T.C. Memo. 2011-78
UNITED STATES TAX COURT
KURT SOLLBERGER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9458-08. Filed April 4, 2011.
Brian G. Isaacson, for petitioner.
Daniel J. Parent, for respondent.
MEMORANDUM OPINION
KROUPA, Judge: This matter is before the Court on
respondent’s motion for summary judgment and petitioner’s cross-
motion for partial summary judgment, each filed under Rule 121.1
Petitioner transferred floating rate notes (FRNs) to Optech Ltd.
1
All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for 2004, unless otherwise indicated.
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(Optech) in exchange for cash in 2004. We must decide whether
petitioner’s transfer to Optech was a nonrecourse loan or a sale.
We hold that petitioner’s transfer was a sale. Accordingly, we
shall grant respondent’s motion for summary judgment and deny
petitioner’s cross-motion for partial summary judgment.
Background
Petitioner was president and owner of Swiss Micron, Inc.
(Swiss Micron), a high-precision-component manufacturing company
in Rancho Santa Margarita, California. Swiss Micron adopted the
Swiss Micron Employee Stock Ownership Plan (ESOP) in 1999, and
petitioner subsequently sold 340 shares of Swiss Micron stock to
the ESOP for $1,032,240 in 2000 (ESOP stock sale). Petitioner
could defer recognition of capital gain on the ESOP stock sale
pursuant to section 1042, provided he invested the proceeds in
qualified replacement property (QRP). Petitioner elected to
defer recognition of the gain by using the ESOP stock sale
proceeds to purchase 1,000 FRNs from Bank of America for $1,000
each. The FRNs qualified as QRP, and petitioner therefore could
defer recognizing gain from the ESOP stock sale until he sold the
FRNs. See sec. 1042(e).
FRNs are debt securities with a variable interest rate tied
to a money market index. The fair market value of an FRN
generally equals the note’s face value because the interest paid
on the note will vary over time. Here, the interest rate
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adjusted quarterly and was tied to the London Interbank Offered
Rate (LIBOR).
In 2004 petitioner met representatives of Optech. Optech,
an affiliate of Derivium Capital, LLC (Derivium),2 promoted and
marketed an ESOP-QRP loan program to petitioner.3 The ESOP-QRP
loan program required petitioner to pledge the FRNs to Optech as
collateral in exchange for 90 percent of the value of the FRNs.
The loan would be nonrecourse. This meant petitioner would not
be entitled to the return of the FRNs if he did not repay at the
end of the loan term. Optech could keep the FRNs if petitioner
did not repay the loan but could not sue for any unpaid balance
on the loan. Optech told petitioner that the ESOP-QRP loan
program allowed petitioner to defer tax on the proceeds from the
ESOP stock sale as well as allow him to cash in on 90 percent of
the value of his FRNs immediately.
Petitioner relied on the representations Optech made and
decided to enter into the loan agreement with Optech. Petitioner
2
Derivium, its affiliates and its customers have been
involved in numerous civil and criminal cases relating to
Derivium’s 90-percent ESOP-QRP loan program and 90-percent-stock-
loan program. See, e.g., Calloway v. Commissioner, 135 T.C. 26
(2010); United States v. Cathcart, No. C 07-4762 (N.D. Cal. filed
Sept. 17, 2007); Derivium Capital LLC v. U.S. Tr., 97 AFTR 2d
2006-2582 (S.D.N.Y. 2006). Derivium eventually went bankrupt and
is widely reported to have been involved in a Ponzi scheme. Shao
v. Commissioner, T.C. Memo. 2010-189.
3
We use the terms “loan,” “collateral,” “borrow,” “lend,”
“hedge” and “maturity” with all related terms throughout this
opinion merely for convenience, not as legal definitions.
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signed two documents. One was entitled “Schedule A-1, Loan
Schedule” (Schedule A-1), and the other was entitled “Master Loan
Financing and Security Agreement” (MLSA). Schedule A-1 set forth
the essential terms of the transaction. It listed the total face
value of all FRNs at $1 million. It further stated that the loan
term was 7 years, there was no margin requirement and the loan
was noncallable and nonrecourse. Schedule A-1 indicated that the
lender would receive the interest on the collateral and would
apply the interest on the loan so only “net interest” would be
due.
Optech agreed under the MLSA to serve as the lender or as
agent for another lender. The MLSA provided that petitioner, as
the borrower, remained the beneficial owner of the FRNs posted as
collateral during the term of the loan and the FRNs would not be
subject to the claims of any of Optech’s creditors. The MLSA
stated, however, that the lender had the right to register the
FRNs in the lender’s name, and Optech could “assign, transfer,
pledge, repledge, hypothecate, rehypothecate, lend, encumber
short sell and/or sale” the FRNs during the term of the loan
without notifying petitioner. Moreover, petitioner waived his
rights in the MLSA to receive interest and other benefits from
the FRNs during the term of the loan, and he could not prepay on
the loan.
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Petitioner instructed his bank, California Bank & Trust, to
transfer his FRNs to a Morgan Keegan bank account (Morgan Keegan
account) on behalf of Optech, per their agreement. Optech then
mailed petitioner a “Valuation Confirmation” indicating that
Optech had received the FRNs into the Morgan Keegan account
valued at $1 million. The “Valuation Confirmation” also stated
that Optech advanced petitioner $293,274.21 on the loan. Two
days after Optech received the FRNs, an agent of Optech sold the
FRNs for $961,293.33, which was less than the $1 million fair
market value, and deposited the proceeds into the Morgan Keegan
account. Optech transferred the remaining $606,725.79 of the
loan to petitioner’s personal bank account at Wells Fargo on
August 2, 2004.
