Judges: GOEKE
Attorneys: Robert A. Rudnick , Jonathan R. DeFosse , Richard J. Gagnon Jr. , and Thomas S. Martin , for petitioners. Dennis M. Kelly , Michael Cooper , and Jennifer Auchterlonie , for respondent.
Filed: Jul. 22, 2010
Latest Update: Nov. 21, 2020
Summary: ANSCHUTZ COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT PHILIP F. AND NANCY P. ANSCHUTZ, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket Nos. 18942–07, 19083–07. Filed July 22, 2010. P–PA, an individual, owned P–AC, an S corporation. TAC is a wholly owned qualified subch. S subsidiary of P–AC, and its items of income and gain are reported on P–AC’s Federal tax return. P–PA used TAC as an investment vehicle. TAC held the stock of companies that P–PA decided
Summary: ANSCHUTZ COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT PHILIP F. AND NANCY P. ANSCHUTZ, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket Nos. 18942–07, 19083–07. Filed July 22, 2010. P–PA, an individual, owned P–AC, an S corporation. TAC is a wholly owned qualified subch. S subsidiary of P–AC, and its items of income and gain are reported on P–AC’s Federal tax return. P–PA used TAC as an investment vehicle. TAC held the stock of companies that P–PA decided ..
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ANSCHUTZ COMPANY, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
PHILIP F. AND NANCY P. ANSCHUTZ, PETITIONERS
v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket Nos. 18942–07, 19083–07. Filed July 22, 2010.
P–PA, an individual, owned P–AC, an S corporation. TAC
is a wholly owned qualified subch. S subsidiary of P–AC, and
its items of income and gain are reported on P–AC’s Federal
tax return. P–PA used TAC as an investment vehicle. TAC
held the stock of companies that P–PA decided to invest in.
TAC entered into a master stock purchase agreement (MSPA)
for the sale of some of those corporate stocks in 2000 and
2001 to DLJ, an investment bank. The MSPA consisted of for-
ward contracts and share-lending agreements. The forward
contracts were prepaid in cash and would be settled with vari-
able numbers of shares of stock. The share-lending agree-
ments called for TAC to lend the shares of stock subject to the
forward contracts to DLJ. P–PA and P–AC treated the MSPA
as an open transaction and did not report any gain or loss on
the transfers of stock. R determined that the MSPA was a
sale of stock and that P–AC was liable for built-in gains tax
pursuant to sec. 1374, I.R.C., as a result of TAC’s income and
gain being reported on P–AC’s return. R also determined that
there were deficiencies in the personal income tax of P–PA,
the sole shareholder of P–AC, as a result of adjustments
including in his income a distributive share of the built-in
gain. Under sec. 1058, I.R.C., no gain or loss is recognized by
a taxpayer who transfers securities pursuant to an agreement
that meets the requirements of sec. 1058(b), I.R.C. Sec. 1259,
I.R.C., provides for constructive sale treatment if a taxpayer
enters into a transaction listed in sec. 1259(c)(1), I.R.C. Held:
The MSPA constituted a sale and TAC and P–AC must recog-
nize gain to the extent of the upfront cash payments received
in 2000 and 2001; the MSPA called for the lending of shares
but did not meet the requirements of sec. 1058(b), I.R.C.,
because it limited TAC’s risk of loss. Held, further, TAC did
not engage in constructive sales of stock in 2000 and 2001
pursuant to sec. 1259, I.R.C.
Robert A. Rudnick, Jonathan R. DeFosse, Richard J.
Gagnon, Jr., and Thomas S. Martin, for petitioners.
Dennis M. Kelly, Michael Cooper, and Jennifer
Auchterlonie, for respondent.
78
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(78) ANSCHUTZ CO. v. COMMISSIONER 79
GOEKE, Judge: This deficiency case turns on the treatment
of stock transactions entered into by the Anschutz Corp.
(TAC), a qualified subchapter S subsidiary of the Anschutz
Co., during 2000 and 2001. TAC entered into a master stock
purchase agreement (MSPA) to sell shares of stock to an
investment bank. The MSPA also called for TAC to lend those
same shares to the bank. The issue is whether this sale
agreement with concurrent share lending requires TAC, and
its parent, Anschutz Co., to recognize built-in gain upon
entering into the transaction. For the reasons stated herein,
we conclude that TAC and Anschutz Co. must recognize gain
to the extent of the upfront cash payments received in 2000
and 2001 exceed TAC’s basis in the stock.
FINDINGS OF FACT
1. General Background
Some of the facts have been stipulated, and the stipula-
tions of fact and the attached the exhibits are incorporated
herein by this reference.
Philip F. Anschutz (Mr. Anschutz) resided in Colorado at
the time he filed his petition. 1 Mr. Anschutz was the sole
shareholder of Anschutz Co. and is a calendar year taxpayer.
Anschutz Co. was incorporated in Delaware on July 25, 1991.
At the time it filed its petition, Anschutz Co.’s principal place
of business was Denver, Colorado. Anschutz Co. elected,
effective August 1, 1999, to be treated as an S corporation
under section 1362. 2
TAC was incorporated in Kansas on December 17, 1959,
and its principal place of business was in Denver, Colorado.
At all times during 2000 and 2001 Anschutz Co. owned all
of the outstanding stock of TAC.
Anschutz Co. elected to treat TAC as a qualified subchapter
S subsidiary under section 1361(b)(3)(B)(ii). As a result, all
assets, liabilities, income, deductions, and credits of TAC were
treated as those of Anschutz Co. on the latter’s Federal
income tax returns for 2000 and 2001.
1 Nancy P. Anschutz is a party because she and Mr. Anschutz filed joint Federal income tax
returns.
2 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect
for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Proce-
dure.
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80 135 UNITED STATES TAX COURT REPORTS (78)
The stock transactions at issue were entered into by TAC.
We refer to Mr. Anschutz and Anschutz Co. collectively as
petitioners.
Respondent determined that TAC’s stock transaction should
have been treated as a closed sale. Because TAC is a qualified
subchapter S subsidiary, its income would be reported on
Anschutz Co.’s tax return. As a result, respondent deter-
mined that Anschutz Co. was liable for deficiencies in built-
in gains tax under section 1374 of $49,724,005 and
$63,856,385 for 2000 and 2001, respectively. Because
Anschutz Co. is an S corporation and thus a flow-through
entity, these determinations caused adjustments to Mr.
Anschutz’s distributive share of Anschutz Co.’s income and
gain. As a result of these adjustments, respondent deter-
mined correlative deficiencies of $12,081,726 and $17,941,239
in Mr. Anschutz’s income tax for 2000 and 2001, respectively.
2. Background of the Transactions at Issue
Beginning in the 1960s, Mr. Anschutz invested in and
operated companies engaged in oil exploration and devel-
oping natural resources. During the past two decades Mr.
Anschutz invested in and operated railroad companies.
Mr. Anschutz’s decision to invest in a particular company
typically left him holding large blocks of its stock. Mr.
Anschutz used TAC as an investment vehicle to hold these
stocks.
Over the past decade Mr. Anschutz began investing in real
estate and entertainment companies. These activities
included ownership of the Staples Center in Los Angeles,
California, the Los Angeles Kings of the National Hockey
League, and the Los Angeles Galaxy of Major League Soccer.
In the late 1990s and early 2000s Mr. Anschutz needed
substantial amounts of cash to fund the acquisition, develop-
ment, and expansion of these new business ventures.
In the course of researching various financing vehicles to
fund its expanding real estate and entertainment enter-
prises, Mr. Anschutz and executives at Anschutz Co. con-
sulted with Donaldson, Lufkin & Jenrette Securities Corp.
(DLJ). 3 Mr. Anschutz and Anschutz Co. decided to raise funds
3 The principal party to the stock transactions with TAC was DLJ Cayman Islands, LDC. DLJ
Cayman Islands and Donaldson, Lufkin & Jenrette Securities Corp. were subsidiaries of Donald-
son, Lufkin & Jenrette, a U.S. investment bank. On Nov. 3, 2000, DLJ was acquired by Credit
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(78) ANSCHUTZ CO. v. COMMISSIONER 81
by causing TAC to enter into transactions with DLJ involving
the appreciated stock owned by TAC. Mr. Anschutz believed
that these transactions would allow TAC to receive cash,
using the appreciated stock as collateral, without having
caused a sale for Federal income tax purposes.
TAC entered into long-term sale and lending agreements
with regard to the stock at issue. The sale agreements were
memorialized by a master stock purchase agreement (MSPA)
and various accompanying documents but were referred to by
petitioners as ‘‘Prepaid Variable Forward Contracts’’ (PVFCs).
These PVFCs were accompanied by share-lending agreements
(SLAs) with respect to the shares subject to the PVFCs.
TAC and DLJ negotiated the structure, basic provisions, and
terms of all of the memorializing documents for the PVFCs
and the SLAs used in implementing the stock transactions
over the course of a year. The parties disagree whether the
PVFCs should be viewed separately from the SLAs or as part
of an integrated transaction.
