Sollberger v. Commissioner , 691 F.3d 1119 ( 2012 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
KURT SOLLBERGER, 
Petitioner-Appellant, No. 11-71883
v.
 Tax Ct. No.
9458-08
COMMISSIONER OF INTERNAL
REVENUE, OPINION
Respondent-Appellee.

Appeal from a Decision of the
United States Tax Court
Argued and Submitted
July 13, 2012—Seattle, Washington
Filed August 16, 2012
Before: Mary M. Schroeder, Andrew J. Kleinfeld, and
Milan D. Smith, Jr., Circuit Judges.
Opinion by Judge Milan D. Smith, Jr.
9421
SOLLBERGER v. CIR 9423
COUNSEL
Brian G. Isaacson (argued), Isaacson & Wilson, P.S., Seattle,
Washington, for the petitioner-appellant.
Tamara W. Ashford, Kenneth L. Greene, Andrew M. Weiner
(argued), United States Department of Justice, Tax Division,
Washington, D.C., for the respondent-appellee.
9424 SOLLBERGER v. CIR
OPINION
M. SMITH, Circuit Judge:
Petitioner-Appellant Kurt Sollberger (Sollberger) appeals
from a decision of the United States Tax Court (the tax court),
which concluded that he owes $128,979 in income tax for the
2004 taxable year. Sollberger entered into an agreement with
Optech Limited (Optech) pursuant to which he transferred
floating rate notes (FRNs) worth approximately $1 million to
Optech in return for a nonrecourse loan of ninety percent of
the FRNs’ value. The loan agreement gave Optech the right
to receive all dividends and interest on the FRNs, and the
right to sell the FRNs during the loan term without Sollber-
ger’s consent. Instead of holding the FRNs as collateral for
the loan, Optech immediately sold the FRNs and, based on the
sale price, transferred ninety percent of the proceeds to Soll-
berger. Sollberger did not report that he had sold the FRNs in
his 2004 federal income tax return.
We hold that Sollberger’s transaction with Optech consti-
tuted a sale for tax purposes, despite its taking the form of a
loan, because the burdens and benefits of owning the FRNs
were transferred to Optech. See Gray v. Comm’r, 561 F.2d
753, 757 (9th Cir. 1977). Accordingly, we affirm the decision
of the tax court.
FACTUAL AND PROCEDURAL BACKGROUND
Sollberger is president of Swiss Micron, Inc. (Swiss
Micron). On June 1, 1999, Swiss Micron adopted the Swiss
Micron, Inc. Employee Stock Ownership Plan (the ESOP).
On January 1, 2000, Sollberger sold 340 shares of Swiss
Micron stock to the ESOP for $1,032,240. Because his origi-
nal basis in the stock was $47,749, he earned a profit of
$984,491. Instead of recognizing the capital gain from the
sale of Swiss Micron stock, Sollberger exercised his option
under 26 U.S.C. § 1042(a) to defer paying taxes on the profit
SOLLBERGER v. CIR 9425
by using the stock sale proceeds to purchase FRNs issued by
Bank of America, with a face value of $1,000,000.1
On July 6, 2004, Sollberger entered into the Master Loan
Financing and Security Agreement (the Master Agreement)
with Optech.2 Under the Master Agreement, Optech agreed to
loan Sollberger ninety percent of the face value of the FRNs
pursuant to the Schedule A-1 Loan Schedule (the Loan
Schedule). In return, Sollberger agreed to transfer custody of
the FRNs to Optech and give Optech certain rights. The loan
was nonrecourse to Sollberger and secured only by the FRNs.3
Optech was to receive the quarterly interest payments from
the FRNs and apply them to the quarterly interest accruing on
the loan, with Sollberger being responsible for paying the dif-
ference, if any. The loan term was seven years, and Sollberger
was not allowed to prepay the principal before the maturity
date. Optech agreed to return the FRNs to Sollberger at the
end of the loan term if Sollberger had repaid the loan amount
in full, in addition to any outstanding net interest, and late
penalties due. However, Optech was given the right to sell or
otherwise dispose of the FRNs during the loan term, without
giving Sollberger notice, or receiving his consent.
