The Internal Revenue Service Provides Limited Relief from the AHYDO Rules for Pre-2009 Financing Commitments

Excerpt from Practical US/Domestic Tax Strategies by Yoram Keinan and Mark H. Leeds (Greenberg Traurig, LLP)

The Internal Revenue Service has responded again to the troubled credit markets by easing the potential tax burden on corporations that issue debt pursuant to previously established financing commitments (Commitments).

On August 8, 2008, the Service issued a Revenue Procedure that describes circumstances under which it will not treat a debt instrument issued pursuant to a Commitment as an applicable high yield discount obligation (AHYDO) for federal income tax purposes. The AHYDO rules can result in both deferral of interest and original issue discount (OID) deductions, as well as a disallowance of such deductions. As a result, corporate borrowers who were lucky enough to lock Commitments prior to the current credit crunch will not face possible deferral and/or disallowance of interest and OID deductions on their debt as a result of actions taken by their lenders.

Read More on the Background of the AHYDO Rules (free)