1997 U.S. Tax Ct. LEXIS 12">*12 Decisions will be entered under Rule 155.
108 T.C. 208">*208 OPINION
SWIFT,
| Increased Interest | ||
| Year | Deficiency | Sec. 6621(c) |
| 1977 | $ 9,837 | * |
| 1979 | 14,442 | * |
| 1980 | 62,482 | * |
| * 120 percent of interest | ||
| accruing after Dec. 31, | ||
| 1984, on portion of the | ||
| underpayment attributable | ||
| to a tax-motivated | ||
| transaction. | ||
108 T.C. 208">*209
| Increased Interest | ||
| Year | Deficiency | Sec. 6621(c) |
| 1979 | $ 55,114 | * |
| 1980 | 82,369 | * |
| 1981 | 2,294 | * |
| * 120 percent of interest | ||
| accruing after Dec. 31, | ||
| 1984, on portion of the | ||
| underpayment attributable | ||
| to a tax-motivated | ||
| transaction. | ||
1997 U.S. Tax Ct. LEXIS 12">*15 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After settlement, the sole issue for decision is whether losses incurred in connection with closing forward contracts in Government securities should be treated as capital losses or as ordinary losses.
The parties submitted these consolidated cases fully stipulated under Rule 122. More specifically, as factual evidence in these cases, the parties stipulated the admissibility of the entire trial record of
We expressly incorporate into our findings of fact the background facts relating to Holly's investments in forward contracts and commodity straddle transactions as well as the specific facts relating to the particular commodity forward contracts that are at issue herein as those facts were found in our opinion in
We also attach hereto and incorporate into our findings of fact as Appendixes A-1 and A-2, certain schedules that were attached to our opinion in
The schedule below identifies lines of Appendixes A-1 and A-2 that reflect specific information with regard to each of the three groups of forward contracts in issue and the amount of the losses claimed by Holly with respect thereto:
| Transaction & Losses | ||||
| Claimed | Appendixes A-1 and A-2 Line Nos. | |||
| First Contracts | -- | ($ 837,500) | A-1, | Lines 5, 7, 9, 11, 17-24, 26, 28 |
| Second Contracts | -- | ($ 816,219) | A-2, | Lines 1, 3, 5, 7-12, 24-26, 29, 30 |
| Third Contracts | -- | ($ 10,000) | A-2, | Lines 13-20 |
The opinion of the U.S. Court of Appeals for the District of Columbia Circuit in
We also, in light of the essentially legal nature of the issue before us, set forth herein a somewhat abbreviated explanation of the details of the particular forward contracts that 108 T.C. 208">*211 are at issue, but 1997 U.S. Tax Ct. LEXIS 12">*18 we emphasize particular aspects of these forward contracts, the significance of which appears to have been overlooked by the Court of Appeals in its analysis and opinion in
We believe that the aspects of these transactions that we emphasize herein are significant and determinative of the narrow issue before us (namely, whether the losses in question are deductible as capital or as ordinary losses). We also note that respondent has conceded the increased interest under section 6621(c) and makes no contention herein that the forward contracts at issue were sham transactions or lacked a business purpose or profit motive. Further, no issue is raised as to petitioners' cost basis in the forward contracts in question.
As indicated, from 1979 to 1982, Israel, Wolff, Stoller, and other individuals were partners in Holly, which partnership invested nominally in interest-bearing Government securities, such as U.S. Treasury Bonds (T-Bonds) and Government National Mortgage Association Bonds (GNMA's) by way of unregulated commodity forward contracts.
Holly utilized forward contracts to conduct an arbitrage program involving the simultaneous purchase in one1997 U.S. Tax Ct. LEXIS 12">*19 market and sale in another market with the expectation of making a profit on price differences in the different markets. Holly's program involved the establishment of long positions in Government securities and the simultaneous establishment of short positions in different Government securities, with a difference in the interest rates, or repurchase rates, on the two positions that was calculated to yield a nominal net profit to Holly when the positions were liquidated.
In this instance, a long position represents a contract to purchase a Government security in the future, and a short position represents a contract to sell a Government security in the future. The establishment of both long and short positions in the same type of commodity is called a spread or a straddle.
In the minds of the partners of Holly, in actuality and in substance, Holly's investments in commodity forward contracts involved nothing more than contracts to speculate in or to arbitrage -- for the short length of time that the forward contracts remained outstanding -- changes or shifts in the interest and discount rates associated with the particular 108 T.C. 208">*212 type of Government securities to which the forward contracts1997 U.S. Tax Ct. LEXIS 12">*20 were pegged. By entering into offsetting forward contracts to purchase and to sell these Government securities, Holly effectively created synthetic short-term security investments by means of the straddles, even though the underlying Government securities to which the interest rate speculation was pegged constituted long-term Government securities.
For example, by entering into a contract to purchase, at the current market or other specified price, 15-year T-Bonds for delivery in 3 months and simultaneously entering into a contract to sell, at the current market or other specified price, 15-year T-Bonds for delivery 6 months later, Holly "created" the economic equivalent of a contract to purchase a 6-month T-Bond. Holly then arbitraged these contracts against simultaneous contracts to sell GNMA's on the same specified date in 3 months and to purchase GNMA's 6 months later.
In economic terms, and as between the parties, the only important factors in such a straddle transaction are the initially specified price differential between the legs of the forward contracts or straddle and changes in interest and discount rates associated with the particular Government securities to which 1997 U.S. Tax Ct. LEXIS 12">*21 the contracts are pegged that occur during the period of time that the contracts remain outstanding. Those factors will determine the entire net gain or loss whenever the position is settled or closed out.
No actual purchase or sale of the Government securities to which the forward contracts are pegged is ever contemplated. In fact, no specific Government securities are identified as being associated with the forward contracts. In actuality, the Government securities to which the forward contracts are associated are more accurately described as hypothetical Government securities that, if they existed, would have the same interest rates and other features as the type of Government securities to which the forward contracts are pegged.
Pricing of the forward contracts entered into by Holly occurred in the following manner. Mr. Wolff, on behalf of Holly, negotiated with ACLI Government Securities, Inc. (AGS), a dealer in Government securities and a broker of commodity futures contracts, the price differential -- as of the date the contracts were entered into -- between the long and short positions of each straddle and, once that differential was agreed upon, left it to AGS to assign 1997 U.S. Tax Ct. LEXIS 12">*22 prices to the two 108 T.C. 208">*213 legs of the straddle reflecting the initial price differential agreed upon. When Mr. Wolff negotiated with AGS regarding offsetting positions, again he would negotiate with AGS only the price differential as of the date the offsetting contracts were entered into.
