OCTOBER TERM, 1994
Syllabus
NEBRASKA DEPARTMENT OF REVENUE
v.
LOEWENSTEIN
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 SellerBorrower 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-
124
ties if the value exceeds 102%; and (4) the Seller-Borrower may,
during the term of the repo, substitute federal securities of equal
market value for the securities initially involved in the
transaction. The fact that the Trusts take "delivery" of the
federal securities at the repo's commencement also is consistent
with understanding the repos as loans, since "delivery" perfects
the Trusts' security interests in their collateral. Pp.
128-133.
(b) Respondent's two objections to this interpretation of §
3124(a) are unpersuasive. It does not matter that the Trusts and
SellerBorrower characterize the repos as sales and repurchases,
since the substance and economic realities of the transactions show
that the Trusts receive interest on cash they have lent to the
Seller-Borrower. Cf.
Frank Lyon Co. v.
United States,
435 U. S. 561,
582. And, contrary to respondent's argument, this case does not
involve the construction or validity of the Nebraska income tax
statute's add-back rule. Pp. 133-135.
2. Nebraska's taxation of income from repos involving federal
securities does not violate the Supremacy Clause. Respondent has
pointed to no statute, revenue ruling, or other manifestation of
Nebraska policy that treats "state" repos differently from
"federal" repos for tax purposes. Nor does the taxation at issue
make it more difficult and expensive for the Federal Government to
finance the national debt. Expert testimony referred to by
respondent has no relevance to this case, and respondent has shown
no "obvious and appreciable" injury to the Government's borrowing
power as a result of Nebraska's taxation of the Trusts' repo
income, see
Rockford Life Ins. Co. v.
Illinois Dept. of
Revenue, 482 U.
S. 182, 190, n. 10. Pp. 135-137.
244 Neb. 82, 504 N. W. 2d 800, reversed and remanded.
THOMAS, J., delivered the opinion for a unanimous Court.
L. Jay Bartel, Assistant Attorney General of Nebraska,
argued the cause for petitioner. With him on the briefs was
Don
Stenberg, Attorney General.
Terry R. Wittler argued the cause for respondent. With
him on the brief was
Larry A. Holle. *
*Briefs of
amici curiae urging reversal were filed for
the State of California et al. by
Daniel E. Lungren,
Attorney General of California,
Timothy G.
Laddish,
Assistant Attorney General,
Joyce E. Hee, Deputy Attorney
General, and
Patrick J. Kusiak, and by the
Attorneys General for their respective jurisdictions as follows:
James H. Evans of Alabama,
Grant Woods of Arizona,
Charles M. Oberly III of Delaware,
Roland W
Burris
125
JUSTICE THOMAS delivered the opinion of the Court.
We took this case to decide whether States may tax interest
income derived from repurchase agreements involving federal
securities. If the income that taxpayers earn by participating in
such agreements constitutes interest on federal securities, then
the taxation violates 31 U. S. C. § 3124(a), which exempts interest
on "obligations of the United States Government" from taxation by
States. On the other hand, if that income constitutes interest on
loans to a private party, the taxation is not prohibited by the
statute. With respect to the repurchase agreements at issue in this
case, we conclude that for purposes of § 3124(a), the interest
earned by taxpayers is interest on loans to a private party, not
interest on federal securities. Accordingly, we hold that § 3124(a)
does not prohibit States from taxing such income.
I
Respondent is a Nebraska resident who owns shares in two mutual
funds, the Trust for Short-Term U. S. Government Securities and the
Trust for U. S. Treasury Obligations (Trusts). The Trusts earn a
portion of their income by participating in "repurchase agreements"
that involve debt securities issued by the United States Government
and its agen-
of Illinois,
Pamela Carter of Indiana,
Chris
Gorman of Kentucky,
Richard p. Ieyoub of Louisiana,
J. Joseph Curran, Jr., of Maryland,
Scott
Harshbarger of Massachusetts,
Frank J.
Kelley of Michigan,
Jeffrey R. Howard of New
Hampshire,
Deborah T. Poritz of New Jersey,
Tom Udall
of New Mexico, G.
Oliver Koppell of New York,
Heidi
Heitkamp of North Dakota,
Susan Brimer Loving of
Oklahoma,
Theodore R. Kulongoski of Oregon,
Jan
Graham of Utah,
Jeffrey L. Amestoy of Vermont,
James S.
