132 T.C. No. 4

UNITED STATES TAX COURT

HENRY AND SUSAN F. SAMUELI, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

THOMAS G. AND PATRICIA W. RICKS, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 13953-06, 14147-06. Filed March 16, 2009.

Ps-S purchased an approximate $1.64 billion of

securities from F in October 2001 and simultaneously

transferred the securities back to F pursuant to F’s

promise to transfer identical securities to Ps-S on

Jan. 15, 2003. The agreement between Ps-S and F

allowed Ps-S to require an earlier transfer of the

identical securities only by terminating the

transaction on July 1 or Dec. 2, 2002. Ps-S did not

require an earlier transfer and sold the securities to

F on Jan. 15, 2003. Ps treated the transaction as a

securities lending arrangement subject to sec. 1058,

I.R.C., and Ps-S reported an approximate $50.6 million

long-term capital gain on the sale. Ps also deducted

millions of dollars of interest related to the

transaction. R determined that the transaction was not

a securities lending arrangement subject to sec. 1058,

I.R.C. Instead, R determined that Ps-S purchased the
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securities from and immediately sold the securities to

F in 2001 at no gain or loss and then repurchased from

(pursuant to a forward contract) and immediately resold

the securities to F in 2003 realizing an approximate

$13.5 million short-term capital gain. R also

disallowed all of Ps’ interest deductions because the

corresponding debt that Ps claimed was related to the

transaction did not exist.

Held: The transaction is not a securities lending

arrangement subject to sec. 1058, I.R.C., because the

ability of Ps-S to cause F to transfer the identical

securities to Ps-S on only three of the approximate

450 days during the transaction period reduced their

“opportunity for gain * * * in the transferred

securities” under sec. 1058(b)(3), I.R.C. The

substance of the transaction was the purchases and

sales that R determined.

Held, further, Ps are not entitled to their

claimed interest deductions because the debt Ps claimed

was related to the transaction did not exist.

Nancy L. Iredale, Jeffrey G. Varga, and Stephen J.

Turanchik, for petitioners.

Miles B. Fuller and Louis B. Jack, for respondent.

OPINION

KROUPA, Judge: These consolidated cases are before the

Court on petitioners’ motion for summary judgment and

respondent’s cross-motion for partial summary judgment. 

Respondent determined a $2,177,532 deficiency for 2001 and a

$171,026 deficiency for 2003 in the Federal income taxes of Henry

and Susan F. Samueli (collectively, Samuelis). Respondent

determined a $6,126 deficiency for 2001 in the Federal income tax
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1The Samuelis were the primary participants in the

Transaction. The relevant participation of the Rickses involved

their claim to an interest deduction related to the Transaction.

2Section references are to the applicable versions of the

Internal Revenue Code, and Rule references are to the Tax Court

Rules of Practice and Procedure, unless otherwise stated.

of Thomas G. and Patricia W. Ricks (collectively, Rickses). Each

deficiency relates to petitioners’ participation in a leveraged

securities transaction (Transaction).1 Petitioners treated the

Transaction as a securities lending arrangement subject to

section 1058,2 the provisions of which we set forth in an

appendix.

These cases present an issue of first impression on the

interpretation of section 1058(b)(3). Specifically, we decide

whether the agreement (Agreement) underlying the Transaction did

“not reduce the * * * opportunity for gain of the transferor of

the securities in the securities transferred” within the meaning

of section 1058(b)(3). We agree with respondent’s primary

determination that the Agreement did reduce the Samuelis’

opportunity for gain in the securities (Securities) transferred

in the Transaction. Accordingly, we hold that the Transaction

did not qualify as a securities lending arrangement under section

1058. We also decide whether petitioners may deduct interest

claimed paid with respect to the Transaction. We hold they may

not because the debt that petitioners claimed was related to the

Transaction did not exist.
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Background

I. Preliminaries

The parties filed an extensive stipulation of facts with

accompanying exhibits. We treat the facts set forth in this

background section as true solely for purposes of deciding the

parties’ motions, not as findings of fact for these cases. See

Fed. R. Civ. P. 52(a); P & X Mkts., Inc. v. Commissioner,

106 T.C. 441, 442 n.2 (1996), affd. without published opinion

139 F.3d 907 (9th Cir. 1998).

II. Individuals and Entities

A. Overview of Petitioners

Petitioners are two couples, each husband and wife, who

filed joint Federal individual income tax returns for the

relevant years. Each petitioner resided in California when his

or her petition was filed with the Court.

B. Mr. Samueli

Henry Samueli (Mr. Samueli) is a billionaire who co-founded

Broadcom Corporation, a publicly traded company listed on the

NASDAQ Exchange.

