48
Circuit erred in not recognizing “the fundamental sale or
exchange nature” of cancellations of forward contracts. Majority
op. p. 22.
The majority’s perception of fundamental reality is bottomed on
the treatment accorded RFCs settled by offset, as articulated in
Covington v. Commissioner, supra. There, the taxpayer argued
that the reality of an exchange regulated offset is the lack of
any actual sale or exchange because there is an extinguishment of
the RFC settled by offset. The Court of Appeals for the Fifth
Circuit, however, forced the taxpayer to abide by the form of the
transaction he had chosen (as sculpted by the exchange rules
dealing with offsets) and held that, in effect, he had entered
into two contracts and realized a gain on closing the short
contract. That is a perfectly appropriate result. See, e.g.,
Legg v. Commissioner, 57 T.C. 164, 169 (1971), affd. 496 F.2d
1179 (9th Cir. 1974), in which we stated: “A taxpayer cannot
elect a specific course of action and then when finding himself
in an adverse situation extricate himself by applying the age-old
theory of substance over form.”
The fiction imposed on a taxpayer that settles RFCs by offset,
however, is not a ground to conclude that, in reality, a taxpayer
not engaging in an exchange regulated offset (indeed, not
engaging in an offset at all) entered into a hypothetical
contract to complete the purchase and sale of a commodity that he
never owned. Assume, for instance, that the taxpayer has
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