3. The Transactions
a. PVFCs
A forward contract is an executory contract calling for the
delivery of property at a future date in exchange for a pay-
ment at that time. A PVFC is a variation of a standard for-
ward contract. In a typical PVFC, a securities owner (the
forward seller) holding an appreciated equity position enters
into a forward contract to sell a variable number of shares
of that equity position. The purchaser prepays its obligation
under the PVFC to purchase a variable number of shares on
a future date. At the maturity date of the contract, the for-
ward seller will settle the contract by delivering either: (1)
Shares of stock that had been pledged as collateral at incep-
tion of the contract; (2) identical shares of the stock; 4 or (3)
cash. Typically the number of shares or the amount of cash
to be delivered at maturity is determined at or near the con-
Suisse First Boston, Inc. (CSFB). This acquisition did not materially affect the terms of the
stock transactions. We will refer to Donaldson, Lufkin & Jenrette, its subsidiaries, and CSFB
as DLJ for simplicity.
4 ‘‘Identical’’ in this context does not mean the exact shares pledged at inception, but shares
of stock of the same corporation and class as those pledged at inception. This allows the seller
to retain the original shares but acquire additional shares in the open market at or around the
contract’s maturity and deliver those shares instead.
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82 135 UNITED STATES TAX COURT REPORTS (78)
tract maturity date according to the market price of the stock
at issue.
Consider a taxpayer holding 100 shares of Corporation X
stock, trading at $10 per share. The taxpayer enters into a
PVFC to deliver a number of shares in 1 year and receives a
$1,000 upfront cash payment. If the stock is trading at $10
or below, the taxpayer must deliver all 100 shares. If the
stock is trading at $20, the taxpayer must deliver 50 shares
or $1,000 cash.
b. Share-Lending Agreements
Share-lending agreements are often entered into by equity
holders who have taken a long position with respect to a
stock and plan on holding it for an extended period. The
equity owner can agree to lend the stock to a counterparty,
who can then use the borrowed shares to increase market
liquidity and facilitate stock sales. For example, the equity
owner can lend shares to an investment bank, which could
then use the lent shares to execute short sales on behalf of
its clients.
The borrower will normally pledge cash collateral, and the
lender will derive a profit lending the shares by retaining a
portion of the interest earned by this cash collateral. At the
end of the lending period, the counterparty will return the
borrowed shares to the equity owner/lender.
4. TAC’s Transactions
a. Transaction Terms
Mr. Anschutz caused TAC to enter into the MSPA. Both the
PVFCs and the SLAs were governed by the same transaction
documents. DLJ was the counterparty, and Wilmington Trust
Co. (WTC) served as the collateral agent.
The PVFCs required DLJ to make an upfront payment to
TAC in exchange for a promise by TAC to deliver a variable
number of shares to DLJ 10 years in the future. TAC and DLJ
negotiated two issues: (1) The amount of DLJ’s upfront pay-
ment in relation to the fair market value of the shares; and
(2) the amount of appreciation TAC would be entitled to
retain over the term of the PVFCs.
TAC and DLJ decided that DLJ would make an upfront pay-
ment equal to 75 percent of the fair market value of the
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(78) ANSCHUTZ CO. v. COMMISSIONER 83
shares subject to the PVFCs. The parties also agreed that
there would be a ceiling on TAC’s entitlement to any appre-
ciation in the stock over the term of the PVFC. If the fair
market value of the stock at issue in the PVFC were to
increase over the term of the contract, TAC was entitled to
retain the first 50 percent of this appreciation. Any addi-
tional appreciation above the first 50 percent would accrue to
DLJ.
The MSPA also required TAC to pledge collateral in
exchange for the upfront cash payment under the PVFC and
required TAC and DLJ to execute pledge agreements for each
transaction schedule. TAC pledged the shares of stock at issue
in the PVFCs as collateral for the upfront payment and to
guarantee TAC’s performance under the PVFC. The pledged
shares were delivered to WTC as trustee. The pledge agree-
ments further required WTC to enter into SLAs with DLJ. WTC
held title to the stock pursuant to the pledge agreements and
acted as TAC’s agent in entering into the SLAs. TAC received
a prepaid lending fee calculated by reference to the value of
the lent shares (discussed in detail below); the fee was gen-
erally equal to 5 percent of the fair market value of the
shares lent under the SLAs.
The diagram below illustrates the general outline of the
transaction.
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84 135 UNITED STATES TAX COURT REPORTS (78)
b. Transaction Documents
The stock transactions were memorialized in the MSPA. The
MSPA required the execution of a transaction schedule for
each stock at issue. TAC and DLJ executed three transaction
schedules.
The MSPA also required that for each transaction schedule
the parties execute a pledge agreement establishing collat-
eral accounts with WTC. Pledge agreements were executed,
corresponding to the three transaction schedules. Each
pledge agreement required WTC as collateral agent and DLJ
to execute an SLA that would allow WTC to lend shares of
stock to DLJ. Three SLAs were executed corresponding to the
three pledge agreements.
Although each transaction schedule governed a certain
number of shares of stock, these base numbers of shares
were further divided into smaller segments for each PVFC,
called ‘‘tranches’’. A tranche is a number of related securities
that are part of a larger securities transaction. The MSPA
required that each PVFC and each instance of share lending
be memorialized by a pricing schedule and notice of bor-
223501.eps
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(78) ANSCHUTZ CO. v. COMMISSIONER 85
rowing, respectively. Each pricing schedule and notice
of borrowing caused the establishment of a tranche.
There were a total of 10 pricing schedules and notices of
borrowing executed pursuant to the 3 transaction schedules
and 3 SLAs. Transaction 1 was made up of six tranches;
transaction 2 was made up of three tranches; and transaction
3 was made up of one tranche.
The amounts of the upfront payments and the numbers of
shares to be delivered were decided by reference to formulas
and definitions contained in the MSPA, discussed in more
detail below.
i. MSPA
The MSPA between TAC as seller and DLJ as buyer was
entered into on May 9, 2000. The MSPA provided the basic
framework for the stock transactions and defined certain
terms and requirements that applied to all of the stock trans-
actions. The MSPA also included terms that would apply dif-
ferently depending on the specific transaction schedule or
pricing schedule at issue. These terms would be defined in
greater detail in the transaction schedule or pricing schedule
as each was executed.
ii. Transaction Schedules
As stated previously, TAC and DLJ executed three trans-
action schedules pursuant to the MSPA. Each corresponded to
a different corporate security.
Each transaction schedule identified the issuer, the type of
security at issue, and the maximum number of shares that
would be subject to the transaction. The transaction schedule
further defined certain terms, initially defined and contained
in the MSPA, as they would apply to all of the shares gov-
erned by that specific transaction schedule. These terms
included the effective date and maturity dates of the trans-
action, the ‘‘Minimum Average Hedge Price’’, the ‘‘Hedging
Termination Date’’, the ‘‘Threshold Appreciation Price Multi-
plier’’, the ‘‘Purchase Price Multiplier’’, and the ‘‘Maximum
Borrow Cost Spread Trigger’’.
The effective date of a transaction schedule was the date
on which TAC and DLJ executed the transaction schedule.
Each transaction schedule had a range of maturity dates
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86 135 UNITED STATES TAX COURT REPORTS (78)
beginning on the 10th and ending on the 11th anniversary
of the effective date of the transaction.
Each stock transaction between TAC and DLJ was preceded
by DLJ’s executing short sales of that stock in the open
market. These short sales had to be executed between the
effective date of a transaction schedule and the hedging
termination date. The hedging termination date was the final
date for DLJ to execute short sales to determine the ‘‘average
hedge price’’.
iii. Pricing Schedules
Each individual stock transfer made pursuant to a trans-
action schedule was memorialized by a pricing schedule. The
execution of a pricing schedule established a tranche for that
transaction. 5 The sum of the base shares in each tranche
equaled the number of shares subject to the transaction
schedule.
These terms included: (1) The average hedge price; (2) the
downside protection threshold price; (3) the threshold appre-
ciation price; (4) the purchase price; (5) the payment
schedule (within 5 days of execution of the pricing schedule);
(6) the tranche notice date; and (7) the maturity dates.
The information in each pricing schedule was generated by
DLJ’s executing short sales of the stock that would be in the
tranche. These short sales in effect hedged DLJ’s risk on the
forward contract, because the short sales protected DLJ from
a decrease in stock value during the term of the PVFC.
The average hedge price was the average price DLJ
received on its short sales. The average hedge price and the
downside protection threshold price were equal. The down-
side protection threshold price is so named because it rep-
resents the lowest value that TAC could receive for its shares
on the settlement date. This in effect locked in a value per
share that TAC would get credit for when the PVFCs were set-
tled.
TAC’s entitlement to the first 50 percent of any apprecia-
tion of the shares was represented in the transaction
5 Each individual tranche had both a transaction number and a tranche number. Thus, a
tranche could be identified as T1T1, where the first number was the number of the transaction
and the second was the number of the tranche within that transaction. Thus, the six tranches
under transaction 1 can be represented as T1T1 through T1T6, the three tranches under trans-
action 2 as T2T1 through T2T3, and the tranche under transaction 3 as T3T1.
