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ARTICLE · 30 JANUARY 2020

IBOR Transition Update: The Fair Market Value Test

Hogan Lovells Cadwalader
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In October, Treasury and the IRS issued proposed regulations confirming that switching from a LIBOR-based rate to a SOFR-based rate in a debt instrument or derivative generally will not be a taxable event.

United StatesFinance and Banking
Linda Swartz
Linda Swartz
Mark Howe
Mark Howe
Adam Blakemore
Adam Blakemore
Gary Silverstein
Gary Silverstein
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In October, Treasury and the IRS issued proposed regulations confirming that switching from a LIBOR-based rate to a SOFR-based rate in a debt instrument or derivative generally will not be a taxable event if the fair market value of the modified contract is substantially equivalent to the fair market value of the unmodified contract (the FMV test). We discuss the proposed regulations in greater detail here.

In the weeks since, bar associations and trade groups have expressed concern that the FMV test could create uncertainty in several contexts.

FMV Test Safe Harbors

As a general rule, fair market value must be determined using a reasonable, consistently applied valuation method and must take into account the value of any one-time payment that is made in connection with a reference rate switch.

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