Opinion ID: 729795
Heading Depth: 2
Heading Rank: 2

Heading: The Repurchase Agreements

Text: 6 MTH's returns also claimed interest expense deductions arising from repurchase agreements, known in the trade as repos. Under these repo agreements, MTH contracted to sell Treasury Bills in one tax year and repurchase them in the next tax year. We have characterized such a repurchase agreement as a loan in the amount of the proceeds of the original sale, collateralized by the T-Bill, with interest equal to the difference between the sale and repurchase prices. United States v. Manko, 979 F.2d 900, 902 (2d Cir.1992), cert. denied, 509 U.S. 903, 113 S.Ct. 2993, 125 L.Ed.2d 687 (1993). These transactions created tax advantages because, until the tax laws changed in 1984, a securities dealer could deduct the interest payments on the loan as they accrued, but only had to report the corresponding gain from the appreciation of the T-Bill at maturity. If the T-Bill matured in the tax year after the repurchase agreement was made, the taxpayer would be able to defer income equal to the amount of interest accrued in the first year. Id. 7 The IRS contended that MTH used the repurchase agreements solely to defer interest income attributable to the T-Bills, and that the repurchase agreements should thus be disregarded for federal income tax purposes. Disregarding each repo transaction would require adjustments to MTH's tax returns in two successive years: MTH's interest expense deductions in the first year would be disallowed; and roughly commensurate interest income realized in the second year upon the maturing of the repurchased T-Bill would likewise be disregarded. These adjustments, in combination, would have the effect of backing income into the prior tax years.