument pays interest at a rate of sixmonth CME Term SOFR plus 92.826 

basis points. 

(B) Analysis. As concluded in 

paragraph (j)(6)(i)(B) of this section 

(Example 1), the portion of these 

modifications that implements the 

LIBOR replacement modification with 

basis adjustment spread is a covered 

modification of the debt instrument. 

However, the portion of these 

modifications that subtracts 50 basis 

points from the rate changes the amount 

of cash flows on the debt instrument, 

and that change is a concession granted 

to B because B is experiencing financial 

difficulty. Therefore, the portion of 

these modifications that subtracts those 

50 basis points from the rate is 

described in paragraph (j)(3) of this 

section and, consequently, is a 

noncovered modification of the debt 

instrument. See paragraph (b)(2) of this 

section for the treatment of a 

contemporaneous noncovered 

modification. 

(vii) Example 7: Change in rights or 

obligations not derived from the 

modified contract—(A) Facts. B is the 

issuer and L is the holder of a debt 

instrument (Debt X) with respect to 

which the facts are the same as in 

paragraph (j)(6)(i)(A) of this section 

(Example 1). In addition, B and L are the 

issuer and holder, respectively, of a 

second debt instrument (Debt Y). At the 

same time that the LIBOR replacement 

modification with basis adjustment 

spread occurs with respect to Debt X, B 

and L also modify customary financial 

covenants in Debt Y in a manner that 

benefits B. In exchange for the 

modification of customary financial 

covenants in Debt Y, B agrees to add 

another 30 basis points to the rate on 

Debt X such that, once all modifications 

are effective, Debt X pays interest at a 

rate of six-month CME Term SOFR plus 

172.826 basis points. 

(B) Analysis. As concluded in 

paragraph (j)(6)(i)(B) of this section 

(Example 1), the portion of these 

modifications that implements the 

LIBOR replacement modification with 

basis adjustment spread is a covered 

modification of Debt X. However, the 

portion of these modifications that adds 

30 basis points to the rate on Debt X 

changes the amount of cash flows on 

Debt X, and the parties intend that 

change to compensate L for a change in 

rights or obligations that are not derived 

from Debt X (i.e., the modification of 

customary financial covenants in Debt 

Y). Therefore, the portion of these 

modifications that adds those 30 basis 

points to the rate on Debt X is described 

in paragraph (j)(4) of this section and, 

consequently, is a noncovered 

modification of Debt X. See paragraph 

(b)(2) of this section for the treatment of 

a contemporaneous noncovered 

modification. 

(k) Applicability date. This section 

applies to a modification of the terms of 

a contract that occurs on or after March 

7, 2022. A taxpayer may choose to apply 

this section to modifications of the 

terms of contracts that occur before 

March 7, 2022, provided that the 

taxpayer and all related parties (within 

the meaning of section 267(b) or section 

707(b)(1) or within the meaning of 

§ 1.150–1(b) for a taxpayer that is a State 


tkelley on DSK125TN23PROD with RULES1
182 Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Rules and Regulations 

or local governmental unit (as defined 

in § 1.103–1(a)) or a 501(c)(3) 

organization (as defined in section 

150(a)(4))) apply this section to all 

modifications of the terms of contracts 

that occur before that date. See section 

7805(b)(7). 

■ Par. 6. Section 1.1271–0 is amended 

by adding entries for § 1.1275–2(m) to 

read as follows: 

§ 1.12711–0 Original issue discount; 

effective date; table of contents. 

* * * * * 

§ 1.12751–2 Special rules relating to debt 

instruments. 

* * * * * 

(m) Transition from certain 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 is amended 

by adding paragraph (m) to read as 

follows: 

§ 1.12751 –2 Special rules relating to debt 

instruments. 

* * * * * 

(m) Transition from certain 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 a 

discontinued IBOR and for a 

methodology to change that rate 

referencing a discontinued IBOR to a 

different rate in anticipation of the 

discontinued IBOR becoming 

unavailable or unreliable. For purposes 

of this paragraph (m), discontinued 

IBOR has the meaning provided in 

§ 1.1001–6(h)(4). See § 1.1001–6 for 

additional rules that may apply to a debt 

instrument that provides for a rate 

referencing a discontinued IBOR. 

