Current Options
Disclosure Document
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Disclosure Document
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Twenty-First
Securities Corporation

780 Third Avenue
New York, NY 10017
212.418.6000
info@twenty-first.com


Winter 2006, Volume IX, Issue 1    


Troublesome Variable Forward Ruling Now "Public"

January 27, 2006: TAM released by IRS.
May 2006: TAM analyzed  

The Technical Advice Memorandum that we discussed in our last newsletter (“On The Grapevine") has become “public”. The TAM holds that when an investor lent its shares in connection with a prepaid variable forward, that arrangement (as well as other indicia of the contract) created a sale under common law.  The analysis portion of the TAM is circulating among tax advisors.  The analysis notes that the counterparty acquired possession and use of the shares, including the ability to trigger the shares’ delivery. It also notes that the shares could not be withdrawn during the contract and replaced by other collateral and that the contract demanded physical settlement.  The analysis also focuses on voting and dividend rights; it states (rather ambiguously) that the taxpayer was to forfeit dividends on the shares during the contract. 

The TAM has not yet been published by the IRS, so some facts are as yet unknown. Twenty-First Securities does not agree with the TAM’s conclusions but has, since 1998, alerted investors to the possible risk in loaning hedged shares to the counterparty. (See “Potential Tax Traps For Equity Collars”).  We continue to recommend caution and believe it prudent, until there is further clarity, to operate as if the ruling were law.  For this reason, we advise investors who hedge with prepaid variable forwards not to lend the hedged stock to the counterparty.   

Originally published December 20, 2005.  


This article and other articles are provided for information purposes only.  They are not intended to be an offer to engage in any securities transactions or to provide specific financial, legal or tax advice. Articles may have been rendered partly inaccurate by events that have occurred since publication.  Investors should consult their advisers before acting on any topics discussed herein.   

Options involve risk
and are not suitable for all investors.  Before engaging in an options transaction, investors must review the booklet "Characteristics and Risks of Standardized Options".  

 



 



     

 

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