In the context of the straddle transactions of the type involved in these cases, commodity forward contracts (as with futures commodity contracts) are not consummated by actual sale or purchase and delivery of the underlying securities or commodity. Actual delivery of the underlying securities is not contemplated. Rather, forward contracts are generally closed by offset, that is by entering into opposite forward contracts in the same commodity with the same or similar settlement dates. When such opposite forward contracts in the same commodity are entered into, the rights and obligations of the investor in the initial contracts are simply regarded as terminated.
The parties agree that in the above situation the termination by offset of the investor's respective positions constitutes a capital transaction. We emphasize that all that has happened in closing the transaction by way of offset is that the investor1997 U.S. Tax Ct. LEXIS 12">*23 (at whatever time during the length of the contract the investor chooses to terminate or lock in the gain or loss that has occurred with respect thereto as a result of changes in the price differential and in interest and discount rates relating to the relevant Government securities from the day the forward contracts were first entered into until the day the contracts are closed) simply notifies the other party of the investor's desire to close the transaction by offset and, in effect, the contracts or positions are terminated as of that point in time.
Occasionally, an investor may wish to terminate or "lock in" the gain or loss on only a particular leg of a commodity forward contract or straddle. The procedure is essentially the same, and the transaction is essentially the same, regardless of which of a number of available methods is utilized to lock in the gain or loss on a particular leg of a commodity straddle transaction that has occurred up until that point in time.
True cancellations of forward contracts, where the transaction or contracts are vitiated ab initio, only occur when forward contracts contain errors.
108 T.C. 208">*214 When interest rates change at any time during the period of1997 U.S. Tax Ct. LEXIS 12">*24 time that forward contracts are open, the value of the straddle increases or decreases, but that increase or decrease is moderated by the fact that as one leg of the straddle increases in value, the other leg decreases in value by a similar amount. Although the change in value of a given straddle remains fairly constant, one particular leg of a straddle may reflect a large loss and the other leg may reflect a large gain when interest rates fluctuate widely and when the other leg of the straddle is not considered. It was at such a point in time that Holly, for income tax purposes, occasionally would close by offset or by "cancellation" only a loss leg of a straddle and simultaneously replace the loss leg with a new contract for a slightly different delivery date, thereby locking in the loss on the first leg and the gain on the second leg of the straddle that had occurred from the day the contracts had initially been entered into until the day the initial loss leg of the contract is closed.
In the above scenario, when the loss leg is closed by "cancellation" and simultaneously replaced with a new forward contract, the purpose of going through the formality of "canceling" the loss leg1997 U.S. Tax Ct. LEXIS 12">*25 of the forward contract and replacing it (instead of directly "offsetting" the loss leg) was to attempt to convert the capital loss that petitioners concede would have been associated with the offset procedure into an ordinary loss that Holly claims is associated with a "cancellation."
When a loss leg of a straddle is closed by cancellation and terminated (i.e., no replacement or offset contract is purchased), as well as when a loss leg of a straddle is closed and a replacement contract is purchased (as distinguished from closing by offset), the loss leg of the contract is closed or terminated as of the date of the closing, and the parties have effectively locked in the "loss" on that leg of the straddle, reflecting simply the change, due to shifts in the interest rates, in the nominal value of that leg from the day the leg was entered into until the day of the closing of the leg.
When Holly closed a loss leg of a straddle and no replacement or offset contract was purchased, Holly paid AGS what was referred to as a "cancellation" fee equal to and representing the loss that had been realized on just that leg of the straddle.
108 T.C. 208">*215 When Holly closed a loss leg and replaced it, Holly also1997 U.S. Tax Ct. LEXIS 12">*26 paid AGS a "cancellation" fee equal to and representing the loss that had been realized on just that leg of the straddle (and without taking into account the offsetting gain that also was realized and locked in as of that point in time via the replacement leg of the straddle), which cancellation fee represented the loss realized on the loss leg that was closed.
The closing or liquidation of loss legs of forward contracts by way of offset or by way of "cancellation" (and whether or not "cancellation" is followed by replacement contracts) is economically the same. Where "cancellation" of loss legs is followed by replacement contracts, the replacement contracts simply serve to lock in the offsetting gain on other legs of the straddle that has occurred from the day the straddle was first entered into until the day the loss legs are closed. The replacement contracts simply relate to the need to lock in the large gain in order to offset the large loss that is going to be claimed for tax purposes. The replacement contracts in no way alter the character of the loss realized on the legs that are closed.
Holly typically, in the following year, closed the gain legs of the straddle transactions1997 U.S. Tax Ct. LEXIS 12">*27 by offset in order to qualify the gain as capital gain.
The so-called cancellation fees that were due on closing the loss legs of forward contracts (at least with regard to the first and second groups of forward contracts in issue) were not paid by Holly at the time the investors' loss positions were locked in. Mere bookkeeping entries were made to reflect the so-called cancellation fees.
Just prior to the end of each year, the individual partners of Holly obtained bank loans and made contributions to their partnership capital accounts in Holly in amounts sufficient to pay the cancellation fees owed by Holly. Holly then used such funds to pay the cancellation fees to AGS and treated the fees as ordinary losses at the partnership level and passed through the claimed ordinary losses to the individual partners.
Just after the first of each year, AGS paid to Holly an amount essentially equivalent to the cancellation fees that Holly had paid AGS at the end of the prior year -- reflecting the gains that were locked in on the straddle transactions. Holly then distributed these funds to the individual partners 108 T.C. 208">*216 as a return of capital, and the partners used these funds to repay their bank1997 U.S. Tax Ct. LEXIS 12">*28 loans approximately 1 to 2 weeks after having been loaned the funds.
On its Federal income tax returns for the years in issue, Holly treated losses arising from forward contracts closed by offset as capital losses. Holly, however, reported losses arising from forward contracts closed by "cancellation" (regardless of whether or not replacement contracts were purchased) as ordinary losses.
In 1979, Holly reported a capital gain of $ 1,875 from trading in commodity forward contracts and an ordinary loss of $ 837,500 relating to the "cancellation" of the first group of forward contracts in issue.
In 1980, Holly reported capital gains in the amount of $ 850,000 (relating to the straddle the above loss leg of which was closed in 1979 to produce the $ 837,500 loss claimed in 1979) and an ordinary loss of $ 826,219 relating to "cancellation" of the second and third forward contracts in issue that were "canceled" in 1980 (an $ 816,219 loss relating to the second group of forward contracts closed by "cancellation" and replacement, and a $ 10,000 loss relating to the forward contract "canceled" and terminated).
In 1981, Holly reported a cumulative net short-term capital loss of $ 349,4681997 U.S. Tax Ct. LEXIS 12">*29 from trading in forward contracts. The record is not clear as to the amount of the capital gain Holly reported in 1981 with respect to closing in 1981 the replacement contracts that Holly acquired in 1980.
