Tax Consequences of Interest Rate Swaps : Characterization by Function, Not Prejudice
Tax Consequences of Interest Rate Swaps : Characterization by Function, Not Prejudice by Patricia Brownt INTRODUCTION An interest rate swap is a transaction in which two parties, known as counterparties, t contract to make periodic payments to each other during the contract period. Most often, these streams of payments are meant to coincide with and cover obligations, usually interest payments, that the parties owe to creditors that are not parties to the swap. 2 A swap is a means by which a borrower can change the terms of existing debt by "swapping" those terms with another borrower 3 that has procured debt on terms more attractive to the first borrower.4 Although a swap is often described as a financing tech- nique, it is not, in itself, a new source of funds for a corporation seeking to raise more capital. The parties to the swap must look to the regular capital markets to obtain the loans whose terms they swap.5 t B.S.F.S. Georgetown University, 1984; J.D. Boalt Hall School of Law, 1987, University of California, Berkeley. Associate, Cleary, Gottlieb, Steen & Hamilton, New York. 1. In this article, the term "counterparty" refers to the party to the swap whose activity or treatment is not being discussed at that point. Therefore, the identity of the counterparty will change when the discussion shifts to the effect on the other party to the swap. 2. The "asset-based" swap has also emerged as a means of matching a corporation's liabil- ities to the income from its assets. Walmsley, Understanding Interest Rate Swaps, BANKER'S MAG., July-Aug.
[Show full text]