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(78) ANSCHUTZ CO. v. COMMISSIONER 87
schedule by the threshold appreciation price multiplier and
in the pricing schedule by the initial threshold appreciation
price multiplier of 1.50. The initial threshold appreci-
ation price multiplier was applied to the average hedge price
to calculate the threshold appreciation price. The threshold
appreciation price was the maximum amount per share that
TAC would retain.
In sum, TAC was entitled to retain any stock value above
the downside protection threshold price and below or equal
to the threshold appreciation price. Any value per share
above the threshold appreciation price accrued to DLJ.
The short sales and accompanying information were used
to determine the upfront payment TAC was entitled to receive
under each tranche. This upfront payment was equal to 75
percent and was represented in the transaction schedule by
a purchase price multiplier of .75. The amount of the upfront
payment was calculated in each pricing schedule. The base
number of shares in a tranche was multiplied by the average
hedge price and the purchase price multiplier of .75. The
resulting amount was the upfront payment made to TAC
under the PVFCs.
iv. Pledge Agreements
The MSPA required TAC and DLJ to establish collateral
accounts to hold shares subject to the MSPA, the transaction
schedule, and the pricing schedule. TAC and DLJ entered into
three pledge agreements, each corresponding to one of the
three transaction schedules.
WTC served as collateral agent. Each pledge agreement pro-
vided for the establishment of collateral accounts with WTC,
delivery to WTC of the number of shares initially subject to
the applicable transaction and tranche, the creation of secu-
rity interests in the pledged shares, and release of these
pledged shares to WTC. The pledge agreement also dealt with
the treatment of income and distributions related to the
pledged shares.
v. SLAs
The MSPA and the pledge agreements required WTC to enter
into SLAs with DLJ that allowed DLJ to borrow from WTC the
shares pledged as collateral.
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88 135 UNITED STATES TAX COURT REPORTS (78)
Three SLAs were executed, corresponding to the three
transaction schedules and pledge agreements entered into
under the MSPA. Individual acts of borrowing were initiated
by DLJ. The separate SLAs, like the transaction schedules,
were divided into separate tranches. Each tranche was estab-
lished by the filing of a notice of borrowing with WTC.
The tranche establishment notice assigned a tranche
number and identified the number of shares subject to the
SLA tranche. Each notice of borrowing corresponded to a spe-
cific tranche established under one of the three transaction
schedules. Thus, for each pricing schedule tranche T1T1
through T3T1, there is a corresponding share-lending
tranche.
The SLAs further provided procedures for the transfer of
shares, periodic payments of dividends and distributions with
respect to the shares at issue, payment of fees, guaranties,
and the recall of shares lent under the agreement. The SLAs
provided that TAC could recall the pledged shares by noti-
fying WTC, which would then inform DLJ of the recall. Upon
receiving notice, DLJ would return the number of borrowed
shares subject to that specific recall to TAC’s collateral
accounts at WTC. If TAC recalled shares from DLJ, it would
have to return a pro rata portion of the prepaid lending fee
it received upon the initial share lending.
c. Acceleration Provisions
Each PVFC had a maturity date of 10 to 11 years after
execution. However, DLJ could, pursuant to the MSPA, accel-
erate the settlement date of a PVFC if certain events occurred.
If DLJ accelerated a transaction, TAC would have to deliver a
number of shares that would vary with the parties’ relative
economic positions at the time of acceleration.
DLJ could accelerate a PVFC only if certain events occurred,
including TAC’s filing for bankruptcy or a material change in
TAC’s economic position such that it was unclear whether TAC
would be able to satisfy its obligations under the PVFC.
Lastly, DLJ could accelerate the settlement of a PVFC if it was
unable to hedge its position with respect to the stock at issue
in the PVFC.
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(78) ANSCHUTZ CO. v. COMMISSIONER 89
d. Execution of PVFCs and SLAs
Each individual PVFC was executed according to the same
steps. DLJ, upon receiving notice that TAC wanted to execute
a PVFC, would borrow shares of the stock at issue 6 in the
pricing schedule from an unrelated third party and sell those
shares in the open market as part of a short sale. These
short sales would be used to generate the information in the
pricing schedule and to determine TAC’s upfront payment.
These short sales were executed between the execution date
of the pricing schedule and the hedging termination date,
and the results of the short sales were compiled in the
pricing schedule. The short sale proceeds were used to fund
the upfront payment made as part of the PVFC and left DLJ
with an obligation to close out the short sale by transferring
identical shares to the original third-party lender. The PVFCs
and the short sales worked to cancel out DLJ’s risk of loss on
the stock purchases. If the fair market value of stock subject
to the PVFCs dropped over the course of the contract, the
short sales would earn a profit; if the fair market value
increased, the PVFCs would earn a profit.
DLJ would not execute one short sale for the entire amount
of stock at issue in the pricing schedule. Instead, DLJ would
split the number of shares over a number of different short
sales as part of the process for establishing each tranche.
The various prices received on these short sales were then
averaged to determine the average hedge price for the
tranche.
The other terms of the various pricing schedules memori-
alizing each tranche under the MSPA were determined on the
basis of these initial short sales. As stated previously, the
average hedge price equaled the downside threshold protec-
tion price. The base number of shares was multiplied by the
average hedge price and the purchase price multiplier to
determine TAC’s upfront payment. The downside protection
threshold price was multiplied by the initial threshold appre-
ciation price multiplier to determine the maximum amount of
value per share that TAC would be entitled to keep if the
stock appreciated.
6 The corporate stocks at issue in the transactions are all widely traded and available, so the
borrowing of shares to execute a short sale was not difficult.
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90 135 UNITED STATES TAX COURT REPORTS (78)
The cash proceeds of the short sales were used to fund the
upfront payment of the PVFCs. Payment was made within 5
days of delivery of the pricing schedule to TAC.
5. TAC’s Three Transactions
a. Transaction 1
On May 9, 2000, TAC and DLJ executed a transaction
schedule pursuant to the MSPA for transaction 1. Transaction
1 implemented a stock transaction with respect to a max-
imum of 10 million shares of Union Pacific Resources Group,
Inc. (UPR) common stock.
The transaction schedule for transaction 1 provided an
effective date of May 9, 2000, and a range of maturity dates
from the 10th to the 11th anniversary of the effective date.
The transaction schedule further provided a hedging termi-
nation date of December 31, 2000, an initial threshold appre-
ciation price multiplier of 1.50, and a purchase price multi-
plier of .75. Although the MSPA allowed TAC to settle with
either cash or securities, the transaction schedule deleted the
cash settlement option.
On May 9, 2000, TAC, DLJ, and WTC entered into a pledge
agreement with respect to the stock subject to transaction 1.
As stated previously, transaction 1 was divided into six
tranches, corresponding to six pricing schedules. Three of the
six pricing schedules were for a total of 4 million shares of
UPR common stock. The other three were for a total of
2,217,903 shares of Anadarko Petroleum Corp. (APC) common
stock.
The pricing schedule for T1T1 was dated May 12, 2000,
and was for 1.5 million shares of UPR common stock. T1T1
had an average hedge price of $21.49. 7 TAC received an
upfront cash payment of $24,181,087 for T1T1. DLJ executed
a share-lending notice, establishing a borrowing tranche cor-
responding to T1T1. The borrowing tranche was for 1.5 mil-
lion shares of stock. DLJ actually borrowed 1,449,000. TAC
received a prepaid lending fee of $1,640,143 for these shares.
The pricing schedule for T1T2 was dated May 12, 2000,
and was for 1.5 million shares of UPR common stock. T1T2
had an average hedge price of $21.49. TAC received an
7 All prices are rounded to two decimal places.
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(78) ANSCHUTZ CO. v. COMMISSIONER 91
upfront cash payment of $24,181,087 for T1T2. DLJ executed
a share-lending notice, establishing a borrowing tranche cor-
responding to T1T2. The borrowing tranche was for 1.5 mil-
lion shares of stock. DLJ actually borrowed 1,449,000. TAC
received a prepaid lending fee of $1,640,143 for these shares.
The pricing schedule for T1T3 was dated June 9, 2000, and
was for 1 million shares of UPR common stock. T1T3 had an
average hedge price of $23.76. TAC received an upfront cash
payment of $17,818,725 for T1T3. DLJ executed a share-
lending notice, establishing a borrowing tranche cor-
responding to T1T3. The borrowing tranche was for 1 million
shares of stock. DLJ actually borrowed 1 million. TAC received
a prepaid lending fee of $1,131,914 for these shares.
On July 14, 2000, UPR merged with APC. As a result, the
4 million shares at issue in tranches T1T1 through T1T3
were converted to 1,820,000 shares of APC common stock. The
3,898,000 shares actually lent pursuant to lending tranches
established under T1T1 through T1T3 were converted to
1,773,590 shares of APC common stock. Further, tranches 4–
6, discussed below, dealt with shares of APC common stock,
not UPR common stock.
The pricing schedule for T1T4 was dated August 8, 2000,
and was for 951,117 shares of APC common stock. T1T4 had
an average hedge price of $49.85. TAC received an upfront
cash payment of $35,559,530 for T1T4. DLJ executed a share-
lending notice, establishing a borrowing tranche cor-
responding to T1T4. The borrowing tranche was for 951,117
shares of stock. DLJ actually borrowed 747,182. TAC received
a prepaid lending fee of $2,370,635 for these shares.
