Estate of Leon Israel, Jr., Deceased, Barry W. Gray, Executor, and Audrey H. Israel - Page 16

            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 simply settle or                           
            close out their position in a straddle or in a leg of a straddle                          
                  As stated, the parties agree that forward contracts in                              
            commodity markets held for investment constitute capital assets                           
            under section 1221.  Commissioner v. Covington, 120 F.2d 768 (5th                         
            Cir. 1941), affg. in part and revg. in part 42 B.T.A. 601 (1940);                         
            Vickers v. Commissioner, 80 T.C. 394 (1983); Hoover Co. v.                                
            Commissioner, 72 T.C. 206 (1979).  Although no delivery or                                
            physical exchange of the underlying commodity is contemplated,                            
            the monetary settlements that occur between the respective                                
            parties holding the contra positions in forward contracts have                            
            long been recognized to constitute "sales or exchanges" under the                         
            tax laws.                                                                                 
                  As we explained in Vickers v. Commissioner, supra at 409,                           
            involving futures contracts, for our purposes not significantly                           
            different from forward contracts --                                                       

                  both the Supreme Court and the Congress have had occasions                          
                  to deal with commodity futures transactions, have treated                           

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