Leema Enterprises, Inc. - Page 18




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          the contract to maturity and take (or make) delivery;6 (2) he could         
          obtain Merit's "cancellation" of his position, thus freeing the             
          investor from his or her obligations under the contract; or (3) the         
          investor could engage Merit "as a broker" to sell the investor's            
          contractual obligation to some other participant.                           
               The PPM noted the passage of the loss disallowance rules in            
          ERTA, but stated--                                                          
                    Because the Forward Contracts presumably represent                
               an interest in stock, and stock is excluded from the                   
               definition of "personal property", the Contracts should                
               not constitute "positions" which are subject to the loss               
               disallowance rules of Section 1092 of the Code.                        
               The PPM also discussed "cancellations" and the possibility of          
          deducting losses from trading in stock forwards as ordinary income:         
                    Alternatively, an investor may, from time to time,                
               negotiate with Merit to cancel his obligations under a                 
               particular Forward Contract, rather than sell or perform               
               under such Forward Contract.  Under these circumstances,               
               such investor may take the position that losses, if any,               
               realized upon the cancellation of a Forward Contract are               
               ordinary losses, on the basis that a cancellation is not               
               a "sale or exchange" for tax purposes * * *.                           
               As with its earlier options markets, Merit generated profits           
          from its stock forwards program in two ways.  First, it collected           
          a bid/ask differential on most opening positions.  Second, it               
          retained the interest earned on customers' deposits in their                




               6    The only documentary evidence of delivery of assets in            
          any of the Merit markets pursuant to an option or forward                   
          contract was the delivery of Tandy stock to an investor in                  
          October 1983, which was redelivered the following month, and the            
          delivery of Zapata stock to an investor partnership in November             
          1983.                                                                       

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Last modified: May 25, 2011