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any agreed modifications of the spread price made earlier in the
day of the trade or after 11 a.m. on the day before. Merit printed
and provided to customers a record of transactions.
Forward spread positions had the potential for returning
economic profits if the underlying stock market prices moved in
advantageous directions.
Merit engaged an accounting firm that reviewed its system of
control and records, finding them adequate. The accountants did
not, however, audit each trade shown on Merit's books.
II. Trading Activity of Individual Petitioners
A. K. Richard Keeler
Petitioner Keeler is a professional trader who has traded
commodities for his own account and for the accounts of clients.
In all of such trading, Mr. Keeler has never taken delivery of the
underlying commodity.
Mr. Keeler opened a T-bill option account on November 20,
1980. He deposited a $150,000 check with Merit and established a
combination spread of options in Merit's account No. 139. On
December 29, 1980, the T-bills were switched. As a result, Mr.
Keeler's account reflected deductible option losses of $689,600,
and unrealized gains of $667,685, carried over into the next year.7
7 Mr. Keeler's taxable year 1980 is not at issue in this
case, but the trading is set forth as background for the trades
executed in 1981 and thereafter which are at issue.
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