Anschutz v. Commissioner: Integration of Prepaid Variable Forward Contracts and Share Lending Agreements under Internal Revenue Code Section 1058
53 Pages Posted: 19 Nov 2012 Last revised: 20 Jan 2013
Date Written: January 17, 2011
Securities lending agreements and forward contracts — both standard investment techniques — can be combined to create a derivative product known as a prepaid variable forward contract ("PVFC"). PVFCs allow investors to significantly defer capital gains taxes on dispositions of large amounts of stock. Essentially, a PVFC replicates the economic substance of a current sale without triggering a tax event. Structured with tax deferral purposes in mind, PVFCs became wildly popular with ultra-wealthy investors during the late 1990's and early 2000's. The use of PVFCs, however, has gone largely unnoticed by the public. In 2007 the Internal Revenue Service caught on and began attacking these complex derivatives. The first of these cases, Anschutz v. Commissioner, involved the use of a PVFC to defer over one hundred million dollars in capital gains taxes. This Note analyzes the Tax Court's use of section 1058 of the Internal Revenue Code to strike down the tax deferral scheme. While supporting the Tax Court's efforts in preserving the fiscal health of the Treasury, this Note proposes that the Tax Court's use of section 1058 may have raised more questions than it has answered regarding the tax consequences of these complex derivative products. Additionally, the court's opinion may have placed unnecessary strain on the securities lending industry, hampering economic growth.
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