Gilmore III of Virginia, and
James E.
Doyle of Wisconsin; and for the Council of State Governments et
al. by
Richard Ruda and
Lee Fennell.
Briefs of
amici curiae urging affirmance were filed for
The Dreyfus Corporation by
Jeffrey S.
Sion; and for
the Investment Company Institute by
Albert G.
Lauber,
Jr., Paul Schott Stevens, and
Catherine Heron.
Thomas C.
Baxter, Jr., filed a brief for the
Federal Reserve Bank of New York as
amicus curiae.
126
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 SellerBorrower'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.
127
States ... but exempt from state income taxes under the laws of
the United States." Neb. Rev. Stat. § 77-2716(1)(a) (Supp. 1994).
For purposes of Nebraska's income tax law, if interest would be
exempt from tax in the hands of the Trusts, then respondent's
proportionate share of such interest will be exempt. §
77-2716(1)(b).
A decade ago petitioner considered whether the interest income
derived from repurchase agreements involving federal securities and
then distributed to respondent and similarly situated individuals
was subject to Nebraska's income tax. Petitioner concluded that it
was. Neb. Rev. Rul. 2285-1, Brief for Petitioner 4-5, n. 1. In
1988, respondent brought a declaratory judgment action in the
District Court of Lancaster County, Nebraska, asking that Revenue
Ruling 22-85-1 be declared invalid as contrary to 31 U. S. C. §
3124(a) and the Supremacy Clause of the United States Constitution.
The District Court granted the requested relief. On appeal, the
Supreme Court of Nebraska affirmed, concluding that "the income
received by [respondent] from repo transactions executed by the
[T]rusts involving federal securities is exempt from state taxation
under § 3124."
Loewenstein v.
State, 244 Neb. 82, 90,
504 N. W. 2d 800, 805 (1993).
As the Nebraska Supreme Court itself acknowledged, see
id., at 88-90, 504 N. W. 2d, at 804-805, several state
courts have reached directly contrary conclusions,2 and two
Federal
2 See
Hammond Lead Products, Inc. v.
State Tax
Commissioners, 575 N. E. 2d 998 (Ind. 1991);
Department of
Revenue v.
Page, 541 So. 2d 1270 (Fla. App. 1989);
Capital Preservation Fund, Inc. v.
Wisconsin Dept. of
Revenue, 145 Wis. 2d 841, 429 N. W. 2d 551 (App. 1988);
Andras v.
Illinois Dept. of Revenue, 154 Ill. App. 3d
37, 506 N. E. 2d 439 (1987), cert. denied, 485 U. S. 960
(1988).
As Justice Caporale pointed out in dissent below, see 244 Neb.,
at 91-92, 504 N. W. 2d, at 806, at least five other state courts
also have reached a result contrary to that of the majority. See
Everett v.
State Dept. of Revenue and Finance, 470 N.
W. 2d 13 (Iowa 1991);
Comptroller of the Treasury, Income Tax
Div. v.
First United Bank &
Trust, 320 Md.
352, 578
128
Courts of Appeals have ruled that interest income derived from
repos involving municipal bonds is not exempt from federal taxation
under § 103(a)(1) of the Internal Revenue Code.3 We granted
certiorari to resolve this conflict, 510 U. S. 1176 (1994), and we
now reverse.
II
We begin with the text of 31 U. S. C. § 3124(a). It pro-
vides in relevant part:
"[O]bligations of the United States Government are exempt from
taxation by a State or political subdivision of a State. The
exemption applies to each form of taxation that would require the
obligation, the interest on the obligation, or both, to be
considered in computing a tax .... "
Under this provision, a state tax may consider neither the
federal "obligation" itself nor the "interest on the obligation."
The obligation itself is "considered" when its value is "taken into
account, or included in the accounting,"
Ameri-
A. 2d 192 (1990);
Borg v.
Department of Revenue of
Oregon, 308 Ore. 34, 774 P. 2d 1099 (1989);
Massman Constr.
Co. v.
Director of Revenue of Missouri, 765 S. W. 2d 592
(Mo. 1989);
In re Sawyer Estate, 149 Vt. 541, 546 A. 2d 784
(1987). Accord,
H. J. Heinz Co. v.
Department of Treasury, 197 Mich. App. 210, 494 N. W. 2d 850
(1992) (distinguishing
Matz v.
