United States Tax Court

161 T.C. No. 9

ESTATE OF ANDREW J. McKELVEY, DECEASED, BRADFORD G. 

PETERS, EXECUTOR,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,1

Respondent

—————

Docket No. 26830-14. Filed November 2, 2023.

—————

Decedent (D) entered into variable prepaid forward 

contracts (first set of VPFCs) with two investment banks 

in 2007. Pursuant to the terms of the first set of VPFCs, 

the investment banks made cash payments to D, and D was 

obligated to deliver variable quantities of stock or their 

cash equivalent to the investment banks on specified 

future settlement dates in 2008 (original settlement dates). 

Treating the execution of the first set of VPFCs as an open 

transaction, D did not report any gain or loss for 2007 in 

connection with entering into the first set of VPFCs.

In 2008, before the original settlement dates, D paid 

consideration to the investment banks to exchange the first 

set of VPFCs for an amended set of VPFCs that had 

settlement dates in 2010 (second set of VPFCs). Treating 

the first set of VPFCs as remaining open after the 

exchanges, D did not report any gain or loss for 2008 with 

respect to those VPFCs as a result of the exchange. Later 

in 2008, and after the exchanges, D passed away. R 

determined with respect to D’s 2008 tax year that the 

exchanges of the VPFCs constituted sales or exchanges of 

1 This opinion supplements our previously filed opinion Estate of McKelvey v. 

Commissioner, 148 T.C. 312 (2017), reversed and remanded, 906 F.3d 26 (2d Cir. 2018).

Served 11/02/23
2

property under 26 U.S.C. § 1001, that the exchanges also 

resulted in constructive sales under 26 U.S.C. § 1259 of the 

stock shares D used to collateralize the first set of VPFCs, 

and that, as a result, D should have reported gain from the 

transactions.

In Estate of McKelvey v. Commissioner (Estate of 

McKelvey I), 148 T.C. 312 (2017), we held that D’s 

treatment of the first set of VPFCs as remaining open after 

the exchanges was appropriate and that the exchanges

constituted neither the sale nor the exchange of property 

under 26 U.S.C. § 1001 nor resulted in constructive sales 

of stock under 26 U.S.C. § 1259. Consequently, we 

concluded D did not have gain from the exchanges with 

respect to 2008. In Estate of McKelvey v. Commissioner

(Estate of McKelvey II), 906 F.3d 26 (2d Cir. 2018), the U.S. 

Court of Appeals for the Second Circuit reversed, 

determining that the exchanges of the VPFCs terminated 

the first set of VPFCs and resulted in the constructive sale 

of stock under 26 U.S.C. § 1259. The Second Circuit 

remanded for us to determine whether the exchanges 

terminated D’s underlying obligations with respect to the 

first set of VPFCs for purposes of 26 U.S.C. § 1234A and, if 

so, the amount of D’s gain from the termination. The 

Second Circuit also remanded for us to determine D’s gain 

with respect to the constructive sale of stock under 26 

U.S.C. § 1259, an amount which the parties subsequently 

stipulated. 

In the light of the Second Circuit’s decision in Estate 

of McKelvey II, we reach the following holdings.

Held: Upon the exchange of the first set of VPFCs for 

the second set of VPFCs, the first set of VPFCs was closed 

and D’s underlying obligations with respect to that first set 

terminated for purposes of 26 U.S.C. § 1234A.

Held, further, D realized $71,668,034 of short-term 

capital gain for tax year 2008 from the exchange of VPFCs.

—————

Robert A. Rudnick, Kristen M. Garry, Mark D. Lanpher, and Nathan K. 

Tasso, for petitioner.
3

Steven N. Balahtsis, Steven A. Sirotic, Francesca M. Ugolini, Elizabeth 

P. Flores, Michael A. Sienkiewicz, and Clint A. Carpenter, for 

respondent.

SUPPLEMENTAL OPINION

MARSHALL, Judge:2 This case is before the Court on remand 

from the U.S. Court of Appeals for the Second Circuit for further 

consideration consistent with its opinion in Estate of McKelvey v. 

Commissioner (Estate of McKelvey II), 906 F.3d 26 (2d Cir. 2018), 

reversing and remanding our decision in Estate of McKelvey v. 

Commissioner (Estate of McKelvey I), 148 T.C. 312 (2017).

In Estate of McKelvey I, we considered whether Andrew J. 

McKelvey (decedent) realized over $200 million in short-term and longterm capital gain pursuant to sections 1001 and 1259, respectively, by 

executing amendments extending two variable prepaid forward 

contracts (VPFCs) in 2008 (year at issue).3 In so doing, we rejected 

respondent’s contention that decedent’s execution of the extensions 

constituted taxable exchanges of “property” under section 1001. Estate 

of McKelvey I, 148 T.C. at 320–32. We also rejected his contention that 

the extensions resulted in constructive sales under section 1259 of the 

collateralized stock shares decedent pledged under the VPFCs. Estate 

of McKelvey I, 148 T.C. at 332–33. We thus concluded that the 

extensions did not trigger any capital gain for the year at issue. Id.

at 320–33.

In Estate of McKelvey II, the Second Circuit agreed with us that 

decedent’s execution of the extensions did not constitute exchanges of 

“property,” such that no short-term capital gain was triggered pursuant 

to section 1001. Estate of McKelvey II, 906 F.3d at 34. However, it also 

considered a new, alternative argument by respondent that the 

extensions nevertheless triggered short-term capital gain under section 

2 By order of the Chief Judge, this case was reassigned from Judge Robert P. 

Ruwe to Judge Alina I. Marshall for disposition.