On July 9, 2004, Sollberger instructed his bank to transfer
the FRNs to a Morgan Keegan & Co. Inc. bank account. Soll-
berger had previously used the FRNs as collateral for another
loan in the amount of $293,274.21, and Bancroft Ventures,
1
FRNs are notes “carrying a variable interest rate that is periodically
adjusted within a predetermined range.” See Black’s Law Dictionary 1162
(9th ed. 2009).
2
When referring to the Optech-Sollberger transaction in this opinion, the
word “loan” is used only to describe the transaction’s form, not its sub-
stance.
3
A “nonrecourse loan” is a loan in which a lender may seek recovery
only against the collateral, not the borrower’s personal assets, if the loan
is not repaid. See Black’s Law Dictionary 1020 (9th ed. 2009); see also
Shao v. Comm’r, 100 T.C.M. 182, 2010 WL 3377501, at *2
(2010).
9426 SOLLBERGER v. CIR
Limited (Bancroft) paid off that loan.4 Optech acknowledged
receipt of the FRNs on July 21, 2004. A few days later, Ban-
croft sold the FRNs. Optech then informed Sollberger that he
would receive a loan in the sum of $900,000, less the
$293,274.21 expended by Bancroft to repay the previous loan
from a third party to Sollberger, for a total net loan of
$606,725.79. Sollberger received the net loan amount on
August 2, 2004.
After Sollberger obtained the aggregate funds from Optech,
he received quarterly account statements from Optech for the
third and fourth quarter of 2004, and for the first quarter of
2005. The statements listed the FRNs as collateral (although
they had already been sold) and showed the quarterly interest
purportedly earned on the FRNs (which were shown as a
credit against the loan interest). Initially, Sollberger paid the
difference between the interest accruing under the loan and
the interest from the FRNs. After the first quarter of 2005,
Sollberger stopped receiving account statements, and he
stopped making interest payments.
Sollberger did not report selling the FRNs on his 2004 fed-
eral income tax return. The Internal Revenue Service (the
IRS) determined that Sollberger sold the FRNs in 2004, earn-
ing a long-term capital gain of $852,251 (the amount of the
$900,000 loan in the aggregate, less Sollberger’s basis of
4
The precise relationship between Bancroft and Optech is unclear.
According to the Government, Optech was part of an affiliated group in
which Derivium Capital, LLC (Derivium) was the most prominent mem-
ber. Bancroft and another corporation allegedly provided funding to
Derivium. Derivium, Optech, and Bancroft were all allegedly controlled
by the owners of Derivium, and were operated as alter egos of one
another. See In re Derivium Capital, LLC, 437 B.R. 798, 816 (Bankr.
D.S.C. 2010) (finding genuine issues of material fact about whether
Derivium exercised total dominion and control over Bancroft and Optech).
Derivium “eventually went bankrupt and is widely reported to have been
a Ponzi scheme.” Shao, 2010 WL 3377501, at *1. Sollberger agrees that
Optech was an affiliate of Derivium.
SOLLBERGER v. CIR 9427
$47,749). Accordingly, the IRS found that Sollberger owed
$128,979 in additional taxes, plus interest.
Sollberger petitioned the tax court to redetermine his defi-
ciency. The tax court granted Respondent-Appellee Commis-
sioner of Internal Revenue’s (the Commissioner) motion for
summary judgment, and denied Sollberger’s motion for par-
tial summary judgment. In prior decisions, the tax court had
held that essentially identical transactions between taxpayers
and Derivium were sales triggering capital gains rather than
loans. See Shao, 2010 WL 3377501, at *6; Calloway v.
