For several years, certain wealthy taxpayers have taken advantage of a growing arsenal of Wall Street techniques to delay or entirely avoid taxes on their investment gains. The tax law has been struggling to keep up, as the sophistication and spread of the use of financial products to produce as many benefits of a stock sale, while still delaying taxes on the proceeds, has increased. One such instrument that was sold for years to sophisticated investors, but is only now getting its day in court, is a Prepaid Variable Forward Contract (PVFC). Debate among tax professionals hinged on whether PVFCs would be taxable at execution, either as an outright sale or as a constructive sale, under Internal Revenue Code Sections 1001 and 1259, respectively, or at the final settlement of the underlying contracts, consistent with Revenue Ruling 2003‐7. A brief review of how PVFCs work is followed by authoritative positions on their tax treatment; these are followed by a discussion of recent court decisions and their implications for tax planning, followed by a conclusion.

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