Salina Partnership LP - Page 14




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          1993.  Salina completed the short sale transaction described above          
          to the extent of $175 million executed through Goldman Sachs and            
          $175 million executed through ABN.  To complete delivery of the             
          Treasury bills, Salina entered into a master repurchase agreement           
          with ABN (the Salina/ABN master repurchase agreement) under which           
          Salina lent $343,875,000 to ABN, and ABN collateralized the loan            
          with the Treasury bills that Salina sold short.  Salina treated the         
          amount it was due from ABN under the Salina/ABN master repurchase           
          agreement ($343,875,000) and accrued interest thereon ($278,921) as         
          assets on its opening balance sheet.   Salina treated the amount of         



               5(...continued)                                                        
                    In the absence of statutory guidance, the                         
               treatment of * * * [short sale] transactions would be                  
               unclear because the first transaction is in form a sale                
               but gain or loss cannot be computed because the                        
               taxpayer’s cost for the securities is unknown, whereas                 
               the second transaction is in form the repayment of a                   
               loan. [Fn. ref. omitted.]                                              
          2 Bittker & Lokken, Federal Taxation Of Income, Estates And                 
          Gifts, par. 54.3.1, at 54-21 (2d ed. 1990).                                 
               The strategy of a short sale is that by the time the                   
          security is covered, the seller will have acquired the security             
          by purchasing it on the open market at a price lower than that              
          for which it was sold, thereby making a profit.  Another way to             
          cover a short position is to use the security obtained in a                 
          reverse repo transaction.  Reverse repo transactions are the                
          mirror images of repo transactions–-securities are purchased by             
          the first party subject to the obligation of the second party to            
          repurchase them.  Notwithstanding the first party’s obligation to           
          sell (in a reverse repo transaction) a like amount of the same              
          securities back to the second party, the first party generally is           
          entitled to use the securities in transactions with third                   
          parties.  See Price v. Commissioner, supra at 864-865 nn. 9, 11.            





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