C. H&S Ventures

H&S Ventures, LLC (H&S Ventures), was a limited liability

company that was treated as a partnership for Federal tax

purposes. Mr. Samueli owned 10 percent of H&S Ventures, Susan

Samueli owned 10 percent of H&S Ventures, and the Samuelis’
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3The parties agree that Shiloh is disregarded for Federal

tax purposes because it was a grantor trust subject to secs. 671

through 679. We refer to Shiloh as the Samuelis.

grantor trust (Shiloh) owned the remaining 80 percent of H&S

Ventures.3 H&S Ventures was the primary entity through which the

Samuelis conducted their business affairs.

D. Mr. Ricks and Mr. Schulman

Thomas Ricks (Mr. Ricks) was the chief investment officer

for H&S Ventures and an investment adviser to the Samuelis. 

Michael Schulman (Mr. Schulman) was the managing director of H&S

Ventures and the Samuelis’ personal attorney.

E. TFSC

Twenty-First Securities Corporation (TFSC) was a brokerage

and financial services firm specializing in structuring leveraged

securities transactions for wealthy clients. TFSC structured the

Transaction for the Samuelis. TFSC was unrelated to the

Samuelis.

III. Genesis of the Transaction

TFSC had forecast in 2001 that interest rates would decline. 

Katherine Szem (Ms. Szem), then a tax partner with Arthur

Andersen LLP, discussed with Thomas Boczar (Mr. Boczar), Director

of Marketing for Financial Institutions at TFSC, the pricing and

mechanics of a leveraged securities transaction for the Samuelis. 

Ms. Szem suggested to Mr. Schulman that the Samuelis consider

entering into a leveraged securities transaction.
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4The word “STRIPS” is an acronym for the investment term

“Separate Trading of Registered Interest and Principal of

Securities.” See Acronyms, Initialisms & Abbreviations

Dictionary 3455 (20th ed. 1996).

Mr. Boczar forwarded to Mr. Ricks hypothetical leveraged

transactions using fixed-income securities including U.S.

Treasury STRIPS and agency STRIPS,4 such as those from the

Federal Home Loan Mortgage Corporation (Freddie Mac). The

profitability of these transactions hinged on a fluctuation of

market interest rates favorable to the investor; i.e., an

investor would borrow money at a variable interest rate to invest

in fixed-income securities and could realize a gain from the

investment if market interest rates then declined. Two days

later, Mr. Ricks recommended to Mr. Schulman that the Samuelis

invest in a proposed leveraged securities transaction. Shortly

after that, the Samuelis decided to make such an investment.

IV. The Transaction

A. Investors in the Transaction

The Samuelis, the Rickses, and Mr. Schulman invested in the

Transaction. The Samuelis held a 99.5-percent interest in the

Transaction. The Rickses and Mr. Schulman collectively held the

remaining one-half-percent interest. The Rickses’ interest was

.2 percent, and Mr. Schulman’s interest was .3 percent.
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5The Bond Market Association (formerly known as the Public

Securities Association) was the international trade association

for the bond market industry. The Bond Market Association merged

with the Securities Industry Association on Nov. 1, 2006, to form

the Securities Industry & Financial Markets Association.

B. Documents Underlying the Transaction

The Transaction was governed by five written documents

entered into by and between the Samuelis and their securities

broker, Refco Securities, LLC (Refco). These documents were

a(n): (1) Master Securities Loan Agreement (MSLA); (2) Amendment

to Master Securities Loan Agreement (Amendment); (3) Addendum to

the Master Securities Loan Agreement (Addendum); (4) Client’s

Agreement/Margin Agreement (Client Agreement); and (5) Refco

Statement of Interest Charges Pursuant to the “Truth-In-Lending”

Rule 10(b)-16. The MSLA, the Amendment, and the Client Agreement

were each entered into on or about October 11, 2001. The

Addendum was dated October 17, 2001.

C. Specifics of the Transaction

The Samuelis and Refco entered into the MSLA and the

Amendment approximately a week after the TFSC’s marketing

director contacted the Samuelis’ trusted adviser. Both the MSLA

and the Amendment were on standard forms used by the Bond Market

Association.5 The MSLA and the Amendment required the Samuelis

to acquire the Securities from Refco through the use of a margin

loan and then to “loan” the Securities to Refco. The MSLA and

the Amendment allowed the Samuelis to terminate the Transaction
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6The MSLA defined a “business day” as a day on which regular

trading occurred in the principal market for the Securities. We

include the identical securities in our term “Securities.”

7“LIBOR” is an acronym for “London Interbank Offering Rate.” 