The pricing schedule for T1T5 was dated August 10, 2000,
and was for 633,393 shares of APC common stock. T1T5 had
an average hedge price of $52.49. TAC received an upfront
cash payment of $24,937,189 for T1T5. DLJ executed a share-
lending notice, establishing a borrowing tranche cor-
responding to T1T5. The borrowing tranche was for 633,393
shares of stock. DLJ actually borrowed 523,984. TAC received
a prepaid lending fee of $1,662,479 for these shares.
The pricing schedule for T1T6 was dated August 10, 2000,
and was for 633,393 shares of APC common stock. T1T6 had
an average hedge price of $52.49. TAC received an upfront
cash payment of $24,937,189 for T1T6. DLJ executed a share-
lending notice, establishing a borrowing tranche cor-
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92 135 UNITED STATES TAX COURT REPORTS (78)
responding to T1T6. The borrowing tranche was for 633,393
shares of stock. DLJ actually borrowed 523,984. TAC received
a prepaid lending fee of $1,662,479 for these shares.
b. Transaction 2
On December 5, 2000, TAC and DLJ executed a transaction
schedule for transaction 2 for 2 million shares of Union
Pacific Corp. (UPC) common stock. It was later amended to
allow for a maximum of 3 million shares of UPC common
stock. The transaction schedule for transaction 2 stated an
effective date of December 5, 2000, a range of maturity dates,
a hedging termination date of January 30, 2001, an initial
threshold appreciation price multiplier of 1.50, and a pur-
chase price multiplier of .75. The transaction schedule fur-
ther stated that transaction 2 could not be settled in cash.
On December 5, 2000, TAC and DLJ executed a pledge
agreement for the shares subject to transaction 2. On Feb-
ruary 9, 2001, DLJ and WTC, as agent for TAC, entered into
an SLA with respect to the shares at issue in transaction 2.
Transaction 2 was executed through three pricing sched-
ules. The pricing schedule for T2T1 was dated January 4,
2001, and was for 750,000 shares of UPC common stock. T2T1
had an average hedge price of $50.56. TAC received an
upfront cash payment of $28,440,562 for T2T1. DLJ executed
a share-lending notice, establishing a borrowing tranche cor-
responding to T2T1. The borrowing tranche was for 750,000
shares of stock. DLJ actually borrowed 750,000. TAC received
a prepaid lending fee of $1,896,037 for these shares.
The pricing schedule for T2T2 was dated January 4, 2001,
and was for 750,000 shares of UPC common stock. T2T2 had
an average hedge price of $51.09. TAC received an upfront
cash payment of $28,742,681 for T2T2. DLJ executed a share-
lending notice, establishing a borrowing tranche cor-
responding to T2T2. The borrowing tranche was for 750,000
shares of stock. DLJ actually borrowed 750,000. TAC received
a prepaid lending fee of $1,916,178 for these shares.
The pricing schedule for T2T3 was dated January 16, 2001,
and was for 1.5 million shares of UPC common stock. T2T3
had an average hedge price of $51.61. TAC received an
upfront cash payment of $58,061,250 for T2T3. DLJ executed
a share-lending notice, establishing a borrowing tranche cor-
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(78) ANSCHUTZ CO. v. COMMISSIONER 93
responding to T2T3. The borrowing tranche was for 1.5 mil-
lion shares of stock. DLJ actually borrowed 1.5 million shares.
TAC received a prepaid lending fee of $3,870,750 for these
shares.
c. Transaction 3
On April 5, 2001, TAC and DLJ executed a transaction
schedule for transaction 3 to execute a stock transaction with
respect to a maximum of 2 million shares of UPC common
stock.
On April 5, 2001, TAC, DLJ, and WTC entered into a pledge
agreement with respect to the shares subject to transaction
3. WTC, as agent for TAC, and DLJ entered into an SLA with
respect to the shares of transaction 3.
Transaction 3 consisted of only one pricing schedule for all
2 million shares at issue. The pricing schedule for T3T1 was
dated April 25, 2001, and had an average hedge price per
share of $56.07. TAC received an upfront cash payment of
$84,109,350 for T3T1. DLJ executed a share-lending notice,
establishing a borrowing tranche corresponding to T3T1. The
borrowing tranche was for 2 million shares of stock. DLJ actu-
ally borrowed 2 million shares. TAC received a prepaid
lending fee of $5,607,290 for these shares.
d. Total Payments Received
received upfront payments under the PVFCs totaling
TAC
$350,968,652 and $23,398,050 in prepaid lending fees under
the SLAs.
6. Later Years
a. Amendments to Documentation
The parties to the MSPA have continued to monitor the
transactions with regard to their business goals. DLJ, for
instance, has continued to adjust its hedges under the PVFCs.
The MSPA, pledge agreements, and SLAs were amended on
June 13, 2003, to reflect DLJ’s being acquired by CSFB and to
introduce the concept of ‘‘share reduction cash payments’’.
This amendment dealt with cash dividends or dividend
equivalent payments received by TAC with respect to the
stocks subject to the transactions at issue. The share reduc-
tion program gave TAC two options: (1) It would pay DLJ cash
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94 135 UNITED STATES TAX COURT REPORTS (78)
equal to any cash dividends or dividend equivalent pay-
ments; or (2) use the payments to acquire additional shares
of the particular stock at issue and pledge those additional
shares as collateral under the pledge agreements.
b. Share Recalls
In 2006, during respondent’s audit of petitioners, TAC
recalled a portion of the shares pursuant to its authority
under the SLAs. The decision to recall shares was an attempt
by petitioners to show respondent that the SLAs were valid.
Shortly before trial, petitioners recalled the remaining
shares lent under the SLAs. The shares of stock were recalled
to again show the legitimacy of the SLAs and TAC’s right of
recall. In both instances, TAC paid DLJ a pro rata portion of
the prepaid lending fee, as required by the SLAs.
7. Settling the PVFCs at Maturity
The PVFCs will be settled at their maturity dates when it
will be determined how many shares, or the cash equivalent,
must be delivered to DLJ (the settlement shares). The MSPA
sets out the process for calculating the settlement shares or
amount of cash that TAC must deliver.
The number of settlement shares required to be delivered
at a PVFC’s maturity date is determined by multiplying the
base number of shares in each tranche by the average settle-
ment ratio. The average settlement ratio will be calculated
before the maturity date and is determined by reference to
the adjusted settlement price.
The adjusted settlement price will be the New York Stock
Exchange trading value multiplied by the distribution adjust-
ment factor. The distribution adjustment factor is applied in
order to account for any distributions made with respect to
the stock at issue at or near the maturity date.
Once the adjusted settlement price is calculated, it will be
compared to the downside protection threshold price and the
threshold appreciation price, which, as discussed above, pro-
vided the range of values in which TAC would keep some
appreciation of the stock.
If the adjusted settlement price was less than or equal to
the downside protection threshold price, the average settle-
ment ratio will be 1. Applying a ratio of 1 to the base number
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(78) ANSCHUTZ CO. v. COMMISSIONER 95
of shares means that TAC will be required to deliver at most
the base number of shares and will not have to return any
additional value to DLJ. In effect, if the adjusted settlement
price was less than or equal to the downside protection
threshold price, then TAC just had to deliver the number of
shares at issue in the tranche. No matter how far the value
of the stock fell, TAC would not have to return any portion
of the upfront cash payment. Thus, the downside threshold
protection price locked in a minimum value that TAC was
guaranteed to receive credit for.
If the adjusted settlement price was between the downside
protection threshold price and the threshold appreciation
price, the average settlement ratio was a ratio that when
applied to the base number of shares in each tranche would
reduce TAC’s ultimate delivery obligation by a certain number
of shares. The shares TAC was entitled to keep would be
equal in value to any appreciation of the stock that TAC was
entitled to retain.
If the adjusted settlement price was greater than the
threshold appreciation price, the average settlement ratio
was a fraction that when applied to the base number of
shares in each tranche would allow TAC to keep the first 50
percent of appreciation and allow any excess appreciation to
go to DLJ as previously explained.
Once the average settlement ratio was determined, it was
multiplied by the base number of shares in each tranche. TAC
was then required to deliver that number of shares to DLJ to
satisfy its obligation under the PVFCs. The shares used to
settle the PVFCs could be those in TAC’s collateral accounts at
WTC (to which the lent shares were returned) or similar
shares. Alternatively, cash could be used to make the settle-
ment payment.
8. Procedural Posture
Mr. Anschutz and Anschutz Co. treated the PVFC portions
of the MSPA as open transactions and not as closed sales of
stock. Neither reported gain or loss from the stock trans-
actions on his or its Federal income tax returns.
