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market is limited to transactions among the straddles' customers
and the creator of the market, we have focused upon whether the
purported transactions existed in substance. Freytag v.
Commissioner, 89 T.C. 849, 876 (1987), affd. 904 F.2d 1011 (5th
Cir. 1990), affd. 501 U.S. 868 (1991).
The underlying issue in these cases is whether petitioners are
entitled to deduct losses for various years between 1979 and 1984
resulting from their trading on the Merit T-bill, T-bond, and stock
forwards markets. Respondent contends that even if petitioners'
straddle transactions actually occurred, they lacked economic
substance.
The economic substance doctrine was articulated in Gregory v.
Helvering, 293 U.S. 465, 469 (1935), where the Supreme Court
explained: "the question for determination is whether what was
done, apart from the tax motive, was the thing which the statute
intended". The Court of Appeals for the Third Circuit has
explained the Supreme Court's holding in Gregory as "settled
federal tax law that for transactions to be recognized for tax
purposes they must have economic substance. Therefore, economic
substance is a prerequisite to the application of any Code
provisions allowing deductions". Lerman v. Commissioner, 939 F.2d
44, 52 (3d Cir. 1991) (emphasis added), affg. Fox v. Commissioner,
T.C. Memo. 1988-570.
The economic substance test involves an objective examination
of the transactions at issue. The test is whether the substance of
a transaction reflects its form and whether from an objective
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