Optech agreed to loan him 90% of the value of the FRNs on a non-recourse basis.
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.
Rather than sell the note and pay the tax he entered into a deal with a company called Optech.
If the plan were to be actually followed through in detail, the interest earned on the FRNs would not simply wash the interest owed to Optech.
Optech would apply the interest earned on the FRNs to the interest that Mr. Sollberger owed Optech and he would pay the difference, if he felt like it.
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.
If it went into investments though the Optech interest would be deductible as investment interest, which when you consider all the computations tied to AGI makes it not a wash.
The FRN interest would be includible in gross income and the interest to Optech would be deductible or not based on how Mr. Sollberger had spent the money he received from Optech.
Also, it seems that despite what I just explained about the interest tracing rules, he had been treating the FRN interest collected and the Optech interest paid as a wash for income tax purposes, which makes the ending kind of puzzling.
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