Document: 513 U.S. 123115 S.Ct. 557130 L.Ed.2d 470 NEBRASKA DEPARTMENT OF REVENUE, Petitionerv.John LOEWENSTEIN. No. 93-823. Supreme Court of the United States Argued Oct. 11, 1994. Decided Dec. 12, Syllabus * Respondent, a Nebraska resident, owns shares in mutual funds (Trusts) that earn some their income by participating "repurchase agreements" (repos) involving federal debt securities. In such transaction, party holding securities (Seller-Borrower) transfers them to Trusts return for specified amount cash. At later date, deliver back Seller-Borrower, who credits an equal cash transfer plus interest at agreed-upon rate bears no relation yield on underlying Ultimately, Trusts' is distributed respondent proportion his Trusts. After petitioner issued Revenue Ruling concluding from repos subject Nebraska's tax, brought this declaratory judgment action state court, asking be declared invalid as contrary Supremacy Clause and 31 U.S.C. § 3124(a), which, relevant part, exempts taxation "obligations Government." The court granted relief, affirmed. Held: 1. derived does not violate 3124(a). Pp. __. (a) For purposes earned loans securities; context, are merely collateral these loans. Several features lead conclusion: (1) repo's commencement, pay Seller-Borrower fixed sum money, which repaid with bearing either coupon paid or discount accrued during term repo; (2) may liquidate should default debt, but, like lender, they must any proceeds excess expenses, recover deficiency Seller-Borrower; (3) market value maintained 102% original payment amount, delivering additional if falls below 102%, returning exceeds 102%; (4) may, repo, substitute initially involved transaction. fact take "delivery" commencement also consistent understanding loans, since perfects security interests collateral. (b) Respondent's two objections interpretation 3124(a) unpersuasive. It matter characterize sales repurchases, substance economic realities transactions show receive have lent Seller-Borrower. Cf. Frank Lyon Co. v. States, 435 561, 582, 98 1291, 1303, 55 550. And, respondent's argument, case involve construction validity tax statute's add-back rule. 2. Clause. Respondent has pointed statute, revenue ruling, other manifestation policy treats "state" differently "federal" purposes. Nor issue make it more difficult expensive Federal Government finance national debt. Expert testimony referred relevance case, shown "obvious appreciable" injury Government's borrowing power result repo income, see Rockford Life Ins. Illinois Dept. Revenue, 482 182, 190, n. 10, 107 2312, 2317, 96 152. 244 Neb. 82, 504 N.W.2d 800 (1993), reversed remanded. THOMAS, J., delivered opinion unanimous Court. L. Jay Bartel, Lincoln, NE, petitioner. Terry R. Wittler, respondent. Justice THOMAS 1 We took decide whether repurchase agreements If taxpayers constitutes securities, then violates Government" States. On hand, private party, prohibited statute. With respect we conclude Accordingly, hold prohibit taxing income. 2 resident funds, Trust Short-Term Securities Treasury Obligations (Trusts). portion its agencies (federal securities). A typical agreement used Trusts, App. 65-81, establishes two-part commonly called "repo," between holds seeks (the Seller-Borrower) available idle (in Trusts). part one "transfers" records Reserve System's commercial book-entry system. Simultaneously, Seller-Borrower's bank account. 3 transaction—which occurs date or, absence agreement, upon demand party—the "delivers" Reserve's records, account "interest" rate. This securities—either when were came into hands Seller-Borrower—but based instead current investments maturities securities.1 4 deducting administrative costs, distribute ownership State generally taxes but "interest dividends received owner obligations . exempt under laws States." Neb.Rev.Stat. 77-2716(1)(a) (Supp.1994). law, would proportionate share will exempt. 77-2716(1)(b). 