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California; and petitioner K. Richard Keeler was a resident of
Evanston, Wyoming.
Our use in this opinion of the terms "loss", "gain", "profit
position", "spread", "straddle", "option", "market", "trade", and
"transaction" is not to be construed as a finding that the
transactions at issue are, or are not, valid for Federal income tax
purposes. Rather, our use of those terms is only for convenience.
I. Corporate Structure
Petitioner Leema was the parent of a consolidated group of
companies that included Merit and Futures Trading, Inc. (FTI).
Merit shared an office with Leema and its subsidiaries. In
addition, Leema, Merit, and FTI shared the same computer system and
employees. Merit was a registered broker/dealer throughout the
period at issue. Leema had two additional wholly owned
subsidiaries, Horizon Trading, Inc. (formerly Merit Trading, Inc.),
and Omni Securities, Inc. During the years at issue, petitioner
Leon E. Richartz (Dr. Richartz) owned the majority of Leema's
stock; for some portion of those years petitioner Maria Rivera
owned 15 percent of Leema's stock. Dr. Richartz was Merit's
chairman of the board of directors.
Merit operated three over-the-counter markets, one for options
to buy or sell T-bills, a similar market for options in T-bonds,
and, subsequently, stock forwards.
A. T-bill and T-bond Options
Late in 1979, Merit began its T-bill and T-bond option
activity. T-bills and T-bonds represent debt obligations of the
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