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established after June 23, 1981. ERTA secs. 503, 508(a), 95
Stat. 327, 333. However, under ERTA section 508(c), 95 Stat.
333, a taxpayer could elect to have the provisions of ERTA
sections 503-509, 95 Stat. 327-333, apply to all regulated
futures contracts or positions held by the taxpayer on June 23,
1981. Under ERTA section 509, 95 Stat 333, a taxpayer could
elect to have all regulated futures contracts held by the
taxpayer during a taxable year that included June 23, 1981,
marked to market and taxed under ERTA section 509. The elections
under ERTA sections 508 and 509 are referred to as "the
transitional rule elections."
In preparing Messrs. Brown and Hemmings' returns for 1981,
Mr. Harris, their accountant, was aware of the changes made by
ERTA and the transitional rule elections. Mr. Harris, however,
was informed by Conti that the trading with Conti resulted in
losses that precluded any benefit from use of the transitional
rule elections. As a result, Messrs. Brown and Hemmings did not
make any transitional rule elections on their 1981 returns.
Upon examination of the 1981 returns, respondent disallowed
the losses from the Conti transactions on the grounds that
the transactions were preconceived shams lacking
economic substance. Further, the transactions and
losses did not occur or occur in the manner claimed.
Further, recognition of the claimed deductions, income,
gains and losses would distort the economic reality of
the entire transaction. No genuine loss occurred, the
alleged losses were but one step in a series of
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