Revisiting Tax Court Rulings on Stock Loans

In 2010, the United States Tax Courts ruled in a trio of cases that the stock loans at issue in those cases were, in fact, stock sales, and it asserted fines and penalties on the borrowers in those cases for failing to properly report those sales on their individual tax returns. Far from having a chilling effect on the collateralized stock loan industry, these cases provided a foundation that clarified the positive tax treatment of the proceeds of stock loans as the industry grew and matured.

Since that time, Astor Capital Fund has established itself as a premier international collateralized stock loan originator. The treatment of stock loan proceeds under United States laws, rules, and regulations may differ from how other jurisdictions view those proceeds. Moreover, as the 2010 cases reveal, the tax treatment of any individual stock loan will be a function of the individual facts of each situation. Astor Capital Fund offers no tax, accounting, or legal advice on the tax status of its loan products. Our advisors and loan consultants do follow regulatory developments to offer products and provide loan services that comply with the laws and rules of the jurisdictions and stock exchanges that list the publicly-traded shares that are pledged as collateral for our loans.

The pertinent facts in the three Tax Court cases from 2010 are as follows:

  • In Anschutz Co. v. Commissioner, the court characterized a stock loan as a sale because the lender received both title to the collateral stock, and the full benefits of potential appreciation and detriments of ownership.
  • In Lizzie W. and Albert L. Calloway v. Commissioner, the court observed that the loan was based on the sale price of the underlying stock collateral and not its value on the day it was pledged to the lender. The transaction was also structured to eliminate the borrower’s right to receive any gains or to suffer any losses in the value of that collateral.
  • In Cecilia Shao v. Commissioner, the borrower pledged her employer’s company stock, which had appreciated significantly but then dropped in value with the implosion of the technology industries. The court, in this case, gave the borrower the benefit of her good-faith reliance on the recommendations of a financial planner, who did not explain the distinction between margin loans and stock loans to her when she was referred to the lender.

The outcomes in the Calloway and Shao rulings were driven, in part, by the identity of the lender that had extended stock loans to the two borrowers. That lender, Derivium Capital, LLC, filed for bankruptcy in 2005 after U.S. government regulators characterized more than 1,700 loans that the lender had made as stock sales and imposed penalties and fines on the lender based on more than $235 million in taxes that the lender had failed to remit.

The pledged stock lending industry has grown substantially in the ten years after the U.S. Tax Court issued this trio of opinions. That growth would not have been possible if lenders, including Astor Capital Fund, had not analyzed those and other opinions that addressed collateralized stock loans. Throughout this period, pledged stock lending has evolved from an unregulated nascent industry into a mature financial option for investors to realize liquidity from the publicly-traded stock in their portfolios without forfeiting the benefits of owning that stock.

Astor Capital Fund’s loan consultants stress that collateralized stock loans are sophisticated financial transactions that are intended only for accredited investors who have the knowledge and sophistication to understand the transaction’s benefits and risks. Because of this, our consultants provide all prospective borrowers with ample time and opportunity to review each stock loan transaction with his or her legal advisors to verify the structure of the loan for that borrower.

Astor Capital Fund structures its collateralized stock loan products to reflect the tax, accounting, and legal of the laws of the jurisdictions in which the underlying collateral is traded and the loans are made. The terms and conditions of the collateralized stock loans that we offer are described in the loan documents and agreements for each loan. General descriptions of those terms and conditions are for information purposes only and are not intended to be nor should they be used to interpret or construe those terms and conditions.

Our advisors frequently revisit the critical opinions that have shaped the stock lending industry, and our mission is to provide full compliance with all securities and exchange laws, rules, and regulations that may apply to that industry.