10th Circuit Affirms Taxability of Variable Prepaid Forward Contracts

The Tenth Circuit, in Anschutz v. Commissioner, affirmed a Tax Court decision taxing the disposition of appreciated stock through a Variable Prepaid Forward Contract (VPFC).  The underlying issue was whether the complex financial arrangement created a taxable constructive sale.  The transaction involved a series of contracts including (1) a “forward contract” to sell the appreciated stock to the buyer in the future and (2) a loan from the buyer to the seller, secured by a pledge of the underlying stock.  The court analyzed a series of eight factors in its determination that there was a current taxable sale, noting in particular that the ostensible buyer “has paid between 75 percent and 85 percent of the purchase price up front and is economically entitled to 100 percent of the initial value of the stock with no obligation to make additional payments.  In contrast, the taxpayer has effectively cashed out its equity in the property in exchange for the upfront cash payment and a contingent contract right to acquire a certain number of shares based on the stock price on the settlement date.”  The court also concluded that the transaction was distinguishable from the VPFC described in Rev. Rul. 2003-7, where there was not a constructive sale.  The court found that the Anschutz transaction went further than the ruling by adding a master share purchase agreement and share-lending agreements, resulting in the “buyer” obtaining possession and most of the incidents of ownership of the underlying appreciated stock.  The court also cited the IRS’s prior generic legal advice memorandum on the topic of variable purchase contracts and share lending arrangements.