See generally Bank One Corp. v. Commissioner, 120 T.C. 174, 189

(2003), affd. in part and vacated in part sub nom. J.P. Morgan

Chase & Co. v. Commissioner, 458 F.3d 564 (7th Cir. 2006).

(and thus cause Refco to transfer to the Samuelis securities

identical to the Securities) by giving notice to Refco before the

close of business on any “business day.”6 The Client Agreement

allowed Refco to hold the Securities as security for the margin

loan and to subject the Securities to a general lien and right of

setoff for all obligations of the Samuelis to Refco.

Refco and the Samuelis also entered into the Addendum. 

Unlike the MSLA and the Amendment, the Addendum was customized

and provided that the Samuelis’ “loan” of the Securities to Refco

would terminate on January 15, 2003 (and thus require Refco on

that date to provide the Samuelis with the Securities). The

Addendum also allowed the Samuelis to terminate the Transaction

earlier on July 1 or December 2, 2002 (early termination dates). 

Refco could purchase the Securities from the Samuelis at a price

established under a LIBOR-based formula set forth in the Addendum

if the Transaction was terminated on either early termination

date.7
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8The trade underlying this purchase was placed on Oct. 17,

2001, and the trade settled on Oct. 19, 2001.

D. The Samuelis’ 2001 Purchase

The Samuelis purchased the Securities from Refco in October

2001.8 The Securities consisted of a $1.7 billion principal

STRIP of the $5.7 billion principal on an unsecured fixed-income

obligation issued by Freddie Mac. The maturity date of the

obligation was February 15, 2003, and the yield to maturity on

October 17, 2001, at which the Securities accrued interest, was

fixed at 2.581 percent.

The Samuelis purchased the Securities at a price of

$1,643,322,000 ($1.64 billion). The Samuelis paid the $1.64

billion by obtaining a margin loan of the same amount from Refco

pursuant to the Client Agreement. The Samuelis deposited $21.25

million with Refco to obtain the margin loan. Refco held the

Securities as security for the margin loan, and the Securities

were subject to Refco’s general lien and right of setoff for all

of the Samuelis’ obligations to Refco.

Mr. Ricks paid $42,500 to participate in the Transaction. 

He paid this amount to purchase the Rickses’ .2-percent ownership

interest in the Securities owned by the Samuelis

($42,500/$21,250,000 = .2%).
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E. The Samuelis’ 2001 Transfer

The Samuelis transferred the Securities to Refco when their

trade for the purchase of the Securities settled. The MSLA

required Refco to transfer “cash collateral” to the Samuelis

equal to at least 100 percent of the market value of the

Securities before or concurrently with the Samuelis’ transfer. 

Refco transferred $1.64 billion to the Samuelis as cash

collateral contemporaneously with the Samuelis’ transfer of the

Securities to Refco. The Samuelis used that $1.64 billion upon

receipt to repay the margin loan. The MSLA stated that the

Samuelis were entitled to receive all interest, dividends, and

other distributions attributable to the Securities.

F. Variable Rate Fee

The Samuelis were obligated to pay Refco a fee (variable

rate fee) for use of the $1.64 billion cash collateral. The

amount of the variable rate fee was calculated by applying a

market-based variable interest rate to the amount of the cash

collateral. That variable rate generally reset on the first

Monday of each month from November 5, 2001, to January 14, 2003,

to a rate equal to 1-month LIBOR plus 10 basis points. The

variable rate was 2.60125 percent from October 19 to November 4,

2001, and decreased steadily through January 15, 2003, to 1.48

percent. The Samuelis accrued interest on their $21.25 million

deposit at the same rate as the variable rate.
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V. The Samuelis’ December 2001 Payment

Petitioners calculated that $7,815,983 ($7.8 million) of

interest had accrued on the cash collateral as of December 28,

2001, and on that date the Samuelis (on behalf of themselves, the

Rickses, and Mr. Schulman) wired the $7.8 million to Refco as

payment of that interest. Mr. Boczar had informed Mr. Ricks

approximately two weeks before that the money could be returned

to the Samuelis two weeks after the transfer. Refco applied the

$7.8 million to reduce the variable rate fee calculated as owed

to it with respect to the cash collateral.

Refco transferred $7.8 million to the Samuelis approximately

two weeks after the Samuelis’ transfer, and Refco recorded its

transfer to the Samuelis as additional cash collateral. The MSLA

allowed the Samuelis to borrow an additional $7.8 million because

the Securities had increased in value.

