The memorandum is very interesting because it addresses the same VPFS analyzed in Revenue Ruling 2003-7, with one critical distinction.
Consistent with TAM 200604033, the memorandum concluded that the VPFS was taxable pursuant to I.
Accordingly, the IRS determined that all of the agreements must be considered together as part of a single transaction to determine the objective economic realities of the VPFS.
Interestingly, the IRS's conclusion that the VPFS is taxable at the outset is predicated solely on the rights conferred upon the counterparty by the share lending agreement.
The IRS determined that, when considered together, the underlying VPFS documents shift nearly all of the benefits and burdens of owning the pledged shares to the counterparty at the outset of the transaction.
The memorandum's adverse conclusion is primarily based on the counterparty's right to the unfettered use of the pledged shares, which effectively terminates the taxpayer's right to vote and receive dividends and precludes the taxpayer from reacquiring the specific shares pledged by electing to settle the VPFS in cash or other shares of the same issuer.
In the event that tax practitioners still weren't clear on the IRS's position regarding a VPFS that includes a share lending arrangement, the IRS reiterated effectively the same analysis and conclusion in Coordinated Issue Paper LMSB-04-1207-077, released February 6, 2008, as it did in TAM 200604033 and the memorandum.
The issue paper represents the IRS's most recent and comprehensive analysis of a VPFS that incorporates a share lending arrangement.
section] 1001 when the taxpayer entered into the VPFS.
Accordingly, the IRS's consistently articulated position is that a VPFS that grants the counterparty possession and unfettered use of the pledged shares is taxable at the outset when the counterparty acquires the legal right to borrow and dispose of the collateral.
section] 1058 nor the open transaction doctrine applies to defer the tax consequences of the VPFS.
Taxpayers can structure a VPFS that achieves the desired tax consequences by following Revenue Ruling 2003-7.