SECTION 2. BACKGROUND

.01 Sourcing Items of Income The general rules for determining whether items of income are from sources within or without the United States are found in sections 861 through 865 of the Code. The Code provides specific sourcing rules for, among other items, interest, dividends, compensation for personal services, rents and royalties, and income from sales of personal property. Section 863(a) grants authority to the Secretary to prescribe regulations allocating or

apportioning items of gross income not otherwise specified in sections 861(a) and 862(a) to sources within or without the United States.

.02 Securities Lending and Sale-Repur- chase Transactions ¹

(1) Transactional Documentation Securities lending transactions and sale-repurchase transactions are typically entered into under a standardized form of agreement ² that includes industry-standard legal and commercial terms and definitions, and attached annexes or schedules, which provide other standardized terms applicable to specific types of transactions and may include procedures for making elections permitted by the standardized agreement (together, a “master agreement”). A related short-form confirmation memorializes the specific business terms of a particular securities lending transaction or sale-repurchase transaction.

(2) Securities Lending Transactions In a securities lending transaction, one party (the “securities lender”) lends securities (the “loaned securities”) to another party (the “securities borrower”), subject to an obligation by the securities borrower to return equivalent securities to the securities lender, and the securities borrower typically transfers collateral in the form of cash, securities, or other financial instruments to the securities lender as security for the securities borrower’s obligation under the agreement.

Under the standard master agreement used in the U.S. financial markets, the fee arrangement in a securities lending transaction depends on the type of collateral posted. When the securities borrower posts non-cash collateral with the securities lender, the securities borrower pays the securities lender an explicit fee, often referred to as a borrow fee.

By contrast, when cash collateral is posted, the master agreement provides for the securities lender to pay the securities

borrower an amount frequently described as a fee or “rebate” with respect to the cash collateral, which is computed daily based on the amount of cash held by the securities lender as collateral at a rate agreed to by the parties. The securities lender retains the excess of the return it generates on the cash collateral over the amount paid to the securities borrower. This differential retained by the securities lender provides it with the economic equivalent of a borrow fee. In most such cases, no explicit fee is paid by the securities borrower to the securities lender.

However, in certain circumstances where the securities borrower has posted cash collateral, the securities borrower may pay an explicit fee (sometimes referred to as a “negative rebate”) to the securities lender. This may happen, for example, when the prevailing interest rates are low or the demand for the loaned securities is high. More specifically, if the borrow fee, on a standalone basis, exceeds the return the securities lender could earn on the cash collateral, the securities borrower would pay the securities lender a negative rebate equal to the excess of the borrow fee over the return on the cash collateral.

The terms of master agreements used in international financial markets or with respect to non-U.S. securities differ in some respects. Some master agreements require the securities borrower to pay an explicit fee to the securities lender without regard to the type of collateral posted by the borrower. In such cases, the securities borrower is always required to pay a borrow fee, although the payment may be set off against the return on the cash collateral.

(3) Sale-Repurchase Transactions In a sale-repurchase transaction (sometimes referred to as a “repo”), one party (the “cash lender”) purchases securities from another (the “cash borrower”) sub

1 The description of securities lending transactions and sale-repurchase transactions in this Section 2.02 is intended as a description of market practice and does not represent a conclusion by Treasury or the IRS as to the tax characterization of the transactions.

2 For examples of standardized master agreements for securities lending transactions, see, e.g., Securities Industry and Financial Markets Association (SIFMA), Master Securities Loan Agreement (2017) (referring to a borrow fee as a “Loan Fee”); International Securities Lending Association, Global Master Securities Lending Agreement (2010). For examples of standardized agreements for sale-repurchase agreements, see, e.g., SIFMA, Master Repurchase Agreement (1996); SIFMA and International Capital Market Association, Global Master Repurchase Agreement (2011); The Bond Market Association and International Securities Market Association, Global Master Repurchase Agreement (2000).

Bulletin No. 2025–46 709 November 10, 2025

ject to an agreement for the cash borrower to repurchase equivalent securities in the future at a prearranged price. A sale-repurchase transaction may function economically as a secured loan of money, a securities lending transaction, or both.

If the transaction is initiated because the initiating party wants to borrow money or earn a rate of return on excess funds, then the transaction economically resembles a loan of money. The securities sold function as collateral for the loan, with the amount of that collateral determined based on the loan “principal.” Where a sale-repurchase transaction is intended primarily as a secured loan of money, the parties will often agree to a general collateral sale-repurchase agreement. Under a general collateral sale-repurchase agreement, the parties agree in advance on the types of securities and related haircuts that the cash lender is willing to accept, which generally includes U.S. Treasuries, and the cash borrower can choose which of those securities to provide. The cash borrower will pay a “general collateral” rate of return on the loan “principal.”

A sale-repurchase agreement may also function as a securities lending transaction. If the cash lender requires the cash borrower to sell and repurchase a specific security, then the sale-repurchase agreement is described as a “special sale-repurchase agreement.” Generally, the effective interest rate on a special sale-repurchase agreement is less than the interest rate on a general collateral sale-repurchase agreement (of equal tenure). The difference between those rates economically functions as a borrow fee to the cash borrower. The greater the demand for a security, the greater the implicit borrow fee. In a manner similar to a securities lending transaction, a special sale-repurchase agreement may result in the cash lender paying a neg

ative rebate when the interest rate for a general collateral sale-repurchase agreement is low or the demand for the specific security is high.