Stock shares purchased with promissory note - definition of &quot;substantial&quot; for personal liability in Regs. Sec. 1.83-3(a)(2)?
<p>If purchasing stock shares of a company via a promissory note, Sec. 1.83-3(a)(2) states that "if the amount paid for the transfer of property is an indebtedness secured by the transferred property, on which there is no personal liability to pay all or a substantial part of such indebtedness, such transaction may be in substance the same as the grant of an option" (see <a href="https://www.law.cornell.edu/cfr/text/26/1.83-3" rel="nofollow noreferrer">https://www.law.cornell.edu/cfr/text/26/1.83-3</a>). </p>

<p>Having the transaction not be treated as an option grant is important because then the long term capital gains holding period doesn't start which can result in a much higher tax paid if the shares appreciate and are sold eventually. </p>

<p>What percentage of the indebtedness must be secured personally to count as "substantial"? </p>

<p>Is there any case law or regulation that authoritatively establishes that definition in this context that someone could point to, or if not, how is this percentage arrived at?</p>

<p>Back in January 2010 when <a href="http://www.thetaxadviser.com/issues/2010/feb/unexpectedtaxconsequencesofbuyingemployerstockwithloanproceeds.html" rel="nofollow noreferrer">http://www.thetaxadviser.com/issues/2010/feb/unexpectedtaxconsequencesofbuyingemployerstockwithloanproceeds.html</a> was written, it discussed there being no clear guidance with some practitioners saying 50% and some saying higher and some saying lower, but I wonder if either that was incorrect or if things have become clarified since then. What's ironic is that the IRS uses a far lower number for "substantial" when it's in the context of a person or entity not paying taxes.</p>

<p>If there is no definition in the statute then "substantial" means what it means in <a href="http://legal-dictionary.thefreedictionary.com/substantial" rel="nofollow">English</a>:</p>

<blockquote>
  <p>Of real worth and importance; of considerable value; valuable. Belonging to substance; actually existing; real; not seeming or imaginary; not illusive; solid; true; veritable.</p>
</blockquote>

<p>It is likely that the IRS or a court would look at all of the percentage, the dollar value and the proportion it represents of the taxpayers liability. <em>Substantial</em> to an individual is unlikely to be <em>substantial</em> to CitiBank.</p>

tax-law corporate-law