The World’s Most Important Number: The IRS Addresses the Replacement of LIBOR

On October 8, 2019, the US Internal Revenue Service released proposed regulations (the “Proposed Regulations”) addressing certain US federal tax consequences of replacing an interbank offered rate ("IBOR") with a successor rate. As discussed in this Legal Update, the Proposed Regulations generally provide (a) circumstances in which the replacement of an IBOR, such as the London Interbank Offer Rate ("LIBOR"), with a fallback rate, or an addition of a fallback mechanic to an existing instrument, will not result in a deemed taxable exchange of the instrument under section 1001 of the Internal Revenue Code, (b) the source and character of any one-time payment associated with a replacement of an IBOR rate, (c) relief under the rules for real estate mortgage investment conduits (“REMICs”), and (d) some relief pursuant to specific tests under existing regulations governing variable rate debt instruments (“VRDIs”).