> If you take a loan out to live off of of 80 million you would at least need to pay 5% to make it a true loan. The IRS That is 40 million in interest over 10 years. You said .05% loans, that is not realistic because you would get hit with inputted interest and phantom income from the difference between your loan and the IRS AFR rate.
To which they answered as follows:
> To your third bullet point - that’s a great observation, but by law these products are actually securities, not “loans” as the term is used in Code § 7872. That’s why it’s important that the stock appreciation rights are the predominant means of profit from the transaction for the investment bank. Where the taxpayer and investment bank can’t come to an agreement that would result in these products being characterized as securities, the interest rate will be much higher - SOFR plus 1.5-5 basis points - but may be “paid-in-kind” (i.e., the interest is not required to be paid in cash currently but added to principal).
That is incorrect and the linked IRS tax code doesn't even cover this specific example. It is a security to the bank since you're selling what amounts to an options contract to them. The cash they loan you is still considered a cash loan, and must follow the minimum AFS rate. The "options contract" for appreciation rights is the collateral for the loan (secured loan), the loan is still a loan. It's effectively the same as a home equity loan.
They were asked the question:
> If you take a loan out to live off of of 80 million you would at least need to pay 5% to make it a true loan. The IRS That is 40 million in interest over 10 years. You said .05% loans, that is not realistic because you would get hit with inputted interest and phantom income from the difference between your loan and the IRS AFR rate.
To which they answered as follows:
> To your third bullet point - that’s a great observation, but by law these products are actually securities, not “loans” as the term is used in Code § 7872. That’s why it’s important that the stock appreciation rights are the predominant means of profit from the transaction for the investment bank. Where the taxpayer and investment bank can’t come to an agreement that would result in these products being characterized as securities, the interest rate will be much higher - SOFR plus 1.5-5 basis points - but may be “paid-in-kind” (i.e., the interest is not required to be paid in cash currently but added to principal).