(2) Single qualified floating rate. If a 

debt instrument is described in 

paragraph (m)(1) of this section, the rate 

referencing a discontinued IBOR 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 discontinued 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 

discontinued 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 March 7, 

2022. A taxpayer may choose to apply 

paragraph (m) of this section to debt 

instruments issued before March 7, 

2022, provided that the taxpayer and all 

related parties (within the meaning of 

section 267(b) or section 707(b)(1) or 

within the meaning of § 1.150–1(b) for a 

taxpayer that is a State or local 

governmental unit (as defined in 

§ 1.103–1(a)) or a 501(c)(3) organization 

(as defined in section 150(a)(4))) apply 

paragraph (m) of this section to all debt 

instruments issued before that date. See 

section 7805(b)(7). 

■ Par. 8. Section 1.7701(l)–3 is amended 

by adding a sentence at the end of 

paragraph (b)(2)(ii) to read as follows: 

§ 1.77011 (l)–3 Recharacterizing financing 

arrangements involving fast-pay stock. 

* * * * * 

(b) * * * 

(2) * * * 

(ii) * * * See § 1.1001–6(e) for 

additional rules that may apply to stock 

that provides for a rate referencing a 

discontinued IBOR, as defined in 

§ 1.1001–6(h)(4). 

* * * * * 

PART 301—PROCEDURE AND 

ADMINISTRATION 

■ Par. 9. The authority citation for part 

301 continues to read in part as follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 10. Section 301.7701–4 is 

amended by adding a sentence at the 

end of paragraph (c)(1) to read as 

follows: 

§ 301.7701301–4 Trusts. 

* * * * * 

(c) * * * 

(1) * * * See § 1.1001–6(f) of this 

chapter for additional rules that may 

apply to an investment trust that holds 

one or more contracts that provide for 

a rate referencing a discontinued IBOR, 

as defined in § 1.1001–6(h)(4) of this 

chapter, and for additional rules that 

may apply to an investment trust with 

one or more ownership interests that 

reference a discontinued IBOR. 

* * * * * 

Douglas W. O’Donnell, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: December 19, 2021. 

Lily Batchelder, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 2021–28452 Filed 12–30–21; 4:15 pm] 

BILLING CODE 4830–01–P 

DEPARTMENT OF JUSTICE 

Bureau of Alcohol, Tobacco, Firearms, 

and Explosives 

27 CFR Part 478 

[Docket No. ATF 24P; AG Order No. 5304– 

2021] 

RIN 1140–AA10 

Secure Gun Storage and Definition of 

‘‘Antique Firearm’’ 

AGENCY: Bureau of Alcohol, Tobacco, 

Firearms, and Explosives, Department of 

Justice. 

ACTION: Final rule. 

SUMMARY: The Department of Justice is 

amending the regulations of the Bureau 

of Alcohol, Tobacco, Firearms, and 

Explosives (‘‘ATF’’) to codify into 

regulation certain provisions of the 

Omnibus Consolidated and Emergency 

Supplemental Appropriations Act, 

1999. This rule amends ATF’s 

regulations to account for the existing 

statutory requirement that applicants for 

Federal firearms dealer licenses certify 

that secure gun storage or safety devices 

will be available at any place where 

firearms are sold under the license to 

nonlicensed individuals. This 

certification is already included in the 

Application for Federal Firearms 

License, ATF Form 7/7CR (‘‘Form 7/ 

7CR’’). The regulation also requires 

applicants for manufacturer or importer 

licenses to complete the certification if 

the licensee will have premises where 

firearms are sold to nonlicensees. 

Moreover, the regulation requires that 

the secure gun storage or safety devices 

be compatible with the firearms offered 

for sale by the licensee. Finally, it 

conforms the regulatory definitions of 

certain terms to the statutory language, 

including the definition of ‘‘antique 

firearm,’’ which is amended to include 

certain modern muzzle loading firearms. 

DATES: This rule is effective February 3, 

2022. 


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