VI. Termination of the Transaction

The Samuelis did not terminate the Transaction on either

early termination date, and the Transaction terminated on

January 15, 2003. Refco obligated itself on the termination day

to pay the Samuelis $1,697,795,219 ($1.69 billion) to purchase

the Securities in lieu of transferring the Securities to the

Samuelis. The $1.69 billion reflected the amount for which the

Securities were trading on January 15, 2003. Simultaneously with

Refco’s obligating itself to pay the $1.69 billion to the
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Samuelis, the Samuelis obligated themselves to pay $1,684,185,567

($1.68 billion) to Refco. The $1.68 billion reflected repayment

of the $1.64 billion cash collateral, plus unpaid variable rate

fees that had accrued during the term of the Transaction.

The Samuelis determined that they realized a $13,609,652

($13.6 million) economic gain on the Transaction. The $13.6

million economic gain resulted from the $1.69 billion that Refco

obligated itself to pay to the Samuelis less the $1.68 billion

that the Samuelis obligated themselves to pay to Refco. The

Samuelis received a $35,388,983 ($35.3 million) wire transfer

from Refco on January 16, 2003. The $35.3 million reflected the

$13.6 million determined economic gain, plus a return of the

$21.25 million the Samuelis deposited with Refco to obtain the

margin loan, plus accrued interest of $529,331.

VII. Petitioners’ Reporting Position

The Samuelis claimed an interest deduction on their return

for 2001 for their reported portion of the $7.8 million wired to

Refco as an accrued interest payment on December 28, 2001. Their

reported portion, $7,796,903, was an approximate 99.8 percent of

the total payment. The Rickses also claimed on their return for

2001 an interest deduction for their portion of the $7.8 million. 

Their portion, $15,667, was .2 percent of the total payment. 
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9We use the term “forward contract” to refer to a contract

to buy the Securities for a fixed price on a date certain.

On their return for 2003, the Samuelis reported that they

realized a $50,661,926 long-term capital gain from the

Transaction. They calculated that gain as follows:

Proceeds of sale of securities

 from the Samuelis to Refco $1,697,795,219

 Less: Purchase price of securities 1,643,322,000

 Less: Transaction costs 3,556,710

 Gain 50,916,509

 The Samuelis’ 99.5-percent

 ownership interest .995

 Capital gain to the Samuelis 50,661,926

The Samuelis reported the $50,661,926 gain as a long-term capital

gain because they held the Securities for over a year.

The Samuelis treated the $1.68 billion (the original cash

collateral plus the unpaid variable rate fees) as accrued cash

collateral fees and claimed they were entitled to deduct a

portion ($32,792,720) as interest for 2003. The Rickses did not

deduct any cash collateral fees for 2003.

VIII. Respondent’s Determination

Respondent determined that the Transaction did not qualify

as a securities lending arrangement under section 1058. Instead,

respondent determined that the Samuelis purchased the Securities

from and immediately sold the Securities to Refco in October 2001

and then repurchased from (pursuant to a forward contract) and

immediately resold the Securities to Refco in January 2003.9

Thus, respondent determined, the Samuelis realized no gain or
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loss on the sale in 2001 and realized a short-term capital gain

of $13,541,604 on the sale in 2003. Further, respondent

determined, petitioners could not deduct the cash collateral fees

claimed paid as interest in connection with the reported

securities lending arrangement because no debt existed.

Discussion

I. Overview

Petitioners argue in moving for summary judgment that the

Agreement satisfied each requirement set forth in section

1058(b). Respondent counters that he is entitled to partial

summary judgment because the Agreement did not meet the specific

requirement in section 1058(b)(3). Respondent does not challenge

petitioners’ assertion that the Agreement satisfied each of the

other requirements set forth in section 1058(b). We therefore

shall decide whether full or partial summary judgment is

appropriate.

II. General Rules for Summary Judgment

Summary judgment is intended to expedite litigation and to

avoid unnecessary and expensive trials of phantom factual issues. 

See Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73, 75

(2004), affd. 404 F.3d 1291 (11th Cir. 2005). A decision on the

merits of a taxpayer’s claim can be made by way of summary

judgment “if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,
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together with the affidavits, if any, show there is no genuine

issue as to any material fact and that a decision may be rendered

as a matter of law.” Rule 121(b). The moving party bears the

burden of proving that there is no genuine issue of material

fact, and factual inferences are drawn in a manner most favorable

to the party opposing summary judgment. See Dahlstrom v.

Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commissioner,

79 T.C. 340, 344 (1982). Because summary judgment decides

against a party before trial, we grant such a remedy cautiously

and sparingly, and only after carefully ascertaining that the

moving party has met all requirements for summary judgment. See

Associated Press v. United States, 326 U.S. 1, 6 (1945).

