The Tax Court held that a leveraged secu- rities agreement was not a securities lend- ing arrangement under IRC [section] 1058 since its economic substance indicated the tax- payers' opportunity for gain had been reduced. Thus the arrangement was treat- ed as two separate sales transactions; the first resulted in no gain or loss, and the second resulted in the recognition of short-term capital gain. Also, the court found the agreement had no debt component. Since no debt existed, the taxpayers' interest deductions were also disallowed. Under section 1058, no gain or loss is recognized by an owner of securities when those securities are transferred to a borrower under a securities lending arrangement. The agreement must require the return of identical securities to die transferor, and the transferor must receive payments equal to die amount of any interest, dividends or other distributions related to the securities during the period beginning with the transfer and ending with their return. The agreement may not reduce the transferor's risk of loss or opportunity for gain related to the transferred securities, and the agreement must conform to any other requirements prescribed in Treasury regulations. Property acquired under such an agreement will have the same basis as the property transferred.

In a marketed arrangement, in October 2001, Henry and Susan Samueli entered into a leveraged securities agreement with Refco Securities, a securities broker. Henry Samueli is the co-founder of Broadcom Corp. and in 2008 ranked No. 262 among the Forbes 400 richest Americans. The Samuelis, using a margin loan, purchased roughly $1.64 billion of securities from Refco. As soon as the purchase was settled, the Samuelis transferred the securities back to Refco, which was obligated to return identical securities to them on Jan. 15, 2003, or if the Samuelis exercised their option to terminate the agreement early, on July 1 , 2002, or Dec. 2, 2002.

After it received the securities, Refco immediately transferred cash collateral of about $1.64 billion to the Samuelis, who used those proceeds to repay their mar- gin loan with Refco. During the transac- tion period, the Samuelis were required to pay a variable rate of interest on the cash collateral to Refco but were entitled to receive any interest, dividends or other distributions related to the securities. The early termination option was not exer- cised, and rather than returning the secu- rities on Jan. 15, 2003, Refco purchased them from the Samuelis for $1.69 billion, their market value on that date. The Samuelis used the proceeds to repay the cash collateral plus the accrued interest, totaling $1.68 billion.