New Guidance on Loan Modifications: IRS Finalizes Rules on Issuer’s Credit Quality and Provides a Safe Harbor for REITs

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On January 6, 2011, the Internal Revenue Service issued final regulations (T.D. 9513) under U.S. Treasury Department Regulation Section 1.1001-3 clarifying that a change in the issuer’s credit quality between the issue date and the modification date of a debt instrument is not considered in determining the nature of the instrument or property that results from modification of the debt instrument. For example, a decrease in the fair market value of a debt instrument between the issue date and modification date is not taken into account if it is attributable to the deterioration of the obligor’s financial condition and not to a modification of the instrument’s terms. This rule does not apply if the modification includes the substitution of a new obligor or the addition or deletion of a co-obligor.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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