On audit, insofar as is pertinent to the sole issue before us in the instant cases, respondent determined that Holly's claimed ordinary losses (relating to the forward contracts "canceled" and replaced and to the forward contracts "canceled" and terminated) should be treated as capital losses.
The parties herein agree on two important points: (1) That the commodity forward contracts that Holly entered into and created with AGS constituted capital assets; and (2) that locking in,
The issue in the instant cases is whether locking in -- at any point in time during the duration or length of a forward contract -- a loss relating to a leg of a straddle transaction by two methods slightly different1997 U.S. Tax Ct. LEXIS 12">*30 from the offset method (namely, by cancellation and replacement and by cancellation and termination) also constitutes a sale or exchange of a capital asset, as respondent contends, or whether the taxpayers can convert the capital loss into an ordinary loss by the use of either of such two different methods, as petitioners contend.
As is often the case, critical to resolution of the issue before us is the statement of the issue. If the industry label and nomenclature are accepted at face value, and if the issue herein is stated simply in terms of whether "cancellation" of a leg of a forward contract gives rise to capital gain or loss, as distinguished from ordinary gain or loss, one is directed quickly to certain case authority (discussed below) that addresses tax consequences of unexpected "cancellations" of commercial contracts, which cases generally turn on whether property rights relating to or arising out of the original contract survived the cancellation and whether all rights relating to the contract "vanished" with the cancellation. As explained below, we believe such "cancellation" cases do not control the cancellation of commodity forward contracts by which investors simply1997 U.S. Tax Ct. LEXIS 12">*31 settle or close out their position in a straddle or in a leg of a straddle transaction.
As stated, the parties agree that forward contracts in commodity markets held for investment constitute capital assets under
As we explained in 108 T.C. 208">*218 both the Supreme Court and the Congress have had occasions to deal with commodity futures transactions, have treated them as capital transactions thus presupposing a "sale1997 U.S. Tax Ct. LEXIS 12">*32 or exchange," and have never questioned our [ In the landmark
We went on in
In [The taxpayer argues that the investor] doesn't, by its dealing, become the owner of any property, it merely enters into executory It is difficult to see how, if * * * [the taxpayer] is right in this naive reduction to fundamentals, of the transactions in which it has been engaged, its activities can be distinguished from mere wagering or to be equally naive, betting or gambling. But they are so distinguished in law and in business contemplation, and they are so distinguished, because 108 T.C. 208">*219
We believe the above statement from this early opinion is apropos to the facts of the transactions before us in this case and succinctly distills the essence of what is going on -- namely, the "purchase and sale" of forward contracts or "positions" in a particular1997 U.S. Tax Ct. LEXIS 12">*35 market (in this case the market for interest-sensitive Government securities). Whenever the investor (during the length or duration of the forward contracts that have been purchased) elects to settle, close out, extinguish, or cancel the contracts or positions, or one of the legs thereof, and to realize the gain or loss associated with the contracts, or with one of the legs thereof, and regardless of whether the investor "closes out" or "locks in" the gain or loss by way of offset, by way of cancellation and replacement contracts, or by way of cancellation and termination, the transaction is exactly the same -- in purpose, in effect, and in substance -- and produces exactly the same type of taxable gain or loss -- in the instant cases capital gain or capital loss.
As the U.S. Court of Appeals for the Fifth Circuit stated, implicit in the realization or "lock in" of the gain or loss associated with straddle transactions or with legs thereof (whether the lock in is effected by way of offset, cancellation and replacement, or cancellation and termination) is the agreement and understanding that actual purchases and sales have occurred with respect to the price-differential and interest-sensitive1997 U.S. Tax Ct. LEXIS 12">*36 risk for T-Bonds and GNMA's that each party accepted when the commodity straddle transaction was first entered into. In each case, the investor assumed the risk of swings in the price of such Government securities for whatever time each leg of the contract was outstanding.
Regardless of when and how a loss position in a commodity forward contract is extinguished, closed, settled, terminated, or canceled, at any one point in time during the length or duration of the contract, the investor in fact has participated in exactly the transaction for which the investor contracted from the time the transaction was first entered into until the day the investor chooses to close or terminate that leg. The investor got exactly what was bargained for (participation in this interest-sensitive risk transaction for a period of time) 108 T.C. 208">*220 and when the investor closed the leg or the position (by whichever of the various "alternative liquidation techniques" that are made available to investors in commodities forward contracts (see
When the investor chooses to dispose of or terminate that risk, or any part thereof, and to lock in the gain or loss that has occurred on any leg of the straddle, because of swings in interest rates on Government securities that have occurred, the investor elects a method to do so, but each method produces exactly the same economic event and consequence, only nominal differences in form, and certainly, as between the parties to the forward contracts, a sale or exchange of the respective price-differential and interest-sensitive risk positions that their contracts represented from the time they first entered into the forward contracts up until the time that the risk is terminated and the gain or loss is locked in.
As we stated in These offsets clearly constitute both "closure" under1997 U.S. Tax Ct. LEXIS 12">*38 section 1233 and a sufficient sale or exchange under the general capital provisions to mandate capital treatment here. * * * [
As use of the term "compensate" was not controlling in
Respectfully, we believe that the Court of Appeals for the District of Columbia Circuit in
Whether 6-months' offsetting forward contracts, all of the legs of an entire straddle, or simply one leg thereof, are settled or closed 1 week or 1 month after they are entered into, or not until the initially specified settlement date, and by whatever method used to settle or close the contracts (in the instant cases, by offset, by cancellation and replacement, and by cancellation and termination), in each situation the capital transaction that the parties entered into through the forward contracts, the straddle, and the legs thereof, has been closed and the payment received (if a gain is realized) or made (if a loss is realized) represents exactly the same type of income or loss earned with regard to the contracts, the straddle, or the legs thereof, for the length of time the forward contracts1997 U.S. Tax Ct. LEXIS 12">*40 were outstanding.
Other legs of the straddle may remain open, and the parties may continue to be exposed to continuing shifts in interest rates and in price fluctuations of Government securities for the duration or length of time that other legs of the straddle remain open, but with regard to the leg that has been closed, or canceled, or offset, the transaction is closed, and a completed sale or exchange has occurred under
With the benefit of further analysis, it is our conclusion that our opinion in
As the Court of Appeals for the Fifth Circuit early recognized in
Courts often must address taxpayers' "artful devices" to convert ordinary gain into more favorable capital gain or to convert capital loss into more favorable ordinary loss. See
We reiterate what we stated in
As stated earlier, we believe that cases involving unexpected and true cancellations of commercial contracts and "vanishing" or "disappearing assets" are not particularly helpful. See
Those cases involve regular commercial contracts for the provision of goods or services and the unexpected1997 U.S. Tax Ct. LEXIS 12">*43 cancellation of the contracts in midstream due to unusual circumstances not consistent with the continuation of the original contracts that had been entered into.
