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the rights of the parties associated with that portion of the
straddle that was closed.
With the benefit of further analysis, it is our conclusion
that our opinion in Stoller v. Commissioner, T.C. Memo. 1990-659,
affd. in part and revd. in part 994 F.2d 855 (D.C. Cir. 1993) (in
its treatment of a cancellation and termination of a leg of a
straddle transaction) and the opinion of the Court of Appeals for
the District of Columbia Circuit in Stoller v. Commissioner (in
its treatment of both cancellation and replacement and
cancellation and termination of legs of straddle transactions)
erred in not recognizing the fundamental sale or exchange nature
of these transactions in which, simply stated, the gain or loss
-- at a certain point in time -- is locked in with regard to the
portion of the straddle that is closed.
As the Court of Appeals for the Fifth Circuit early
recognized in Commissioner v. Covington, 120 F.2d at 769-770,
"closing" of the contracts at a profit or loss is the sum and
substance of the transactions before us. We perceive no
difference, for income tax purposes and in determining the
character of the gain or loss, between closing a leg of a
straddle and closing the entire straddle. Both events lock in
the gain or loss on the interest rate shift that has occurred as
of the point in time that a leg or legs of the straddle are
closed.
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