Rev. Rul. 2003-7 provides that variable prepaid futures contracts (VFPCs) represent “open transactions” that are not subject to tax until the contract is finally settled and do not represent constructive sales of the stock under IRC §1259. The case of Estate of McKelvey v. Commissioner, 148 T.C. No. 13 looks at whether an extension of the VFPC represents either a taxable settlement of the contract or a constructive sale of the related shares under IRC §1259, a question not previously addressed by the Tax Court.
Under a variable prepaid forward contract, a taxpayer agrees to pledge a certain amount of stock in exchange for receiving a payment of cash. The contract provides that, at a specified date in the future the taxpayer will deliver either a number of shares of stock (either from the original pledged group or other shares the taxpayer has) or a cash payment. The number of shares to be delivered varies over a specified range of shares, based on the price of the stock on the date the transaction is closed. The shares that are pledged represent the maximum number that may need to be delivered. As well, the party pledging the shares would retain the right to close out the contract at any time before the final settlement date, either by transferring shares or cash.
Image copyright iqoncept / 123RF Stock PhotoRead More