Department of
Treasury, 155 Mich. App. 778, 401 N. W. 2d 62 (1986)
(per
curiam)).
3 See
Union Planters Nat. Bank of Memphis v.
United
States, 426 F. 2d
115 (CA6), cert. denied, 400 U.
S. 827 (1970);
American Nat. Bank of Austin v.
United
States, 421 F.2d
442 (CA5), cert. denied, 400 U. S. 819 (1970). Accord,
First American Nat. Bank of Nashville v.
United
States, 467 F. 2d
1098 (CA6 1972)
(per
curiam). Cf.
Citizens Nat. Bank of Waco v.
United
States, 213 Ct. Cl. 236, 248-251,
551 F.2d
832, 839-840 (1977) (agreeing that these decisions were
correct, but distinguishing them on the facts of the case).
The Internal Revenue Service also has concluded that a taxpayer
in the position of the Trusts who derives interest income by
participating in repurchase agreements does not earn interest on
the securities involved in those agreements. See Rev. Rul. 74-27,
1974-1 Cum. Bull. 24; Rev. Rul. 77-59, 1977-1 Cum. Bull. 196; Rev.
Rul. 79-108, 1979-1 Cum. Bull. 75.
129
can Bank &
Trust Co. v.
Dallas County,
463 U. S. 855,
862 (1983), in computing the taxable value of a taxpayer's assets
or net worth for the purpose of a property tax or the like. See,
e. g., First Nat. Bank of Atlanta v.
Bartow County Bd. of
Tax Assessors, 470 U. S. 583, 585-586
(1985) (property tax on bank shares). By contrast, the interest on
the obligation is "considered" when that interest is included in
computing the taxpayer's net income or earnings for the purpose of
an income tax or the like. See,
e. g., Memphis Bank &
Trust Co. v.
Garner, 459 U. S. 392, 393-394
(1983) (tax on net earnings of banks).
By participating in repos involving federal securities, the
Trusts (and thus respondent) earned interest income, and Nebraska's
income tax admittedly considered that interest in computing
respondent's taxable income. We must decide whether for purposes of
§ 3124(a) the interest earned by the Trusts from these repos is
interest on "obligations of the United States Government" or
interest on loans of cash from the Trusts to the Seller-Borrower.
We conclude that it is the latter, and we accordingly hold that
Nebraska's taxation of the income derived by respondent from the
repos does not violate § 3124(a).
An investor may earn interest income from a federal security in
one or both of two ways. First, the investor may receive periodic
payments from the United States Government at the interest rate
stated on the face of the security. Such payments are traditionally
known as "coupon interest." Second, the investor may acquire the
security at a discount from the amount for which it will ultimately
be redeemed by the Government at maturity. This discount is also
considered interest for purposes of taxation.4 Although
"discount
4 For example, Treasury notes and bonds, which have maturities
of at least one year, pay coupon interest on a semiannual basis and
may be issued at discount, par (face amount), or premium, depending
on market conditions. See 31 CFR §§ 356.5(b), (c), 356.30 (1994).
Treasury bills, by contrast, have maturities of not more than one
year, pay no coupon interest, and are always issued at a discount.
See § 356.5(a). "For purposes
130
interest" accrues during the term of the security, the investor
does not receive it in cash until the security is redeemed or
transferred to a third party.
Our examination of the typical repurchase agreement used by the
Trusts convinces us that they did not earn either kind of interest
on federal securities. Certainly, none of the income the Trusts
earn by participating in repos can be attributed to redemptions of
the securities or payments of coupon interest by the Government:
The Trusts must "pay over to [the Seller-Borrower] as soon as
received all principal, interest and other sums paid by or on
behalf of the issuer in respect of the Securities and collected by
the [Trusts]." App.69.
Nor can we conclude that the Trusts receive discount interest
when the federal securities are transferred back to the
Seller-Borrower in part two of the repo. Under the typical
repurchase agreement, any individual repo transaction may involve a
mix of federal securities with varying maturities, and therefore
varying yields. During the term of the repo, these securities earn
discount interest based on their respective yields (and on whether
they pay coupon interest). The Trusts, however, earn interest from
the Seller-Borrower at an agreed-upon rate that is not based on any
of these yields, or any combination of them. Thus, the interest
that the Trusts earn by participating in the repo will bear no
relation to the discount interest earned on federal securities
during the same period.
