Appeal from a Decision of the United States Tax Court Tax Ct. No. 9458-08
The opinion of the court was delivered by: M. Smith, Circuit Judge:
Argued and Submitted July 13, 2012-Seattle, Washington
Before: Mary M. Schroeder, Andrew J. Kleinfeld, and Milan D. Smith, Jr., Circuit Judges.
Opinion by Judge Milan D. Smith, Jr.
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 non-recourse 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.*fn1
On July 6, 2004, Sollberger entered into the Master Loan Financing and Security Agreement (the Master Agreement) with Optech.*fn2 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 non-recourse to Sollberger and secured only by the FRNs.*fn3
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 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.*fn4 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 ...