3 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are 

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, 

and Rule references are to the Tax Court Rules of Practice and Procedure. Some 

monetary amounts are rounded to the nearest dollar.
4

1234A by terminating decedent’s obligations under the original VPFCs.4

Estate of McKelvey II, 906 F.3d at 34–35. With respect to this argument, 

the Second Circuit concluded that, although not exchanges of “property” 

for purposes of section 1001, the original VPFCs were exchanged for 

amended VPFCs. Estate of McKelvey II, 906 F.3d at 34–35. It 

correspondingly remanded the case for us to determine “whether the 

replacement of the obligations in the original VPFCs with the 

obligations in what we hold are new contracts satisfies the criteria for a 

termination of obligations that gives rise to taxable income, presumably 

capital gain, and the amount of such gain.” Id. at 35; see also id. at 41 

(directing the Court, more succinctly, to determine “whether the 

termination of obligations that occurred when the amended contracts 

were executed resulted in taxable short-term capital gains”).

Additionally, the Second Circuit reversed our holding as to section 

1259, concluding that the extensions did result in constructive sales of 

the collateralized shares that triggered long-term capital gains. Estate 

of McKelvey II, 906 F.3d at 40–41. In the light of this conclusion, the 

Second Circuit further mandated that we calculate the amount of such 

gain. Id. at 41. The parties having subsequently stipulated that amount 

as $102,406,962.12, only the issues identified by the Second Circuit with 

respect to the “replacement of the obligations in the original VPFCs with 

the obligations in . . . [the] new contracts” remain.

In the light of the Second Circuit’s holdings, we will refer to the 

transactions at issue as “replacements” or “exchanges” for the remainder 

of this Opinion.

Background

The facts material to the issues under consideration have already 

been set forth in Estate of McKelvey I.5 For convenience, we restate them 

here.

4 The parties agreed the Second Circuit could consider this argument because 

petitioner had asserted before this Court that the extensions did not result in a 

termination of decedent’s obligations under the original VPFCs. Estate of McKelvey II, 

906 F.3d at 34.

5 This case was submitted fully stipulated under Rule 122, and in Estate of 

McKelvey I we incorporated by reference the parties’ First Amended, Second, and Third 

Stipulations of Facts and attached Exhibits. Estate of McKelvey I, 148 T.C. at 313. In 

briefing the case for remand, respondent requested additional findings of fact, 
5

At the time the Petition was filed, Bradford G. Peters had been 

appointed executor of decedent’s estate by the Surrogate’s Court of the 

State of New York, New York County.6

Decedent was the founder and chief executive officer of Monster 

Worldwide, Inc. (Monster), a company known for its website, 

monster.com. Monster.com helps inform job seekers of job openings that 

match their skills and desired geographic location. Decedent died on 

November 27, 2008. Bradford G. Peters is the executor of decedent’s 

estate.

I. Bank of America

Effective September 11, 2007, decedent entered into a VPFC with 

Bank of America, N.A. (BofA), with respect to 1,765,188 shares of 

Monster class B common stock owned by decedent (BofA VPFC).7

Pursuant to the terms of the BofA VPFC, decedent received from BofA 

a cash prepayment of $50,943,578.31 on September 14, 2007. In 

exchange, decedent agreed to deliver to BofA, over the course of ten

separate settlement dates in September 2008, up to 1,765,188 Monster 

shares or the cash equivalent. The actual number of Monster shares (or 

the cash equivalent) required for delivery on each settlement date would 

vary according to the stock market closing price of Monster shares on 

each specified settlement date. Three different scenarios were 

contemplated in the BofA VPFC. If the Monster stock closing price on a 

particular settlement date was less than or equal to $30.4610 per share 

(BofA floor price), the number of Monster shares (or cash equivalent) 

deliverable to BofA on the settlement date would be as follows:

Settlement Date

Monster Shares

Deliverable to BofA

9/11/08 176,518

9/12/08 176,518

proposing valuations for the VPFCs both before and after the exchange. The 

valuations, but for a few rounding differences, align with the valuations which both 

parties stipulated in the Third Stipulation of Facts. We therefore decline respondent’s 

request.

6 The parties stipulate that at the time the Petition was filed, petitioner’s

address was in West Islip, NY. 

7 At the close of trading on the National Association of Securities Dealers 

Automated Quotation (NASDAQ) on September 11, 2007, the share price of Monster 

was $32.91.
6 

9/15/08 176,519

9/16/08 176,519

9/17/08 176,519

9/18/08 176,519

9/19/08 176,519

9/22/08 176,519

9/23/08 176,519

9/24/08 176,519

If the Monster stock closing price on a particular settlement date 

was greater than the BofA floor price but less than or equal to $40.5809 

per share (BofA cap price), then the number of Monster shares (or cash 

equivalent) deliverable to BofA would be the product of:

176,519 × BofA floor price_

Stock closing price

The multiplier used for the September 11 and 12, 2008, 

settlement dates is 176,518 instead of 176,519. 

If the Monster stock closing price on a particular settlement date 

was greater than the BofA cap price, then the number of Monster shares 

(or cash equivalent) deliverable to BofA would be the product of:

176,519 × BofA floor price + Stock closing price – BofA cap price

Stock closing price

The multiplier used for the September 11 and 12, 2008, settlement dates 

is 176,518 instead of 176,519.

On each settlement date, decedent could elect to settle the VPFC 

by delivering the requisite number of Monster shares or the cash 

equivalent. Decedent pledged 1,765,188 Monster shares to BofA to 

secure his obligations under the BofA VPFC but could substitute other 

collateral, subject to BofA’s approval, at any time during the term of the 

VPFC.
7

On July 24, 2008, decedent paid BofA $3,477,949.92 in additional 

consideration to extend the BofA VPFC settlement dates (BofA 

extension), as follows:8

Original BofA 

Settlement Date

Extended BofA 

Settlement Date

9/11/08 2/1/10

9/12/08 2/2/10

9/15/08 2/3/10

9/16/08 2/4/10

9/17/08 2/5/10

9/18/08 2/8/10

9/19/08 2/9/10

9/22/08 2/10/10

9/23/08 2/11/10

9/24/08 2/12/10

The BofA extension further provides: “Except as amended herein, all 

other terms and conditions of the . . . [BofA VPFC] shall remain in full

force and in effect.”