TAC had bases during 2000 of $0.87 and $1.91, respectively,
in the UPR and APC shares subject to transaction 1. TAC had
a basis of $1.51 during 2001 in the UPC shares subject to
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96 135 UNITED STATES TAX COURT REPORTS (78)
transactions 2 and 3. On August 22, 2007, respondent issued
a notice of deficiency to Anschutz Co. for tax years 2000 and
2001. The notice of deficiency determined that TAC had
entered into closed sales of stock, had received 100 percent
of the fair market value for the stock, and thus was liable
for section 1374 built-in gains tax in 2000 and 2001 to the
extent the value received exceeded Anschutz Co.’s basis in
the stock. The built-in gains tax was calculated by reference
to the shares of stock that were pledged to WTC, then bor-
rowed by DLJ. The deficiencies do not include shares pledged
as collateral by TAC but not borrowed by DLJ.
Because S corporations are flow-through entities, the built-
in gain respondent determined on Anschutz Co.’s returns,
less the tax on that gain, then flowed to Mr. Anschutz. On
August 22, 2007, respondent issued a notice of deficiency to
Mr. Anschutz for 2000 and 2001. The notice of deficiency
determined deficiencies in Mr. Anschutz’s income tax with
respect to the adjustments to Anschutz Co.’s tax liabilities.
On August 21, 2007, Anschutz Co. filed its petition in
docket No. 18942–07. On August 23, 2007, Mr. Anschutz
filed his petition in docket No. 19083–07. A trial in these
consolidated cases was held on February 9–10, 2009, in
Washington, D.C.
Respondent submitted an expert report in support of his
position that closed sales of stock occurred in 2000 and 2001.
Petitioners submitted a report in rebuttal.
OPINION
The Commissioner’s determinations in the notice of defi-
ciency are presumed correct, and the taxpayer bears the bur-
den of proving, by a preponderance of the evidence, that
these determinations are incorrect. Rule 142(a)(1); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Under section 7491(a),
if the taxpayer produces credible evidence with respect to
any factual issue relevant to ascertaining the taxpayer’s
liability and meets other requirements, the burden of proof
shifts from the taxpayer to the Commissioner as to that fac-
tual issue. Neither party addressed the burden of proof.
Because we decide this case on the basis of the preponder-
ance of the evidence, we need not decide upon which party
the burden rests.
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(78) ANSCHUTZ CO. v. COMMISSIONER 97
Section 61(a)(3) provides that gross income includes gains
derived from dealings in property. Section 1001(a) provides
that the gain from the sale or other disposition of property
shall be the excess of the amount realized over the adjusted
basis, as calculated by reference to section 1011.
The stocks at issue were owned by TAC, a qualified sub-
chapter S subsidiary. Normally, an S corporation is not
subject to Federal income taxes. Sec. 1363(a). Like a partner-
ship, it is a conduit through which income and loss flow to
its shareholders. Normally, if an S corporation disposes of
stock, any gain on the disposition will flow to the corpora-
tion’s owners.
Anschutz Co. elected S corporation status on August 1,
1999. Anschutz Co. also elected to treat TAC as a qualified
subchapter S subsidiary under section 1361(b)(3)(B). As a
result, all income, deductions, and credits of TAC were includ-
able in Anschutz Co.’s Federal income tax returns for 2000
and 2001.
Section 1374(a) provides an exception to the general rule
of flow-through treatment. Section 1374(a) imposes a cor-
porate-level tax on the net recognized built-in gain of an S
corporation that has converted from C corporation to S cor-
poration status. The tax generally applies to built-in gain
recognized during the 10-year period beginning with the first
taxable year for which the corporation is an S corporation.
See sec. 1374(d)(7). Built-in gain is measured by the appre-
ciation of any asset over its adjusted basis at the time the
corporation converts from C corporation to S corporation
status. N.Y. Football Giants, Inc. v. Commissioner, 117 T.C.
152, 155 (2001); see sec. 1374(d)(3). An S corporation gen-
erally is not liable for the built-in gains tax on the disposi-
tion of any asset if it establishes that it did not own the asset
on the day it converted from C to S status, or that the fair
market value of the asset was less than its adjusted basis on
the first day of the first taxable year for which it was an S
corporation. N.Y. Football Giants, Inc. v. Commissioner,
supra at 155.
TAC owned the stock at issue and entered into the stock
transactions with DLJ. Because the fair market value of the
stock exceeded its adjusted basis on the first day TAC became
a qualified subchapter S subsidiary, the built-in gains tax
will be triggered if the stock transactions are treated as com-
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98 135 UNITED STATES TAX COURT REPORTS (78)
pleted sales for Federal income tax purposes. Because TAC is
treated as a qualifying subchapter S subsidiary, its assets,
liabilities, and items of income and deductions are attributed
to its parent, Anschutz Co. Petitioners concede that if we find
the PVFCs and the SLAs constitute sales for Federal tax pur-
poses, then the built-in gains tax will apply.
Because Anschutz Co. is an S corporation, Mr. Anschutz
would normally have to report Anschutz Co.’s income on his
own return. Section 1366(f)(2) provides that any section 1374
tax paid by an S corporation is treated as a loss sustained
by that corporation. N.Y. Football Giants, Inc. v. Commis-
sioner, supra at 157 & n.5. If we find that Anschutz Co. was
required to report gain upon TAC’s entering into the MSPA,
Anschutz Co. will be required to pay built-in gains tax. This
tax will then be treated as a loss for Anschutz Co. See sec.
1366(f)(2). Treating the stock transactions as closed sales will
have an impact on Mr. Anschutz’s distributive share of
Anschutz Co.’s income and loss, consisting of an increase in
his income to the extent the gain from sale treatment
exceeds the built-in gains tax. Accordingly, respondent deter-
mined deficiencies in Mr. Anschutz’s income tax as a result
of determining that built-in gain from the stock transactions
was attributable to Anschutz Co.
Respondent puts forth two arguments in support of his
determinations: (1) That the MSPA triggered a sale under sec-
tion 1001; and (2) that there was a constructive sale under
either section 1259(c)(1)(A) or (C). We will address each in
turn.
I. Section 1001 Sale of Stock
A. Respondent’s Argument
Respondent argues that TAC’s transfers of stock during
2000 and 2001 should be treated as closed transactions for
Federal tax purposes. His argument comprises three parts:
(1) TAC transferred legal title and the benefits and burdens
of ownership; (2) the SLAs are not true lending arrangements,
but a way for TAC to deliver the shares of stock to DLJ; and
(3) TAC transferred the shares to DLJ in exchange for an
ascertainable amount of consideration equal to 100 percent of
the fair market value of the stock.
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(78) ANSCHUTZ CO. v. COMMISSIONER 99
To determine whether an agreement transfers substan-
tially all of the incidents of ownership, we look at all of the
facts and circumstances surrounding the transfer, relying on
objective evidence of the parties’ intentions provided by their
overt acts. Ragghianti v. Commissioner, 71 T.C. 346, 349–350
(1978); Pac. Coast Music Jobbers, Inc. v. Commissioner, 55
T.C. 866, 874 (1971), affd.
457 F.2d 1165 (5th Cir. 1972);
Dunne v. Commissioner, T.C. Memo. 2008–63.
In Dunne v. Commissioner, supra, we compiled the fol-
lowing nonexclusive factors that are evaluated in deter-
mining whether a transaction transfers the accoutrements of
stock ownership:
(1) Whether the taxpayer has legal title or a contractual
right to obtain legal title in the future;
(2) whether the taxpayer has the right to receive consider-
ation from a transferee of the stock;
(3) whether the taxpayer enjoys the economic benefits and
burdens of being a shareholder;
(4) whether the taxpayer has the power to control the com-
pany;
(5) whether the taxpayer has the right to attend share-
holder meetings;
(6) whether the taxpayer has the ability to vote the shares;
(7) whether the stock certificates are in the taxpayer’s
possession or are being held in escrow for the benefit of that
taxpayer;
(8) whether the corporation lists the taxpayer as a share-
holder on its tax return;
(9) whether the taxpayer lists himself as a shareholder on
his individual tax return;
(10) whether the taxpayer has been compensated for the
amount of income taxes due by reason of shareholder status;
(11) whether the taxpayer has access to the corporate
books; and
(12) whether the taxpayer shows by his overt acts that he
believes he is the owner of the stock.
No one factor is necessarily determinative, and the weight of
a factor in each case depends on the surrounding facts and
circumstances. Id.
Respondent argues that in determining whether a sale
occurred, we must look at all relevant documents to deter-
mine whether TAC has transferred the indicia of ownership.
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100 135 UNITED STATES TAX COURT REPORTS (78)
Respondent contends that this includes the MSPA, all trans-
action schedules, all pledge agreements, and all SLAs.
Respondent argues that all of these documents must be ana-
lyzed because they are interrelated and the parties treated
the PVFCs and the SLAs as one transaction.
1. Did TAC Transfer Legal Title and the Benefits and Bur-
dens of Ownership?
Respondent points out that TAC transferred legal title to
the stock but concedes that transfer of title without transfer
of the benefits and burdens of the stock might not qualify as
a sale for Federal tax purposes. Respondent further argues
that TAC transferred the benefits and burdens of ownership
upon entering into the MSPA, including: (1) The right to vote
the pledged shares as a shareholder; (2) control and the right
to dispose of the pledged shares; and (3) substantially all of
TAC’s economic rights in the pledged shares. TAC received
substantial upfront cash payments for the shares.