5 decade ago considered similarly situated individuals was tax. Petitioner concluded was. Neb.Rev.Rul. 22-85-1, Brief 4-5, 1988, District Lancaster County, Nebraska, 22-85-1 Constitution. requested relief. appeal, affirmed, "the [respondent] executed [T]rusts 3124." Loewenstein State, 90, 800, 805 (1993). 6 As itself acknowledged, id., 89, N.W.2d, 804-805, several courts reached directly conclusions,2 Courts Appeals ruled municipal bonds section 103(a)(1) Internal Code.3 certiorari resolve conflict, now reverse. II 7 begin text provides part: 8 "[O]bligations political subdivision State. exemption applies each form require obligation, both, computing ." Under provision, consider neither "obligation" nor obligation." obligation "considered" "taken account, included accounting," American Bank & Dallas Cty., 463 855, 862, 103 3369, 3375, 77 1072 (1983), taxable taxpayer's assets net worth purpose property like. See, e.g., First Nat. Atlanta Bartow Cty. Bd. Tax Assessors, 583, 585-586, 105 1516, 1517-1518, 84 535 (1985) (property shares). By contrast, earnings Memphis Garner, 459 392, 393-394, 692, 693-694, 74 562 (1983) (tax banks). 9 (and thus respondent) admittedly latter, accordingly 10 An investor both ways. First, periodic payments stated face security. Such traditionally known "coupon interest." Second, acquire ultimately redeemed maturity. taxation.4 Although "discount interest" accrues security, until transferred third party. 11 Our examination convinces us did kind Certainly, none can attributed redemptions Government: "pay over [the Seller-Borrower] soon all principal, sums behalf issuer collected [Trusts]." 69. 12 repo. individual transaction mix varying maturities, therefore yields. During respective yields interest). however, yields, combination them. Thus, bear same period. 13 conclusion. money; termination, repays "interest." explained above, 14 defaults But lender liquidates collateral, retain liquidation only up expenses; Moreover, insufficient satisfy 15 Third, originally latter immediately restore held amount. rises above These provisions lender-borrower relationship prudent desires protect while borrower attempts pledge little possible. 16 Fourth, "substitute" course, indifferent particular pledged borrower, so long sufficient liquidity. 17 parties stipulated (or agents) 63. even Seller-Borrower: most recent version 8-321(1) Uniform Commercial Code, "[a] enforceable attach secured pursuant provision [§ 8-313(1) ]." 2C U.L.A. (1991). Section 8-313(1)(a) "acquires possession certificated security." Id., 402.5 Of allows effect expeditious, nonjudicial defaults. U.C.C. 9-504(1), 3B 127 (1992). ability obviously critical context transactions, lifespan single day. 18 Based foregoing analysis, Because former type taxation, statute taxed income.6 III 19 offers find persuasive. A. 20 explicitly identifies "sale" subsequent "repurchase." maintains honor characterization because structured repurchases valid business regulatory reasons independent considerations. relies our statement 583-584, 1303-1304, 550 (1978), 21 "where there genuine multiple-party compelled encouraged realities, imbued tax-independent considerations, shaped solely tax-avoidance meaningless labels attached, allocation rights duties effectuated parties." 22 do believe matters characterized sale repurchase. sale-repurchase presumably "owners" dispositive question Government," "owned" obligations. himself concedes, "[t]he concept 'ownership' simply 10. 23 Even how support position. Whatever language relied mean, decision "sale-and-leaseback" rather than "financing transaction" founded transaction." U.S., S.Ct., 1303. identification 27 specific facts. See 582-583, manifested facts discussed repos. Rather, reality, 24 specifically dispute conclusion argues ordinary bankruptcy, banking law well local government law. need examine accuracy assertions, interpret those bodies today 3124(a)—not Exchange Act 1934, Bankruptcy body B 25 oral advanced another argument against adopted here: petitioner's ruling nominally acknowledges right claim scheme allow realize full exemption. allegedly frustrate Congress' granting According respondent, after subtracted [it as] States," paragraph 77-2716(1) (Supp.1994), forced add "any indebtedness incurred carry [federal] obligations," (e)(i) 77-2716(1). conjectures course constitute just interest. hypothesizes receives, example, $100 holder pays out $90 might give $10 ($100-$90), Congress arguably intended. 