AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
Fully Paid Securities Lending and Disqualifying disposition
Posted by: hpanther, April 20, 2016 05:54PM
After exercising ISOs to hold, if the stock is "hard to borrow", one possibility is to participate in a fully paid securities lending program such as offered by Fidelity.
Exercising ISOs to hold can be part of a strategy leading to a qualified disposition. However, there are transactions that can lead to a disqualifying disposition or reset the timer for the 1-year holding period required for a qualifying disposition. Among those transactions are short sales or option trades in the same security.
What, if any, relevance does lending shares have when considering a qualifying/disqualifying disposition?

Re: Fully Paid Securities Lending and Disqualifying disposition
Posted by: Kaye Thomas, May 19, 2016 12:46PM
Not sure of the answer here. I'm inclined to believe the IRS would not treat a lending transaction as a disposition unless something went wrong to prevent you from recovering the shares, but I'm not aware of any ruling on the issue. As a technical matter, it would be analyzed under section 424(c) of the Code, where a "disposition" is defined to include "a sale, exchange, gift, or a transfer of legal title," with certain exceptions. Ordinarily the lender of an asset retains legal title, but I'm not sure this is the case in a securities lending transaction?

If you are transferring legal title, then you have to fit within the exception for a "mere pledge or hypothecation," but I believe those terms refer to a situation where you borrow money and use the shares as security for that loan, rather than a situation where you lend the shares. The IRS might nevertheless agree that this is not the kind of transaction that should be treated as a disposition, but the only way to know for sure would be to obtain a private letter ruling, which is a cumbersome and fabulously expensive process.

Kaye Thomas
Fairmark.com



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