III. Primary Issue Under Section 1058(b)(3)

The primary issue under section 1058(b)(3) is ripe for

summary judgment. That issue turns on the interpretation of

section 1058(b)(3), and the parties agree on all material facts

relating to the issue. Thus, to decide the issue we need only

interpret the plain meaning of the text “not reduce the * * *

opportunity for gain of the transferor of the securities in the

securities transferred” and apply that interpretation to the

agreed-upon facts. See Glass v. Commissioner, 124 T.C. 258, 281

(2005), affd. 471 F.3d 698 (6th Cir. 2006). We interpret that

text as written in the setting of the statute as a whole. See

Fla. Country Clubs, Inc. v. Commissioner, supra at 75-76; see
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also Huffman v. Commissioner, 978 F.2d 1139, 1145 (9th Cir.

1992), affg. T.C. Memo. 1991-144.

We focus on the meaning of the phrase “not reduce the * * *

opportunity for gain of the transferor of the securities in the

securities transferred.” We understand the verb “reduce” to mean

“to diminish in size, amount, extent, or number.” Webster’s

Third New International Dictionary 1905 (2002). We understand

the noun “opportunity” to mean “a combination of circumstances,

time, and place suitable or favorable for a particular activity

or action” and to be synonymous with the word “chance.” Id. at

1583. We therefore read the relevant phrase in the context of

the statutory scheme to mean that the Agreement will not meet the

requirement set forth in section 1058(b)(3) if the Agreement

diminished the Samuelis’ chance to realize a gain that was

present in the Securities during the transaction period. Stated

differently, the Samuelis’ opportunity for gain as to the

Securities was reduced on account of the Agreement if during the

transaction period their ability to realize a gain in the

Securities was less with the Agreement than it would have been

without the Agreement.

We conclude that the Agreement reduced the Samuelis’

opportunity for gain in the Securities for purposes of section

1058(b)(3) because the Agreement prevented the Samuelis on all

but three days of the approximate 450-day transaction period from
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10Petitioners concede that the Agreement increased the

Samuelis’ risk of loss because the Samuelis could not terminate

the Transaction at any time. We infer from this concession that

the Agreement also reduced the Samuelis’ opportunity for gain as

to the Securities.

causing Refco to transfer the Securities to the Samuelis. Absent

the Agreement, the Samuelis could have sold the Securities and

realized any inherent gain whenever they wanted to simply by

instructing their broker to execute such a sale. With the

Agreement, however, the Samuelis’ ability to realize such an

inherent gain was severely reduced in that the Samuelis could

realize such a gain only if the gain continued to be present on

one or more of the three stated days. Stated differently, the

Samuelis’ opportunity for gain was reduced by the Agreement

because the Agreement limited their ability to sell the

Securities at any time that the possibility for a profitable sale

arose.10

In so concluding, we reject petitioners’ argument that they

always retained the opportunity for gain in the Securities by

continuing to own the Securities from the day they purchased them

until the day they sold them. A taxpayer’s opportunity for gain

under petitioners’ theory is not reduced for section 1058

purposes if the taxpayer retains the opportunity for gain as of

the end of a loan period. The statute does not speak to

retaining the opportunity for gain. It speaks to whether the

opportunity for gain was reduced.
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In addition, we read the relevant requirement differently

from petitioners to measure a taxpayer’s opportunity for gain as

of each day during the loan period. A taxpayer has such an

opportunity for gain as to a security only if the taxpayer is

able to effect a sale of the security in the ordinary course of

the relevant market (e.g., by calling a broker to place a sale)

whenever the security is in-the-money. A significant impediment

to the taxpayer’s ability to effect such a sale, e.g., as

occurred here through the specific 3-day limit as to when the

Samuelis could demand that Refco transfer the Securities to them,

is a reduction in a taxpayer’s opportunity for gain.

Nor did the Samuelis’ opportunity for gain turn, as

petitioners would have it, on the consequences of the Samuelis’

variable rate financing arrangement. Petitioners assert that

their opportunity for gain as to the Securities depended entirely

on whether their fixed return on the Securities was greater than

their financing expense (i.e., the variable rate fee paid to

Refco) and conclude that the Agreement did not reduce this

opportunity because they continued to retain this opportunity

throughout the transaction period. Section 1058(b)(3) speaks

solely to the transferor’s “opportunity for gain * * * in the

securities transferred” and does not implicate the consideration

of any independent gain that the transferor may realize outside

of those securities (e.g., through a favorable financing
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11Petitioners also assert that the Transaction is a routine

securities lending transaction in the marketplace. We disagree. 

