126
Opinion of the Court
cies (federal securities). A typical repurchase agreement used by the Trusts, see App. 65-81, establishes a two-part transaction, commonly called a "repo," between a party who holds federal securities and seeks cash (Seller-Borrower) and a party who has available cash and seeks to earn interest on its idle funds (in this case, the Trusts). In part one of the repo, the Seller-Borrower "transfers" specified federal securities to the Trusts on the records of the Federal Reserve System's commercial book-entry system. Simultaneously, the Trusts transfer a specified amount of cash to the Seller-Borrower's bank account.
In part two of the transaction—which occurs at a later date fixed by agreement or, in the absence of any agreement, upon demand of either party—the Trusts "deliver" the federal securities back to the Seller-Borrower on the Federal Reserve's records, and the Seller-Borrower credits the Trusts' bank account in an amount equal to the sum of the original cash transfer plus "interest" at an agreed-upon rate. This interest rate bears no relation to the yield on the underlying federal securities—either when they were issued by the United States Government or when they later came into the hands of the Seller-Borrower—but is based instead on the current market rate paid on investments with maturities equal to the term of the repo, not to the original or current maturities of the underlying securities.1
After deducting administrative costs, the Trusts distribute this interest income to respondent in proportion to his ownership of shares in the Trusts. The State of Nebraska generally taxes interest income, but it does not tax "interest or dividends received by the owner of obligations of the United
1 A repurchase agreement is so called because the parties to the agreement identify part one of the transaction as a "sale" of federal securities from the Seller-Borrower to the Trusts and part two a "repurchase" of the securities by the Seller-Borrower from the Trusts. Because the accuracy of these labels is part of the dispute in this case, we use more neutral terms to describe the transaction.
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