It seems obvious to us that the cancellations involved in the above cases are fundamentally different from the "cancellations" of forward contracts that are involved herein where the "cancellations", lock in, settlement, or closing that occurred are exactly what the parties contemplated when they entered into the forward contracts (namely, Holly and AGS contemplated that Holly would have the risk of price fluctuations on each leg of the straddle from the day the straddle was first opened until whatever day Holly chooses to lock in the gain or loss). Holly received the 1997 U.S. Tax Ct. LEXIS 12">*44 benefit of that contract and now becomes liable for the burden (namely, the loss incurred on the legs Holly chose to close). Holly received exactly what it contracted for. AGS did likewise. In this sense, the transactions in question with respect to the loss legs do not represent cancellations. They represent consummations. The cases, therefore, involving unexpected cancellations of commercial contracts are of limited applicability.
In a number of cases, taxpayers and respondent have sought to invoke the "disappearing asset" theory, but that theory was found to be inapplicable where a close scrutiny of the substance and reality of the transaction in issue indicated that much more was involved than mere "vanishing assets." In
In
That is the situation before us. Particularly with regard to the loss legs that were "canceled" and immediately replaced, little, if anything, "vanished" upon Holly's closing or settling the loss legs. To the contrary, Holly and the Holly partners stayed around, continued to participate in the straddle transactions, 108 T.C. 208">*224 postponed even paying the loss until the very end of the year with funds borrowed by Holly, closed or settled the offsetting gain leg of the forward contracts just after the new year, and used the gain to repay the bank. The last thing the investors would have wanted -- upon the "cancellations" in question -- is to vanish or disappear from the rest of these straddle transactions, the consequence of which is that the investors might actually have had a real loss to pay.
More than anything else, the investors wanted to stay around, to be a part of the straddle transactions as they came to their predictable, inevitable, intended, and planned closing. We agree with the analysis set forth in our prior opinion in1997 U.S. Tax Ct. LEXIS 12">*46 the substance of the alleged cancellation transactions [will be determined] by looking to the entire spread arbitrage transaction and the economic consequences sought by the parties. * * * When * * * [the taxpayer] requested the cancellation of a contract or series of contracts, it was part of an ongoing straddle and was for the purpose of changing Holly's window of risk. He did not want to terminate Holly's straddle with AGS, he just wanted to change the delivery date of one leg and accelerate the loss to be recognized by Holly and its partners. * * * [Citation omitted.]
Respectfully, we also believe that in The definition of capital gains and losses in section 1222 requires1997 U.S. Tax Ct. LEXIS 12">*47 that there be a "sale or exchange" of a capital asset. Court decisions have interpreted this requirement to mean that when a disposition is not a sale or exchange of a capital asset, for example, a lapse, cancellation, or abandonment, the disposition produces ordinary income or loss. * * * [See The committee believes that the change in the sale or exchange rule is necessary to prevent tax-avoidance transactions designed to create fully-deductible ordinary losses on certain dispositions of capital assets, which if sold at a gain, would produce capital gains. * * * 108 T.C. 208">*225 Some taxpayers and tax shelter promoters have attempted to exploit court decisions holding that ordinary income or loss results from certain dispositions of property whose sale or exchange would produce capital gain or loss. * * * * * * * Some of the more common of these tax-oriented ordinary loss and capital gain transactions involve cancellations of forward contracts for currency or securities. The committee1997 U.S. Tax Ct. LEXIS 12">*48 considers this ordinary loss treatment inappropriate if the transaction, such as settlement of a contract to deliver a capital asset, is economically equivalent to a sale or exchange of the contract. * * * [S. Rept. 97-144, at 170-171 (1981),
According to the Court of Appeals for the District of Columbia Circuit, the above language from the legislative history indicates that Congress thought that it was changing the law and that this change in the law is strong evidence that "cancellation" of commodity forward contracts before the change in the law produced ordinary losses.
We respectfully disagree with the Court of Appeals for the District of Columbia Circuit's analysis of the above legislative history. See our explanation of the above legislative history in Whether new
Petitioners argue that the proper venue for appeal of these cases is to the U.S. Court of Appeals for the District of Columbia Circuit and therefore that under
At the time the respective petitions in these cases were filed, however, petitioners resided as follows:
| Petitioners | Residence |
| Audrey H. Israel | New Jersey |
| Barry W. Gray, Executor representing | |
| the Estate of Leon Israel, Jr.* | New York |
| Jonathan P. and Margaret A. Wolff | New York |
| * Leon Israel, Jr., died a resident of New Jersey. | |
1997 U.S. Tax Ct. LEXIS 12">*50 Petitioners' counsel argues that docket No. 31588-88, involving the Estate of Leon Israel, Jr., is appealable to the U.S. Court of Appeals for the District of Columbia Circuit because petitioners' counsel, Herbert Stoller, is also a coexecutor of the Estate of Leon Israel, Jr., and resided in Bermuda at the time the petition was filed. In this regard, we note that the petition in docket No. 31588-88 was filed not by Herbert Stoller, as executor of the Estate of Leon Israel, Jr., but by Barry W. Gray, as executor of the Estate of Leon Israel, Jr.
