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1986 (TRA), Pub. L. 99-514, sec. 1808(d), 100 Stat. 2085, 2817.
Both require a “loss”. If a transaction lacks economic substance,
it cannot provide a basis for a deductible “loss”. Lerman v.
Commissioner, supra at 45.
Like other tax straddles, Merit trades appear to indicate that
its investors had actually incurred substantial yearend losses. In
reality, there were no such losses; the investors, who purchased
only straddles, were substantially protected against the economic
effect of actual losses by holding onto unrealized gains--gains that
would be taxed only in the next year, or even later. Merit employed
combination spreads--that is, two spreads, each of whose movements
in response to a market shift would counteract the other.
Combination spreads thus afforded even more protection against
actual economic effects--whether losses or gains. Such tactics take
unintended "advantage of the practical necessity of preserving the
integrity of separate taxable years. Congress never intended such
stratagems to prosper.” Fox v. Commissioner, supra at 1027.
As petitioners point out, we have permitted the deduction of
straddle losses incurred by profit-motivated individuals who trade
consistently on established markets and hedge their positions. See,
e.g., Laureys v. Commissioner, 92 T.C. 101 (1989). In those cases,
however, we have been convinced that the taxpayers had primarily
for-profit objectives and that the markets on which they invested
possessed a potential for delivering meaningful profits.
Petitioners have failed to make that showing.
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