- 14 -
Of 76 participants in the initial Merit T-bill market, only
one had a gain, of $961, at the end of the first taxable year of
investing. Upon completion of their T-bill trading, only 12 of the
participants had earned overall profits; however, these were
generally very small.4
(b) T-bond Transactions
Merit also offered a market in T-bond options for which it
issued a separate PPM. This PPM advised that "there are material
income tax considerations involved". The material under the
heading "Federal Income Tax Aspects" provided an explanation of tax
aspects of trading in options. It traced the provisions of Rev.
Rul. 78-182, 1978-1 C.B. 265, which discussed trading commodity
options on the Chicago Board of Exchange. It discussed the
"special rules relating to the tax treatment accorded to the writer
of an option on inter alia, securities such as T-Bonds". It
explained that--
gain or loss recognized by a writer resulting from the
sale of T-Bonds pursuant to the exercise of a call would
be taxable as capital gain or loss. Such gain or loss
will be characterized as long-term * * * where the T-
Bonds sold have been held for a period of at least one
year * * *.
4 One notable exception was Case Enterprises, an offshore
entity set up by the Carabini family, who also controlled Monex.
In its first participating transaction, Case Enterprises
deposited $1 million with Merit in September 1981, the last month
of its fiscal year, incurring losses of $7,200, and in October
1981 (the beginning of its next taxable year), it withdrew
$992,800. In September 1982, it again deposited $1 million,
incurred substantial gains, and, 10 days later, in October 1982
(the beginning of its third taxable year), it withdrew
$1,255,000.
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