IRS Attacks “Barrier Options” and Treats Optionholder as Owning the Underlying Securities

more+
less-

The Internal Revenue Service (IRS) recently released Advice Memorandum 2010-005 (the AM), in which it held that a so-called barrier option or “knock out option,” as described below, would not be respected as an option for U.S. federal income tax purposes and would cause the optionholder to be treated as the owner of the “optioned” securities.

Generally, when a taxpayer acquires an option, it is not treated as the owner of the securities underlying the option and is not required to recognize gain or loss until the option settles or expires. At the time of settlement, if the asset underlying the option is a capital asset, the optionholder will generally recognize long-term capital gain if it held the option for longer than one year. The IRS’s holding in the AM would require a “barrier” optionholder to accelerate recognition of income and gain, and may cause the optionholder to recognize short-term capital gain or ordinary income rather than longterm capital gain.

Please see full advisory below for more information.

LOADING PDF: If there are any problems, click here to download the file.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Katten Muchin Rosenman LLP | Attorney Advertising

Written by:

more+
less-

Katten Muchin Rosenman LLP on:

JD Supra Readers' Choice 2016 Awards
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:

Sign up to create your digest using LinkedIn*

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Already signed up? Log in here

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
×
Loading...
×
×