A lender could terminate a security loan on any business day

under the standard form used in the marketplace. The parties to

the Transaction, however, modified the standard form to eliminate

that standard provision and to prevent the Samuelis from

demanding that the Securities be transferred to them during the

transaction period, except on the three specific days.

arrangement). Thus, while the profitability of the Transaction

may have depended on the return that the Samuelis earned on the

Securities vis-a-vis the amount of the variable rate fee that

they paid to Refco, the Samuelis’ opportunity for gain in the

transferred securities rested on the fluctuation in the value of

the Securities.

We also reject petitioners’ assertion that the Samuelis

could have locked in their gain in the Securities on any day of

the transaction period simply by entering in the marketplace into

a financial transaction that allowed them to fix their gain,

e.g., by purchasing an option to sell the Securities at a fixed

price. This assertion has no direct bearing on our inquiry. 

Section 1058 concerns itself only with the agreement connected

with the transfer of the securities. Whether the Samuelis could

have entered into another agreement to lock in their gain is of

no moment.11

We also reject petitioners’ argument that section 1058(b)(3)

cannot contain a requirement that loaned securities be returned
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to the lender upon the lender’s demand at any time because

section 512(a)(5)(B) specifically contains such a requirement. 

Section 512(a)(5)(A) generally defines the phrase “payments with

respect to securities loans” by reference to “a security * * *

transferred by the owner to another person in a transaction to

which section 1058 applies.” Section 512(a)(5)(B) adds that

section 512(a)(5)(A) shall apply only where the agreement

underlying the transaction “provides for * * * termination of the

loan by the transferor upon notice of not more than 5 business

days.” Petitioners argue that sections 512(a)(5)(B) and

1058(b)(3) were enacted in the same legislation and that Congress

is presumed not to have included unnecessary words in a statute. 

See, e.g., Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998); Johnson

v. Commissioner, 441 F.3d 845, 850 (9th Cir. 2006). Petitioners

conclude that part of section 512(a)(5)(B) would be surplusage

were a prompt return of a security already a requirement of

section 1058(b). Again, we disagree.

Our reading of section 1058(b)(3) to require that the lender

be able to demand a prompt return of the loaned securities does

not render any part of section 512(a)(5)(B) surplusage. Section

1058(b)(3) does not require explicitly that a securities loan be

terminable within a set period akin to the 5-day period of

section 512(a)(5)(B). It does not necessarily follow, however,

as petitioners ask us to conclude, that section 1058(b)(3) fails
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to require that the lender be able to demand a prompt return of

the loaned securities. The firmly established law at the time of

the enactment of those sections provided that a lender in a

securities loan arrangement be able to terminate the loan

agreement upon demand and require a prompt return of the

securities to the lender. We read nothing in the statute or in

its history that reveals that Congress intended to overrule that

firmly established law by enacting sections 512(a)(5)(B) and

1058(b)(3). We decline to read such an intent into the statute. 

Such is especially so given the plain reading of the terms

“reduce” and “opportunity for gain” and our finding that the

Agreement reduced the Samuelis’ opportunity for gain by limiting

their ability to sell the Securities at any time that the

possibility for a profitable sale arose.

We recognize that unequivocal evidence of a clear

legislative intent may sometimes override a plain meaning

interpretation and lead to a different result. See Consumer

Prod. Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108

(1980); see also Albertson’s, Inc. v. Commissioner, 42 F.3d 537,

545 (9th Cir. 1994), affg. 95 T.C. 415 (1990). The legislative

history of the applicable statute supports the plain meaning of

the relevant text and does not override it. Congress enacted

section 1058 mainly to clarify the then-existing law that applied

to the loan of securities by regulated investment companies and
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tax-exempt entities, on the one hand, and by general security

lenders, on the other hand. See S. Rept. 95-762, at 4 (1978). 

The former group of lenders was concerned that payments made to

them by the borrowers of securities could be considered unrelated

business taxable income. See id. The latter group of lenders

was concerned that a securities loan could be considered a

taxable disposition. See id. at 5-6. Congress added section

1058 to the Code to address each of these concerns, explicitly

providing through the statute that payments from borrowers to

tax-exempt entities were considered investment income to the

tax-exempt entities and clarifying that the existing law that

applied to lenders of securities in general continued to apply. 

See id. at 6-7.

