Debt Restructurings: IRS Finalizes Regulations Clarifying that an Issuer’s Financial Condition Will Generally Not Be Taken into Account in Determining Whether a Modified Debt Instrument Will Continue to Be Treated as Indebtedness

Sullivan & Cromwell LLP - January 6, 2011

On Thursday, January 6, 2011, the IRS released final regulations (the “Final Regulations”) clarifying that the deterioration of an issuer’s credit quality will generally be disregarded for the purpose of determining whether a modified debt instrument will continue to be characterized as debt under U.S. federal income tax law. Before the January 6, 2011 amendment, the regulations governing the modification of debt instruments (the “1001 Regulations”) were ambiguous on this point. The Final Regulations are substantively the same as the proposed regulations that the IRS issued on this topic in June 2010 (the “Proposed Regulations”) and apply to modifications occurring on or after January 7, 2011, although taxpayers may rely on the Final Regulations to evaluate debt instruments that were modified by earlier transactions.