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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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