The Senate Committee on Finance noted that owners of

securities were reluctant under existing law to enter into

securities lending transactions because the income tax treatment

of those transactions was uncertain. See id. at 4. The

committee also noted that the Commissioner apparently agreed that

a securities lending transaction was not a taxable disposition of

the loaned securities and that the transaction did not interrupt

the lender’s holding period, but that the Commissioner had

recently declined to issue rulings stating as much. See id. at

4. The committee believed a clarification of existing law was

required to encourage organizations and individuals with
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securities holdings to enter into securities lending transactions

so as to allow the lendee brokers to deliver the securities to a

purchaser of the securities within the time required by the

relevant market rules. See id. at 5. The committee explained

that section 1058 codified the existing law on securities lending

arrangements that required that a contractual obligation subject

to that law did not differ materially either in kind or in extent

from the securities exchanged. See id. at 7.

This legislative history is consistent with our analysis. 

The legislative history explains that section 1058 codified the

firmly established law requiring that a securities loan agreement

keep the lender in the same economic position that the lender

would have been in had the lender not entered into the agreement. 

For example, the lender must possess all of the benefits and

burdens of ownership of the transferred securities and be able to

terminate the loan agreement upon demand. The firmly established

law came from the United States Supreme Court in Provost v.

United States, 269 U.S. 443 (1926). There, the taxpayers sought

to recover the cost of internal revenue stamps affixed by them to

“tickets” that evidenced transactions where shares of stock were

“loaned” to brokers or returned by the borrower to the lender,

each in accordance with the rules and practice of the Stock

Exchange. See id. at 449. The Court held that those transfers

of stock were taxable transfers within the meaning of the
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12The Commissioner later ruled similarly in Rev. Rul.

57-451, 1957-2 C.B. 295. That ruling, which is referenced in the

legislative history to sec. 1058, see S. Rept. 95-762, at 4

(1978), states in relevant part:

The second situation described above, wherein the

optionee authorizes the broker to “lend” his stock

certificates to other customers in the ordinary course

of business, presumably anticipates the “loan” of the

stock to others for use in satisfying obligations

incurred in short sale transactions. In such a case,

all of the incidents of ownership in the stock and not

mere legal title, pass to the “borrowing” customer from

the “lending” broker. For such incidents of ownership,

the “lending” broker has substituted the personal

obligation, wholly contractual, of the “borrowing”

customer to restore him, on demand, to the economic

position in which he would have been as owner of the

stock, had the “loan” transaction not been entered

into. See Provost v. United States, 269, U.S. 443,

T.D. 3811, C.B. V-1, 417 (1926). Since the “lending”

broker is not acting as the agent of the optionee in

such a transaction, he must have necessarily obtained

from the optionee all of the incidents of ownership in

the stock which he passes to his “borrowing” customer. 

[Rev. Rul. 57-451, 1957-2 C.B. at 297.]

applicable Revenue Acts because “both the loan of stock and the

return of the borrowed stock involve ‘transfers of legal title to

shares of stock’.” Id. at 456. The Court noted that a lender of

securities under a loan agreement retained all of the benefits

and burdens of the loaned stock throughout the loan period, as

though the lender had retained the stock, and that both parties

to the loan agreement could terminate the agreement on demand and

thus cause a return of the stock to the lender.12 See id. at

452-453.
- 25 -

13The Transaction is similar to the transactions involved in

a long line of cases involving M. Eli Livingstone, a broker and

securities dealer who aspired to create debt through initial

steps that completely offset each other. Courts consistently

disregarded those offsetting steps because they left the parties

to the transactions in the same position they were in before the

(continued...)

We conclude that the Transaction was not a securities

lending arrangement subject to section 1058 and that the

underlying transfers of the Securities in 2001 and 2003 were

therefore taxable events. Respondent determined and argues that

the Samuelis’ transfer of the Securities to Refco in 2001 was in

substance a sale of the Securities by the Samuelis in exchange

for the $1.64 billion they received as cash collateral and that

Refco’s purchase of the Securities in 2003 was a second sale of

the Securities by the Samuelis in exchange for the money wired to

them on January 16, 2003. For Federal tax purposes, the

characterization of a transaction depends on economic reality and

not just on the form employed by the parties to the transaction. 

See Frank Lyon Co. v. United States, 435 U.S. 561, 572-573

(1978).

We agree with respondent that the economic reality of the

Transaction establishes that the Transaction was not a securities

lending arrangement as structured but was in substance two

separate sales of the Securities without any resulting debt

obligation running between petitioners and Refco from October

2001 through January 15, 2003.13 The transfers in 2001 were in
- 26 -

13(...continued)

steps were taken. See, e.g., Cahn v. Commissioner, 358 F.2d 492

(9th Cir. 1966), affg. 41 T.C. 858 (1964); Jockmus v. United

States, 335 F.2d 23, 29 (2d Cir. 1964); Rubin v. United States,

304 F.2d 766 (7th Cir. 1962); Lynch v. Commissioner, 273 F.2d

867, 872 (1st Cir. 1959), affg. 31 T.C. 990 (1959) and Julian v.

