Securities transfer is not a securities lending arrangement.

• Author: Beavers, James

In a case of first impression, the Tax Court held that a billion dollar--plus securities transaction was not a securities lending arrangement under Sec. 1058 because its terms reduced the opportunity for gain to the transferor of the securities in the transaction for almost the entire transaction period.

Background

Henry Samueli, billionaire co-founder of Broadcom Corporation, and his wife purchased approximately $1.64 billion of securities from a securities broker, Refco Securities, in October 2001. The Samuelis simultaneously transferred the securities back to Refco per Refco's promise to transfer identical securities to the Samuelis on January 15, 2003. Refco also transferred $1.64 billion to the Samuelis as "cash collateral" for the securities. Under the agreement, the Samuelis were required to pay Refco a fee for the use of the cash collateral.

The agreement between the Samuelis and Refco allowed the Samuelis to require an earlier transfer of the identical securities only by terminating the transaction on July I or December 2, 2002. The Samuelis did not require an earlier transfer and sold the securities to Refco on January 15, 2003. The Samuelis treated the transaction as a securities lending arrangement subject to Sec. 1058 and reported an approximate $50.6 million long-term capital gain on the transaction in 2003. They also deducted as interest their portion of the almost $8 million in fees paid for the use of the cash collateral during the transaction period.

The IRS determined that the transaction was not a securities lending arrangement subject to Sec. 1058. Instead, it ruled that the Samuelis purchased the securities from and immediately sold them to Refco in 2001 at no gain or loss and then repurchased the securities from Refco (under a forward contract) and immediately sold them back in 2003, realizing an approximate $13.5 million short-term capital gain. The IRS also disallowed all of the Samuelis' interest deductions because, under its characterization of the transaction, the debt that the Samuelis claimed the agreement created never existed.

Sec. 1058(b)

If an agreement to transfer securities qualifies as a securities lending arrangement under Sec. 1058, the transfer will not result in gain recognition to the transferor. Under Sec. 1058(b), an agreement qualifies as a securities lending arrangement if it:

* Provides for the return to the transferor of securities identical to the securities transferred;

* Requires that...