(A) in the case of a petitioner seeking redetermination of tax liability other than a corporation, the legal residence of the petitioner,
Because Herbert Stoller is not a petitioner in docket No. 31588-88, it is unclear whether said docket would be appealable to the U.S. Courts of Appeals for the Second and/or Third Circuit or to the U.S. Court of Appeals for the District of Columbia Circuit. Accordingly, we are not bound by the opinion of the
COHEN, CHABOT, JACOBS, GERBER, PARR, WELLS, RUWE, COLVIN, BEGHE, LARO, FOLEY, VASQUEZ, and GALE,
108 T.C. 208">*227 APPENDIX A-1
CHRONOLOGY OF HOLLY'S STRADDLE TRANSACTIONS
| Explanation of Columns: | ||
| ACLIX # = ACLI Contract # | Trade Date = Date | Settlement Date = |
| Face = Face Value of | Position Established | Delivery Date |
| Security | L/S = Long or Short | Scrty. = Government |
| Rate = Rate of Security | Price - Purchase or | Security |
| O/C = Closed by Offset or | Sale Price | G/L Disp = Gain or |
| Canceled | Line Tr. Beg/Cl = Line # | Loss on |
| Transaction Begins | Disposition When | |
| or Closes | Position Closes | |
| Other Abbreviations: | ||
| MM = Millions of $ | GNMA = Ginnie Mae | TBond = US Treasury Bond |
| CAN = Canceled | Certificate |
| 1979-1980 STRADDLE TRANSACTIONS | |||||||
| Trade | Settle | ||||||
| ACLIX # | Line # | Date | Date | Face | L/S | Scrty. | Rate |
| 929772 | 1 | 10/12/79 | 9/16/81 | 3MM | L | ||
| GNMA | 77 9/32 | ||||||
| 929773 | 2 | 10/12/79 | 3/18/81 | 3MM | S | ||
| GNMA | 77 30/32 | ||||||
| 918904 | 3 | 10/12/79 | 3/81 | 3MM | L | ||
| TBond | 83 11/32 | ||||||
| 918903 | 4 | 10/12/79 | 9/81 | 3MM | S | ||
| TBond | 83 1/32 | ||||||
| 929768 | 5 | 10/12/79 | 9/16/81 | 5MM | L | ||
| GNMA | 77 7/32 | ||||||
| 929770 | 6 | 10/12/79 | 3/18/81 | 5MM | S | ||
| GNMA | 77 28/32 | ||||||
| 929769 | 7 | 10/12/79 | 9/16/81 | 5MM | L | ||
| GNMA | 77 8/32 | ||||||
| 929771 | 8 | 10/12/79 | 3/18/81 | 5MM | S | ||
| GNMA | 77 29/32 | ||||||
| 918907 | 9 | 10/12/79 | 3/81 | 5MM | L | ||
| TBond | 83 12/32 | ||||||
| 918905 | 10 | 10/12/79 | 9/81 | 5MM | S | ||
| TBond | 83 2/32 | ||||||
| 918908 | 11 | 10/12/79 | 3/81 | 5MM | L | ||
| TBond | 83 11/32 | ||||||
| 918906 | 12 | 10/12/79 | 9/81 | 5MM | S | ||
| TBond | 83 1/32 | ||||||
| 020094 | 13 | 10/23/79 | 3/18/81 | 3MM | L | ||
| GNMA | 73 30/32 | ||||||
| 020093 | 14 | 10/23/79 | 9/16/81 | 3MM | S | ||
| GNMA | 73 17/32 | ||||||
| 020053 | 15 | 10/23/79 | 9/81 | 3MM | L | ||
| TBond | 79 16/32 | ||||||
| 020052 | 16 | 10/23/79 | 3/81 | 3MM | S | ||
| TBond | 79 20/32 | ||||||
| CAN929768 | 17 | 10/24/79 | 9/16/81 | 5MM | L | ||
| GNMA | |||||||
| CAN929769 | 18 | 10/24/79 | 9/16/81 | 5MM | L | ||
| GNMA | |||||||
| CAN918907 | 19 | 10/24/79 | 3/81 | 5MM | L | ||
| TBond | |||||||
| CAN918908 | 20 | 10/24/79 | 3/81 | 5MM | L | ||
| TBond | |||||||
| 020073 | 21 | 10/24/79 | 6/17/81 | 5MM | L | ||
| GNMA | 73 14/32 | ||||||
| 020074 | 22 | 10/24/79 | 6/17/81 | 5MM | L | ||
| GNMA | 73 14/32 | ||||||
| 020050 | 23 | 10/24/79 | 6/81 | 5MM | L | ||
| TBond | 78 30/32 | ||||||
| 020051 | 24 | 10/24/79 | 6/81 | 5MM | L | ||
| TBond | 78 30/32 | ||||||
| 105623 | 25 | 1/23/80 | 3/18/81 | 10MM | L | ||
| GNMA | 77 25/32 | ||||||
| 105622 | 26 | 1/23/80 | 6/17/81 | 10MM | S | ||
| GNMA | 77 21/32 | ||||||
| 105625 | 27 | 1/23/80 | 9/1/81 | 10MM | L | ||
| TBond | 79 13/32 | ||||||
| 105624 | 28 | 1/23/80 | 6/1/81 | 10MM | S | ||
| TBond | 79 15/32 | ||||||
| STRADDLES OPENED AND CLOSED -- 1980 | |||||||
| 147848 | 1 | 6/20/80 | 12/16/81 | 6MM | L | ||
| GNMA | 30 10/32 | ||||||
| 147847 | 2 | 6/20/80 | 6/19/82 | 6MM | S | ||
| GNMA | 76 26/32 | ||||||
| 147349 | 3 | 6/20/80 | 6/1/82 | 6MM | L | ||
| TBond | 83 8/32 | ||||||
| 147350 | 4 | 6/20/80 | 12/1/81 | 6MM | S | ||
| TBond | 83 20/32 | ||||||
| 150081 | 5 | 6/30/80 | 6/16/82 | 6MM | L | ||
| GNMA | 76 5/32 | ||||||
| 150082 | 6 | 6/30/80 | 12/16/81 | 6MM | S | ||
| GNMA | 76 15/32 | ||||||
| 150083 | 7 | 6/30/80 | 12/1/81 | 6MM | L | ||
| TBond | 79 14/32 | ||||||
| 150084 | 8 | 6/30/80 | 6/1/82 | 6MM | S | ||
| TBond | 79 12/32 | ||||||
| 1979-1980 STRADDLE TRANSACTIONS | ||||
| Line Tr. | ||||
| ACLIX # | Price | G/L | O/C | Beg/Cl |
| 929772 | 2,318,437.50 | O | 14 | |
| 929773 | (2,338,125.00) | O | 13 | |
| 918904 | 2,500,312.50 | O | 16 | |
| 918903 | (2,490,937.50) | O | 15 | |
| 929768 | 3,860,937.50 | C | 17 | |
| 929770 | (3,893,750.00) | O | 25 | |
| 929769 | 3,862,500.00 | C | 18 | |
| 929771 | (3,895,312.50) | O | 25 | |
| 918907 | 4,168,750.00 | C | 19 | |
| 918905 | (4,153,125.00) | O | 27 | |
| 918908 | 4,167,187.50 | C | 20 | |
| 918906 | (4,151,562.50) | O | 27 | |
| 020094 | 2,218,125.00 | 120,000.00 | O | 2 |
| 020093 | (2,205,937.50) | (112,500.00) | O | 1 |
| 020053 | 2,385,000.00 | 105,937.50 | O | 4 |
| 020052 | (2,388,750.00) | (111,562.50) | O | 3 |
| CAN929768 | (200,000.00) | C | 5 | |
| CAN929769 | (201,562.50) | C | 7 | |
| CAN918907 | (218,750.00) | C | 9 | |
| CAN918908 | (217,187.50) | C | 11 | |
| 020073 | 3,671,875.00 | O | 26 | |
| 020074 | 3,671,875.00 | O | 26 | |
| 020050 | 3,946,875.00 | O | 28 | |
| 020051 | 3,946,875.00 | O | 28 | |
| 105623 | 7,778,125.00 | 10,937.50 | O | 6 & 8 |
| 105622 | (7,765,625.00) | 421,875.00 | O | 21 & 22 |
| 105625 | 7,940,625.00 | 364,062.50 | O | 10 & 12 |
| 105624 | (7,946,875.00) | 53,125.00 | O | 23 & 24 |
| STRADDLES OPENED AND CLOSED -- 1980 | ||||
