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NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports.  Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash-
ington, D.C. 20543, of any typographical or other formal errors, in order that
corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
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No. 93-823
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NEBRASKA DEPARTMENT OF REVENUE, PETI-
TIONER v. JOHN LOEWENSTEIN
on writ of certiorari to the supreme court
of nebraska
[December 12, 1994]

  Justice Thomas delivered the opinion of the Court.
  We took this case to decide whether States may tax
interest income derived from repurchase agreements in-
volving 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 -obliga-
tions 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 repur-
chase agreements at issue in this case, we conclude that
for purposes of 3124(a), the interest earned by taxpay-
ers 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 Gov-
ernment and its agencies (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 (the 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 securi-
ties 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 agree-
ment, upon demand of either party-the Trust -delivers-
the federal securities back to the Seller-Borrower on the
Federal Reserve's records, and the Seller-Borrower cred-
its 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 maturi-
ties of the underlying securities.
  After deducting administrative costs, the Trusts dis-
tribute 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 States . . . but exempt from
state income taxes under the laws of the United States.-
Neb. Rev. Stat. 77-2716(1)(a) (Supp. 1994).  For pur-
poses of Nebraska's income tax law, if interest would
be exempt from tax in the hands of the Trusts, then re-
spondent's proportionate share of such interest will be
exempt.  77-2716(1)(b).
  A decade ago petitioner considered whether the inter-
est 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. 22-85-1, 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 con-
trary 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, __, 504 N. W. 2d 800, 805 (1993).
  As the Nebraska Supreme Court itself acknowledged,
see id., at __, 504 N. W. 2d, at 804-805, several state
courts have reached directly contrary conclusions, and
two federal Courts of Appeals have ruled that interest
income derived from repos involving municipal bonds is
not exempt from federal taxation under section 103(a)(1)
of the Internal Revenue Code.  We granted certiorari to
resolve this conflict, and we now reverse.

                     II
  We begin with the text of 31 U. S. C. 3124(a).  It
provides in relevant part:
-[O]bligations of the United States Government are
exempt from taxation by a State or political subdivi-
sion 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 account-
ing,- American Bank & Trust Co. v. Dallas Cty., 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 Cty. 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 taxpay-
er'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 earn-
ings 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 inter-
est 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.  Although -discount 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 in-
terest 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 combi-
nation 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 fed-
eral securities are involved in the repo transactions as
collateral for 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 fed-
eral securities during the term of the repo.
  Second, if the Seller-Borrower defaults on its obliga-
tion 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.
  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, -[a] security interest
in a security is enforceable and can attach only if it is
transferred to the secured party . . . pursuant to a pro-
vision 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.-  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 con-
text 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 inter-
est from state taxation, Nebraska did not violate that
statute when it taxed respondent's interest income.

                     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 character-
ization because the repos were structured by the Trusts
and the Seller-Borrower 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), that
-where . . . there is a genuine multiple-party trans-
action 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 ef-
fectuated by the parties.-
  We do not believe it matters for purposes of 3124(a)
whether the repo is characterized as a sale and subse-
quent repurchase.  A sale-repurchase characterization
presumably would make the Trusts the -owners- of the
federal securities during the term of the repo.  But the
dispositive question is whether the Trusts earned inter-
est 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-and-leaseback- rather than a -financing trans-
action- 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 Trust's repo transactions, as
manifested in the specific facts discussed above, are that
the Trusts do not receive either coupon interest or dis-
count 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 conclu-
sion 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 accu-
racy 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 argu-
ment 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 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 paragraph
(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
paragraph (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-$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
77-2716(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, re-
spondent contends that Nebraska discriminates against
federal obligations because it does not tax income from
repos involving Nebraska's own state and local obliga-
tions.  Although Nebraska Revenue Ruling 22-85-1 con-
cerns repos involving -federal government obligations-
and does not mention their Nebraska counterparts, re-
spondent has pointed to no statute, revenue ruling, or
other manifestation of Nebraska policy 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 Suprem-
acy 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 pri-
vate institutional investors.  App. 42, 43.  These possi-
bilities 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.
  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 ob-
vious and appreciable.'-  482 U. S., at 190, n. 10 (quot-
ing Plummer v. Coler, 178 U. S. 115, 137-138 (1900)).
Respondent has shown us no -obvious and appreciable-
injury to the borrowing power of the United States Gov-
ernment 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 Su-
preme Court of Nebraska is reversed, and the case is
remanded for further proceedings not inconsistent with
this opinion.
                            It is so ordered.