Following decedent’s death, petitioner settled the BofA VPFC by 

delivering to BofA 1,757,016 shares of Monster stock on or about May 8, 

2009.9

II. Morgan Stanley

Effective September 24, 2007, decedent entered into an 

agreement with Morgan Stanley & Co. International plc (MSI), with 

respect to 4,762,000 shares of Monster common stock (MSI VPFC).10 

Pursuant to the terms of the MSI VPFC decedent received from MSI a 

8 At the close of trading on the NASDAQ on July 24, 2008, the share price of 

Monster was $18.24.

9 It appears that the original BofA VPFC provided for expedited settlement 

upon the occurrence of certain default or termination events, such as decedent’s death. 

Neither party attaches any significance to the fact that there was an event triggering 

settlement before the contractually specified dates.

10 At the close of trading on the NASDAQ on September 24, 2007, the share 

price of Monster was $33.47.
8 

cash prepayment of $142,626,185.80 on September 27, 2007. In 

exchange, decedent agreed to deliver to MSI, on or about September 24, 

2008, up to 4,762,000 Monster shares or the cash equivalent. The actual 

number of Monster shares (or cash equivalent) required for delivery 

would vary according to the average closing price of Monster stock on 

specified dates (averaging dates). The averaging dates used to calculate 

the number of deliverable shares under the MSI VPFC were the same 

ten settlement dates used in the original BofA VPFC.

Similarly to the BofA VPFC, three different scenarios were 

contemplated in the MSI VPFC. If the average closing price of Monster 

stock over the ten averaging dates was less than or equal to $30.894 per 

share (MSI floor price), then decedent would be required to deliver to 

MSI 4,762,000 Monster shares or the cash equivalent. If the average 

closing price of Monster stock over the ten averaging dates was greater 

than the MSI floor price but less than or equal to $35.772 per share (MSI 

cap price), then the number of Monster shares (or cash equivalent) 

deliverable to MSI would be calculated using the following formula:

4,762,000 × MSI floor price

Stock average price

If the average closing price of Monster stock over the 10 averaging dates 

was greater than the MSI cap price, then the number of Monster shares 

(or cash equivalent) deliverable to MSI would be calculated using the 

following formula:

4,762,000 × MSI floor price + average price – MSI cap price

Stock closing price

The terms of the MSI VPFC, like the terms of the BofA VPFC, 

provided that decedent could elect to settle the contract either by 

delivering the requisite number of Monster shares or by paying the cash 

equivalent. Decedent pledged 4,762,000 Monster shares to secure his 

obligations under the MSI VPFC but could substitute other collateral, 

subject to MSI’s approval, at any time during the term of the MSI VPFC.

On July 15, 2008, decedent paid MSI $8,190,640 in additional 

consideration to extend the MSI VPFC averaging and settlement date(s) 
9

(MSI extension).11 Pursuant to the terms of the MSI extension decedent 

and MSI postponed the settlement date of the MSI contract from 

September 24, 2008, to January 15, 2010. The MSI extension also 

postponed the ten averaging dates to be used for the calculation of the 

average closing price, as follows:

Original MSI 

Settlement Date

Extended MSI 

Settlement Date

9/11/08 1/4/10

9/12/08 1/5/10

9/15/08 1/6/10

9/16/08 1/7/10

9/17/08 1/8/10

9/18/08 1/11/10

9/19/08 1/12/10

9/22/08 1/13/10

9/23/08 1/14/10

9/24/08 1/15/10

The MSI extension further provides: “This Confirmation supplements, 

forms part of, and is subject to, the . . . [MSI VPFC] . . . between you 

and us. All provisions in the . . . [MSI VPFC] govern this Confirmation 

except as expressly modified below.”

Following decedent’s death, petitioner settled the MSI VPFC by 

delivering to MSI 4,762,000 shares of Monster stock on or about 

August 5, 2009.12

11 At the close of trading on the NASDAQ on July 15, 2008, the share price of 

Monster was $17.28.

12 It appears that the original MSI VPFC, like the original BofA VPFC, 

provided for expedited settlement upon the occurrence of certain default or termination 

events, such as decedent’s death. Neither party attaches any significance to the fact 

that there was an event triggering settlement before the contractually specified dates. 

Petitioner received a $95,240 credit from MSI at settlement, and the parties do not 

explain and it is unclear from the record why MSI credited this amount.
10

III. Tax Return

Petitioner timely filed Form 1040, U.S. Individual Income Tax 

Return, for decedent’s taxable year 2008. On August 14, 2014, 

respondent issued a notice of deficiency to petitioner for decedent’s 

taxable year 2008. Respondent determined in the notice of deficiency 

that decedent, upon executing the BofA and MSI extensions in 2008, 

realized capital gain of $200,886,619. Respondent’s determined gain 

comprised: (1) decedent’s realization of short-term capital gain of 

$88,096,811.03 from his exchange of the VPFC extensions (amended, or 

second set of, VPFCs) for the original VPFCs (first set of VPFCs);13 and 

(2) decedent’s realization of $112,789,808.6414 of long-term capital gain 

from the constructive sales of Monster shares pledged under the 

VPFCs.15 Respondent’s determination of long-term capital gain is based 

on decedent, as the founder of Monster, having a zero basis in the 

Monster shares pledged as collateral to BofA and MSI.16 Petitioner 

timely filed a Petition with the Court disputing respondent’s 

determinations in the notice of deficiency.