| 147848 | 4,818,750.00 | O | 6 | |
| 147847 | (4,788,750.00) | O | 5 | |
| 147349 | 4,995,000.00 | O | 8 | |
| 147350 | (5,017,500.00) | O | 7 | |
| 150081 | 4,569,375.00 | 219,375.00 | O | 2 |
| 150082 | (4,588,125.00) | (230,625.00) | O | 1 |
| 150083 | 4,766,250.00 | 251,250.00 | O | 4 |
| 150084 | (4,762,500.00) | (232,500.00) | O | 3 |
1997 U.S. Tax Ct. LEXIS 12">*53 APPENDIX A-2
| 1980-1982 STRADDLE TRANSACTIONS | |||||||
| Trade | Settle | ||||||
| ACLIX # | Line # | Date | Date | Face | L/S | Scrty. | Rate |
| 164941 | 1 | 8/29/80 | 9/16/81 | 10MM | L | ||
| GNMA | 70 6/32 | ||||||
| 164940 | 2 | 8/29/80 | 3/17/82 | 10MM | S | ||
| GNMA | 70 6/32 | ||||||
| 164943 | 3 | 8/29/80 | 3/01/82 | 10MM | L | ||
| TBond | 72 20/32 | ||||||
| 164942 | 4 | 8/29/80 | 9/18/81 | 10MM | S | ||
| TBond | 72 10/32 | ||||||
| 178424 | 5 | 10/22/80 | 9/16/81 | 2.9MM | L | ||
| GNMA | 70 23/32 | ||||||
| 178425 | 6 | 10/22/80 | 3/17/82 | 2.9MM | S | ||
| GNMA | 70 22/32 | ||||||
| CAN178424 | 7 | 10/28/80 | 9/16/81 | 2.9MM | L | ||
| GNMA | |||||||
| CAN164941 | 8 | 10/28/80 | 9/16/81 | 10MM | L | ||
| GNMA | |||||||
| CAN164943 | 9 | 10/28/80 | 3/82 | 10MM | L | ||
| TBond | |||||||
| 180286 | 10 | 10/28/80 | 12/16/81 | 2.9MM | L | ||
| GNMA | 67 8/32 | ||||||
| 180285 | 11 | 10/28/80 | 12/16/81 | 10MM | L | ||
| GNMA | 67 8/32 | ||||||
| 180287 | 12 | 10/28/80 | 12/16/81 | 10MM | L | ||
| TBond | 68 10/32 | ||||||
| 181467 | 13 | 11/05/80 | 12/80 | 1MM | L | ||
| TBond | 68 | ||||||
| 181466 | 14 | 11/05/80 | 3/81 | 1MM | S | ||
| TBond | 68 20/32 | ||||||
| 182250 | 15 | 11/07/80 | 12/80 | 1MM | L | ||
| TBond | 67 | ||||||
| 182251 | 16 | 11/07/80 | 3/81 | 1MM | S | ||
| TBond | 67 20/32 | ||||||
| CAN181467 | 17 | 11/25/80 | 12/80 | 1MM | L | ||
| TBond | |||||||
| CAN181466 | 18 | 11/25/80 | 3/81 | 1MM | S | ||
| TBond | |||||||
| CAN182250 | 19 | 11/25/80 | 12/80 | 1MM | L | ||
| TBond | |||||||
| CAN182281 | 20 | 11/25/80 | 3/81 | 1MM | S | ||
| TBond | |||||||
| 390801 | 21 | 9/18/81 | 3/17/82 | 2.5MM | L | ||
| GNMA | 58 1/32 | ||||||
| 390800 | 22 | 9/18/81 | 3/17/82 | .9MM | L | ||
| GNMA | 58 | ||||||
| 390799 | 23 | 9/18/81 | 6/16/82 | 9.5MM | L | ||
| GNMA | 53 2/32 | ||||||
| 390802 | 24 | 9/18/81 | 12/16/81 | 5.6MM | S | ||
| GNMA | 57 25/32 | ||||||
| 390803 | 25 | 9/18/81 | 12/16/81 | 2.4MM | S | ||
| GNMA | 57 26/32 | ||||||
| 390804 | 26 | 9/18/81 | 12/16/81 | 4.9MM | S | ||
| GNMA | 57 27/32 | ||||||
| 390805 | 27 | 9/18/81 | 9/18/81 | 5.1MM | L | ||
| TBond | 59 | ||||||
| 390806 | 28 | 9/18/81 | 9/18/81 | 4.9MM | L | ||
| TBond | 58 24/32 | ||||||
| 390808 | 29 | 9/18/81 | 12/1/81 | 4.9MM | S | ||
| TBond | 59 11/32 | ||||||
| 391075 | 30 | 9/18/81 | 12/1/81 | 5.1MM | S | ||
| TBond | 59 16/32 | ||||||
| 436789 | 31 | 3/4/82 | 3/17/82 | 9.5MM | L | ||
| GNMA | 63 5/32 | ||||||
| 436790 | 32 | 3/4/82 | 6/16/82 | 9.5MM | S | ||
| GNMA | 62 13/32 | ||||||
| 1980-1982 STRADDLE TRANSACTIONS | ||||
| Line Tr. | ||||
| ACLIX # | Price | G/L | O/C | Beg/Cl |
| 164941 | 7,018,750.00 | C | 8 | |
| 164940 | (7,018,750.00) | O | 21,22,31 | |
| 164943 | 7,262,500.00 | C | 9 | |
| 164942 | (7,231,250.00) | O | 27 & 28 | |
| 178424 | 2,050,843.75 | C | 7 | |
| 178425 | (2,049,937.50) | O | 31 | |
| CAN178424 | (100,593.75) | C | 5 | |
| CAN164941 | (293,750.00) | C | 1 | |
| CAN164943 | (421,875.00) | C | 3 | |
| 180286 | 1,950,250.00 | O | 24,25,26 | |
| 180285 | 6,725,000.00 | O | 24,25,26 | |
| 180287 | 6,831,250.00 | O | 29 & 30 | |
| 181467 | 680,000.00 | C | 17 | |
| 181466 | (686,250.00) | C | 18 | |
| 182250 | 670,000.00 | C | 19 | |
| 182251 | (676,250.00) | C | 20 | |
| CAN181467 | 10,000.00 | C | 13 | |
| CAN181466 | (15,000.00) | C | 14 | |
| CAN182250 | 20,000.00 | C | 15 | |
| CAN182281 | (25,000.00) | C | 16 | |
| 390801 | 1,450,781.25 | O | 2 | |
| 390800 | 522,000.00 | 413,593.75 1 | O | 2 |
| 390799 | 5,515,937.50 | O | 32 | |
| 390802 | (3,235,750.00) | O | 10 & 11 | |
| 390803 | (1,387,500.00) | O | 10 & 11 | |
| 390804 | (2,834,343.75) | (1,217,656.25) 2 | O | 10 & 11 |
| 390805 | 3,009,000.00 | O | 4 | |
| 390806 | 2,878,750.00 | 1,343,500.00 3 | O | 4 |
| 390808 | (2,907,843.75) | O | 12 | |
| 391075 | (3,034,500.00) | (888,906.25) 4 | O | 12 |
| 436789 | 5,999,843.75 | 682,468.75 51997 U.S. Tax Ct. LEXIS 12">*55 | O | 2 & 6 |
| 436790 | (5,928,593.75) | 412,656.25 | O | 23 |
108 T.C. 208">*231 BEGHE,
With all due respect, the author of the dissenting opinion and the Court of Appeals for the District Columbia Circuit in
Other special circumstances present in the cases at hand provide a principled basis for looking beyond the conceded facts that the transactions in question were bona fide, had economic substance, and were entered into for profit--all of which only go to the economics of the amount of gain or loss--to recognize the also inescapable facts that Holly and AGS were related parties with no adverse interests insofar as the treatment of the closing transactions as offsets or cancellations was concerned. The custom or usage of the trade among dealers and traders in forward contracts and the underlying commodities, which Holly and AGS arbitrarily ignored, is that true cancellations1997 U.S. Tax Ct. LEXIS 12">*57 are only employed to correct mistakes, not to close out forward contracts entered into and disposed of in the ordinary course of business. 1 See 108 T.C. 208">*232
