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and reality of the transaction in issue indicated that much more
was involved than mere "vanishing assets." In Commissioner v.
Ferrer, 304 F.2d 125, 131 (2d Cir. 1962), revg. and remanding 35
T.C. 617 (1961), the cancellation of a contract entitling the
taxpayer to produce the play "Moulin Rouge" (so that rights to
produce the play could be transferred to another producer) was
treated as a sale or exchange.
In Bisbee-Baldwin Corp. v. Tomlinson, 320 F.2d 929, 931-932
(5th Cir. 1963), a cancellation fee was treated as arising from a
sale or exchange where, in substance, the underlying mortgage
servicing contract was transferred to a third party.
That is the situation before us. Particularly with regard
to the loss legs that were "canceled" and immediately replaced,
little, if anything, "vanished" upon Holly’s closing or settling
the loss legs. To the contrary, Holly and the Holly partners
stayed around, continued to participate in the straddle
transactions, postponed even paying the loss until the very end
of the year with funds borrowed by Holly, closed or settled the
offsetting gain leg of the forward contracts just after the new
year, and used the gain to repay the bank. The last thing the
investors would have wanted -- upon the "cancellations" in
question -- is to vanish or disappear from the rest of these
straddle transactions, the consequence of which is that the
investors might actually have had a real loss to pay.
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