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cases de novo, and we have based our findings and holdings upon
consideration of the evidence produced in these cases.
Issue 1. Tax Straddles and Economic Substance
These cases involve various "spreads".16 With respect to the
T-bill and T-bond options, a spread is a hedged position comprising
two substantially offsetting option positions. When the interest
rate changes, the price of one leg of a T-bill or T-bond option
will appreciate in value while the other will depreciate.
In the case of stock forwards, the spread consisted of a long
leg--one for the sale of a corporation's stock at a specific future
date--and a short leg--a contract for the purchase of an equivalent
amount of that corporation's stock on a different future date.
Again, a change in the underlying stock price would cause one leg
to appreciate, while the other would depreciate.
These spreads operated efficiently as tax straddles. A
typical tax straddle works as follows: first the investor
simultaneously acquires offsetting positions. These positions have
different exercise dates, so that they do not cancel each other
out. As the market price of the underlying commodity changes, one
leg will appreciate in value and the other will depreciate. At the
end of the investor’s taxable year, he or she will sell the
depreciated loss leg and replace it with a new contract. The sale
16 To be consistent with the parties' usage, we have
described the offsetting positions as "spreads". These
positions, however, also come within the definition of the term
"straddle" as that term is used in the Internal Revenue Code.
See Katz v. Commissioner, 90 T.C. 1130, 1136 n.12 (1988); Perlin
v. Commissioner, 86 T.C. 388, 391 n.8 (1986).
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