Discussion

I. Taxability of the Replacement of Obligations

The first question we have been asked to address is whether a 

taxable termination of obligations occurred when decedent exchanged 

VPFCs with BofA and MSI, resulting in taxable gain. The Second 

Circuit opined briefly on the exchanges, holding that the extensions of 

13 Respondent’s computation of short-term capital gain is based on 

(1) decedent’s holding period for the original VPFCs before extension and (2) an 

amount realized for each original VPFC equal to the product of (i) the number of 

Monster shares pledged as collateral and (ii) the excess of the floor prices under the 

original VPFCs over the Monster closing price on July 15, 2008, of $17.28 per share

14 In Estate of McKelvey I, 148 T.C. at 318, this amount was misstated as 

$112,789,808.03. 

15 Respondent’s computation of long-term capital gain is based on (1) decedent’s 

long-term holding period for the Monster shares and (2) an amount realized equal to 

the product of (i) the number of Monster shares pledged as collateral under the original 

VPFCs and (ii) the Monster closing price on July 15, 2008, of $17.28 per share.

16 Pursuant to a 2010 settlement between the Internal Revenue Service (IRS) 

Office of Appeals and petitioner regarding decedent’s taxable year ending December 

31, 2002, decedent recognized capital gain of $12,077,427 with respect to 2,500,000 

Monster shares. Neither party addresses the impact, if any, of this capital gain 

recognition on the VPFC transactions, and therefore we do not consider it.
11

the valuation dates resulted in the replacement of the original contracts. 

Estate of McKelvey II, 906 F.3d at 35. More specifically, the Second 

Circuit concluded that extending the valuation dates by an additional 

17 months for the BofA contracts and 16 months for the MSI contracts 

resulted in amended contracts that replaced the original contracts. Id. 

The Second Circuit reasoned that the parties “changed the bets that the 

VPFCs represented”, which it determined to be a “fundamental change,”

invoking a phrase from Revenue Ruling 90-109, 1990-2 C.B. 191. Estate 

of McKelvey II, 906 F.3d at 35. Revenue Ruling 90-109 discusses a 

change in contractual terms that causes an old contract to be “treated 

as if” it was actually exchanged for a new one. See Rev. Rul. 90-109, 

1990-2 C.B. at 192 (“A change in contractual terms effected through an 

option provided in the original contract is treated as an exchange under 

section 1001 if there is a sufficiently fundamental or material change 

that the substance of the original contract is altered through the exercise 

of the option. Under such circumstances, the old contract is treated as 

if it were actually exchanged for a new one.”); see also id. (referring to 

the exercise of the option as resulting in a change that is “substantively 

the same as an actual exchange” and as obviating the need for an “actual 

exchange” but effecting a “de facto exchange”). The revenue ruling 

employed the phrase “sufficiently fundamental or material change” to 

indicate the point at which the original contracts had been exchanged 

for new contracts, a gain recognition event as an exchange under section 

1001. Id. The Second Circuit ultimately concluded that the extension 

resulted in an exchange of the first set of contracts for new contracts, as 

well as an exchange of the underlying obligations. Estate of McKelvey II, 

906 F.3d at 35.

The Second Circuit stopped short, however, of reaching a holding 

on whether a termination of obligations occurred. Id. On appeal, 

respondent raised an alternative claim that the exchanges resulted in 

the termination of derivative obligations with respect to capital assets. 

Id. at 34–35. Respondent argued that such a termination of obligations 

resulted in short-term capital gain under section 1234A. Estate of 

McKelvey II, 906 F.3d at 34–35. The parties acknowledged that 

respondent was entitled to raise the new claim, and the Second Circuit 

left for us to address on remand the issue of whether decedent realized 

short-term capital gain under section 1234A.

A. Termination of the Obligations Under the VPFCs

The Second Circuit described the exchanges as a “replacement of 

the obligations,” establishing that by executing the transactions, 
12

decedent surrendered one set of obligations and cash in an exchange for 

an entirely separate set of obligations that, in turn, represented 

fundamentally changed bets. Estate of McKelvey II, 906 F.3d at 35; see

Rev. Rul. 90-109. In order to determine whether such an exchange 

qualifies as a taxable termination of the first set of obligations, we turn 

to guidance regarding the treatment of options contracts.17 Broadly 

speaking, an option is the right to buy or sell a stock at a certain price 

within a set period and involves a buyer (or holder) and a seller (also 

known as a writer or grantor). Laureys v. Commissioner, 92 T.C. 101, 

102 (1989). Revenue Ruling 90-109 applies sale or exchange treatment 

to fundamental changes in the terms of options contracts. See Estate of 

McKelvey II, 906 F.3d at 35. The revenue ruling states that where a 

change to contractual terms effected through an option provided in the 

original contract is so substantial as to amount to a fundamental or 

material change, the “old contract is treated as if it were actually 

exchanged for a new one.” Rev. Rul. 90-109, 1990-2 C.B. at 192. Such 

treatment is “substantively the same as an actual exchange of contracts 

and is a sale or other disposition for purposes of section 1001.” Id.; see 

supra p. 11.

While VPFCs are not options themselves, options are similar, 

open transactions from which principles can be applied to VPFCs, a 

shared treatment acknowledged through prior IRS guidance and the 

Second Circuit. See Rev. Rul. 78-182, 1978-1 C.B. 265; Rev. Rul. 58-234, 

1958-1 C.B. 279; see also Estate of McKelvey II, 906 F.3d at 35 (“The new 

valuation dates in the amended contracts resulted in new contracts just 

as new expiration dates for option contracts result in new option 

contracts.”). From the grantor’s perspective, the obligations under an 

option contract terminate, in relevant part, through the grantor’s 

repurchase of the option from the holder or the grantor’s purchase of an 

option with terms identical to the original option granted and 

designating the purchase as a closing transaction. Laureys, 92 T.C. 

at 102–04; Treas. Reg. § 1.1234-3(b)(1). Each option has its own identity 

and is a separate asset from all other options, so the holding period of 

17 The Second Circuit left the issue of “whether the replacement of obligations

. . . satisfies the criteria for a termination of obligations that gives rise to taxable 

income” to be decided by this Court. Estate of McKelvey II, 906 F.3d at 35 (emphasis 

added). The Second Circuit also directed this Court to determine “whether the

termination of obligations that occurred when the amended contracts were executed 

resulted in taxable short-term capital gains.” Id. at 41 (emphasis added). In the light 

of the former statement and discussion by the Second Circuit, we understand the latter 

statement to not be a conclusion with respect to whether a termination occurred for 

purposes of section 1234A. 
13

an option does not relate back to prior option contracts. Reily v. 

