On Friday, October 9, 2020, the US Internal Revenue Service released Revenue Procedure 2020-44 (the “Revenue Procedure”), providing retroactive but limited relief for amending specific types of legacy contracts to add fallback mechanics for LIBOR or other IBORs. The fallback language included must rather strictly follow select model contract language recommended by the Alternative Reference Rate Committee (the “ARRC”) and the International Swaps and Derivatives Association (“ISDA”).
The only permissible deviations from the prescribed ARRC or ISDA contract language are deviations (a) reasonably necessary to make the terms incorporated into the contract legally enforceable in a relevant jurisdiction or to satisfy legal requirements of that jurisdiction, (b) from the terms of an ISDA fallback that are reasonably necessary to incorporate the ISDA fallback into a contract that is not a “protocol covered document” as defined in the ISDA protocol, (c) to omit terms of an ARRC fallback or an ISDA fallback that cannot under any circumstances affect the operation of the modified contract (for example, for a contract that refers only to USD LIBOR, omission of the portions of an ISDA fallback that relate exclusively to contracts referring to another IBOR), and (d) from the terms of an ARRC fallback or an ISDA fallback to add, to revise, or to remove technical, administrative, or operational terms, provided that the addition, revision, or removal is reasonably necessary to adopt or to implement the ARRC fallback or the ISDA fallback
The Revenue Procedure applies to contracts entered on or after October 9, 2020 and before January 1, 2023. It is also retroactive, as taxpayers are permitted to rely on it for modifications to contracts occurring before October 9, 2020.
Mayer Brown will be releasing a Legal Update summarizing the Revenue Procedure in more detail in the coming days.