Comm’r, 135 T.C. 26, 39 (2010). Applying these precedents,
the tax court concluded that Sollberger sold his FRNs to
Optech, triggering capital gains in 2004, on which Sollberger
owed taxes. After the tax court entered its final decision on
April 6, 2011, Sollberger filed a timely notice of appeal, on
July 5, 2011.
STANDARD OF REVIEW AND JURISDICTION
“We review the Tax Court’s grant of summary judgment de
novo.” Taproot Admin. Servs., Inc. v. Comm’r, 679 F.3d
1109, 1114 (9th Cir. 2012).
We have jurisdiction pursuant to 26 U.S.C. § 7482(a)(1).
DISCUSSION
The primary question in this appeal is whether Sollberger’s
transaction with Optech should be treated as a sale for tax
purposes. Although he acknowledges that the transaction took
the form of a loan, Sollberger contends that the transaction
was neither a sale nor a loan, but a transfer of the FRNs as
collateral for a loan, and a theft by Optech of ten percent of
their value. The Commissioner disagrees, arguing that the
transaction was a sale artfully disguised as a loan.5 If the
5
Although the Commissioner does not speculate about Sollberger’s
motive, Sollberger would have received ninety percent of the FRNs’ value
9428 SOLLBERGER v. CIR
transaction was a sale, Sollberger earned capital gains in
2004, on which he owes taxes.
“As an overarching principle, absent specific provisions,
the tax consequences of any particular transaction must reflect
the economic reality.” Wash. Mut. Inc. v. United States, 636
F.3d 1207, 1218 (9th Cir. 2011). “In the field of taxation,
administrators of the laws and the courts are concerned with
substance and realities, and formal written documents are not
rigidly binding.” Frank Lyon Co. v. United States, 435 U.S.
561, 573 (1978) (internal quotation marks and citation omit-
ted).
“There is no simple device available to peel away the form
of [a] transaction and to reveal its substance.” Id. at 576. Nev-
ertheless, “[t]echnical considerations, niceties of the law of
trusts or conveyances, or the legal paraphernalia which inven-
tive genius may construct must not frustrate an examination
of the facts in the light of economic realities.” Lazarus v.
Comm’r, 513 F.2d 824, 829 n.9 (9th Cir. 1975) (internal quo-
tation marks and citation omitted).
[1] Taxable income includes gains from the sale or other
disposition of property. See 26 U.S.C. §§ 61(a)(3), 1001(a).
The term “sale” is “given its ordinary meaning,” which “is a
in cash free of any tax if the transaction had been deemed a loan by the
Commissioner, leaving him better off than if he had sold the FRNs for
their full market value and paid taxes on the gain. See Calloway, 135 T.C.
at 38; see also Comm’r v. Tufts, 461 U.S. 300, 307 (1983) (“When a tax-
payer receives a loan, he incurs an obligation to repay that loan at some
future date. Because of this obligation, the loan proceeds do not qualify
as income to the taxpayer.”). Whatever Sollberger understood, “Derivium
USA promoted ‘the 90% Stock Loan’ and other products to people who
held appreciated securities with a relatively low basis, promising that the
transactions would allow customers to ‘monetize’ their securities without
paying taxes on their capital gains.” United States v. Cathcart, No. C 07-
4762 PJH, 2010 WL 1048829, at *4 (N.D. Cal. Feb. 12, 2010), adopted,
2010 WL 807444 (N.D. Cal. Mar. 5, 2010).
SOLLBERGER v. CIR 9429
transfer of property for a fixed price in money or its equiva-
lent” and “a contract to pass rights of property for money,—
which the buyer pays or promises to pay to the seller.”
Comm’r v. Brown, 380 U.S. 563, 571 (1965) (internal quota-
tion marks omitted and alterations in original).
[2] “For tax purposes, sale is essentially an economic
rather than a formal concept.” Gray, 561 F.2d at 757. A
court’s “task is to examine all of the factors to determine the
point at which the burdens and benefits of ownership were
transferred.” Id.
