T.C. Memo. 2011-64
UNITED STATES TAX COURT
EDWARD M. KURATA AND LORRAINE A. KURATA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5217-09. Filed March 16, 2011.
William E. Taggart, Jr., and Barbara N. Doherty, for
petitioners.
Daniel J. Parent, for respondent.
MEMORANDUM OPINION
HAINES, Judge: This case is before the Court on
respondent’s motion for summary judgment filed pursuant to Rule
121.1
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
(continued...)
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We must decide whether transactions in which petitioners
transferred shares of Foundry Network, Inc. (FDRY), to Derivium
Capital, L.L.C. (Derivium) in exchange for a total of $7,404,720
were sales or loans for Federal tax purposes in 2000.
Background
At the time of the filing of the petition, petitioners
resided in California.
In 2000 petitioners were introduced to Derivium and its 90-
percent-stock-loan program. We recently described the details of
this program in Calloway v. Commissioner, 135 T.C. 26 (2010), and
Shao v. Commissioner, T.C. Memo. 2010-189. As we discussed in
Calloway and Shao, under the 90-percent-stock-loan program
Derivium would purport to lend 90 percent of the value of
securities pledged to Derivium as collateral. Petitioners do not
dispute the facts relevant to their participation in Derivium’s
90-percent-stock-loan program and concede that their transactions
are “quite similar” to the transactions discussed in Calloway.
Petitioners transferred 65,013 and 25,000 shares of FDRY to
Derivium on April 27 and June 13, 2000, respectively. In each of
the transactions at issue, Derivium sold the FDRY stock received
from petitioners within several days of receipt. On May 3, 2000,
Derivium transferred $4,638,654 (90 percent of the value of
1
(...continued)
references are to the Tax Court Rules of Practice and Procedure.
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62,313 shares of FDRY) to petitioners, and on June 21, 2000,
Derivium transferred an additional $2,766,066 to petitioners (90
percent of the value of 27,700 shares of FDRY).2 Each transfer
was made pursuant to a “Master Agreement to Provide Financing and
Custodial Services” (the master agreements). Each master
agreement provides:
This Agreement is made for the purpose of engaging * * *
[Derivium] to provide or arrange financing(s) and provide
custodial services to * * * [petitioners] with respect to
certain securities and assets (“Properties”) to be pledged
as security, the details of which financing and Properties
are to be set out on loan term sheets. * * *
In executing the master agreements, petitioners granted
Derivium complete control over the transferred FDRY stock.
Paragraph 3 of each schedule D, Disclosure Acknowledgment and
Broker/Bank Indemnification, of each master agreement provides,
in pertinent part:
[Petitioners] understand that by transferring securities as
collateral to * * * [Derivium] under the terms of the
Agreement, * * * [petitioners] give * * * [Derivium] the
right, without notice to * * * [petitioners], to transfer,
pledge, repledge, hypothecate, rehypothecate, lend, short
sell and/or sell outright some or all of the securities
during the period covered by the Loan. * * * [Petitioners
understand] that * * * [Derivium] has the right to receive
and retain the benefits from any such transaction and that
the * * * [petitioners are] not entitled to these benefits
during the term of the loan.
2
When Derivium transferred $4,638,654 to petitioners on May
3, 2000, it continued to hold 2,700 shares of FDRY received on
Apr. 27, 2000. Derivium transferred 90 percent of the value of
these 2,700 shares as part of the $2,766,066 paid to petitioners
on Jun. 21, 2000.
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Accordingly, Derivium funded the “loan” payments made to
petitioners by selling the FDRY stock.
In connection with each master agreement, Derivium sent
petitioners a schedule setting forth the essential terms of the
transactions (schedule A). Pursuant to each schedule A, the
alleged loans: (1) Had a term of 3 years at an interest rate of
10.5 percent annually accruing until and due at maturity; (2) did
not permit prepayments before maturity; (3) did not include
margin requirements; (4) could not be called; (5) were
nonrecourse; and (6) were renewable at the borrowers’ request.