1997 U.S. Tax Ct. LEXIS 12">*58 In these circumstances, the analysis in the majority opinion of the forward contracts in question and the ways in which they were handled by Holly and AGS is consistent with and supported by Judge Friendly's analysis in
CHABOT, JACOBS, and PARR,
HALPERN,
I.
I dissent because I believe that the majority is not justified in disregarding the actual transactions engaged in by Holly (the partnership) in favor of hypothetical transactions that yield the largest tax for the Government. The majority justifies treating a cancellation as a sale on the ground that cancellations and offsets are economically equivalent. Even were I to accept that proposition, the majority has failed1997 U.S. Tax Ct. LEXIS 12">*59 to persuade me that a common "reality" of the two transactions is a sale. In searching for that reality, it is important to keep in mind that respondent has made the following concession: 108 T.C. 208">*233 Respondent concedes for purposes of these cases that Holly Trading Associates' transactions in forward contracts with ACLI Government Securities, Inc. during the years at issue were
II.
I believe that, in part, the majority misunderstands some of the complex arrangements by which persons arrange for the future purchase or sale of a commodity. A certain amount of detail is necessary to appreciate what I believe the majority misunderstands. Many of the factual details of the various anticipatory arrangements for the purchase or sale of a commodity can be found in our opinion in
A.
A
Trading in RFCs for a specific commodity and delivery month continues until the day of the month set by the exchange on which trading in contracts for that delivery month stops. Thereafter, delivery of the commodity is made by holders of open short RFCs to holders of open long RFCs on the matched-up basis established by the clearing organization.
Up until the date trading stops, the holders of both long and short RFCs can close out their contracts without making or taking delivery of the commodity by entering into inverse purchase or sale contracts on the exchange. Thus, the holder of a long RFC1997 U.S. Tax Ct. LEXIS 12">*62 can eliminate the risk of, or "offset", his obligation to purchase and pay for the commodity by acquiring from another the promise to purchase and pay for the same commodity on the same exchange for the same delivery month, that is, by entering into an inverse, short RFC. Such a transaction has been held to meet the Code requirement of a "sale or exchange", which can give rise to capital gain or loss, on the ground that a "fictional" delivery is made on the offsetting inverse, short RFC with the commodity "acquired" under the long RFC.
It appears that, under the usual exchange rules applicable to RFCs, the offsetting contracts, which are both with the exchange, immediately cancel and are terminated, with a money settlement for the difference in value.
108 T.C. 208">*235 B.
A Finally, we note that the most common method of settling a forward sale contract has traditionally been to enter into a purchase contract and to offset the contractual obligations to sell and purchase.
There is, thus, an important distinction between the operation of offset in the contexts of RFCs and forward contracts. By exchange rules, offsetting RFCs cancel and are terminated on the offset date, with a money settlement then for any difference in values. Offsetting forward contracts, being privately negotiated, do not automatically cancel and terminate on the offset date but, unless the parties agree to the contrary, coexist until the settlement date, when both contracts are deemed to have been executed, with delivery taken (on the long contract) and delivery made (on the short contract). Although not perfectly clear on that point,
C.
A person who has entered into either a RFC or a forward contract (when no distinction is intended, an "anticipatory contract") assumes the risk that the1997 U.S. Tax Ct. LEXIS 12">*67 market price for delivery of the commodity on the agreed date will change. Changes in the market price for delivery of the commodity will result in changes in the value of an anticipatory contract for delivery in that month. An anticipatory contract holder is described as being in a "naked" position when he bears the unalloyed risk of changes in the market price for delivery of the commodity (market risk).
A "
D.
A participant in a straddle may replace one leg of the straddle with another contract of the same kind (i.e., long or short) for1997 U.S. Tax Ct. LEXIS 12">*68 a different delivery date (such replacement of one leg being referred to as a switch). For example, here, in
In the case of a straddle built on RFCs, the mechanics of a switch would involve the taxpayer simultaneously entering into (1) an inverse contract with respect to the long or short RFC being switched and (2) a like (long or short) RFC to replace the RFC being switched. Except perhaps in the case of certain tax-motivated straddles, see, e.g.,
E.
1997 U.S. Tax Ct. LEXIS 12">*70 The majority has not made clear that what it has called the Third Contract, see majority op. p. 4 (the November 25th group), involved straddles consisting of contracts that were all closed by cancellation on the same date. There was no switch of any leg and, consequently, no continuing straddle investment after the cancellations, all of which took place on November 25, 1980.