We conclude instead that for purposes of § 3124(a), the interest
income earned by the Trusts is interest on loans from the Trusts to
the Seller-Borrower, and that the federal securities are involved
in the repo transactions as collateral for
of taxation the amount of discount at which Treasury bills are
originally sold by the United States shall be considered to be
interest." §309.4. See generally M. Stigum, The Money Market 36-37
(3d ed. 1990) (hereinafter Stigum).
131
these loans. Several features of the repos lead to this
conclusion. First, at the commencement of a repo, the Trusts pay
the Seller-Borrower a fixed sum of money; at the repo's
termination, the Seller-Borrower repays that sum with "interest."
As explained above, this repo interest bears no relation to either
the coupon interest paid or the discount interest accrued on the
federal securities during the term of the repo.
Second, if the Seller-Borrower defaults on its obligation to pay
its debt, the Trusts may liquidate the federal securities. But like
any lender who liquidates collateral, the Trusts may retain the
proceeds of liquidation only up to the amount of the debt plus
expenses; any excess must be paid to the Seller-Borrower. Moreover,
if the proceeds are insufficient to satisfy the debt, the Trusts
may recover the deficiency from the Seller-Borrower.
Third, if the market value of the federal securities involved in
the repo falls below 102% of the amount the Trusts originally paid
to the Seller-Borrower, the latter must immediately deliver cash or
additional securities to the Trusts to restore the value of the
securities held by the Trusts to 102% of the original payment
amount. On the other hand, if the market value of the securities
rises above 102% of this amount, the Seller-Borrower may require
the Trusts to return some of the securities to the Seller-Borrower.
These provisions are consistent with a lender-borrower relationship
in which a prudent lender desires to protect the value of its
collateral, while a prudent borrower attempts to pledge as little
collateral as possible.
Fourth, the Seller-Borrower may, during the term of the repo,
"substitute" federal securities of equal market value for the
federal securities initially involved in the transaction. A lender,
of course, is indifferent to the particular collateral pledged by
the borrower, so long as that collateral has sufficient value and
liquidity.
132
The parties have stipulated that the Trusts (or their agents)
take "Delivery" of the federal securities at the commencement of a
repo. App. 63. But even this fact is consistent with understanding
repos as loans of cash from the Trusts to the Seller-Borrower:
"Delivery" of the securities perfects the Trusts' security
interests in their collateral. Under the most recent version of §
8-321(1) of the Uniform Commercial Code (u. C. C.), "[a] security
interest in a security is enforceable and can attach only if it is
transferred to the secured party ... pursuant to a provision of [§]
8-313(1)." 2C U. L. A. 459 (1991). Section 8-313(1)(a) provides
that transfer of a security interest in a security occurs when the
secured party "acquires possession of a certificated security."5
Id., at 402. Of course, possession of the federal securities
allows the Trusts to effect an expeditious, nonjudicial liquidation
of the securities if the Seller-Borrower defaults. Cf. U. C. C. §
9-504(1), 3B U. L. A. 127 (1992). The ability to liquidate
immediately is obviously critical in the context of repo
transactions, which may have a lifespan of only a single day.
Based on the foregoing analysis, we conclude that the interest
income earned by the Trusts from repurchase agreements involving
federal securities is not interest on "obligations of the United
States Government." For purposes of 31 U. S. C. § 3124(a), the
income is instead interest on loans from the Trusts to the
Seller-Borrower. Because § 3124(a) exempts only the former type of
interest from state taxation,
5 The parties have also stipulated that delivery of the federal
securities is effected "through the Federal Reserve book entry
system." App. 63. Although securities held in that system exist not
in the form of certificates but only as entries in the records of a
Federal Reserve bank, see generally Stigum 636-638, regulations
issued by the Treasury Department and other federal agencies
indulge in the fiction that transferees acquire possession of
certificated securities. See,
e. g., 31 CFR § 306.
118(a) (1994) (transfer of Treasury notes and bonds); § 350.4(a)
(transfer of Treasury bills). Of course, these regulations and
their relationship to the U. C. C. are not before us here.
