Opinion by Judge TASHIMA; Concurrence by Judge RAWLINSON.

ORDER

Petitioners-appellants’ petition for panel rehearing, which is unopposed by respondent-appellee, at least in part, is granted. The Opinion, filed September 15, 2011, slip op. 17597, [ 658 F.3d 992 ], is amended, as follows:

1. In the second full paragraph on slip op. at 17619 [658 F.3d at 1003], line 3, the word shall be substituted for the word < purchase > in the phrase

2. The first paragraph on slip op. at 17628 [658 F.3d at 1008], commencing with “This error, however, did not make a difference ...” and ending with “we affirm the Tax Court’s ultimate deficiency determination.” is deleted, and replaced by the following:

3. The Conclusion, Part III, slip op. at 17628 [658 F.3d at 1008], is deleted, and replaced by the following:

Judge Rawlinson would grant the petition for panel rehearing, but only for the purpose of amending the majority opinion to conform to her concurring opinion.

No further petitions for rehearing shall be entertained.

OPINION

This case requires us to decide whether a purported securities loan with a fixed term of at least 250 days and possibly as long as 450 days, entered into not for the purpose of providing the borrower with access to the lent securities, but instead for the purpose of avoiding taxable income for the lender, qualifies for nonrecognition treatment as a securities loan pursuant to § 1058 of the Internal Revenue Code (the “Code”), 26 U.S.C. § 1058 . 1 We hold that it does not.

I. BACKGROUND

A. Statutory Background

As a general rule, any sale or other disposition of property is a taxable event. § 1001(c). Prior to 1978, there was some uncertainty regarding the application of this general rule to so-called securities lending transactions. These transactions were developed in response to the needs of securities brokers, who frequently faced delays in obtaining securities to deliver to purchasers and therefore were forced to borrow the required securities from organizations and individuals who held such securities in their investment portfolios. See S. Rep. 95-762 (“Senate Report”), at 3-4 (1978), reprinted in 1978 U.S.C.C.A.N. 1286, 1289. In 1926, the Supreme Court had held that the passage of securities from lender to borrower pursuant to a securities lending agreement, and then back again from borrower to lender at the end of the loan term, were taxable events. Provost v. United States, 269 U.S. 443, 459 , 46 S.Ct. 152 , 70 L.Ed. 352 (1926). Subsequent rulings by the Internal Revenue Service (the “IRS”), however, had taken the opposite position and declared that these transactions were not taxable events. E.g., Rev. Rui. 57-451, 1957- 2 C.B. 295 , 1957 WL 11085 .

In 1978, Congress sought to clear up this confusion by enacting § 1058, which provides that securities lending transactions will not be treated as taxable dispositions. The Senate Finance Committee recognized that such transactions are “desirable” because they reduce the chances that brokers will fail to deliver securities to purchasers within the time required by the relevant market rules. Senate Report at 5, 1978 U.S.C.C.A.N. at 1291. Under § 1058, when a taxpayer transfers securities under an agreement that meets certain enumerated requirements, “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.” § 1058(a).

In order to qualify for nonrecognition under § 1058(a), an agreement must:

§ 1058(b).

B. Factual Background 3

Petitioners in this case are Henry and Susan Samueli and Thomas and Patricia Ricks (collectively, “Taxpayers”). Both the Samuelis and the Rickses are married couples who filed joint income tax returns for 2001 and 2003. Henry Samueli is the billionaire co-founder of Broadcom Corporation, and Thomas Ricks is an investment advisor to the Samuelis. 4

In 2000 and 2001, the Samuelis’ accountant and tax consultant, Arthur Andersen LLP, and Twenty First Securities, a brokerage and financial firm, jointly designed and marketed to the Samuelis a transaction that was predicated on the expectation that short-term interest rates were going to fall from their then-current levels. After evaluating memoranda prepared by Twenty-First Securities, Thomas Ricks recommended to the Samuelis that they invest in the proposed transaction, and they elected to do so. Thomas Ricks later became a participant in the transaction as well when he acquired a 0.2% stake in it from another pass-through entity affiliated with the Samuelis.

In its economic essence, the transaction consisted of Taxpayers purchasing a security with a fixed rate of return determined by interest rates at the time of purchase, and paying for that purchase at a price derived from a variable interest rate. However, the transaction as executed was considerably more complex than that description and is best understood as a series of discrete steps.

