49
constructed a straddle in X commodity, entering into a long May
forward contract and a short September forward contract. Assume
further that there is an unrealized loss in the short contract,
and, for legitimate business reasons, the taxpayer wishes to
switch the short contract to a December forward contract. The
taxpayer cancels the short September contract, makes a cash
settlement payment, and enters into a short December contract.
The reality that the majority would impose is that the taxpayer
entered into a long September contract under which,
hypothetically, he took delivery of the commodity, which was used
to satisfy the short September contract. To me, that is not
reality; it is a fiction built upon a fiction.
As a matter of tax policy, perhaps the cancellation of a
forward contract should be treated as a zero dollar sale so as to
satisfy the sale or exchange requirement of section 1222.
Congress thinks so and has added section 1234A, which, however,
is not effective with respect to the facts of this case.
The majority’s understanding of the “nature of the termination
of offsetting forward contracts”, majority op. p. 20, is
illustrated by certain forward contracts in this case. That
perspective is set forth as follows: “Upon closing by offset of
forward contracts, the transaction is terminated and
extinguished, settlement between the parties occurs at that time,
and no contracts remain in effect.” Id. If that is intended as
a general statement of fact or of legal consequence, it is
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