133
Nebraska did not violate that statute when it taxed respondent's
interest income.6
III
Respondent offers two objections to this interpretation of §
3124(a). We find neither of them persuasive.
A
The typical repurchase agreement at issue in this case
explicitly identifies the original transfer of the federal
securities to the Trusts as a "sale" and the subsequent transfer
back to the Seller-Borrower as a "repurchase." Respondent maintains
we should honor this characterization because the repos were
structured by the Trusts and the SellerBorrower as sales and
repurchases for valid business and regulatory reasons independent
of tax considerations. Respondent relies on our statement in
Frank Lyon Co. v.
United States, 435 U. S. 561, 583-584
(1978):
"[W]here ... there is a genuine multiple-party transaction with
economic substance which is compelled or encouraged by business or
regulatory realities, is imbued with tax-independent
considerations, and is not shaped solely by tax-avoidance features
that have meaningless labels attached, the Government should honor
the allocation of rights and duties effectuated by the
parties."
We do not believe it matters for purposes of § 3124(a) whether
the repo is characterized as a sale and subsequent repurchase. A
sale-repurchase characterization presumably would make the Trusts
the "owners" of the federal securities
6 It follows from our analysis that it is the Seller-Borrower
who earns the interest on the federal securities during the
pendency of the repo. Nebraska Revenue Ruling 22-85-1 concludes as
much: "The interest earned on the United States government
obligations remains the income of the [party] who submitted the
securities as collateral for the loan." Brief for Petitioner 4-5,
n. 1.
134
during the term of the repo. But the dispositive question is
whether the Trusts earned interest on "obligations of the United
States Government," not whether the Trusts "owned" such
obligations. As respondent himself concedes, "[t]he concept of
'ownership' is simply not an issue under 31 U. S. C. § 3124." Brief
for Respondent 10.
Even if it did matter how repos were characterized for purposes
of § 3124(a),
Frank Lyon Co. does not support respondent's
position. Whatever the language relied on by respondent may mean,
our decision in that case to honor the taxpayer's characterization
of its transaction as a "sale-andleaseback" rather than a
"financing transaction" was founded on an examination of "the
substance and economic realities of the transaction." 435 U. S., at
582. This examination included identification of 27 specific facts.
See
id., at 582-583. The substance and economic realities of
the Trusts' repo transactions, as manifested in the specific facts
discussed above, are that the Trusts do not receive either coupon
interest or discount interest from federal securities by
participating in repos. Rather, in economic reality, the Trusts
receive interest on cash they have lent to the Seller-Borrower.
Respondent does not specifically dispute this conclusion but
argues that repos are characterized as ordinary sales and
repurchases for purposes of federal securities, bankruptcy, and
banking law as well as commercial and local government law. We need
not examine the accuracy of these assertions, for we are not called
upon in this case to interpret any of those bodies of law. Our
decision today is an interpretation only of 31 U. S. C. §
3124(a)-not the Securities Exchange Act of 1934, the Bankruptcy
Code, or any other body of law.
B
At oral argument, respondent advanced another argument against
the interpretation of § 3124(a) adopted here: Although petitioner's
Revenue Ruling nominally acknowledges the right of the
Seller-Borrower to claim the exemption granted by § 3124(a),
Nebraska's income tax scheme will not
135
allow the Seller-Borrower to realize the full amount of the
federal exemption. This would allegedly frustrate Congress' purpose
in granting the exemption. According to respondent, after the
Seller-Borrower has subtracted from its taxable income any
"interest or dividends received by [it as] the owner of obligations
of the United States," pursuant to subsection (a) of Neb. Rev.
Stat. § 77-2716(1) (Supp. 1994), it will then be forced to add back
"any interest on indebtedness incurred to carry the [federal]
obligations," pursuant to subsection (e) (i) of § 77-2716(1).
Respondent conjectures that the interest paid by the
Seller-Borrower to the Trusts in the course of repos may constitute
just such interest. Respondent therefore hypothesizes that if the
Seller-Borrower receives, for example, $100 in interest as the
holder of federal securities and pays out $90 to the Trusts in the
course of repos involving those securities, Nebraska might give the
Seller-Borrower an income tax exemption worth only $10 ($100 minus
$90), rather than the $100 exemption that Congress arguably
intended.
