Planning for Executives - 9 Value, risks, and tax implications of utilizing portfolio margin strategies in concentrated stock situations

Question 1

What is a pre-paid variable forward contract.

Answer 1

In the case of the pre-
paid variable forward contract, rather than buying a put and selling a call, the investor
enters into a forward contract in which they agree to deliver a variable number of
shares in the future, based upon the price of the stock in the future. However, the
investor is guaranteed that they will only have to deliver a certain maximum number of
shares based on today’s price

Question 2

What is a collar strategy?

Answer 2

An investor implementing a collar strategy is one who is willing to give up some
potential appreciation of the stock in exchange for some protection against the stock
value dropping considerably.

Question 3

Why is the collar strategy implemented?

Answer 3

The collar strategy is implemented by purchasing a put
option and also selling a call option. The put option gives the owner the ability to sell the
stock at a specified strike price during a certain period of time

Question 4

What is IRS Section 1259?

Answer 4

he Constructive Sale Rule, Section 1259, is a section of the Internal Revenue Code that expands the types of transactions that are considered to be sales and are subject to capital gains tax.

Question 5

How do collar strategies and prepaid variable forward contract circumvent IRS Section 1259?

Answer 5

The
investor could consider borrowing against the “hedged” concentrated stock position and
redeploying the borrowed funds into a diversified portfolio ontop of employing a collared strategy or a prepaid variable forward contract.
If structured properly, the tax consequences should result in a deferral of the original
capital gain.