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produces a tax-deductible loss in that year, but no corresponding
gain. In the next taxable year, the investor will sell or close
out the gain leg. Thus, the investor has not only obtained a
current deduction but also deferred taxable gain on his or her
investment into the next year. Presumably, if the investor is
interested in further deferral, he or she could go back to the
first step in the second taxable year and, in effect, move the
taxable gain into a third taxable year.17
These tax tactics were subject to some added refinements. For
example, the sale or exchange of a purchased ("long") option was
deemed to have the same character as the underlying property.
During 1979 through June 23, 1981, T-bills--the underlying property
of the T-bill options--were excluded from the definition of a
capital asset by then section 1221(5). Accordingly, investors
reported losses upon the sale of purchased options as ordinary
losses.
In 1981, Congress enacted ERTA. The explanation accompanying
the legislation noted that "Congress was concerned about the
adverse impact of Treasury bill straddles on Government tax
revenues." Staff of Joint Comm. on Taxation, General Explanation
17 In Smith v. Commissioner, 78 T.C. 350, 365 (1982), we
stated:
In fact, if petitioners' analysis of the tax law is
correct, nothing but commission costs and death would
prevent a taxpayer from perpetually straddling,
achieving perhaps the ultimate tax goal of permanent
deferral of taxation of an initial short-term capital
gain. * * *
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