26 There short answer multilayered hypothesis: rule applied context. cite 77-2716(1)(e)(i) opinion, grant provision. IV Finally, contends discriminates own concerns "federal obligations" mention counterparts, treating different 28 cites 152 (1987), intergovernmental immunity doctrine proposition essential aspect authority and, bars property, manner adverse States' ability." undisputed expert record 29 essentially consists 1986 affidavit sworn Peter D. Sternlight, official New York. view, Sternlight's case. "an impairment less attractive [government securities] dealers perform [their] very useful function [of underwriting sizeable securities], adding costs." 42. "impairment" worried Sternlight "[i]f lose present characteristics flexibility liquidity," became "unavailable" certain kinds public institutional investors. 42, 43. possibilities develop bankruptcy today, says nothing about purposes.7 30 Disregarding inapplicable affidavit, evidence impair otherwise Government. confirmed " 'when effort made establish unconstitutional character claiming remote government, ought something substantial act mere conjecture. obvious appreciable.' (quoting Plummer Coler, 178 115, 137-138, 829, 837-838, 44 L.Ed. 998 (1900)). he given "mere conjecture." circumstances, cannot justifiably reasons, reversed, remanded further proceedings inconsistent opinion. 32 ordered. syllabus been prepared Reporter Decisions convenience reader. Detroit Lumber Co., 200 321, 337, 282, 287, 50 499. identify "repurchase" use neutral terms describe Hammond Lead Products, Inc. Commissioners, 575 N.E.2d (Ind.1991); Department Page, 541 So.2d 1270 (Fla.App.1989); Capital Preservation Fund, Wisconsin 145 Wis.2d 841, 429 551 (App.1988); Andras 154 Ill.App.3d 37, 106 Ill.Dec. 732, 506 439 cert. denied, 485 960, 108 1223, 99 424 (1988). Caporale dissent below, Neb., 91, 806, least five majority. Everett Finance, (Iowa 1991); Comptroller Treasury, Income Div. Trust, 320 Md. 352, 578 A.2d 192 (1990); Borg Oregon, 308 Ore. 34, 774 P.2d 1099 (1989); Massman Constr. Director Missouri, 765 S.W.2d 592 (Mo.1989); re Sawyer Estate, 149 Vt. 541, 546 784 (1987). Accord, H.J. Heinz 197 Mich.App. 210, 494 850 (1992) (distinguishing Matz 155 778, 401 62 (1986) (per curiam) ). Union Planters 426 F.2d 115 (CA6), 400 827, 91 53, 56 (1970); Austin 421 442 (CA5), 819, 36, 46 (1970). Nashville 467 1098 (CA6 1972) curiam). Citizens Waco 213 Ct.Cl. 236, 248-251, 832, 839-840 (1977) (agreeing decisions correct, distinguishing case). Service taxpayer position derives agreements. Rev.Rul. 74-27, 1974-1 Cum.Bull. 24; 77-59, 1977-1 196; 79-108, 1979-1 75. notes bonds, year, semiannual basis discount, par (face amount), premium, depending conditions. CFR §§ 356.5(b), (c), 356.30 (1994). bills, interest, always discount. 356.5(a). "For bills sold shall 309.4. M. Stigum, Money Market 36-37 (3d ed. 1990) (hereinafter Stigum). delivery effected "through book entry system." system exist certificates entries bank, Stigum 636-638, regulations indulge fiction transferees 306.118(a) (1994) (transfer bonds); 350.4(a) bills). before here. follows analysis earns pendency concludes much: "The remains [party] submitted loan." York Amicus Curiae 9-10 ("The Affidavit filed Fed. amicus curiae [a case] had Mr. opine for] securities"); Hearings H.R. 2852 3418 Subcommittee Monopolies Law House Committee Judiciary, 98th Cong., 2d Sess., 106-107 (1984) (letter Sternlight) ("[W]hile gone favoring purchase-and-sale agreements, limited taken endorsement accounting, (emphasis added)).

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