Sollberger v. Comm'r, 11–71883.

• Decision Date: 16 August 2012
• Docket Number: No. 11–71883.,11–71883.
• Citation: 691 F.3d 1119,2012 Daily Journal D.A.R. 11441,12 Cal. Daily Op. Serv. 9376,110 A.F.T.R.2d 2012
• Parties: Kurt SOLLBERGER, Petitioner–Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

691 F.3d 1119

110 A.F.T.R.2d 2012-5609

12 Cal. Daily Op. Serv. 9376

2012 Daily Journal D.A.R. 11,441

Kurt SOLLBERGER, Petitioner–Appellant,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.

No. 11–71883.

United States Court of Appeals,Ninth Circuit.

Argued and Submitted July 13, 2012.

Filed Aug. 16, 2012.

Brian G. Isaacson (argued), Isaacson & Wilson, P.S., Seattle, WA, 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.

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 9458–08.

Before: MARY M. SCHROEDER, ANDREW J. KLEINFELD, and MILAN D. SMITH, JR., Circuit Judges.

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 Sollberger'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 Sollberger. 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 constituted 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 original 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 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.³Optech 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 difference, 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. Sollberger had previously used the FRNs as collateral for another loan in the amount of $293,274.21, and Bancroft Ventures, Limited (Bancroft) paid off that loan.⁴ Optech acknowledged receipt of the FRNs on July 21, 2004. A few days later, Bancroft 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 federal income tax return. The Internal Revenue Service (the IRS) determined that Sollberger sold the FRNs in 2004, earning a long-term capital gain of $852,251 (the amount of the $900,000 loan in the aggregate, less Sollberger's basis of $47,749). Accordingly, the IRS found that Sollberger owed $128,979 in additional taxes, plus interest.

Sollberger petitioned the tax court to redetermine his deficiency. The tax court granted Respondent–Appellee Commissioner of Internal Revenue's (the Commissioner) motion for summary judgment, and denied Sollberger's motion for partial 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 Sollbergerowed 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 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, 98 S.Ct. 1291, 55 L.Ed.2d 550 (1978) (internal quotation marks and citation omitted).

“There is no simple device available to peel away the form of [a] transaction and to reveal its substance.” Id. at 576, 98 S.Ct. 1291. Nevertheless, “[t]echnical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive 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 quotation marks and citation omitted).

Taxable income includes gains from the sale or other disposition of property. See26 U.S.C. §§ 61(a)(3), 1001(a). The term “sale” is “given its ordinary meaning,” which “is a transfer of property for a fixed price in money or its equivalent” 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, 85 S.Ct. 1162, 14 L.Ed.2d 75 (1965) (internal quotation marks omitted and alterations in original).

“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 purposes:

(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. at 33–36 (applying the Grodt & McKay factors to determine 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,” hamstringing a court's effort to discern a...