The FAQs listed below have been condensed for ease of understanding. Please contact us to obtain the full text

• When the loan is entered into, is there a taxable sale or other disposition for federal income tax purposes by the Borrower?
• Who would be able to benefit form the PSP loan?
• How are the dividends earned on the Collateral Securities treated for federal income tax purposes?
• Will the repayment of a PSP loan and the recovery of the Collateral Securities result in a taxable event to the Borrower for federal income tax purposes?
• If the Borrower dies during the term of a PSP loan, would the repayment of the loan and recovery of the collateral cause the estate or heirs to recognize any income or loss for federal income tax purposes?
• What are the tax consequences to the Borrower if he/she outlives the term of the PSP loan and forfeits the collateral?
• If the Borrower dies during the term of the PSP loan, what is the amount that will be included in the Borrower's gross estate for federal estate tax purposes?
• What are the tax consequences if the estate or heirs walk away from the PSP loan when the loan matures and the collateral is forfeited?
• If the Borrower defaults on the loan and walks away from the shares, will the gain recognized from the disposition of the shares constitute capital gain for federal income tax purposes?

When the loan is entered into, is there a taxable sale or other disposition for federal income tax purposes?

A Protected Securities Plan (PSP) loan should not give rise to a taxable sale or other disposition of the Collateral Securities at the time that the loan in entered into. The primary reason is that the Borrower will retain significant upside in the appreciation in the value of the Collateral Securities during the term of the loan.

Who would be able to benefit from the PSP loan?

Almost any type of individual or entity, other than possibly a tax-exempt entity, that owns the appropriate appreciated stock can benefit under the PSP.

How are the dividends earned on the Collateral Securities treated for federal income tax purposes?

The dividends earned on the Collateral Securities will be taxed to the Borrower, but may not be eligible for the preferential 15-percent tax rate for qualified dividends. Dividends are used to reduce the interest rate on the loan.

Will repayment of a PSP loan and the recovery of the Collateral Securities result in a taxable event to the Borrower for federal income tax purposes?

No. If a loan is repaid at maturity, there will be no realization event that would trigger income or loss for federal income tax purposes. If the Borrower dies during the term of the loan, no gain or loss would be triggered to the estate or heirs for federal income tax purposes upon their acquisition of the collateral, and they would assume ownership of the collateral with a tax basis in such property equal to its fair market value on the date of the Borrower's death.

What are the tax consequences to the Borrower if he/she outlives the term of the PSP loan and forfeits the collateral?

If the Borrower defaults on the loan and forfeits the collateral, the Borrower will be treated as having sold the collateral for the amount due under the loan, including principal and remaining interest. The Borrower generally will recognize long-term capital gain, which is currently taxed at 15 percent rate.

If the Borrower dies during the term of the PSP loan, what is the amount that will be included in the Borrower's gross estate for federal estate tax purposes?

The Borrower's gross estate will include the fair market value of the Collateral Securities, less the amount of the outstanding debt, subject to a discount for lack of marketability. Under Regulation Section 20.2053-7, property subject to a non recourse liability is required to be included in the decedent's gross estate at an amount equal to the value of the property less the amount of the outstanding debt. Courts typically have upheld discounts in the 30 to 40 percent range.

What are the tax consequences if the estate or heirs walk away from the PSP loan when the loan matures and the collateral is forfeited?

The estate or heirs generally recognize gain equal to the difference between the amount due on the loan and the estate's or heir's basis in the Collateral Securities. If the estate or heirs default on the loan and forfeit collateral, they will be treated as having sold the collateral for the amount due under the loan, including principal and remaining interest. To the extent that the amount of principal and interest due on the loan exceeds the estate's or heir's tax basis in the Collateral Securities, the estate or heirs will recognize gain for federal income tax purposes in an amount equal to this difference.

If the Borrower defaults on the loan and walks away from the shares, will the gain recognized from the disposition of the shares constitute capital gain for federal income tax purposes?

If the Borrower defaults on the loan and walks away from the shares, in all likelihood, any gain recognized will be characterized as long-term capital gain. Generally, any gain recognized from the sale or exchange of a capital asset that has been held for more than one year gives rise to long-term capital gain. Currently, the maximum long-term capital gains rate is 15 percent.