We note that the tax court has identified eight relevant
criteria it uses to determine whether a sale occurs for tax pur-
poses:
(1) Whether legal title passes; (2) how the parties
treat the transaction; (3) whether an equity was
acquired in the property; (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.
Grodt & McKay Realty, Inc. v. Comm’r, 77 T.C. 1221, 1237-
38 (1981) (internal citations omitted); see also Calloway, 135
T.C. 33-36 (applying the Grodt & McKay factors to deter-
mine whether a taxpayer’s transaction with Derivium was a
sale). Although we agree that these criteria may be relevant
in a particular case, we do not regard them as the only indicia
of a sale that a court may consider. Creating an exclusive list
of factors risks over-formalizing the concept of a “sale,” ham-
stringing a court’s effort to discern a transaction’s substance
9430 SOLLBERGER v. CIR
and realities in evaluating tax consequences. See Frank Lyon,
435 U.S. at 573; Lazarus, 513 F.2d at 829 n.9.
[3] To determine whether a sale occurs for tax purposes,
we continue to apply a flexible, case-by-case analysis of
whether the burdens and benefits of ownership have been
transferred. See Gray, 561 F.2d at 757.6 The Grodt & McKay
factors may provide a useful starting point for analyzing the
Sollberger-Optech transaction, but are by no means the end of
our inquiry.
[4] Here, we have no difficulty concluding that the eco-
nomic reality of the Optech-Sollberger transaction is that Soll-
berger sold the FRNs to Optech in return for ninety percent
of their face value. The rights given to Optech in the relevant
agreements suggest that the transaction was a sale. Although
the transaction took the form of a loan, Sollberger transferred
the FRNs to Optech, and gave Optech the right to sell the
FRNs (which Optech promptly exercised), to transfer the reg-
istration of the FRNs into its own name, and to keep all inter-
est due from the FRNs. Sollberger would not be personally
liable if he did not make payments on the loan since it was
nonrecourse. See Shao, 2010 WL 3377501, at *2. Nonre-
course financing, which is sometimes viewed as an “indicator
of a sham transaction,” Sacks v. Comm’r, 69 F.3d 982, 988
(9th Cir. 1995), placed Sollberger more in the position of a
seller than a debtor. Nowhere in the Master Agreement or the
Loan Schedule did Sollberger promise to repay the money
6
See also Clodfelter v. Comm’r, 426 F.2d 1391, 1393-94 (9th Cir. 1970)
(stating that “[t]here are no hard and fast rules of thumb that can be used
in determining, for taxation purposes, when a sale was consummated, and
no single factor is controlling; the transaction must be viewed as a whole
and in light of realism and practicality” and noting that passage of title,
transfer of possession, and whether an unconditional duty to pay arises are
all relevant considerations) (citations omitted); Merrill v. Comm’r, 336
F.2d 771, 771 (9th Cir. 1964) (affirming on the basis of the tax court’s
opinion in Merrill v. Comm’r, 40 T.C. 66 (1963), which considered when
legal title to property had passed and the parties’ intent).
SOLLBERGER v. CIR 9431
“lent” to him. Instead, Optech merely agreed to return the
FRNs if Sollberger repaid the loan at the end of the seven-
year loan term, thereby giving Sollberger the option of repur-
chasing the FRNs in seven years, but not requiring him to do
so. Thus, the transaction was more akin to an option contract,
whereunder the FRNs were sold, but the seller retained a call
option to reacquire them after seven years, if he elected to do
so, than a true loan. See Calloway, 135 T.C. at 38.
[5] Optech’s risk of loss would have arisen only if Sollber-
ger had actually repaid the loan. Id. at 38-39. As the tax court
found in a very similar case, where Derivium “lent” a tax-
payer ninety percent of the value of his stock and then sold
his stock, the “lender” had no economic incentive to expect
or desire that the loan be repaid. See id. at 39. If the FRNs lost
value after Sollberger transferred them to Optech, he would
have been foolish to repay the nonrecourse loan at the end of
the loan term, since he had no personal liability for the princi-
pal or interest allegedly due. See id. at 38. If Sollberger did
not repay the loan, Optech could simply keep the profit it had
already earned from selling the FRNs. But if the FRNs sub-
stantially increased in value above the balance due on the
loan, Sollberger might have an incentive to repay his loan and
exercise his option to repurchase the FRNs from Optech. See
id. If that happened, Optech would be forced to reacquire the
FRNs it had sold, thereby compelling it to sustain a loss.
