Leema Enterprises, Inc. - Page 46




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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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