2. Were the SLAs Legitimate Share-Lending Agreements?
Although respondent next argues that TAC transferred a
number of indicia of ownership to DLJ, were we to give effect
to the SLAs according to their terms, TAC’s ability to recall
the shares would accordingly return those rights and indicia
of ownership to TAC. To that end, respondent argues that the
SLAs were not true share-lending agreements but merely a
means of delivering the shares to DLJ pursuant to stock
sales. If we agree with respondent that the SLAs were not
true share-lending agreements and the shares of stock could
not actually be recalled, it would support respondent’s argu-
ments that the benefits and burdens of stock ownership were
transferred to DLJ along with legal title to the pledged stock.
Respondent’s argument concerning the SLAs is based on his
contention that the SLAs do not conform with industry stand-
ards governing typical share-lending agreements. Respondent
contends that TAC’s SLAs lack the following attributes nor-
mally found in a share-lending agreement: (1) A pledge of
liquid collateral; (2) a securities lending fee payable by the
borrower; (3) a right exercisable by the lender to receive dis-
tributions payable on the securities; and (4) a right exer-
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(78) ANSCHUTZ CO. v. COMMISSIONER 101
cisable by the lender to demand return of the lent shares
without substantial conditions or restrictions.
3. TAC Received 100 Percent Value in 2000 and 2001
Respondent argues that TAC received 100 percent of the
fair market value of the pledged shares in 2000 and 2001,
not only the cash payments equal to 80 percent of the fair
market value of the stock at that time.
As discussed above, TAC is entitled to retain any stock
value above the downside protection threshold price and
below or equal to the threshold appreciation price.
Respondent argues that this right can be valued as an equity
option. Respondent also argues that TAC’s right to any divi-
dends can also be valued as an equity option. Respondent
relies on his expert report in calculating the fair market
values of these options.
Respondent contends that because the SLAs are not legiti-
mate, any additional value that TAC is entitled to keep at the
PVFC maturity dates is more properly viewed as a payment
from DLJ to TAC than as TAC’s retaining shares of stock. In
accordance with this view, respondent contends that TAC,
instead of being able to retain shares, was given equity
options that would pay out should the stock appreciate or
any dividends be paid out on the stocks.
Respondent’s valuation of this equity option and the divi-
dend option and DLJ’s fees for entering into the transactions
make up the difference between the 80 percent of the fair
market value of the shares received as cash and 100 percent
of the fair market value of the stock at the time TAC and DLJ
entered into the transaction.
Respondent contends that TAC received the 100 percent as
follows: (1) 75 percent of the fair market value as the upfront
cash payment under the pricing schedules; (2) 5 percent of
the fair market value as the prepaid lending fee; (3) an
equity option equal in value to the present value of any
appreciation in the pledged shares above the downside
protection threshold and not in excess of the threshold appre-
ciation price; (4) a dividend option equal in value to the
present value of any dividend rights over the term of the
PVFCs; and (5) the remainder as DLJ’s fees for entering into
and structuring the transaction.
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102 135 UNITED STATES TAX COURT REPORTS (78)
B. Petitioners’ Argument
Petitioners argue that TAC executed two separate trans-
actions—PVFCs and SLAs—and neither constitutes a current
sale for Federal tax purposes.
Petitioners argue that the PVFCs are not current sales
because the identity and quantity of stock being sold will not
be determinable until the PVFC maturity dates. Petitioners
contend that the taxpayer’s basis, the holding period, and the
number of securities to be sold cannot be known until the
future delivery date, and it is therefore impossible for the
parties to know how many shares will be sold and whether
TAC will ultimately realize a gain or loss on the transaction.
Petitioners rely heavily on Rev. Rul. 2003–7, 2003–1 C.B.
363, and argue that the PVFCs at issue are substantially
identical to those addressed in the revenue ruling. In Rev.
Rul. 2003–7, supra, the taxpayer entered into a forward con-
tract with an investment bank to deliver a variable number
of shares of stock, depending on the fair market value of the
stock on the delivery date.
The sale agreement required the taxpayer to pledge as
collateral the maximum number of shares that might have to
be delivered at maturity. Rev. Rul. 2003–7, supra, states that
the taxpayer informed his counterparty bank that he
intended to use the shares pledged as collateral to satisfy his
ultimate delivery obligation.
The taxpayer received an upfront payment in exchange for
his obligation to deliver stock at a later date and had the
unrestricted right to deliver the pledged shares, cash, or
identical shares to satisfy his delivery obligation. The rev-
enue ruling held that the taxpayer had not caused a sale
under section 1001.
Petitioners assert that any differences between the instant
case and the PVFCs in Rev. Rul. 2003–7, supra, are immate-
rial, including the fact that the transaction schedules for
transactions 1 and 2 deleted the cash settlement option. Peti-
tioners point to testimony by DLJ employees that TAC could
settle in cash, rather than in shares, because it made no dif-
ference to the bank. Petitioners further contend that their
position is stronger than that of the taxpayer in Rev. Rul.
2003–7, supra, because, unlike the taxpayer in the ruling,
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(78) ANSCHUTZ CO. v. COMMISSIONER 103
TAC never stated to DLJ that it intended to cover the PVFCs
with the shares pledged as collateral.
Petitioners concurrently argue that the SLAs are not cur-
rent sales. Petitioners point to longstanding caselaw that has
held share lending not to be current sales and contend that
Congress’ enactment of section 1058 in 1997 reaffirms the
tax-free nature of share-lending transactions.
Petitioners contend that the SLAs at issue satisfy the
requirements of section 1058, which provides a special rule
for determining taxation under agreements that call for the
lending of shares of stock. Section 1058(a) provides that if a
taxpayer transfers securities subject to an agreement that
meets the requirements of section 1058(b), no gain or loss
shall be recognized on the transfer in exchange for a promise
to return identical shares at the end of the agreement period.
Section 1058(b) imposes four requirements that must be met
in order to satisfy that subsection.
(1) The agreement must provide for the return of identical
securities. Sec. 1058(b)(1).
(2) If dividends, interest, or equivalent payments are made
between the initial transfer by the transferor and the return
of identical securities by the transferee with respect to the
transferred shares, the agreement must provide for the pay-
ment of those amounts to the transferor. Sec. 1058(b)(2).
(3) The agreement must not reduce the risk of loss or
opportunity for gain of the transferor in the securities trans-
ferred. Sec. 1058(b)(3).
(4) The agreement must meet any further requirements
that the Secretary has prescribed by regulation. Sec.
1058(b)(4).
Petitioners argue that the SLAs do not violate section
1058(b) because: (1) DLJ is required to return shares to TAC
of the same issuer, class, and quantity as those borrowed; (2)
while the share loans are outstanding, DLJ is required to pay
TAC amounts equal to all interest, dividends, and other pay-
ments with respect to the lent shares; (3) the SLAs do not
reduce TAC’s risk of loss or opportunity for gain in the bor-
rowed shares.
Petitioners dispute respondent’s contention that the SLAs
are illusory and violate section 1058(b) because the PVFCs
limit TAC’s risk of loss. Petitioners argue that we should look
only at the documents connected with the SLAs themselves,
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104 135 UNITED STATES TAX COURT REPORTS (78)
not those connected with the PVFCs. Petitioners point to
Samueli v. Commissioner, 132 T.C. 37, 48–49 (2009), and
contend that this Court has rejected the idea that section
1058 allows looking beyond the lending agreement itself to
simultaneously executed hedging transactions. In Samueli v.
Commissioner, supra at 47, this Court held that a share-
lending did not meet the requirements of section 1058(b)
because it strictly limited the transferor’s ability to recall the
shares, thus reducing the transferor’s opportunity for gain.
Petitioners point to proposed but never finalized regula-
tions issued under section 1058 and contend that the deter-
mination of whether a share-lending agreement limits a
lender’s risk of loss is made by reference to the lender’s
ability to recall the lent shares. The proposed regulations
indicate that an agreement to lend shares that allows the
lender to terminate the loan upon notice of not more than 5
business days does not limit the lender’s risk of loss. Peti-
tioners argue that because the SLAs can be terminated upon
TAC’s demand and because the SLAs are separate and distinct
from the PVFCs, they do not limit TAC’s risk of loss and there-
fore satisfy the requirements of section 1058.
Petitioners conclude that because the PVFCs and the SLAs
do not require petitioners to recognize gain, respondent’s
determinations should not be upheld.
C. Analysis
1. Was There a Sale?
We agree with respondent that the shares subject to the
VPFCs and lent pursuant to the SLAs were sold for Federal
income tax purposes. TAC transferred the benefits and bur-
dens of ownership to DLJ in exchange for valuable consider-
ation. Petitioners must recognize gain in an amount equal to
the upfront cash payments received upon entering into the
transactions.
TAC entered into an integrated transaction comprising two
legs, one of which called for share lending. The transaction
comprised PVFCs and SLAs. The two legs were clearly related
and interdependent, and both were governed by the MSPA.
The MSPA required TAC to enter into a pledge agreement
upon execution of a transaction schedule, and the pledge
agreement required WTC to enter into an SLA with DLJ upon
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(78) ANSCHUTZ CO. v. COMMISSIONER 105
execution of a pledge agreement. Further, if DLJ could not
maintain its hedges (hedges based on TAC’s lending shares to
DLJ), DLJ could accelerate the PVFCs.
