Estate of Leon Israel, Jr., Deceased, Barry W. Gray, Executor, and Audrey H. Israel - Page 13

                                                 13                                                   
           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 as a return of                          
           capital, and the partners used these funds to repay their bank                             
           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.                                                             






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