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The tax-avoidance orientation of these tax straddles is
reflected in the historic background of the offerings. Fox v.
Commissioner, supra at 1016, 1017. In Merit's case, the T-bond and
T-bill programs flourished until the effective date of ERTA in 1981,
when Congress eliminated the tax benefits of trading option
straddles. Merit’s trading in options stopped suddenly, even though
Congress had done nothing to impair the economic profitability of
trading in options.19 In the same year, however, Merit developed
another tax-favored plan, claiming that its new stock forwards would
provide the benefits of tax straddling that had been the focus of
congressional disfavor in ERTA. Moreover, Merit advised that the
resulting losses could be ordinary losses, because it could provide
its customers with a “cancellation” of their contracts. It is clear
that Merit was interested only in offering tax-advantaged
instruments. When Congress removed the touted tax benefits desired
by the Merit programs, Merit's interest in them dwindled, even
though Congress did nothing to impair the economic viability of
those programs.
Merit’s restriction of its trades to spreads and combination
spreads also indicates that its trading was designed for tax
benefits and not economic gains. Two laws permit the deduction of
straddle losses, Code section 165 and section 108 of the Deficit
Reduction Act of 1984 (DEFRA), as amended by the Tax Reform Act of
19 Even in the exceptional case, when investors reported
appreciable economic earnings, they immediately terminated
trading in those markets. See supra notes 3 and 4.
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