III.
I believe that the key to understanding the majority's error is contained in the following sentence: Whenever the investor (during the length or duration of the forward contracts that have been purchased) elects to settle, close out, extinguish, or cancel the contracts or positions, or one of the legs thereof, and to realize the gain or loss associated with the contracts, or with one of the legs thereof, and regardless of whether the investor "closes out" or "locks in" the gain or loss by way of offset, by way of cancellation and replacement contracts, or by way of cancellation and termination,
The majority states: 108 T.C. 208">*239 Courts often must address taxpayers' "artful devices" to convert ordinary gain into more favorable capital gain or to convert capital loss into more favorable ordinary loss. * * * That task should be accomplished on the basis not of the "cancellation" label used by the parties but on the
The majority's perception of fundamental reality is bottomed on the treatment accorded RFCs settled by offset, as articulated in
The fiction imposed on a taxpayer that settles RFCs by offset, however, is not a ground to conclude that,
As a matter of tax policy, perhaps the cancellation of a forward contract should be treated as a zero dollar sale so as to satisfy the sale or exchange requirement of section 1222. Congress thinks so and has added
The majority's understanding of the "nature of the termination of offsetting forward contracts", majority op. p. 20, is illustrated by certain forward contracts in this case. That perspective is set forth as follows: "Upon closing by offset of forward contracts, the transaction is terminated and extinguished, settlement between the parties1997 U.S. Tax Ct. LEXIS 12">*75 occurs at that time, and no contracts remain in effect." The problem with the Tax Court's reasoning is that cancellation and offset are different in substance as well as in form. When a contract is cancelled it simply ceases to exist.
In addition, the majority suggests that, since "little, if anything, 'vanished' upon Holly's closing or settling the loss legs", sale or exchange treatment of those contract cancellations is appropriate. Majority op. p. 25. The majority recognizes that some contracts were not replaced (the November 25th group). Nevertheless, the majority explains that what remained after the contract cancellations was Holly's continued participation in straddle transactions: "The last thing the investors would have wanted -- upon the 'cancellations' in question -- is to vanish or disappear from the rest of these straddle transactions, the consequence of which is that the investors might actually have had a real loss to pay."
By juxtaposing cases involving "unexpected and true cancellations" of "regular commercial contracts for the provision of goods or services" (true cancellations) with the forward contract cancellations in issue, the majority purports to discern a fundamental difference that distinguishes true cancellations and1997 U.S. Tax Ct. LEXIS 12">*77 explains the capital loss treatment appropriate for the contracts in issue.
I believe that the majority has failed to appreciate the significance of Judge Friendly's analysis in the Tax law is concerned with the substance, here the voluntary passing of "property" rights allegedly constituting "capital assets," not with whether they are passed to a stranger or to a person already having a larger "estate." So we turn to an analysis of what rights1997 U.S. Tax Ct. LEXIS 12">*78 Ferrer conveyed. [
Another difficulty with the rationale of the majority is the majority's failure to explain the steps by which it proceeded to conclude that the cancellation losses were losses from the
IV.
Professors Bittker and Lokken, in their treatise on Federal income, gift, and estate taxation, address the principle that substance must govern over form in taxation. Bittker & Lokken, Federal Taxation of Income, Estates and Gifts, par. 4.3.3, at 4-33, (2d ed. 1989). They begin their1997 U.S. Tax Ct. LEXIS 12">*81 discussion by noting that the substance-over-form principle has been referred to as "the cornerstone of sound taxation" (quoting A rogue offshoot of the substance-over-form doctrine suggests that when a taxpayer selects one of several forms that have identical practical consequences in the real world, the government can disregard the chosen form and tax the transaction as though the most costly of the alternatives had been employed. * * * [
The majority has not invoked much of the substance-over-form jurisprudence. It has, however, looked for the "realities of the transactions" and raised the specter of "artful devices". I believe that it is fair to say that the majority has looked to tax the cancellation transactions on the basis of what it considers to be their substance. In searching for that substance, however, the majority has dug no deeper than the fiction that accounts for the tax treatment of exchange regulated offsets and forward contracts settled by offset and payment. Indeed, with respect to offsetting forward contracts, 108 T.C. 208">*244 the majority appears to conclude, wrongly, that all such contracts cease to exist on the offset date. The reality of the settlement of anticipatory contracts by offset is not that the contract holder took delivery under a long contract of a commodity that he then used to satisfy his delivery obligation under a short contract. That is a fiction imposed on the taxpayer because of the way
*. Briefs amicus curiae were filed on behalf of Martin B. and Marilyn G. Boorstein, and Allan D. and Lesley Yasnyi, other partners against whom respondent has determined income tax deficiencies relating to the same issue involved herein. These other partners have filed petitions in this Court, and they have filed stipulations to be bound by the final resolution of the instant cases.↩
1. Gain figure represents gain realized by offsetting $ 3.4 million of Contract # 164940 (line 2) by lines 21 and 22.↩
2. Loss figure represents total loss realized on closing transactions on lines 10 and 11 by transactions shown on lines 24 through 26.↩
3. Gain figure represents total gain realized by offsetting transaction shown on line 4 by transactions shown on lines 27 and 28.↩
4. Loss figure represents total loss realized by offsetting transaction shown on line 12 by transactions shown on lines 29 and 30↩
5. Gain figure represents gain realized by offsetting $ 6.6 million of Contract # 164940 (line 2) and line 6 by line 31.↩
1. Another fact, shown in the stipulated record, that points up the arbitrary treatment of the transactions between Holly and AGS, insofar as the choice of tax consequences was concerned, is that, in the case of offsetting transactions, Holly and AGS agreed to recognize both gains and losses as of the trade date of the offset. This would seem to be contradicted by the fact that both contracts remain in existence, and a net profit or loss is locked in, but remains unrealized until the settlement date when the securities are deemed delivered and received pursuant to both contracts, and the net profit or loss debited or credited to the trader's account. I don't understand how agreement of the parties could change the tax consequences. If such an agreement were efficacious, the validity of short sales against the box in not only locking in gain but also postponing realization would seem to be thrown into doubt.↩
1. My research has also led me to two helpful articles dealing with both the mechanical and tax aspects of anticipatory commodities transactions, at least as those matters stood in 1981, which is about the date of the transactions involved herein. Donald Schapiro, Commodities, Forwards, Puts and Calls--Things Equal to the Same Things Are Sometimes Not Equal to Each Other,
2. That understanding of Judge Friendly's analysis has been stated by two commentators: Marvin A. Chirelstein, Capital Gain and the Sale of a Business Opportunity: The Income Tax Treatment of Contract Termination Payments,
