com, entered into VPFCs with Bank of America and Morgan Stanley in which the firms gave him approximately $193 million immediately in exchange for delivery of shares of Monster.
His estate continued the VPFCs with the two banks, settling them in 2009.
Issues: The issue before the Tax Court was whether McKelvey's execution of extensions to the VPFCs resulted in taxable dispositions of property that were subject to gain.
For the extension of the VPFCs to trigger a realized gain under Sec.
Further, taxpayers should be cautious because the IRS has indicated in an issue paper that VPFC
transactions are an emerging issue and may be subject to accuracy-related or reportable transaction penalties under Secs.
171) The variable prepaid forward contracts (VPFC
) has the same cash flows as the modified equity collar combined with a loan equal to the value of the shares at the time the VPFC
The economics of a VPFC can best be illustrated by way of an example.
Accordingly, Aidan enters into a five-year VPFC with Big Bank, a large commercial bank, involving 200,000 of his 400,000 shares of Oliver, Inc.
By entering into the VPFC, Aidan has in effect agreed to sell a certain number of his Oliver, Inc.
The coordinated issue paper identifies several variants of VPFC transactions that will be deemed unfettered use by the counterparty and provides a legal analysis of the benefits-and-burdens test in light of the factors that give rise to a sale for tax purposes under Grodt & McKay Realty Inc.
Technical Advice Memo 200604033 drew widespread consternation when issued in January 2006 because of the popularity of VPFCs as, it was believed, a viable strategy to obtain cash from a highly appreciated stock position without triggering gain.
In the earlier revenue ruling, 2003-7 (2003-1 CB 363), the Service said VPFCs per se were not sales, actual or constructive, under either IRC [section] 1001 or 1259, provided specific requirements were satisfied.