1. Step One: Purchase of the Securities; Margin Loan

On October 17, 2001, Taxpayers purchased a $1.7 billion principal “strip” 5 (the “Securities”) issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”) from Refco Securities LLC (“Ref-co”), a securities broker. By purchasing a strip, Taxpayers were purchasing the right to receive the principal on a Freddie Mac bond at the date of maturity but not the right to receive interest payments on that bond prior to maturity. The Securities had a maturity date of February 18, 2003, on which date their holder had the right to receive $1.7 billion. Taxpayers purchased the Securities for $1,643 billion, which meant that cashing in the Securities for *404 their par value on the maturity date would provide them with an annual yield of 2.5810% on the purchase price.

Taxpayers funded the purchase of the Securities with a margin loan (the “Margin Loan”) from Refco. The interest rate of the Margin Loan was set at the variable London Interbank Offering Rate (“LI-BOR”) plus 10 basis points. 6 The Margin Loan was secured by the Securities, and Taxpayers also deposited $21,250,000 with Refco as a condition of obtaining the Margin Loan.

2. Step Two: Loan of the Securities

The plan all along had been for Taxpayers to lend the Securities back to Refco after purchasing them. On or about October 11, 2001, six days before Taxpayers’ purchase of the Securities, Taxpayers and Refco had entered into a Master Securities Loan Agreement and an Amendment to the Master Securities Loan Agreement (together, the “Loan Agreement”). The Loan Agreement was on a standard form for securities loan agreements. Taxpayers and Refco then entered into an Addendum to the Loan Agreement (the “Addendum”) on October 17, the same day that Taxpayers purchased the Securities.

The Loan Agreement required Taxpayers, as lender, to transfer the Securities to Refco, as borrower. In return, Refco would transfer to Taxpayers collateral with a market value at least equal to that of the Securities. Taxpayers were required to pay Refco a fee (the “Cash Collateral Fee”) equal to an agreed-upon percentage of the amount of any such collateral in cash. Refco also was required to “mark to market” the collateral on a daily basis, meaning that if the market value of the Securities went up on any given day, Refco was required to transfer additional collateral to Taxpayers no later than the close of the next business day, so that the market value of the collateral remained equal to the market value of the Securities. The Loan Agreement also provided that Taxpayers could terminate the loan of the Securities at any time, in which event Ref-co would be required to return the Securities no later than the third business day following notice of termination. All of these terms are standard features of securities lending agreements. See Senate Report at 5-6, 1978 U.S.C.C.A.N. at 1291.

The Addendum, however, was a customized document and overrode several of the terms in the Loan Agreement. The provision in the Loan Agreement permitting Taxpayers to terminate the loan and demand return of the Securities on three business days’ notice was superseded by a section of the Addendum entitled “Term of Specified Loan.” This section provided that the loan would terminate on January 15, 2003 (approximately one month before the maturity date of the Securities), unless Taxpayers elected to terminate it on either July 1, 2002, or December 2, 2002. The Addendum also specified that, beginning on November 5, 2001, the Cash Collateral Fee would be set at one-month LIBOR plus ten basis points (the same rate as the interest rate under the Margin Loan) and would be re-calculated on the first Monday of each month. The Cash Collateral Fee would “be deemed to be added to the Collateral held by” Taxpayers and would be paid by Taxpayers to Refco when they returned the collateral to Refco at the end of the loan term, unless Taxpayers elected to pay the Cash Collateral Fee, “in whole or in part, prior to termination” of the loan. Finally, the Addendum provided that Taxpayers would retain a deposit of $21,250,000 (the same amount required to secure the Margin Loan) in an account *405 with Refco and would grant Refco a security interest in those funds to secure the performance of Taxpayers’ obligations under the Loan Agreement.

On October 19, 2001, two days after they purchased the Securities, Taxpayers transferred the Securities to Refco as required by the Loan Agreement. At the same time, Refco provided Taxpayers with cash collateral of $1,643 billion (the value of the Securities), which Taxpayers then used to pay off the Margin Loan.

3. Step Three: 2001 Fee Payment

On December 28, 2001, Taxpayers determined that the accrued Cash Collateral Fee at that time was $7.8 million, and they wired that amount (the “2001 Fee Payment”) to Refco. Approximately two weeks later, Refco returned an identical amount to Taxpayers. This amount was recorded as an increase in the amount of the cash collateral held by Taxpayers.