There is a short answer to respondent's multilayered hypothesis:
this case does not involve the construction or validity of
Nebraska's add-back rule as applied in the repo context. The
Nebraska Supreme Court did not cite § 772716(1)(e)(i) in its
opinion, and we did not grant certiorari to consider that
provision.
IV
Finally, respondent argues that Nebraska's taxation of income
from repos involving federal securities violates the Supremacy
Clause of the Constitution. First, respondent contends that
Nebraska discriminates against federal obligations because it does
not tax income from repos involving Nebraska's own state and local
obligations. Although Nebraska Revenue Ruling 22-85-1 concerns
repos involving "federal government obligations" and does not
mention their Nebraska counterparts, respondent has pointed to no
statute, revenue ruling, or other manifestation of Nebraska
pol-
136
icy treating "state" repos any different from "federal" repos
for tax purposes.
Second, respondent cites our decision in
Rockford Life
Ins.
Co. v.
Illinois Dept. of Revenue, 482 U. S. 182, 190
(1987), in which we stated that "the intergovernmental tax immunity
doctrine ... is based on the proposition that the borrowing power
is an essential aspect of the Federal Government's authority and,
just as the Supremacy Clause bars the States from directly taxing
federal property, it also bars the States from taxing federal
obligations in a manner which has an adverse effect on the United
States' borrowing ability." According to respondent, undisputed
expert testimony in the record establishes that the taxation at
issue in this case will make it more difficult and expensive for
the Federal Government to finance the national debt.
This expert testimony essentially consists of a 1986 affidavit
sworn by Peter D. Sternlight, a former official of the Federal
Reserve Bank of New York. In our view, Sternlight's affidavit has
no relevance to this case. It concluded only that "an impairment of
the repo market would make it less attractive for [government
securities] dealers to perform [their] very useful ... function [of
underwriting a sizeable portion of Treasury securities], thus
adding to Treasury interest costs." App. 42. But the "impairment"
that worried Sternlight would result "[i]f repurchase agreements
were to lose their present characteristics of flexibility and
liquidity," or if repos became "unavailable" to certain kinds of
public and private institutional investors.
Id., at 42, 43.
These possibilities might develop if repos were to be characterized
as secured loans for purposes of federal bankruptcy and banking law
or of commercial and local government law. Our decision today,
however, says nothing about how repos should be characterized for
those purposes.7
7See also Brief for Federal Reserve Bank of New York as
Amicus Curiae 9-10 ("The Sternlight Affidavit was filed by
the New York Fed in 1986 as
amicus curiae in [a case] which
had nothing to do with state
137
Disregarding the inapplicable Sternlight affidavit, we find no
evidence in the record that the taxation at issue will impair the
market in federal securities or otherwise impair the borrowing
ability of the Federal Government.
Rockford Life confirmed
the rule that "'when effort is made ... to establish the
unconstitutional character of a particular tax by claiming its
remote effect will be to impair the borrowing power of the
government, courts ... ought to have something more substantial to
act upon than mere conjecture. The injury ought to be obvious and
appreciable.'" 482 U. S., at 190, n. 10 (quoting
Plummer v.
Coler, 178 U.
S. 115, 137138 (1900)). Respondent has shown us no "obvious and
appreciable" injury to the borrowing power of the United States
Government as a result of Nebraska's taxation of the repo income
earned by the Trusts. Rather, he has given us "mere conjecture." In
these circumstances, we cannot justifiably conclude that Nebraska's
taxation of income derived from repos involving federal securities
violates the Supremacy Clause of the Constitution.
For the foregoing reasons, the judgment of the Supreme Court of
Nebraska is reversed, and the case is remanded for further
proceedings not inconsistent with this opinion.
It is so ordered.
taxation of repo income .... Mr. Sternlight did not opine on the
economic effect of state taxation of repo transaction income on
[the market for] the underlying government securities"); Hearings
on H. R. 2852 and H. R. 3418 before the Subcommittee on Monopolies
and Commercial Law of the House Committee on the Judiciary, 98th
Cong., 2d Sess., 106-107 (1984) (letter of Peter D. Sternlight)
("[W]hile the Federal Reserve has gone on record as favoring
purchase-and-sale characterization of repurchase agreements,
that statement is limited to a bankruptcy context and should not
be taken as an endorsement of purchase-and-sale characterization
for tax, accounting, or other purposes" (emphasis added)).
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