Page 3 - Acquisitions, Dispositions & Structuring Techniques Corner

of relevant factors to be taken into account was identi- ed in Grodt & McKay Realty, Inc.10 Such factors may be summarized as follows: (1) whether legal title passes; (2) how the parties treat the transaction; (3) whether an equity interest was acquired in the property; (4) whether the contract creates a present obligation on the seller to execute and to deliver the deed and a present obligation on the purchaser to make payments; (5) whether the right of possession is vested in the purchaser; (6) which party pays the property taxes; (7) which party bears the risk of loss or damage to the property; and (8) which party receives the pro ts from the operation and sale of the property.
Transactions that involve stocks or securities require con- sideration of additional factors. e Tax Court’s decision in Dunne,11 for example, set forth a list of non-exclusive factors to be used in determining whether a transaction transfers the burdens and bene ts of ownership in a transaction involving stock: (1) whether the taxpayer has legal title or a contractual right to obtain legal title in the future; (2) whether the taxpayer has the right to receive consideration from a transferee of the stock; (3) whether the taxpayer enjoys the economic bene ts and burdens of being a shareholder; (4) whether the taxpayer has the power to control the company; (5) whether the taxpayer has the right to attend shareholder meetings; (6) whether the taxpayer has the ability to vote the shares; (7) whether the stock certi cates are in the taxpayer’s possession or are being held in escrow for the bene t of that taxpayer; (8) whether the corporation lists the taxpayer as a shareholder on its tax return; (9) whether the taxpayer lists himself as a shareholder on his individual tax return; (10) whether the taxpayer has been compensated for the amount of income taxes due by reason of his shareholder status; (11) whether the taxpayer has access to the corporate books; and (12) whether the taxpayer shows by his overt acts that he believes he is the owner of the stock.
No one factor is necessarily determinative, and the weight of a factor in each case depends on the surrounding facts and circumstances. It is also important, of course, to determine as of which particular date the sale occurred.12
Code Sec. 1058, enacted in 1978, codi ed the IRS’s ap- proach of providing non-recognition treatment for securi- ties loans. Under Code Sec. 1058, as a general rule, “[i]n the case of a taxpayer who transfers securities ... pursuant to an agreement which meets the requirements of subsec- tion (b), no gain or loss shall be recognized on the exchange of such securities by the taxpayer for an obligation under such agreement, or on the exchange of rights under such agreement by that taxpayer for securities identical to the securities transferred by that taxpayer.” Under Code Sec. 1058(b), a bona de share loan agreement must satisfy ve
requirements: (1) provide for the return to the transferor of securities identical to the securities transferred; (2) require that payments shall be made to the transferor of amounts equivalent to all interest, dividends, and other distributions which the owner of the securities is entitled to receive during the period beginning with the transfer of the securities by the transferor and ending with the transfer of identical securities back to the transferor; (3) not reduce the risk of loss or opportunity for gain of the transferor of the securities in the securities transferred; and (4) meet such other requirements as the Secretary may by regulation prescribe.13
Share loans can have the characteristic of non-recourse liability, where the share lender can look only to the collateral pledged or charged in satisfying the taxpayer- borrower’s liability at loan maturity or earlier default. In such transactions, it is common for the shares of stock be pledged while title remains in the name of the borrower or selected third party. It is generally thought that the absence of personal liability on part of the borrower and the transfer of title to the shares should not be determina- tive, per se, of whether the transaction is a loan or a sale.14
In other cases, recourse debt permits the lender to pursue any of the borrower’s non-exempt assets, including the posted share collateral, in satisfaction of the debt until it is fully paid. Where the loan is recourse to the borrower, sale treatment should generally follow.15
Variable Prepaid Forward Sales
In a VPFC, an investor who generally owns a block of stock in a particular company or companies enters into an agreement with a buyer or “counterparty” that is gener- ally an investment bank or derivatives dealer. e investor agrees to transfer on one or more settlement dates during the term of the agreement, a variable number of shares of the stock, usually publicly traded, to the counterparty. Normally, the VPFC period can range from one to 10 years. e relevant documentation requires the baseline stock purchase agreement, stock pledge agreement and a share-lending agreement. At the closing of the VPFC sale, the investor-seller receives a non-refundable cash payment that is frequently discounted against the fair market value of the stock on the closing date. e discount may vary but is usually set at 75% to 90% of FMV.
If the share value increases over time, the investor-seller is frequently permitted to bene t from such increase through the agreed formula set forth in the stock purchase agreement to be applied on each settlement date. e investor transfers into the pledge account the maximum number of shares that could be required to close out the
SEPTEMBER–OCTOBER 2017 © 2017 CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED. 9