rp-08-63.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.601: Rules and regulations.
(Also Part I, § 1058)

Rev. Proc. 2008-63

SECTION 1. PURPOSE
This revenue procedure provides guidance with respect to the application of
§ 1058(a) of the Internal Revenue Code to situations in which securities are originally
transferred pursuant to an agreement that meets the requirements of § 1058(b), the
transferee subsequently defaults under the agreement as a direct or indirect result of its
bankruptcy (or the bankruptcy of an affiliate), and as soon as is commercially
practicable (but in no event more than 30 days following the default), the transferor uses
collateral provided pursuant to the agreement to purchase identical securities.

SECTION 2. BACKGROUND
.01 Section 1058(a) provides that in the case of a taxpayer who transfers
securities (as defined in § 1236(c)) pursuant to an agreement which meets the
requirements of § 1058(b), no gain or loss shall be recognized on the exchange of such
securities by the taxpayer for an obligation under such agreement, or on the exchange
of rights under such agreement by that taxpayer for securities identical to the securities
transferred by that taxpayer.
.02 In adding § 1058 to the Code, Congress intended to provide nonrecognition
treatment to securities loans in which “the contractual obligation [to return identical
securities] does not differ materially either in kind or in extent from the securities
exchanged . . . .” S. Rep. No. 762, 95
th
Cong., 2d Sess. 7 (1978); 1978-2 C.B. 357, 361
(“Senate Report”). Congress also sought to encourage securities holders to make their
securities available for loans. Congress explained:
Under present law, uncertainty has developed as to the correct
income tax treatment of certain securities lending transactions. As
a result, some owners of securities are reluctant to enter into such
transactions.
Senate Report at 3; 1978-2 C.B. 359.
Because of time delays which a broker may face in obtaining
securities (from the seller or transfer agent) to deliver to a
purchaser, brokers are frequently required to borrow securities from
organizations and individuals with investment portfolios for use in

2

completing these market transactions. It is generally thought to be
desirable to encourage organizations and individuals with securities
holdings to make the securities available for such loans since the
greater the volume of securities available for loan the less
frequently will brokers fail to deliver a security to a purchaser within
the time required by the relevant market rules.
Senate Report at 5;
1978-2 C.B 360.
.03 Recently, a significant number of securities loans have terminated as a result
of a default by the borrower of the securities. These defaults are often the direct or
indirect result of the bankruptcy of the borrower (or an affiliate of the borrower). For
example, the bankruptcy of the borrower might, by itself, constitute an event of default
under the securities loan agreement. Likewise, the bankruptcy of an affiliate of the
borrower might indirectly prevent the borrower from returning identical securities upon
notice of termination by the lender, if, for example, such a bankruptcy affects the
borrower’s liquidity and practical ability to acquire identical securities in the secondary
market. In many of these situations, the lender thereafter purchases identical securities
and applies collateral provided by the borrower pursuant to the securities loan
agreement against the purchase price (and the borrower’s obligation to return identical
securities is terminated).
SECTION 3. SCOPE
This revenue procedure applies to taxpayers (“Lenders”) who have transferred
securities to an unrelated person (“Borrower”) in a securities loan in which—

3

.01 The securities loan agreement (“Agreement”) satisfies the requirements of
§ 1058(b);
.02 The Agreement requires that the Borrower transfer collateral to secure the
Borrower’s obligations under the Agreement;
.03 The Borrower defaults under the Agreement as a direct or indirect result of its
bankruptcy (or the bankruptcy of an affiliate); and
.04 As soon as is commercially practicable after the default (but in no event more
than 30 days following the default), the Lender applies collateral provided under the
Agreement (or cash generated by the sale of such collateral) to the purchase of
identical securities.
SECTION 4. APPLICATION
For taxpayers within the scope of this revenue procedure, the Internal Revenue
Service will treat the purchase described in section 3.04 of this revenue procedure as
an exchange of rights under the Agreement for identical securities to which § 1058(a)
applies.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for taxable years ending on or after January
1, 2008.
SECTION 6. NO INFERENCE
This revenue procedure provides guidance with respect to certain federal income
tax issues involving securities loans described in section 3 of this revenue procedure.
No inference should be drawn about whether similar consequences will obtain if a

4

5
securities loan falls outside the scope of this revenue procedure.
SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Charles W. Culmer of the Office
of Associate Chief Counsel (Financial Institutions & Products). For further information
regarding this revenue procedure contact Mr. Culmer on (202) 622-3950 (not a toll free
call).