Commissioner, 53 T.C. 8, 12 (1969). The time factor goes to the very 

essence of options contracts. Id.

The Second Circuit held that decedent’s extensions of the VPFCs 

represented such fundamental changes as to warrant treatment as if 

actual exchanges of the old and new contracts had occurred. Estate of 

McKelvey II, 906 F.3d at 35. In treating decedent’s extensions of the 

contracts as if the first set of VPFCs was actually exchanged for the 

second set of VPFCs, the exchange takes the form of an option 

repurchase. Decedent made payments to MSI and BofA and undertook 

obligations as part of the new contracts, in exchange for the termination 

of the prior contracts. Decedent repurchased the options held by MSI 

and BofA, thereby executing closing transactions that terminated his 

obligations with respect to the first set of contracts. See Treas. Reg. 

§ 1.1234-3(b)(1)(i); see also Laureys, 92 T.C. at 102–04. Decedent’s 

obligations under the first set of VPFCs do not relate forward to his 

separate obligations under the second set of VPFCs, and likewise the 

obligations under the second set of VPFCs do not relate back to his 

obligations under the first set. See Reily, 53 T.C. at 12. We therefore 

find that, upon executing the exchanges, decedent terminated the 

obligations under the first set of VPFCs.

B. Sale Treatment Under Section 1234A

Although entry into a VPFC is not a taxable event, its termination 

and replacement are another matter. The Second Circuit established its 

agreement with our conclusion in Estate of McKelvey I that, at the time 

the VPFCs were extended, decedent did not have any rights in the 

VPFCs that could constitute property; but instead all that remained 

were his obligations to deliver Monster shares (or their cash equivalent) 

such that there was no taxable exchange of “property” for purposes of 

section 1001. It remanded, however, for us to consider the exchanges of 

the original VPFCs for the amended contracts in the context of section 

1234A.18 Estate of McKelvey II, 906 F.3d at 34–35. Section 1234A, in 

relevant part, determines the taxable treatment of the termination of 

obligations with respect to capital assets, providing:

18 In so doing, the Second Circuit was careful to note the parties’ agreement 

that the case concerns contracts that are not debt instruments and that it was making 

“no implication as to the tax consequences of fundamental changes in debt 

instruments.” Estate of McKelvey II, 906 F.3d at 35 n.13. 
14

Gain or loss attributable to the cancellation, lapse, 

expiration, or other termination of—

(1) a right or obligation . . . with respect to 

property which is (or on acquisition would be) a 

capital asset in the hands of the taxpayer

. . . .

shall be treated as gain or loss from the sale of a capital 

asset.

Thus, by its terms, section 1234A(1) applies to the termination of 

obligations with respect to capital assets, which include derivative or 

contractual rights to buy or sell such assets. Pilgrim’s Pride Corp. v. 

Commissioner, 779 F.3d 311, 317 (5th Cir. 2015), rev’g on other grounds

141 T.C. 533 (2013); see also Estate of McKelvey II, 906 F.3d at 34 (citing 

same for its interpretation of section 1234A(1)). A “capital asset” for the 

purposes of section 1234A means any property held by the taxpayer, 

with certain exclusions that do not apply here. § 1221(a). And the 

Second Circuit, to which appeal would lie, has opined that “a gain or loss 

from the cancellation of a futures or forward contract would result in 

capital gain or loss pursuant to [section] 1234A.” Wolff v. Commissioner, 

148 F.3d 186, 188 (2d Cir. 1998), rev’g and remanding on other grounds 

T.C. Memo. 1994-196.

Decedent held obligations with respect to Monster shares, which 

are capital assets under section 1221(a). As the exchanges resulted in 

the termination of those obligations, we hold that section 1234A(1) 

applies to the exchanges. Therefore, any gain that decedent realized 

from the exchanges shall be treated as gain from the sale of a capital 

asset. “Short-term capital gain” is defined as the gain from the sale or 

exchange of a capital asset held not more than 1 year. § 1222(1). The 

period for which a taxpayer has held an option, rather than the property 

that is the subject of the option, determines whether the capital gain is 

short term or long term. See Treas. Reg. § 1.1234-1(a)(1). Decedent 

terminated the first set of VPFCs after holding them for less than one 

year, and consequently any gain that decedent realized from the 

exchange is short-term capital gain.

II. Open Transaction Doctrine

As previously mentioned, VPFCs are afforded open transaction 

treatment upon execution. Burnet v. Logan, 283 U.S. 404 (1931); Rev. 

Rul. 2003-7, 2003-1 C.B. 363. Petitioner contends the replacement of 

VPFCs requires equal treatment under the doctrine. The open 
15

transaction doctrine finds its origins in the Code, which generally 

concerns itself only with realized gains or losses or with unrealized gains 

or losses that are reasonably certain and ascertainable. Lucas v. Am. 

Code Co., 280 U.S. 445, 449 (1930). The doctrine governs transactions 

where the realization of income is so uncertain or contingent as to 

prevent accurate gain or loss calculations. Burnet v. Logan, 283 U.S. 