In December 2002, a representative of Twenty-First Securities discussed with Thomas Ricks the possibility of Taxpayers paying Refco approximately $32 million in accrued Cash Collateral Fee. The representative stated that “two weeks from the date the wire is initiated, the money can be returned to The Shiloh Trust.” But Taxpayers' did not end up making such a payment in 2002.

4. Step Four: Termination of the Loan

Taxpayers did not exercise their option to terminate the loan in July or December 2002. Accordingly, the transaction terminated on January 15, 2003, as provided for in the Addendum. What happened upon termination, according to Taxpayers, was that Refco purchased the Securities from Taxpayer for the market price of $1,698 billion. Taxpayers owed Refco $1,684 billion (the amount of the cash collateral plus accrued Cash Collateral Fee). The amounts owed were settled via offset, so the only cash that changed hands at this point was $35.3 million transferred from Refco to Taxpayers on January 16, 2003. This amount was the sum of $13.6 million in actual economic gain for Taxpayers (the excess of the price Refco paid Taxpayers for the Securities over the amount Taxpayers had to return to Refco for the collateral), the return of the Taxpayers’ $21.25 million deposit, and accrued interest on that deposit of just over one-half million dollars.

C. Dispute over Tax Characterization; Procedural Background

On their tax returns for 2001 and 2003, Taxpayers treated the transaction as a securities loan under § 1058. Accordingly, they assumed that their transfer of the Securities to Refco pursuant to the Loan Agreement, and Refco’s return of the Securities when the Loan Agreement expired, were not taxable events. Instead, they: (1) treated the Securities as an asset that they acquired in October 2001 for the purchase price and disposed of in January 2003 for the then-market value; and (2) treated the Cash Collateral Fee as interest paid by them to Refco. 7

*406 Accordingly, on their 2001 returns, Taxpayers claimed an interest deduction for the 2001 Fee Payment in the amount of $7.8 million. (The Samuelis claimed $7,796,903, or 99.8 percent of the total, while the Rickses claimed the remaining 0.2 percent, or $15,667.) On their 2003 return, the Samuelis reported $50,661,926 in long-term capital gain from the sale of the Securities to Refco. This amount represented the proceeds of the sale ($1,697 billion) less the purchase price of the Securities ($1,643 billion), and less transaction costs of $3.56 million, further adjusted to deduct the Rickses’ ownership interest in the Securities. The Samuelis also claimed an interest deduction for $32,792,720, which was the amount of Cash Collateral Fee that had accrued on the termination date and was paid to Refco along with the original amount of the Cash Collateral (the “2003 Fee Payment”). (The Rickses did not claim any interest deduction in connection with the termination of the transaction.)

The Commissioner of Internal Revenue (the “Commissioner”) rejected this characterization of the transaction. The Commissioner determined that the transaction did not in fact qualify as a securities lending arrangement under § 1058 and instead adopted his own interpretation of the transaction, as follows: In October 2001, Taxpayers purchased the Securities from Refco for the purchase price ($1,643 billion) and immediately sold them back to Refco for the amount of the cash collateral (also $1,643 billion). Then, in January 2003, Taxpayers purchased the Securities from Refco a second time pursuant to a “forward contract.” The price for this second purchase was the amount of the cash collateral plus accrued Cash Collateral Fee ($1,684 billion). Immediately after this second purchase of the Securities, Taxpayers again sold them back to Refco, this time for their then market value ($1,698 billion). Accordingly, the Commissioner determined that Taxpayers: (1) had no capital gain or loss in 2001 (because they sold the Securities for the same price at which they had purchased them); (2) had $13.54 million in short-term capital gain in 2003; 8 and (3) could not deduct the Cash Collateral Fee payments as interest expense in either year, because no indebtedness ever existed.

Accordingly, in April 2006, the Commissioner issued a Notice of Deficiency for tax years 2001 (in the amount of $2,177,532) and 2003 (in the amount of $171,026) to the Samuelis, and a Notice of Deficiency for tax year 2001 (in the amount of $6,126) to the Rickses. Both the Samuelis and the Rickses filed petitions with the Tax Court seeking redetermination of the deficiencies. 9 Each of Taxpayers and the Commissioner moved for summary judgment; the Tax Court granted the Commissioner’s motion. See Samueli v. Comm’r, 132 T.C. 37 (2009). Taxpayers timely appealed.