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 crossmotion for partial summary judgment, each filed under Rule 121.1

Petitioner transferred floating rate notes (FRNs) to Optech Ltd.

1All 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

2Derivium, 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-stockloan 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. 

3We 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.