404. Such limitations mean that the open transaction doctrine applies 

only when we cannot determine the value of either of the exchanged 

assets. Davis v. Commissioner, 210 F.3d 1346, 1348 (11th Cir. 2000), 

aff’g T.C. Memo. 1998-248; see also United States v. Davis, 370 U.S. 65 

(1962). In scenarios where the value of only one asset is ascertainable, 

the exchanged assets are deemed to be of equal value. Davis v. 

Commissioner, 210 F.3d at 1348; see also Davis, 370 U.S. at 72.

Petitioner contends that the open transaction doctrine applies to 

the transactions before us. Petitioner argues that in the exchanges of 

VPFCs, VPFCs in the second set are open, which renders any gain 

calculation from the exchanges an impossibility at that time. Petitioner 

continues that, regardless of whether the Court deems them extensions 

or replacements, the gain amount, identity, and cost basis of the 

property to be delivered remained undetermined when the amendments 

were executed. By reiterating that the ultimate exchange of cash or 

property for the prepayment is what is relevant, petitioner makes clear 

the view that rigid adherence to the settlement options contemplated in 

the original contracts is the only way that parties to the contracts may 

calculate their gain.

A. Applicability of Virginia Iron and Hicks

Petitioner attempts to support the position that the open 

transaction doctrine applies with various options-writing cases, 

primarily relying on Virginia Iron Coal & Coke Co. v. Commissioner, 37 

B.T.A. 195 (1938), aff’d, 99 F.2d 919 (4th Cir. 1938), and Hicks v. 

Commissioner, T.C. Memo. 1978-373, 37 T.C.M. (CCH) 1540. Each case 

evaluates written call options that were extended at or after expiration, 

and in each case the Court held that gain or loss was not realized upon 

extension as uncertainty remained regarding what property would be 

delivered to the taxpayers’ counterparties. Va. Iron, 37 B.T.A. 195; 

Hicks, 37 T.C.M. (CCH) 1540. Virginia Iron, in relevant part, concerns 

an option that the taxpayer wrote for a third party to purchase land and 

mineral rights owned by the taxpayer’s subsidiary or stock in the 

subsidiary owned by the taxpayer. Va. Iron, 37 B.T.A. at 196. The 

option retained the third party’s purchase rights for one year in 
16

exchange for an up-front payment of $300,000; the purchase rights could 

be renewed annually on August 1 for the following five years at a rate of 

$125,000 per year. Id. The third party failed to make a payment on 

August 1 of the second year, letting the option lapse, but on September 

21 of that year entered into a supplemental contract, continuing the 

option with some modifications. Id. The following year, the third party 

formally declined to exercise the option. Id. at 197. The Board of Tax 

Appeals (BTA) held that the up-front and renewal payments to the 

taxpayer were not income for the years in which received, but rather 

income for the year when the option was declined because only then 

could “a satisfactory determination of their character” be made. Id.

at 198.

Hicks, in relevant part, concerned two real property parcels that 

the taxpayer and a business partner agreed to sell to a developer. Hicks, 

37 T.C.M. (CCH) at 1541. The purchase agreement, signed in December 

1972, dictated that the developer would purchase the first parcel for 

$208,598, and would make a downpayment of $25,000 for the second 

parcel, plus an interest-bearing note for the balance of $189,162. Id. 

The purchase agreement stated that the closing for the second parcel 

would not be more than one year after the closing for the first parcel;

however, the developer could reconvey the second parcel to the taxpayer 

and his partner at no additional cost. Id. If the developer decided to 

exercise its option to reconvey the second parcel, the taxpayer and his 

partner would keep the downpayment. Id. In November 1973 the 

developer reconveyed the second parcel, and the parties voided the note 

for $189,162 and agreed to grant the developer for $10 an option to 

repurchase the second parcel (purchase option). Id. at 1542. The 

purchase option provided for the developer to purchase the parcel for 

$204,000 between January 15, 1974, and June 7, 1975, plus $1,200 per 

month after January 15, 1974. Id. The downpayment of $25,000 would 

be credited against the purchase price if the developer exercised the 

purchase option. Id. The Court held that any gain recognition for the 

taxpayer with respect to the downpayment should be delayed until the 

extended option was exercised or lapsed, on the basis that the character 

of the payment could not be determined until then. Id. at 1544.

In citing Virginia Iron and Hicks, petitioner encourages the Court 

to ignore whether obligations are “continuing” or “replaced,” proposing 

that such terms are merely irrelevant formalisms. Instead, per 

petitioner, we should focus exclusively on whether it is possible to 

determine the amount and character of any gain or loss. While we agree 

with maintaining a focus on whether the amount and character of any 
17

gain or loss is determinable, we disagree that doing so requires us to act 

as though the Second Circuit’s holding that the obligations were 

replaced is “irrelevant” and ultimately unnecessary. The option 

contracts at issue in Virginia Iron and in Hicks bear a few notable 

differences from the VPFCs at hand, the first of which is that the BTA 

in Virginia Iron and the Court in Hicks did not establish that the 

expiration and subsequent renewal of the option was a replacement of 

the option. Indeed, as petitioner stated on brief, the BTA was not 

focused on such details and did not provide any opinion on the 

distinction between “continuing” and “replacing” the contract. We, on 

the other hand, are operating under the established decision that 

decedent replaced the original set of VPFCs with a distinct second set.

