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a knowledgeable investor, T-bond capital losses would be useful in
eliminating short-term capital gains that had been retained from
spread transactions in prior years. Moreover, the long-term capital
gains offered taxation at 40 percent of the rate applied to ordinary
income.
The subsequently developed stock forwards had their own tax
advantages, which Merit again set forth in PPM's. Merit advised
that the forwards could be exempt from the loss disallowance
provisions of ERTA, and thus, provide the traditional straddle
opportunity for current deductions and postponed income. Moreover,
although contracts for the sale of stock were capital assets in the
hands of the investors, the promoters of Merit claimed that the
disposition of those contracts would produce ordinary losses if the
investors could arrange with Merit for “cancellation” of the
contracts.
In contrast to the explication of tax benefits, none of the
Merit programs depicted a realistic projection of the way in which
investments would produce meaningful economic profit. The PPM's
offered only abstract and technical discussions of spread
strategies, but no detailed projections of realistic economic
returns. No attempt was made to demonstrate the size and likelihood
of profits, set forth in terms that take into account the pervasive
combination spread structure, the amount of transaction fees, and
the amount of forgone interest. The Merit programs instead show
that their actual objectives were tax avoidance and not the
realistic production of profits.
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