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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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