Lending the shares subject to the PVFCs was a vital part
of the transaction and was contemplated during the parties’
negotiations. While evaluating DLJ’s potential as a source of
financing, TAC and its executives viewed presentations by DLJ
as to how the transactions at issue would occur. The presen-
tation provided an overview of a transaction as a whole and
stated that DLJ would borrow shares from TAC pursuant to
the SLAs to cover its initial short sale obligation.
This is in line with testimony of TAC and DLJ executives
involved in the planning and negotiating of the transactions.
Scott Carpenter, a managing director of the Anschutz Invest-
ment Co., who was involved in the negotiations of the stock
transactions, testified that the MSPA required execution of
the pledge agreements, and the pledge agreements required
execution of the SLAs. Philip Turbin, employed by DLJ during
the negotiations with TAC, testified that the borrowed shares
were used to close out the initial short sales. This is in line
with the overall structure of the transaction as initially pre-
sented to TAC.
Petitioners argue that our decision in Samueli supports
their contention that the SLAs were separate and distinct
from the PVFCs. We disagree. The taxpayers in Samueli
argued that the reduction of their opportunity for gain
should not be determinative because they could have entered
into a separate hypothetical transaction. Samueli v. Commis-
sioner, supra at 48–49. This Court rejected the taxpayers’
argument and analyzed the parties’ actual agreement under
section 1058. Id.
Petitioners mischaracterize the Court’s ruling in Samueli
when they argue that the PVFCs are outside the lending
agreement. We have held that the agreement consists of both
the SLAs and the PVFCs.
If we analyze the MSPA as a whole, it is clear that TAC
transferred the benefits and burdens of ownership, including:
(1) Legal title to the shares; (2) all risk of loss; (3) a major
portion of the opportunity for gain; (4) the right to vote the
stock; and (5) possession of the stock.
Neither petitioner nor respondent disputes that TAC trans-
ferred legal title to the stock. Likewise, neither party dis-
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106 135 UNITED STATES TAX COURT REPORTS (78)
putes that TAC did not possess the stock or have the oppor-
tunity to vote the stock.
Analyzing the MSPA makes clear that TAC transferred all
risk of loss and most of the opportunity for gain with regard
to the stock subject to the PVFCs and lent to DLJ. TAC received
75 percent of the cash value of the stock up front. Even if the
stock value fell over the term of the PVFCs, TAC would
not have to pay any of this amount back. DLJ could do with
the lent stock whatever it wanted and in fact disposed of the
stock almost immediately to close out its original short sales.
The parties focus on the validity of TAC’s right to recall the
stock lent to DLJ. Petitioners argue that the ability to recall
the shares means that TAC only temporarily transferred the
benefits and burdens of ownership but could recall the stock
at any time. Thus, in petitioners’ view, although TAC trans-
ferred legal title, possession, the right to vote, risk of loss,
and most opportunity for gain, the transfer was only tem-
porary and could be rescinded at any time upon notice to
WTC and DLJ.
Respondent argues that the recalls should be ignored
because they were shams meant to influence the result of
this case. In respondent’s view, if we ignore the recalls, peti-
tioner could not recall the benefits and burdens of ownership.
Although we agree with petitioners that TAC could recall
the shares, the recalls were accomplished only to influence
the tax analysis. The recalls were not a foreseeable economi-
cally motivated event when the transactions at issue were
structured. They were rather an after-the-fact effort to
change the earlier tax effect which was fixed in 2000 and
2001.
Once TAC lent shares to DLJ, DLJ used them to close out its
original short sales. For all intents and purposes, those lent
shares were gone and could not be recovered.
The transaction documents support a finding that the
share recalls were really TAC borrowing shares from DLJ.
Because DLJ closed out its original short sales with the lent
shares, the shares later transferred to TAC were in substance
DLJ borrowing shares from third parties and delivering them
to TAC. Pursuant to the MSPA, TAC was required to pay back
the prepaid lending fee plus an additional amount if DLJ’s
borrowing costs exceeded the amount of the prepaid lending
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(78) ANSCHUTZ CO. v. COMMISSIONER 107
fee. With regard to the 2009 share recalls, TAC was required
to bear any additional borrowing costs of DLJ.
Accordingly, we find that TAC transferred the benefits and
burdens of ownership to DLJ in 2000 and 2001, and the later
recalls were in substance a separate event akin to TAC bor-
rowing shares.
Petitioners cannot avail themselves of section 1058. The
MSPA violates the requirement of section 1058(b)(3) that the
agreement not limit the lender’s risk of loss or opportunity
for gain. The MSPA eliminated TAC’s risk of loss with regard
to the lent shares.
The crux of petitioners’ argument with regard to section
1058 is that the PVFCs are separate from the SLAs and that
none of the transactions conducted pursuant to the PVFCs
and the SLAs are taxable events. Petitioners’ argument might
hold true if the SLAs were separate and distinct from the
PVFCs. However, the two are linked, and we cannot turn a
blind eye to one aspect of the transaction in evaluating
another.
TAC entered into one agreement that called for the lending
of shares and limited its risk of loss. Once the PVFCs and the
SLAs are viewed together, it is clear that the MSPA violates
section 1058(b)(3) because the MSPA limited TAC’s risk of loss
under the agreement through its use of the downside protec-
tion threshold. The downside protection threshold guaran-
teed that no part of the payment, equal to 75 percent of the
fair market value of the stock, received by TAC at initiation
of the agreement would have to be paid back when the PVFCs
were ultimately settled. At settlement, if the adjusted stock
price was at or below the downside protection threshold, the
average settlement ratio was 1. This meant that the max-
imum TAC had to deliver was the base number of shares in
each tranche without any regard to the fair market value of
those shares.
We can look to tranche T1T1 as an example. That tranche
had an average hedge price of $21.49 and was for 1.5 million
shares of UPR stock. TAC received an upfront payment of
$24,181,087 for agreeing to deliver a variable number of
shares 10 to 11 years in the future. Because of the loss
limitation, TAC would never have to return that upfront pay-
ment. Even if the stock dropped to $1 a share, TAC would not
have to account for this devaluation by giving back any por-
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108 135 UNITED STATES TAX COURT REPORTS (78)
tion of their upfront payment. Petitioners could not lose any
value per share if the fair market value dropped below the
downward protection threshold price. This limitation of the
risk of loss under the agreement violates section 1058(b)(3).
Petitioners contend that TAC’s risk of loss was not limited
because TAC could recall the shares. This argument is not
convincing because it ignores the impact of the PVFCs. We
cannot ignore that the SLAs were coupled with the PVFCs.
Petitioners argue that the transactions are in no way related;
but as discussed above, this is not credible.
The parties entered into an agreement to sell and lend
shares by integrated transactions. The PVFCs and the SLAs
were clearly related. One could not occur without the other.
To the extent that petitioners argue TAC and DLJ could have
entered into the PVFCs without corresponding share-lending
agreements, that hypothetical transaction is not before the
Court. The transaction before the Court transferred the bene-
fits and burdens of ownership of the lent shares, and peti-
tioners do not satisfy the section 1058 safe harbor.
2. What Must Petitioners Recognize?
We next determine the amount of gain petitioners must
recognize on the MSPA. Respondent argues that TAC received
value equal to 100 percent of the fair market value of the
shares that were subject to the PVFCs and were lent pursuant
to the SLAs. We disagree. Petitioners are required to recog-
nize gain only to the extent TAC received cash payments in
2000 and 2001.
Respondent relies on his expert report in arguing that TAC
received 100 percent of the fair market value. Respondent’s
argument in support of his contention that TAC received 100
percent of the fair market value upfront is that the SLAs
were not legitimate and that TAC would never have posses-
sion of the shares after initially lending them to DLJ. Thus,
the PVFCs would never actually be settled within the terms
of the MSPA because TAC would never regain possession of the
shares and never have to calculate and return shares to DLJ.
Because TAC would never regain possession of the shares at
issue, any gain TAC might receive upon appreciation of the
stock was not really a retention of shares but could be viewed
as a payment from DLJ to TAC equal in value to any stock
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(78) ANSCHUTZ CO. v. COMMISSIONER 109
appreciation. Respondent’s expert testified that this payment
profile could be priced as the payout of equity options
received in 2000 and 2001.
Although certain portions of TAC’s contracts can be valued
as equity options representing TAC’s entitlement to some
appreciation in price and future dividends, whether peti-
tioners will ever receive that value will not be determined
until the contracts are settled. Further, as respondent’s
expert testified, the probability of the stock price’s being
above the downward protection threshold price is only 43 to
48 percent for TAC’s three transactions.
Respondent’s determinations, to the extent they treat peti-
tioners as having received additional value in excess of the
cash received, are incorrect. Accordingly, petitioners must
recognize gain to the extent TAC received cash upfront pay-
ments in 2000 and 2001, which would include the 75-percent
payment based upon the fair market value of shares and the
5-percent prepaid lending fee.
