III. Emergency Relief
A. Rev. Proc. 2008-51
1. History of revenue procedure. In early 2008, representatives of private equity funds (PE Funds) approached Treasury with a problem raised by changing credit conditions at that time. In the fall of 2007, PE Funds had negotiated financing commitments with banks that would allow them to complete contemplated leveraged buyouts. Historically, these commitments were extended but not called on by the PE Funds, because when funds were needed, cheaper financing could be found elsewhere. But in 2008, PE Funds were in fact calling on their commitments because credit was scarce, and negotiations over the terms of the financing resulting from the financing commitments became fraught. Lenders who had made the commitments in 2007 did not seriously consider that they would be called on to extend credit and, in 2008, were having much greater trouble selling the loans
resulting from the commitments than they would normally have. To the extent that their contracts allowed them to, lenders were demanding that borrowers agree to change the terms of their loans so that the lenders could
sell the loans in the secondary markets. These circumstances raised the specter of COD and AHYDO for borrowers.
Treasury and the IRS were sympathetic with the scenarios described by the taxpayer representatives and published Rev. Proc. 2008-51 in response to their problems.
Consistent with its provenance, the revenue procedure focuses on debt issued under financing commitments, agreements that ‘‘ensure that [a] corporation will have sufficient debt financing at a future date, within certain parameters (for example, the total amount to be borrowed, an interest rate not to exceed a certain level, and the term of the loan).’’ The revenue procedure then describes two possible outcomes of a financing commitment: (1) the borrower obtains funds on a long-term basis (permanent funding) under the terms of the financing commitment, or (2) the borrower obtains funds for a short period (‘‘temporary’’ funding) after which the loan is extended on a long-term basis (permanent funding).
The revenue procedure notes that when economic conditions deteriorate between the time a financing commitment is negotiated and when funds are extended, tax problems may arise. Two specific problems are described. In the first, if a lender is only able to sell the loan made under the financing commitment for an amount much less than the money provided to the borrower, the issue price of the loan may be significantly less than the cash received. In the second, parties that renegotiate the terms of the permanent financing during the temporary financing period to make the permanent loan more salable by the lender, may find that changes in the loan terms trigger a sale of the old loan for the new.
The revenue procedure addresses a possible problem raised by the facts it describes, namely, that the interest deductions on the renegotiated debt may be substantially denied under the AHYDO rules
2. Operation of revenue procedure. The substantive part of the revenue procedure permanently turns off the AHYDO rules for certain debt instruments.71 This relief generally applies to corporate debt instruments issued for money under the terms of a binding financing commitment, and debt instruments issued in up to two exchanges of those instruments (including exchanges deemed to occur because of a modification).
a. Original instrument. The first type of instrument to which the revenue procedure applies is a debt instrument issued in an original issuance (Original Instrument) that is:
- issued by a corporation;
- for money;
- the terms of which are generally consistent with the terms of a financing commitment where:
a. the terms of such financing commitment
are binding on the parties;
b. the financing commitment was obtained
from a party unrelated to the issuer;
c. the financing commitment was obtained
before January 1, 2009; and
- the debt instrument would not be an AHYDO if
its issue price were the net cash proceeds actually
received by the corporation for the debt instrument
(instead of any market-based issue price that otherwise applies to the instrument).
b. Secondary instrument. The second type of instrument to which the revenue procedure (Secondary Instrument) applies is issued:
- in exchange for an instrument —
a. issued by the same corporation; and
b. meets the definition of an Original Instrument; - within 15 months following the issuance of the Original Instrument; and
- such that the Secondary Instrument would not be an AHYDO if the AHYDO test were applied to it using an issue price equal to the net cash proceeds actually received by the corporation for the Original Instrument.
c. Tertiary instrument. The third type of instrument to
which the revenue procedure (Tertiary Instrument) applies is issued:
- in exchange for an instrument —
a. issued by the same corporation; and
b. meets the definition of a Secondary Instrument; - within 15 months following the issuance of an
Original Instrument; and - such that the Tertiary Instrument would not be
an AHYDO if the AHYDO test were applied to it
using an issue price equal to the net cash proceeds
actually received by the corporation for the Original Instrument.
For example, if a corporation issued a debt instrument for money under a financing commitment and then performed two modifications that are treated as debt-for debt exchanges, the first modification would be a direct exchange eligible for relief as a Secondary Instrument, and the second modification would be an indirect exchange eligible for relief as a Tertiary Instrument (if, in each case, the other requirements are met). However, if
the corporation issued a further instrument in a third debt-for-debt exchange, that instrument would not be eligible for relief.
Finally, additional requirements apply to debt instruments issued in exchanges taking place after August 8, 2008 For this relief to apply, there must not be an increase in maturity date greater than one year over that of the Original Instrument, and no increase at all in the SRPM.