The second difference arises from the underlying property to 

which the derivative contracts relate. In both Virginia Iron and Hicks, 

the options concerned the rights to purchase defined plots of real 

property for a fixed amount set at the signing of each contract. Va. Iron, 

37 B.T.A. at 196; Hicks, 37 T.C.M. (CCH) at 1541. As time passed, the 

underlying real property the parties contemplated did not vary in 

amount or price. Consequently, the bet that the parties made upon 

signing resembled the position that they continued to hold in subsequent 

years; the land values did not significantly change and the acres subject 

to the options remained fixed. Va. Iron, 37 B.T.A. at 196; Hicks, 37 

T.C.M. (CCH) at 1544. The BTA, and later the Court, found that the 

option renewals left each taxpayer holding an obligation that had not 

materially changed from what it was before the renewal. Va. Iron, 37 

B.T.A. at 196; Hicks, 37 T.C.M. (CCH) at 1541. The same cannot be said 

of decedent’s obligations. As respondent’s expert witness, Henrick 

Bessembinder, revealed, the VPFCs carried substantially different 

values depending on the length of time remaining on the contract and 

on the share price relative to the set strike price. With an eye toward 

those variables and the depressed value of the Monster shares at the 

time of extension, the Second Circuit agreed that the change in 

expiration dates fundamentally altered the bets that the VPFCs 

represented. As these fundamental changes were not considerations in 

Virginia Iron and Hicks, we find those cases to be factually distinct and 

noncontrolling.19

19 This Court relied on Virginia Iron in Estate of McKelvey I to conclude that 

open transaction treatment applied to the first set of VPFCs so long as uncertainty 

existed with respect to the second set of VPFCs. In the light of the Second Circuit’s 
18

B. Open Transaction Doctrine as Applied to Exchanged 

Contracts

Having established that we are not bound to the holdings in 

Virgina Iron and Hicks, we turn to petitioner’s argument that the 

VPFCs remained open through their replacement because the gain or 

loss decedent would realize from the second set of VPFCs could not be 

calculated at the time of replacement. Petitioner asserts, and we agree, 

that the first set of VPFCs held uncertainty regarding the property to 

be delivered at settlement, which led to further uncertainty regarding 

decedent’s tax basis in any gain or loss calculation. However, petitioner 

also asserts that the replacement of the first set of VPFCs by the second 

set does not resolve any of this uncertainty as it does not identify or 

determine decedent’s cost basis in the property eventually used to settle 

the second set of VPFCs. In essence, petitioner’s argument is that gain 

cannot be calculated on the then-closed first set of VPFCs because gain 

could not yet be determined on the second set of VPFCs; uncertainty 

replaced with uncertainty does not close the transaction. This argument 

is at odds with the mechanics of the open transaction doctrine.

As mentioned above, the open transaction doctrine applies only

when it is impossible to determine the value of either asset exchanged. 

Davis v. Commissioner, 210 F.3d at 1348. It says nothing of requiring 

certainty in calculating the eventual gain of every asset or obligation 

involved. We therefore look to when it is first possible to determine the 

value of either asset exchanged.

Petitioner points out that, at the time of the exchange, the parties 

had yet to resolve the contracts in the manner originally contemplated 

and the stock or cash equivalent remained undelivered. The issue 

petitioner highlights on brief is whether the exchange “resolved the 

uncertainties regarding the amount, identity and cost basis of the money 

or other property to be delivered in exchange for the prepayment,” 

arguing it did not. But the Second Circuit has already made clear that 

rigid adherence to the original design of the VPFCs is not the only 

acceptable conclusion to the contracts. By extending the contracts, the 

parties replaced the first set of VPFCs with the second set, transactions 

the Second Circuit held to be exchanges of contracts. Estate of 

McKelvey II, 906 F.3d at 35. The exchanges were a trade of decedent’s 

holding that the exchanges terminated the first set of VPFCs and created a second set 

of VPFCs that represented different bets, we no longer find Virginia Iron to dictate 

that conclusion in this case.
19

obligations under the first set of VPFCs for decedent’s obligations under 

the second set of VPFCs, plus additional payments of $8,190,640 to MSI 

and $3,477,950 to BofA. This termination of the first set of VPFCs also 

terminated the uncertainty that existed with respect to the identity and 

the cost basis of the property to be delivered in exchange for the 

prepayment under those contracts. Decedent satisfied the obligations 

from the first set of VPFCs by delivering a combination of cash and new 

obligations to which he was bound. Together, the cash and the new 

obligations establish a value and a tax basis sufficient to calculate any 

gain or loss derived from the first set of VPFCs.

It has long been established that gain is not exclusively derived 

from cash-settled transactions, but rather that gain may be realized 

from the “exchange of property, payment of the taxpayer’s indebtedness, 

relief from a liability, or other profit realized from the completion of a 

transaction.” Helvering v. Bruun, 309 U.S. 461, 469 (1940). Thus, the 

fact that gain is a portion of the value of property received in the 

transaction does not negate its realization. Id. Decedent made such an 

exchange of obligations and property between the first and second set of 

VPFCs and consequently realized the gains or losses from those 

transactions. As it is possible to determine the values of property and 

obligations exchanged, and from there to determine the realized gain, 

the open transaction doctrine does not apply.

Petitioner is correct that the second set of VPFCs, at the time of 

the exchange, existed as an open transaction. At the time of the 

exchange, it would have been impossible to calculate the gain from those 

VPFCs, as decedent was still free to settle the transaction in cash or 

shares. However, we are not addressing decedent’s possible gain from 

the second set of VPFCs; instead, we merely need their value at the time 

of the exchanges. The Second Circuit is not directing us to determine 

decedent’s gain with respect to all VPFCs, merely those terminated by 

way of the exchanges. 

III. Calculation of Gain

A. Applicability of Section 1001

Having established that the open transaction doctrine does not 

apply, and that any gain derived from the transactions is classified as 

short-term capital gain, we turn to the calculation of decedent’s gain at 

the moments of the exchanges. Section 1001 dictates the method for 

calculating such gain:
20

The gain from the sale or other disposition of property shall 

be the excess of the amount realized therefrom over the 

adjusted basis provided in section 1011 for determining 

gain, and the loss shall be the excess of the adjusted basis 

provided in such section for determining loss over the 

amount realized.

§ 1001(a).

