45
change delivery dates in order to shorten the window of risk of
the straddle.
In the case of a straddle built on RFCs, the mechanics of a
switch would involve the taxpayer simultaneously entering into
(1) an inverse contract with respect to the long or short RFC
being switched and (2) a like (long or short) RFC to replace the
RFC being switched. Except perhaps in the case of certain tax-
motivated straddles, see, e.g., Smith v. Commissioner, 78 T.C.
350 (1982), gain or loss on the long RFC component of the
offsetting pair would immediately be realized and recognized.
Commissioner v. Covington, 120 F.2d 768 (5th Cir. 1941). In the
case of a straddle built on forward contracts, the parties to the
contract to be switched may agree to cancel that contract,
settling up with respect to any gain or loss in the contract. To
avoid being naked with respect to the remaining leg of the
straddle, the straddling party would immediately enter into a
contract to replace the canceled contract and complete the
switch. The character of any gain or loss to be accounted for on
the cancellation is the issue in this case, but there seems to be
no disagreement that cancellation is an event giving rise to an
allowable loss. In the case of a switch made by first entering
into an inverse contract with the same party, the suggestion of
Hoover Co. v. Commissioner, 72 T.C. 206 (1979), is that gain or
loss is realized upon the hypothetical delivery under the short
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