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FED ERAL RESER VE BANK O F NEW YORK Fiscal A g en t o f the U nited States r C ircu lar N o . 5 0 4 5 U J u n e 6 , 19 61 1 J Tax Basis for Purchases of Strips of Treasury Bills To A ll Banking In stitution s, and Others Concerned, in the Second F edera l R eserve D istrict: The Treasury Department has informed us that the Internal Revenue Service states that purchasers of the strip o f Treasury bills to be auctioned June 8, for issue June 14, for tax purposes should take such bills 011 to their books on the basis o f their purchase price pro rated to each o f the eighteen outstanding issues, using as a basis fo r proration the closing market prices on June 14. The Internal Revenue Service further states, that it is not permis sible, fo r tax purposes, for purchasers of such bills to place each o f the issues included in the strip on their books at the same purchase price or amount which they pay on accepted tenders for said bills. The following hypothetical example illustrates the method of obtaining an issue price for tax purposes fo r each o f the 18 specific issues included in the strip offered by the Treasury. The example covers a hypothetical strip o f 10 issues o f Treasury bills, and explains the steps required to calculate the issue price for each of these 10 issues. The calculation is based on a hypothetical issue date o f June 1, 1961, and market prices o f these 10 issues as of May 31, 1961. Three steps are involved in the calculation. Step 1 Calculate the average market price of the 10 issues as o f May 31, 1961, as follow s: M a rk et: M aturity date 1961: 9 /2 8 .................................... 1 0 /5 .................................... 10/13.................................. 10/19.................................. 10/26.......... ........................ 1 1 /2 .................................... 1 1 /9 .................................... 11/16.................................. 11/24.................................. 11/30.................................. D ays to m aturity 119 126 134 140 147 154 161 168 176 182 R a tei (% ) P r ice1 2.36 2.42 2.44 2.46 2.46 2.50 2.505 2.51 2.525 2.555 99.220 99.153 99.092 99.043 98.996 98.931 98.880 98.829 98.766 98.708 A verage.................... ............................................................................. 98.962 i Mean o f closing bid and ask prices, 5/31/61. ( over) Step 2 Calculate the ratio o f the actual price bid fo r the strip of bills to the average market price obtained in Step 1. I f the price bid fo r the strip is 98.920, the ratio is 0.9995756 (98.920 divided by 98.962). I f the price bid is 99.000, the ratio is 1.0003840 (99.000 divided by 98.962). , S tep 3 Multiply the market price fo r each issue as of May 31, 1961 by the ratio obtained in Step 2 above, as follow s: M arket p ricei P rora ted issue p rice at h ypothetical subscription price o f : 98.920 2 99.0003 9 /2 8 .................................... 1 0 / 5 . . . . ............................ 1 0 /1 3.................................. 1 0 /1 9 .................................. 1 0 /2 6.................................. 1 1 /2 ..................................... ,1 1 /9 .......... ......................... 1 1 / 1 6 . . . . ............ .............. 11/24.................................. 1 1 /3 0 ................ .................. 99.220 99.153 99.092 99.043 98.996 98.931 98.880 98.829 98.766 98.708 99.178 99.111 99.050 99.001 98.954 98.889 98.838 98.787 98.724 98.666 .................... 98.962 M a tu rity d ate 1961: A 1 verage 99.258 99.191 99.130 99.081 99.034 98.969 98.918 98.867 98.804 98.746 Mean of closing bid and ask prices, 5 /3 1 /6 1 . 2 .042 less than average market price of 10 bills. 3 .038 more than average market price of 10 bills. A lfred H ates, President.
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