Nebraska Department of Revenue v. Loewenstein

PETITIONER:Nebraska Department of Revenue
LOCATION:Spendthrift Farm

DOCKET NO.: 93-823
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: Nebraska Supreme Court

CITATION: 513 US 123 (1994)
ARGUED: Oct 11, 1994
DECIDED: Dec 12, 1994

L. Jay Bartel – on behalf of the Petitioner
Terry R. Wittler – on behalf of the Respondent

Facts of the case


Media for Nebraska Department of Revenue v. Loewenstein

Audio Transcription for Oral Argument – October 11, 1994 in Nebraska Department of Revenue v. Loewenstein

Audio Transcription for Opinion Announcement – December 12, 1994 in Nebraska Department of Revenue v. Loewenstein

William H. Rehnquist:

The opinion of the court number 93-823, Nebraska Department of Revenue v. Loewenstein will be announced by Justice Thomas.

Clarence Thomas:

This case comes to us on writ of certiorari to the Supreme Court of Nebraska, it’s another tax case.

Respondent a Nebraska resident owns shares in mutual funds that earn some of their income by engaging in financial transactions called repurchase agreements or repos for short.

In a typical repo transaction one who holds federal debt securities whom we would refer to as Seller-Borrower, transfers these securities to the funds and exchange the funds then pays the seller-borrower specified amount of cash.

At a later date the funds transfer the securities back to Seller-Borrower returns the cash to the funds.

At that time the seller-borrower pays the funds interest at an agreed upon rate that there is no relation to the yield on a security underline the repo.

This interest is in turn distributed to respondent in proportion to his share of the funds.

Petitioner the Nebraska Department of Revenue determined that respondent had to pay Nebraska income tax on interest, income derived from repos involving federal securities.

Respondent challenge this ruling in the Nebraska Courts, he argue that taxing such income violated the constitution and a federal statute that prohibits states from tax and interest on federal securities.

The Trial Court agreed with respondent and Nebraska Supreme Court affirmed.

In an opinion filed with the clerk today we reverse.

We hold that Nebraska taxation of interest income derives from the repos, does not violate the federal statute or the constitution.

For purposes of statute the interest earned by the funds is interest on loans from the funds to the Seller- Borrower, not the interest on the federal securities.

In the repo context the securities operate as collateral for the loans.

Numerous speeches of the repos are described in detail in our opinion, lead to this conclusion.

The funds and Seller-Borrower characterized these repos as sales and later repurchases, but we reject respondent’s arguments that these labels preclude us from viewing the repos as loans.

In tax cases it is a substance and economic realties over transaction account.

The substance and economic realities of the repos here show that the funds are receiving interest on cash that they have loan to the Seller-Borrower.

The opinion of the court is unanimous.