Problems arise in applying that introductory computation 

paragraph to our facts as the section limits its scope to gain from the 

sale or other disposition of property. See id. Both the Second Circuit 

and this Court have ruled that decedent’s positions with respect to the 

VPFCs are not property, but rather obligations. Estate of McKelvey II, 

906 F.3d at 34; Estate of McKelvey I, 148 T.C. at 322. The capital gain 

calculation as codified under section 1001 requires the sale or exchange 

of property, and decedent’s gain from the VPFCs, while derived from a 

sale or exchange, would seem to be omitted as nonproperty.

Yet strict adherence to the idea that such wording exempts sales 

or exchanges of VPFCs from gain calculation leaves a gap in the Code’s 

application of capital gain tax treatment when it comes to VPFCs and 

other nonproperty derivatives. With respect to the treatment of 

derivatives elsewhere in the Code, the character of the gain and loss 

does not turn on the classification of the taxpayer’s position with respect 

to the derivative, but rather the property to which the contract relates. 

Gain or loss attributable to the sale or exchange of a securities futures 

contract is considered gain or loss from the sale or exchange of the 

underlying property for purposes of determining the character of the 

gain or loss, and the property or nonproperty nature of the taxpayer’s 

position does not dictate taxability. § 1234B. The same holds true for 

the taxability of derivatives as capital assets. Gain or loss from the 

cancellation or lapse of an obligation with respect to property that is a 

capital asset in the hands of the taxpayer is treated as gain or loss from 

the sale of a capital asset, disregarding the nonproperty nature of the 

obligation. § 1234A. For options holders, gain or loss from the sale or 

exchange of options in property is considered to have the same character 

as gain or loss derived from the sale of the underlying property. 

§ 1234(a). For options writers, the gain or loss is treated as gain or loss 

from the sale or exchange of a capital asset without regard to whether 

the position is property or an obligation in the hands of the writer. 

§ 1234(b).
21

These examples paint a clear picture of the Code’s priorities when 

it comes to taxing the gains or losses of derivatives: The nature of the 

underlying property controls. Even when it is well established that the 

taxpayer’s position with respect to a derivative is not property, the Code 

dictates that any gain or loss is treated as if derived from property. We 

will continue to evenly apply that principle to the VPFCs in question. 

Consequently, the applicability of section 1001(a) is not affected by the 

nonproperty nature of decedent’s position with respect to the VPFCs, 

but rather by the fact that the underlying shares are property. The 

underlying Monster shares are property in the hands of decedent, and 

therefore section 1001(a) applies to gain from the sale or other 

disposition of derivatives relating to those shares. Where section 1001 

restricts gain calculations, either to property or otherwise, we will look 

to the nature of the underlying shares as a basis for the section’s 

applicability, rather than to the nature of the taxpayer’s position.

B. Gain Calculation Under Section 1001

The gain from the exchange is determined under section 1001 and 

is calculated as the excess of the amount realized over decedent’s 

adjusted basis in the VPFCs. See § 1001(a). The amount realized from 

the exchange is defined as the sum of any money received plus the fair 

market value of any property received other than money. § 1001(b). 

Gain or loss is realized from the exchange of property for other property 

differing materially either in kind or extent and is treated as income or 

loss sustained. Treas. Reg. § 1.1001-1(a); see Helvering v. Bruun, 309 

U.S. at 468–69 (applying section 22 of the Revenue Act of 1932, ch. 209, 

47 Stat. 169, 178, the predecessor of the current section 61(a), and 

holding that gain may be derived from the exchange of property, 

payment of a taxpayer’s indebtedness, relief from liability, or other 

profit realized from the completion of a transaction). When property is 

exchanged for property in a taxable exchange, the taxpayer is taxed on 

the difference between the adjusted basis of the property given and the 

fair market value of the property received. Williams v. Commissioner, 

37 T.C. 1099, 1106 (1962) (citing Phila. Park Amusement Co. v. United 

States, 126 F. Supp. 184, 188 (Ct. Cl. 1954)).

We calculate decedent’s amount realized by taking the 

prepayment amount he received and subtracting his basis in the 

transactions, which consists of his payments to the VPFC holders and 

decedent’s outstanding liability as a result of the second set of VPFCs in 

the moment immediately following the exchanges. The calculation is as 

follows: 
22

Item MSI BofA Total

Prepayment to Decedent $142,626,186 $50,943,578 $193,569,764

Payment to Effect the 

Exchange of VPFCs −8,190,640 −3,477,950 −11,668,590

Value of Decedent’s 

Ongoing Obligation 

Following the Exchange20

−79,857,244 −30,375,896 −110,233,140

Gain — — $71,668,034

Therefore, upon termination of the first set of VPFCs, decedent 

realized $71,668,034 in short-term capital gain for the taxable year 

ended December 31, 2008. 

IV. Conclusion

We have considered all of the arguments the parties made, and to 

the extent they are not addressed herein we find the arguments to be 

moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

20 The values of decedent’s ongoing obligations following the exchange come 

from the Expert Report of Hendrik Bessembinder, a jointly submitted exhibit prepared 

by respondent’s expert witness, Dr. Bessembinder. Dr. Bessembinder’s report, in 

relevant part, values decedent’s obligations under the VPFCs at various relevant times

using the Black-Scholes option pricing formula. 

The Black–Scholes model is a widely accepted formula for valuing Europeanstyle options on liquid assets. It relies on five variables: (1) the exercise price of the 

option; (2) the market price of the underlying asset; (3) the volatility of the underlying 

asset; (4) the expiration date of the option; and (5) the risk-free interest rate. The Code 

does not require us to use the Black-Scholes valuation method, but we think it is a 

reasonable method for valuing the VPFC obligations here because of its wide 

acceptance and stipulation by both parties with respect to its use by Dr. Bessembinder. 

See 6611, Ltd. v. Commissioner, T.C. Memo. 2013-49, at *71 n.34.