IRS turns up the heat on stock collar transactions; Using a hedge technique could hit wealthy clients in the wallet.(News)

Investment News, February, 2007

Byline: Dan Jamieson IRVINE, Calif. - The Internal Revenue Service is threatening to bring more cases against wealthy investors who have used a popular technique to hedge concentrated stock holdings. The agency has reiterated a year-old warning that a type of stock collar known as a "variable prepaid forward contract'' resulted in sale of the stock for tax purposes.

In a memo last month, the IRS encouraged its staff members to "develop these cases'' and said: "We stand ready to assist you in the legal analysis.'' Under a prepaid forward arrangement, clients get cash upfront and contract with brokerage firms to deliver a variable number of shares or cash several years later, at which time taxes are due. Last year, the IRS issued a...