Acquisitions, Dispositions & Structuring Techniques Corner
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JERALD DAVID AUGUST is a Partner at Kostelanetz & Fink, LLP in New York, New York.
Dispositions & Structuring Techniques Corner
Tax Court’s Recent Decision in McKelvey Est., Af rms Merits of Deferring Gain Under a Variable Prepaid Forward Contract
By Jerald David August
In McKelvey,1 the executor of the taxpayer’s estate petitioned for a redetermina- tion of the $41.26M de ciency in income tax for 2008, proposed by the IRS, attributable to his entering into various variable prepaid forward contracts (“VPFCs”) with respect to shares of stock in Andrew McKelvey was the founder of the Company.2
In the  rst VPFC, the decedent received a cash prepayment of approximately $51M on September 14, 2007, in exchange for his agreeing to deliver to the Bank of America over 10 separate, annual settlement dates, up to 1,765,188 Monster shares or cash equivalent pursuant to an agreed formula. Following the decedent’s death, which occurred in November 27, 2008, the estate settled the Bank of America VPFC by delivering 1,757,016 shares.
In the second VPFC, this one with Morgan Stanley & Co. International plc, the decedent received a cash prepayment of VPFC of $142.6M on September 27, 2007.  e decedent agreed to deliver to Morgan in exchange, on or about September 24, 2008, up to 4,762,000 Monster shares or cash equivalent, again under a speci c formula that was the one used with the Bank of America VPFC.
On July 2, 2008, the decedent paid Bank of America approximately $3.5M in cash as consideration to extend the VPFC settlement agreement dates by ap- proximately 16 months from various dates in September 2008 to speci c dates in February 2010. On July 15, 2008, the decedent paid Morgan the sum of $8.2M in cash to extend the VPFC averaging and settlement date(s) from September 24, 2008, to January 15, 2010.  e extension also postponed the 10 averaging dates to be used for the calculation of the average closing price. Following the decedent’s passing, the estate settled the Morgan VPFC by delivering 4,762,000 shares of Monster stock on or about August 5, 2009.
 e IRS argued that the extensions of two outstanding VPFCs with respect to the subject shares resulted in realization events with respect to the underlying shares that were part of the transactions.  is would trigger short- and long-term capital gains.

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