Sollberger v. CIR

The determination of “whether a sale occurs for tax purposes is based on a flexible case-by-case analysis of whether the burdens and benefits of ownership have been transferred.”

On January 1, 2000, the president of Swiss Micron, Inc., Kurt Sollberger, used the proceeds of a sale of 340 shares to purchase floating rate notes (“FRNs”) issued by Bank of America, thereby allowing Sollberger to defer any capital gains taxes that would have been imposed on his profit from the sale. The FRNs had a face value of $1,000,000. Four years later, Sollberger negotiated a Master Loan Financing and Security Agreement with Optech Limited (“Optech”) under which Optech loaned Sollberger 90 percent of the face value of the FRNs. Sollberger transferred the rights to Optech to hold, trade, or sell the FRNs. Optech instantly exercised its option to sell and obtained the benefit of the $1,000,000 face value, using 90 percent of the proceeds of the sale to fund Sollberger’s loan. Sollberger argued that the agreement was a loan and not taxable, thus avoiding $128,979 in capital gains taxes. The IRS found that Sollberger owed the additional taxes plus interest. Sollberger petitioned the tax court to review his claim. The tax court granted the IRS’s motion for summary judgment. On appeal, Sollberger contended that the transaction was a transfer of the FRNs as collateral for a loan. The Court determined that the FRNs were sold to Optech in return for 90 percent of their face value from which Sollberger realized a capital gain. Thus, the Court held that the 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.” AFFIRMED.