Page 9 - Acquisitions, Dispositions & Structuring Techniques Corner

used in a di erent context. While the decedent received cash prepayments, once these prepayments were received in September 2007, decedent was left only with obligations to deliver the consideration set forth in the VPFCs, as ex- tended, and had no further property rights with respect to the contracts. All decedent had at that time were obligations that might increase or decrease in amount. erefore, the Tax Court held that the right to settle the VPFCs with stock, cash and/or other collateral for the pledge shares similarly was not “property” for purposes of section.
e court stated that its holding was consistent with the rationale behind the open transaction treatment a orded in Rev. Rul. 2003-7. As a general rule, taxation is imposed only on the realization of gain or loss. Unlike a realization event attendant to a sale or other disposition of property, certain transactions, such as VPFCs, are a orded “open” transaction treatment because either the amount realized or the adjusted basis needed for a Code Sec. 1001 sale or exchange calculation is not known until contract matu- rity.29 e court opined that the open transaction doctrine is a “rule of fairness designed to ascertain with reasonable accuracy the amount of gain or loss realized upon an ex- change, and, if appropriate, to defer recognition thereof until the correct amounts can be accurately determined.”
Judge Ruwe felt that the facts of this case fell within the parameters of Rev. Rul. 2003-7 inasmuch as the original VPFCs provided decedent the ability to settle the contracts by delivering (i) Monster shares pledged as collateral, (ii) other shares that were not pledged as collateral, or (iii) a cash equivalent. Decedent had not yet discharged his delivery obligations under the original VPFCs when he executed the extensions, and the original VPFCs were still open transactions.
e extensions made only one change to the original VPFCs, and that was that the settlement and averaging dates were postponed. is extension, in the Tax Court’s view, did not remove the continued uncertainty over the number of shares and/or cash that the decedent (or his successor) would ultimately have to deliver to the coun- terparty to settle the contracts. Decedent also had the discretion to settle the VPFCs using stock with a higher or lower basis than the stock pledged as collateral. Because decedent’s obligation to deliver a variable number of shares (or the cash equivalent) was continuing, it remained uncertain whether decedent would realize a gain or loss upon discharge of his obligations, not to mention the characterization of such gain or loss.
On the constructive sale alternative theory advanced by the IRS under Code Sec. 1259, the court again found in fa- vor of the estate (decedent), and that the extensions to the original VPFCs did not constitute constructive sales under Code Sec. 1259 because the original VPFCs are the only contracts subject to evaluation. e court further noted that the IRS accepted the taxpayer’s reliance on Rev. Rul. 2003-7 as to entering into the two VPFCs in 2007. It felt that implicit in this acknowledgment is that the original VPFCs did not trigger constructive sales under Code Sec. 1259 since, as with the original agreements, the extended VPFCs also required the future delivery of Monster stock subject to signi cant variation. e court felt there was no merit to the IRS argument that the extended VPFCs should be viewed as separate and comprehensive nancial instruments under Code Sec. 1259.
e Tax Court, therefore, held that there was no de cien- cy in income tax attributable to the extension of the VPFCs in 2008, which occurred prior to Mr. McKelvey’s passing.
ENDNOTES
1 McKelvey, 148 TC 13 (2017).
2 Decedent was the founder and chief executive
of cer of Monster Worldwide, Inc. (“Monster”), a company known for its website, monster. com. Monster.com helps inform job seekers of job openings that match their skills and desired geographic location. Decedent died on November 27, 2008.
3 A similar nding was made by the Tax Court in Anschutz Co., 135 TC 78, Dec. 58,275 (2010), aff’d, CA-10, 2012-1 ustc ¶50,117, 664 F3d 313.
4 In contrast with share forward contracts and VPFCs, share-lending agreements are often entered into by equity holders who have taken a long position with respect to a stock and plan on holding it for an extended period. The equity owner can agree to lend the stock to a counterparty, who can then use the borrowed shares to increase its market liquidity and facilitate stock sales for itself or its customers.
SEPTEMBER–OCTOBER 2017
For example, the equity owner can lend shares to an investment bank, which could then use the lent shares to execute short sales on behalf of its clients. The borrower will normally pledge cash collateral, and the lender will derive a pro t lending the shares by retaining a portion of the interest earned by this cash collateral. At the end of the lending period, the counterparty will return the borrowed shares to the equity owner/lender.
5 See Reg. §1.1001-1(a) (general rule for computa- tion of gain or loss from the sale or disposition of property). See L & C Springs Associates, CA-7, 188 F3d 855.
6 M.L. Middleton, 77 TC 310, Dec. 38,124 (1981), aff ’d per curiam, CA-11, 82-2 ustc ¶9713, 693 F2d 124, 693 F2d 124.
7 J.F. Tufts, SCt, 83-1 ustc ¶9328, 461 US 300, 103 SCt 1826.
in property). The Tufts, supra note 7, decision
has been codi ed in Code Sec. 7701(g).
9 A. Ragghianti, 71 TC 346, Dec. 35,565 (1978); Pac. Coast Music Jobbers, Inc., 55 TC 866, Dec. 30,667 (1971), aff’d, CA-5, 72-1 ustc ¶9317, 457 F2d 1165; J.D. Dunne, 95 TCM 1236, Dec. 57,368(M), TC
Memo. 2008-63.
10 Grodt & McKay Realty, Inc., 77 TC 1221, 1236–1237,
Dec. 38,472 (1981).
11 Dunne, 95 TCM 1236, Dec. 57,368(M), TC Memo.
2008-63.
12 For examples of “sale versus loan” cases involv-
ing securities, see A.L. Calloway, 135 TC 26, Dec. 58,264 (2010), aff’d, CA-11, 2012-2 ustc ¶50,533, 691 F3d 1315 (non-recourse “loan” transaction properly characterized as sale by the IRS where taxpayer transferred title to the shares owned, gave lender the right to sell those shares at any time without notice and retain any and all bene ts from such sale, and left the taxpayer at
8 See Reg. §1.61-6 (gains derived from dealings
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