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The Taxation of Variable Forward Contracts—In CCA 201104031 the IRS Changes Its Position (Again)  

Author:  James H.  Combs.

Source: Volume 28, Number 04, Summer 2011 , pp.3-19(17)

Journal of Taxation of Investments

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In CCA 201104031, the IRS has reversed its prior analysis regarding the taxation of the settlement of a variable forward contract with shares borrowed from a securities lender—repudiating its earlier conclusions in PLR 200440005. This reversal is yet another instance where the IRS has faced difficulties in developing its position on how these contracts should be taxed. While forward sellers have always had some flexibility in determining how much gain or loss is recognized on the settlement of a variable forward contract, the IRS is no longer willing to expand the potential alternatives. This article first provides a brief background on Revenue Ruling 2003-7, the settlement of forward contracts, and the taxation of short sales, and then details the CCA 201104031 facts and outcome, and evaluates the current IRS position.

Keywords: CCA 201104031, Rev. Rul. 2003-7, PLR 200440005, forward contract, short sales, constructive sales, hedging

Affiliations:  1: Honigman Miller Schwartz and Cohn LLP.

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