Optech provided petitioner with quarterly and year-end
account statements over the 7-year term of the loan. The
statements purported to reflect the interest accrued, the balance
of the loan and the value of the FRNs. Optech prepared the
statements to make it appear that it still held the securities
and that the transactions were legitimate.
Petitioner timely filed a Federal income tax return for
2004. Petitioner failed to report any of the previously deferred
gain from the ESOP stock sale in 2004 because he treated the
transaction with Optech as a loan, not a sale. Respondent
examined petitioner’s return for 2004, determined that
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petitioner’s transaction with Optech was a sale rather than a
loan and determined a $128,979 deficiency in petitioner’s Federal
income tax for 2004. Petitioner timely filed a petition with
this Court arguing that the Optech transaction was a loan, not a
sale.
Discussion
Respondent asks that we find as a matter of law that
petitioner sold the FRNs to Optech in 2004. Petitioner counters
that the transfer of the FRNs was a loan, not a sale, to Optech,
and Optech’s decision to sell the stock was improper. He asserts
that under the MSLA he retained the benefits and burdens of
ownership as well as the right to their return. Petitioner asks
that we find that the MLSA is an enforceable contract obligating
the return of the FRNs upon demand. We begin by discussing the
standard for summary judgment.
Summary Judgment
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. See, e.g., FPL Group,
Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). Either
party may move for summary judgment upon all or any part of the
legal issues in controversy. Rule 121(a). The Court may grant
summary judgment on a matter concerning which there is no genuine
issue as to any material fact and a decision may be rendered as a
matter of law. See Rule 121(b); Elec. Arts, Inc. v.
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Commissioner, 118 T.C. 226, 238 (2002). The moving party has the
burden of proving that no genuine issue of material fact exists
and that it is entitled to judgment as a matter of law.
Rauenhorst v. Commissioner, 119 T.C. 157, 162 (2002).
Here, the issue is whether the incidents of ownership of the
FRNs transferred from petitioner to Optech. This is a question
of fact established by the written agreement read in the light of
the attending facts and circumstances. See Calloway v.
Commissioner, 135 T.C. 26, 33 (2010). Respondent relies upon the
MLSA and the Schedule A-1 to show that the benefits and burden of
ownership passed from petitioner to Optech. See id. The parties
do not dispute the authenticity or terms of the MLSA or the
Schedule A-1 or whether petitioner transferred FRNs to Optech in
exchange for $900,000. We find that whether ownership passed
from petitioner to Optech can be determined by examining the MLSA
and the Schedule A-1. Accordingly, there is no genuine issue of
material fact for trial, and a decision may entered as a matter
of law.
Sale Versus Loan
The parties dispute whether petitioner’s transaction with
Optech was a loan or a sale. Courts have defined a loan as an
express or implied agreement where one person advances money to
the other and the other agrees to repay it upon such terms as
time and rate of interest. Welch v. Commissioner, 204 F.3d 1228,
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1230 (9th Cir. 2000), affg. T.C. Memo. 1998-221. There must be
an unconditional obligation on the part of the transferee to
repay the money, and an unconditional intention on the part of
the transferor to secure repayment. Haag v. Commissioner, 88
T.C. 604, 615-616 (1987), affd. without published opinion 855
F.2d 855 (8th Cir. 1988). Accordingly, there must be a bona fide
debtor-creditor relationship for the transaction to be
characterized as a loan.
We recently decided two factually similar cases involving
Optech’s affiliate, Derivium. See Calloway v. Commissioner,
supra; Shao v. Commissioner, T.C. Memo. 2010-189. The
transactions in Calloway and Shao mirrored the ESOP-QRP loan
program at issue, except that they used marketable shares instead
of FRNs. Like petitioner, the taxpayers transferred easily
marketable assets to Derivium under its 90-percent-stock-loan
program. Moreover, the taxpayers and Derivium entered into MLSAs
and loan schedules with terms substantially identical to the
agreements in this case. In Calloway, for instance, we
considered the substance of the transaction, not merely its form,
to determine whether the benefits and burdens of stock ownership
passed from the taxpayer to Derivium. Derivium did not hold the
stock as collateral, but rather immediately sold it and, based on
the sale price, passed 90 percent of the proceeds to the
taxpayer. Based on a number of factors, we found that the
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taxpayer transferred all rights and privileges of ownership to
Derivium and held that the transfer of stock to Derivium was a
sale. Calloway v. Commissioner, supra.
There is no factual difference here from either Calloway or
Shao. The benefits and burdens of the FRNs passed from
petitioner to Optech. Optech did not hold the FRNs as
collateral. Instead, Optech immediately sold the FRNs and, based
on the sale price, passed 90 percent to petitioner. We conclude
that petitioner sold his FRNs to Optech, thereby triggering
capital gain in 2004 from the ESOP stock sale.
We have considered all arguments made in reaching our
decision, and, to the extent not mentioned, we conclude that they
are moot, irrelevant, or without merit.
To reflect the foregoing,
An appropriate order granting
respondent’s motion for summary
judgment and denying petitioner’s
cross-motion for summary judgment
and decision will be entered for
respondent.