II. Section 1259 Constructive Sale
A. Respondent’s Arguments
Respondent argues in the alternative that TAC caused
constructive sales of the stock at issue. Respondent asserts
two alternative grounds for finding a constructive sale under
section 1259: A constructive short sale by TAC under section
1259(c)(1)(A) and a constructive forward contract sale under
section 1259(c)(1)(C).
Congress enacted section 1259 because it was concerned
that taxpayers holding appreciated equity positions were
entering into certain complex financial transactions in order
to sell their positions without paying any tax. Section
1259(a)(1) provides that if there is a constructive sale of an
appreciated financial position, the taxpayer shall recognize
gain as if such appreciated position were sold at its fair
market value on the date of such constructive sale. Any gain
shall be taken into account for the taxable year during which
the constructive sale occurred. Sec. 1259(a)(1). Section
1259(b)(1) provides in pertinent part that the term ‘‘appre-
ciated financial position’’ means any position with respect to
stock if there would be gain were such a position sold at its
fair market value.
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110 135 UNITED STATES TAX COURT REPORTS (78)
If a constructive sale of an appreciated financial position
occurs, section 1259(a)(2) provides rules for adjusting the
financial product’s basis and holding period. Section
1259(a)(2)(A) provides that the owner of the appreciated
financial position will increase his or her basis in that posi-
tion to account for the gain recognized on the constructive
sale. Further, the owner’s holding period for the financial
position will reset as of the date of the constructive sale.
These rules are intended to prevent an owner of an appre-
ciated financial position from having to recognize gain
twice—once as of the date of the constructive sale, and again
when the financial transaction leading to the constructive
sale treatment eventually closes.
Section 1259(c)(1) lists certain transactions that are
treated as constructive sales if entered into with respect to
an appreciated financial position. Three of the enumerated
transactions are relevant. Section 1259(c)(1)(A) provides that
a taxpayer shall be treated as having made a constructive
sale of an appreciated financial position if the taxpayer
enters into a short sale of the same or substantially identical
property. Section 1259(c)(1)(C) provides that a taxpayer is
treated as having made a constructive sale with respect to an
appreciated financial position if the taxpayer enters into a
futures or forward contract to deliver the same or substan-
tially identical property. Lastly, section 1259(c)(1)(E) allows
the Secretary to prescribe regulations describing transactions
that will be treated as constructive sales if they are substan-
tially similar in effect to those listed in section 1259(c)(1)(A)–
(D). Section 1259(d)(1) defines a forward contract as a con-
tract to deliver a substantially fixed amount of property
(including cash) for a substantially fixed price.
Respondent argues first that DLJ acted as an agent for TAC
and executed a short sale on TAC’s behalf for the stocks at
issue in the PVFCs. Respondent argues that the constructive
sale occurred as follows: (1) TAC informs DLJ that it intends
to sell shares of stock pursuant to a transaction schedule; (2)
DLJ, acting as TAC’s agent, engages in the short sales used to
generate the terms of a pricing schedule; (3) DLJ borrows
shares pursuant to an SLA; and (4) DLJ uses the borrowed
shares to close out the initial short sale.
Respondent argues in the alternative that the PVFCs
trigger a constructive sale under section 1259(c)(1)(C)
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(78) ANSCHUTZ CO. v. COMMISSIONER 111
because the MSPA is a forward contract to deliver ‘‘the same
or substantially identical property’’ as TAC’s appreciated
financial positions in the stock at issue.
B. Petitioners’ Arguments
Petitioners dispute respondent’s characterization of the
transaction as a constructive sale under either section
1259(c)(1)(A) or (C).
Petitioners argue that there could be no constructive short
sale under section 1259(c)(1)(A) because TAC did not cause
any short sales to occur. Petitioners argue that DLJ was not
acting as TAC’s agent but rather was a counterparty to the
transaction, and the decision to execute short sales was DLJ’s
alone.
Petitioners next argue that TAC did not cause a forward
contract constructive sale under section 1259(c)(1)(C) because
the PVFCs were not forward contracts: the number of shares
to be delivered is not a substantially fixed amount of prop-
erty. Petitioners again point to Rev. Rul. 2003–7, supra, and
argue that because the revenue ruling found 20 percent to be
a substantial variance, then 33.3 percent must be a substan-
tial variance.
C. Analysis
TACdid not cause constructive sales during 2000 and 2001.
TAC did not cause short sales of substantially similar prop-
erty or enter into forward contracts for a substantially fixed
amount of property. DLJ was not acting as an agent for TAC;
DLJ executed short sales in order to meet its contractual
obligations to TAC. Further, use of the short sales was DLJ’s
hedging transaction, a means for DLJ to limit its losses on its
purchase of TAC’s stocks should they decrease in value. The
constructive short sale provisions are intended to force a tax-
payer to recognize gain upon entering into short sales that
limit the taxpayer’s loss. TAC did not limit its loss through
short sales; DLJ did.
TAC’s transactions were likewise not constructive forward
contracts. As discussed above, a forward contract is treated
as a constructive sale if it is for a substantially fixed amount
of property for a substantially fixed price. Sec. 1259(c)(1)(C),
(d)(1). Section 1259 does not define the terms ‘‘substantially
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112 135 UNITED STATES TAX COURT REPORTS (78)
fixed amount of property’’ or ‘‘substantially fixed price’’. Sec-
tion 1259 gives the Secretary two sources of authority for
issuing regulations to carry out Congress’ intent—section
1259(c)(1)(E) and (f)—but no regulations have been issued
defining either phrase.
The legislative history provides some guidance as to deter-
mining whether a transaction is treated as a constructive
sale under section 1259. The Senate Finance Committee
report, S. Rept. 105–33, at 125–126 (1997), 1997–4 C.B. (Vol.
2) 1067, 1205–1206, in stating that a forward contract results
in a constructive sale only if it provides for delivery of a
substantially fixed amount of property at a substantially
fixed price, goes on to say that ‘‘a forward contract providing
for delivery of an amount of property, such as shares of
stock, that is subject to significant variation under the con-
tract terms does not result in a constructive sale.’’ The report
does not define or provide any guidance relative to the term
‘‘significant variation’’, and the Secretary has not issued any
regulations interpreting this term.
The Senate Finance Committee report provides more
detailed guidance when discussing the Secretary’s regulatory
authority under section 1259(c)(1)(E) to issue regulations to
carry out the purpose of section 1259. Id. at 126, 1997–4 C.B.
(Vol. 2) at 1206. Congress anticipated that the Secretary
would use his authority to issue regulations treating as
constructive sales financial transactions which, like those
listed in section 1259(c)(1), have the effect of eliminating
‘‘substantially all of the taxpayer’s risk of loss and oppor-
tunity for income or gain’’ with respect to the appreciated
financial position. Id. However, transactions in which the
taxpayer eliminated his risk of loss, or opportunity for
income or gain, but not both, were not to be treated as
constructive sales under section 1259. Id.
The report goes on to state that it is not intended that risk
of loss and opportunity for gain be considered separately. If
a transaction has the effect of eliminating substantially all of
the taxpayer’s risk of loss and substantially all of the tax-
payer’s opportunity for gain with respect to an appreciated
financial position, it is intended that the Secretary’s regula-
tions would treat the transaction as a constructive sale. Id.
Again, however, section 1259 and the legislative history do
not define ‘‘substantially all’’.
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(78) ANSCHUTZ CO. v. COMMISSIONER 113
Rev. Rul. 2003–7, supra, provides some limited guidance in
evaluating whether TAC’s PVFCs trigger constructive sale
treatment. In that revenue ruling the taxpayer entered into
a forward contract to deliver a variable number of shares of
stock, depending on the fair market value of the stock on the
delivery date. The taxpayer received an upfront payment in
exchange for his obligation to deliver stock at a later date.
The taxpayer’s delivery obligation varied by 20 shares: the
taxpayer would have to deliver no fewer than 80, and no
more than 100, shares of the stock at issue. The revenue
ruling held that the taxpayer had not entered into a
constructive sale under section 1259(c)(1)(C) because the
variation in the number of shares deliverable, 20, was signifi-
cant, and the agreement was not a contract to deliver a
substantially fixed amount of property for purposes of section
1259(d)(1).
TAC’s stock transactions were not forward contract
constructive sales because they were not forward contracts as
defined in section 1259(d)(1)—they did not provide for
delivery of a substantially fixed amount of property for a
substantially fixed price. Section 1259 does not define the
term ‘‘substantial’’, and the Secretary has not issued regula-
tions providing any additional guidance. TAC’s ultimate
delivery obligation may vary by as much as 33.3 percent; this
is in excess of the variance in Rev. Rul. 2003–7, supra. TAC
may ultimately deliver between 6,025,261 and 9,037,903
shares of stock to settle the PVFCs. We find this variance in
TAC’s delivery obligation to be substantial. TAC did not cause
a constructive sale under section 1259(c)(1)(C).
III. Conclusion
Petitioners must recognize gain on the MSPA to the extent
of cash received in 2000 and 2001. Petitioners did not cause
a constructive sale under section 1259(c)(1)(C).
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114 135 UNITED STATES TAX COURT REPORTS (78)
To reflect the foregoing,
Decisions will be entered under Rule 155.
f
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