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B. Stock Forwards
(1) Formation
In 1981, Congress eliminated the tax advantages of straddling.
It passed the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97-
34, sec. 508(a), (c), 95 Stat. 172, 333, parts of which operated to
deny deductions for losses produced by tax straddles except to the
extent that such losses exceed the unrealized gains retained for
realization in the next taxable year.
In 1981, after enactment of ERTA, Merit decided to offer a
market in forward contracts on selected listed corporate stocks.
Stock forwards are contracts for the sale of shares of corporate
stock at a specified future date for a specified price. Merit's
forward contracts were similar to its option contracts in that both
involved agreements for the future purchase of a commodity. In a
forward transaction, however, one party agrees that it will be
obligated to buy or sell marketable corporate stock at a future
date (the settlement date) at a fixed price. Merit's option
contracts, in contrast, involved the sale of a right, but not the
obligation, to buy or sell that commodity.
Merit's forward contracts were written on common stocks traded
on the New York Stock Exchange or on the American Stock Exchange.
In the stock forwards market, Merit functioned as a clearinghouse,
whereby it was the opposite party to every transaction between
customers in its market. It did not take positions that exposed it
5(...continued)
overall gain was $226,481.17.
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