Thus, the only way Optech could have lost money on the
transaction is if the FRNs had increased in value, motivating
Sollberger to repay the loan and demand that the FRNs be
returned to him. The fact that Optech did not expect or desire
for the amount lent to be repaid is yet another indicator that
the transaction was a sale. See id. at 38-39.
[6] Sollberger’s and Optech’s conduct also confirms our
conclusion that the transaction was, in substance, a sale.
Although interest accrued on the loan, Sollberger stopped
receiving account statements and making interest payments
after the first quarter of 2005, less than one year into the
9432 SOLLBERGER v. CIR
seven-year loan term. Thus, neither Sollberger nor Optech
maintained the appearance that a genuine debt existed for
long. The total amount that Sollberger paid to Optech was de
minimis compared to the size of the loan. The FRNs were also
sold before Sollberger received the loan from Optech, which
suggests that Optech funded the majority of the “loan
amount” with the proceeds received from the sale of the
FRNs. The apparent lack of any ability or intention by Optech
to hold the FRNs as collateral to secure repayment of the loan
further buttresses our conclusion that the transaction was
merely a sale in the false garb of a loan. See Gray, 561 F.2d
at 757.
Sollberger’s arguments that the transaction was not a sale
for tax purposes are easily addressed and discarded. Although
Optech may have gotten the better end of the bargain because
Sollberger received less than the full market value of the
FRNs and still owes taxes on his gain, Sollberger received the
benefit of his bargain. Perhaps like the taxpayer in Calloway,
Sollberger engaged in the transaction because he believed he
could receive ninety percent of his asset’s value tax free. See
Calloway, 135 T.C. at 38. If that was his belief, he was sorely
mistaken, and the scheme only appears to be a theft in hind-
sight because it did not allow him to evade taxes. The fact that
the sale of an asset, in the fullness of time, appears to have
been a bad decision for a seller does not change the character
of the transaction for tax purposes.7 Thus, we reject Sollber-
7
See Don E. Williams Co. v. Comm’r, 429 U.S. 569, 579-80 (1977)
(stating that “a transaction is to be given its tax effect in accord with what
actually occurred and not in accord with what might have occurred” and
“[t]his Court has observed repeatedly that, while a taxpayer is free to orga-
nize his affairs as he chooses, nevertheless, once having done so, he must
accept the tax consequences of his choice, whether contemplated or not
. . . and may not enjoy the benefit of some other route he might have cho-
sen to follow but did not”) (internal quotation marks and citation omitted);
Wash. Mut., 636 F.3d at 1221 (“Because the tax consequences of a trans-
action flow by operation of the tax law, the parties’ failure to anticipate
and negotiate all tax consequences of their transaction cannot be inter-
preted as limiting the transaction’s tax consequences to only those
expressly anticipated and bargained over by the parties.”).
SOLLBERGER v. CIR 9433
ger’s argument that the sale was not really a sale because Op-
tech profited at his expense.
