Summary
The Second Circuit reversed the Tax Court, holding that a taxpayer who extended the valuation dates of variable prepaid forward contracts (VPFCs) by paying $11 million entered into new contracts, and that constructive sales of the collateralized shares occurred under 26 U.S.C. § 1259 where the stock price was so far below the floor price that there was an 85-87% probability the maximum shares would be delivered, making the amount "substantially fixed." The court accepted probability analysis (Black-Scholes) to determine substantial fixation under § 1259(d)(1) and remanded for calculation of long-term capital gains, while also remanding for determination of whether the termination of obligations resulted in short-term capital gains under § 1234A.
Holdings
- The taxpayer did not realize a short-term capital gain on the basis of an exchange of property because at the time of amendment, the taxpayer had only obligations under the VPFCs, not property. Obligations are not property. Therefore, § 1001 is inapplicable.
- The court held that the extension of the valuation dates resulted in new contracts that replaced the original contracts, because the change was fundamental (like new expiration dates for options). The court did not decide whether the termination of obligations gave rise to taxable gain, but remanded that issue to the Tax Court.
- The court held that the amount of shares to be delivered at settlement was 'substantially fixed' within the meaning of § 1259(d)(1) because the probability that the stock price would exceed the floor price was very low (15% and 13%), and thus constructive sales occurred. The court concluded that probability analysis may be used to determine substantial fixation.
Questions Presented
- Whether the extension of VPFC valuation dates resulted in a short-term capital gain under § 1001 or § 1234A
- Whether the extension of VPFC valuation dates resulted in a long-term capital gain under § 1259 due to a constructive sale of the collateralized shares
Disposition
reversed_and_remanded
Cases Cited (7)
- General Electric Co. v. Commissioner, 245 F.3d 149 (2d Cir. 2001)(cited)
- Welch v. Helvering, 290 U.S. 111 (1933)(cited)
- Pilgrim's Pride Corp. v. Commissioner, 779 F.3d 311 (5th Cir. 2015)(cited)
- Progressive Corp. v. United States, 970 F.2d 188 (6th Cir. 1992)(cited)
- Frank Lyon Co. v. United States, 435 U.S. 561 (1978)(cited)
- Greene v. United States, 79 F.3d 1348 (2d Cir. 1996)(cited)
- Estate of McKelvey v. Commissioner, 148 T.C. No. 13 (2017)(cited)
Cited In (0)
No citing cases on record yet.