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consolidated Federal income tax returns filed by Leema, Merit's
parent corporation. Leema and its subsidiaries, including Merit,
report their income on the basis of a fiscal year ending on June
30. For taxable years 1980 through 1982, respondent disallowed
losses reported by the Leema consolidated group with respect to
Merit's transactions that gave rise to realized losses.
(1) 1980 Transactions: T-Bond Options
Beginning in June 1980, Merit's T-bond option account, No.
111, engaged in two separate trading series, each of which featured
the open-switch-close pattern of generating tax losses.
On June 11, 1980, Merit set up four straddles involving puts
and calls in T-bonds in trade No. 210. On June 19, 1980, 8 days
later, Merit set up four additional straddles involving T-bond puts
and calls in trade No. 211. Six days later, Merit closed out the
purchased call contracts in a "switch" in trade No. 211. The
switch transactions generated short-term capital losses of
$411,500.1713 for Merit's 1980 taxable year. On June 27, 1980, 2
days later, Merit closed out the purchased call contracts in trade
No. 210 by selling offsetting call contracts. This second switch
in the T-bond options generated additional short-term losses of
$435,235. For its 1980 taxable year, Merit's total T-bond option
losses were $846,735.67. There were no realized gains.
13 One trade in the switch transactions which gave rise to
these losses generated income of $266.09.
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