Commissioner, 31 T.C. 998 (1959); Goodstein v. Commissioner,

267 F.2d 127, 131 (2d Cir. 1959), affg. 30 T.C. 1178 (1958);

MacRae v. Commissioner, 34 T.C. 20, 26 (1960), affd. on this

issue 294 F.2d 56 (9th Cir. 1961). The courts did not disregard

the transactions entirely as shams or as lacking economic

substance. The courts disregarded the initial steps and recast

the transactions as exchanges of promises for future performance. 

The transaction in one case was even recast where the taxpayer

made an economic profit. See Rubin v. United States, supra.

14Petitioners argue they still prevail even if we accept, as

we do, respondent’s characterization of the Transaction. 

Petitioners assert that their sale of the Securities in 2003 was

in consideration for their surrender of their contractual right

(continued...)

substance the Samuelis’ purchase and sale of the Securities at

the same price of $1.64 billion. The Samuelis therefore did not

realize any gain in 2001 as to the Securities. The transfers in

2003 were in substance the Samuelis’ purchase of the Securities

from Refco at $1.68 billion (the purchase price determined in

accordance with the terms of the Addendum, which operated as a

forward contract), followed immediately by the $1.69 billion

market-price sale of the Securities by the Samuelis back to

Refco. The Samuelis therefore realized a capital gain on the

sale in 2003 equal to the difference between the purchase and

sale prices. See sec. 1001. That capital gain is taxed as a

short-term capital gain because the Samuelis held the Securities

for less than a year.14 See sec. 1222.
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14(...continued)

to receive the Securities. Petitioners assert that this

contractual right was a long-term asset acquired in October 2001

and that they may offset the $1.69 billion sale proceeds by their

$1.64 billion basis in that long-term asset. We disagree with

this argument. The Securities were the subject of the sale in

2003, not the surrender of a contractual right as petitioners

assert. In addition, the Samuelis transferred the $1.64 billion

to Refco in 2001 to purchase the Securities.

IV. Secondary Issue Concerning Interest Deductions

The secondary issue for decision involves petitioners’ claim

to interest deductions. Our decision as to this issue also does

not turn on any disputed fact. Thus, this issue is also ripe for

summary judgment.

Respondent disallowed petitioners’ deductions for interest

paid to Refco in 2001 and in 2003 because “there was no

collateral outstanding and the payment did not represent a

payment of interest ‘on indebtedness’.” Petitioners argue that

their payment in 2001 was made with respect to debt in the form

of the cash collateral. Again, we disagree. We conclude on the

basis of the recharacterized transaction that petitioners may not

deduct their claimed interest payments for 2001 and 2003 because

those payments were unrelated to debt. The cash transferred in

2001 represented the proceeds of the first sale and not

collateral for a securities loan. Thus, no “cash collateral” was

outstanding during the relevant years on which the claimed

collateral fees could accrue. Nor did the Samuelis transfer any

cash in 2003 with respect to debt. Their transfer of cash in
- 28 -

2003 was to purchase the Securities pursuant to the forward

contract. Accordingly, we hold that petitioners are not entitled

to their claimed interest deductions.

V. Epilogue

We have considered all arguments petitioners have made and,

to the extent not discussed, we have rejected those arguments as

without merit. To reflect the foregoing,

An appropriate order

will be issued.
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APPENDIX

SEC. 1058. TRANSFERS OF SECURITIES UNDER CERTAIN

 AGREEMENTS.

(a) General Rule.--In the case of a taxpayer who

transfers securities (as defined in section 1236(c))

pursuant to an agreement which meets the requirements

of subsection (b), no gain or loss shall be recognized

on the exchange of such securities by the taxpayer for

an obligation under such agreement, or on the exchange

of rights under such agreement by that taxpayer for

securities identical to the securities transferred by

that taxpayer.

(b) Agreement Requirements.--In order to meet the

requirements of this subsection, an agreement shall--

(1) provide for the return to the

transferor of securities identical to the

securities transferred;

(2) require that payments shall be made

to the transferor of amounts equivalent to

all interest, dividends, and other

distributions which the owner of the

securities is entitled to receive during the

period beginning with the transfer of the

securities by the transferor and ending with

the transfer of identical securities back to

the transferor;

(3) not reduce the risk of loss or

opportunity for gain of the transferor of the

securities in the securities transferred; and

(4) meet such other requirements as the

Secretary may by regulation prescribe.

(c) Basis.--Property acquired by a taxpayer

described in subsection (a), in a transaction described

in that subsection, shall have the same basis as the

property transferred by that taxpayer.