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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 transactions 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
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