Sollberger further argues that the transaction was not a sale
for tax purposes because he retained the right to have his col-
lateral returned on demand since Optech had not fulfilled a
condition precedent under the Master Agreement to fund a
loan or implement a hedging strategy. This argument is based
on Sollberger’s misreading of the relevant agreements. The
Master Agreement provided that “[e]ither party may terminate
this Agreement at any time prior to the Lender’s receipt of the
Collateral and the initiation of any of the Lender’s hedging
transactions.” The Loan Schedule, which set forth the final
terms of the loan, provided that the seven-year loan term
would “start[ ] from the date on which final Loan proceeds
are delivered on the Loan transaction.” Optech was entitled to
hold and sell the FRNs during the loan term, and Sollberger
had no right to demand the return of the FRNs during that
time period. Here, Sollbrger instructed his bank to transfer the
FRNs to Optech on July 9, 2004, and Optech acknowledged
receipt of the collateral on July 21, 2004. Optech then sold the
FRNs on July 26, 2004 and delivered the loan proceeds to
Sollberger on August 2, 2004. Sollberger did not attempt to
void the agreement pursuant to the termination clause before
Optech received and sold the FRNs. Although Optech may
have breached the Master Agreement by selling the FRNs
prior to the start of the loan term, as Sollberger contends, this
breach does not transform the transaction into something
other than a taxable sale of property. Accordingly, Sollber-
ger’s argument is unavailing.
[7] Sollberger also contends that he qualifies for the safe
harbor for nonrecognition of gain or loss under 26 U.S.C.
§ 1058. We disagree. Section 1058 exempts certain transfers
of securities from the capital gains tax so long as the trans-
feror is entitled to receive payments in amounts equivalent to
all interest that the owner of the securities is entitled to
receive, and provided that the transfer does “not reduce the
9434 SOLLBERGER v. CIR
risk of loss or opportunity for gain of the transferor.” See 26
U.S.C. § 1058(b)(2), (3). Even assuming Sollberger did not
waive this argument below, the Master Agreement gave Opt-
ech the right to receive all dividends and interest on the FRNs.
The nonrecourse nature of the loan eliminated any risk that
Sollberger would receive less than the loan amount, and the
seven-year term during which Sollberger could not pay off the
loan and receive the FRNs back eliminated his opportunity for
gain for at least seven years. Thus, Sollberger is not eligible
for the safe harbor because he fails to meet § 1058’s require-
ments. See Calloway, 135 T.C. 43-45; see also Samueli v.
Comm’r, 661 F.3d 399, 407 (9th Cir. 2011) (agreeing that a
transaction did not meet the requirements of § 1058 where the
taxpayers relinquished all control over securities for all but 2
days in a term of approximately 450 days).
[8] Lastly, Sollberger also seems to argue that the transac-
tion with Optech should not be treated as a sale under Trea-
sury Regulation § 1.1001-1(a) or Revenue Ruling 57-451.
Unlike the transaction described in Revenue Ruling 57-451,
Sollberger transferred FRNs rather than stock to Optech, Soll-
berger received a loan amount in exchange for the FRNs, and
Sollberger had no right to demand that he be put in the eco-
nomic position he would have enjoyed as the owner of the
FRNs had he not entered into the loan transaction. See Rev.
Rul. 57-451, 1957-2 C.B. 295 (1957). Thus, Revenue Ruling
57-451 is of no help to Sollberger because this ruling requires
that a transaction involve stock; that the transferor have the
right to be restored, on demand, to the economic position he
would have enjoyed as the owner of the stock, if he had not
entered into the transaction; and that the transferee act as a
custodian, not as a buyer, of the stock. See id.; see also Cal-
loway, 135 T.C. 42. Treasury Regulation § 1.1001-1(a) also
does not help Sollberger because, as discussed above, he sold
the FRNs for money, and the regulation expressly provides
that “the conversion of property into cash . . . is treated as
income or as loss sustained.” Treas. Reg. § 1.1001-1(a). Thus,
SOLLBERGER v. CIR 9435
Sollberger’s argument that the transaction should be exempt
under Treasury Regulation § 1.1001-1(a) is incorrect.
[9] We hold that Sollberger sold the FRNs to Optech,
thereby triggering capital gains tax in 2004. Because Sollber-
ger did not report selling the FRNs on his 2004 federal
income tax return, we affirm the tax court’s decision that
there is a $128,979 deficiency in income tax due from Soll-
berger for the 2004 taxable year.
CONCLUSION
For the foregoing reasons, we affirm the tax court.
AFFIRMED.