According to this story [paid subscription required] in today’s Wall Street Journal, the IRS is targeting a technique used by highly paid individuals to defer capital gains taxes. The strategy is called “prepaid variable forward,” and is a hedging strategy that uses derivatives to protect the user who has a stock portfolio concentrated in one stock from a drop in the price of that stock while deferring capital gains. Typically, the firm involved in the transaction shorts some of the stock to protect itself—and that’s where the problem comes in.
If the firm borrows the shorted shares from the investor, that’s share lending. And the IRS ruled (in a Technical Advice Memorandum that applies to one investor) that when the shares were borrowed, they were effectively “sold,” and subject to immediate capital gains tax.
My generic advice about all tax shelters applies: if it sounds too good to be true….