Petitioners did not make any payments to Derivium during the
term of each “loan”. The price per share of FDRY ranged between
$82 and $87 when petitioners transferred 65,013 shares to
Derivium pursuant to the first master agreement. At maturity of
the first “loan”, the price per share of FDRY was approximately
$10.38. The price per share of FDRY ranged between $110 and
$111.87 when petitioners transferred 25,000 shares to Derivium
pursuant to the second master agreement. At maturity of the
second “loan”, the price per share of FDRY was approximately
$14.81. Accordingly, rather than repaying the “loans” at
maturity in 2003, petitioners walked away from each “loan”,
keeping the $4,638,654 and the $2,766,065 received from Derivium,
respectively, and forfeiting the FDRY stock pledged as
collateral.
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Petitioners’ basis in the FDRY stock transferred to Derivium
in both transactions was 10 cents per share. Petitioners
acquired the FDRY stock transferred to Derivium in both
transactions during February and March of 2000. Petitioners did
not report the $4,638,654 or the $2,766,065 received from
Derivium on their 2000 Federal income tax return. Rather,
petitioners reported the transactions as stock sales in 2003, the
year the “loans” reached maturity.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Fla. Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). The Court may grant
summary judgment when there is no genuine issue of material fact
and a decision may be rendered as matter of law. Rule 121(b);
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.
17 F.3d 965 (7th Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753,
754 (1988). The Court will view any factual material and
inferences in the light most favorable to the nonmoving party.
Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985); Naftel v.
Commissioner, 85 T.C. 527, 529 (1985). We conclude that there
are no genuine issues of material fact, the transactions at issue
were sales in 2000 for Federal income tax purposes, and a
decision may be rendered as a matter of law.
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As discussed above, the transactions at issue in this case
are nearly identical to those we described in Calloway v.
Commissioner, 135 T.C. 26 (2010). The taxpayers in Calloway and
petitioners both entered into the 90-percent-stock-loan program
with Derivium pursuant to the same master agreement and “loan”
terms. In Calloway, we held that the transaction was not a loan
and that the taxpayers sold their stock in the year the stock was
transferred to Derivium. In reaching that conclusion, we
analyzed the transactions at issue by applying the following
factors: (1) Whether legal title passes; (2) how the parties
treat the transaction; (3) whether an equity interest in the
property is acquired; (4) whether the contract creates a present
obligation on the seller to execute and deliver a deed and a
present obligation on the purchaser to make payments; (5) whether
the right of possession is vested in the purchaser; (6) which
party pays the property taxes; (7) which party bears the risk of
loss or damage to the property; and (8) which party receives the
profits from the operation and sale of the property. See id. at
34; see also Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C.
1221, 1237-1238 (1981).
Petitioners concede the transactions at issue are “quite
similar” to the transactions in Calloway. In fact, petitioners
argue only a single factual distinction from Calloway.
Petitioners argue that while the taxpayers in Calloway failed to
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report the 90-percent-stock-loan program with Derivium on its
Federal income tax returns, petitioners reported the transactions
as sales in 2003, when the “loans” reached maturity and they
decided to walk away from the transactions.
Without any further explanation, petitioners argue this
distinction from Calloway v. Commissioner, supra, is significant.
We disagree. The fact that petitioners treated the transactions
as loans in 2000 and reported them as sales in 2003 does not make
them so. In fact, as respondent suggests in brief, the only
material significance of petitioners’ reporting position in 2003
is that it supports the argument that petitioners are not subject
to penalties. No penalties have been determined.
Petitioners further argue that on summary judgment all
factual issues must be resolved in favor of the nonmoving party
and, therefore, an analysis of the eight factors used by this
Court in Calloway to determine whether a transaction is a loan or
a sale requires this Court to deny respondent’s motion. This
argument is without merit. Petitioners have not analyzed any of
the eight factors discussed above, nor have petitioners presented
relevant factual distinctions from Calloway. We find any further
analysis to be unnecessary. Accordingly, consistent with our
holding in Calloway, we hold that petitioners sold the FDRY stock
in 2000, and we sustain respondent’s determinations with respect
to the transactions at issue.
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We have considered all of petitioners’ contentions,
arguments, and requests that are not discussed herein, and we
conclude that they are without merit or irrelevant.
To reflect the foregoing,
An appropriate order and
decision will be entered.