OCTOBER TERM, 1994
Syllabus
certiorari to the supreme court of nebraska
No. 93-823. Argued October 11, 1994—Decided December 12, 1994
Respondent, a Nebraska resident, owns shares in mutual funds (Trusts) that earn some of their income by participating in "repurchase agreements" (repos) involving federal debt securities. In such a transaction, the party holding the securities (Seller-Borrower) transfers them to the Trusts in return for a specified amount of cash. At a later date, the Trusts deliver the securities back to the Seller-Borrower, who credits to the Trusts an amount equal to the cash transfer plus interest at an agreed-upon rate that bears no relation to the yield on the underlying securities. Ultimately, the Trusts' interest income is distributed to respondent in proportion to his shares in the Trusts. After petitioner issued a Revenue Ruling concluding that interest income from repos is subject to Nebraska's income tax, respondent brought this declaratory judgment action in state court, asking that the Revenue Ruling be declared invalid as contrary to the Supremacy Clause and to 31 U. S. C. § 3124(a), which, in relevant part, exempts from state taxation interest on "obligations of the United States Government." The court granted the relief, and the Nebraska Supreme Court affirmed.
Held: 1. Nebraska's taxation of the income respondent derived from the repos does not violate § 3124(a). Pp. 128-135. (a) For purposes of § 3124(a), the interest income earned by the Trusts is interest on loans from the Trusts to the Seller-Borrower, not interest on federal securities; in this context, the securities are merely collateral for these loans. Several features of the repos lead to this conclusion: (1) at a repo's commencement, the Trusts pay the Seller-Borrower a fixed sum of money, which is repaid with interest at a rate bearing no relation to either the coupon interest paid or discount interest accrued on the federal securities during the term of the repo; (2) the Trusts may liquidate the securities should the Seller-Borrower default on the debt, but, like a lender, they must pay to the Seller-Borrower any proceeds in excess of the amount of the debt plus expenses, and may recover any deficiency from the Seller-Borrower; (3) the market value of the securities must be maintained at 102% of the original payment amount, with the Seller-Borrower delivering cash or additional securities if the value falls below 102%, and the Trusts returning securi-
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