- 49 -
B. Trading on the Merit Markets
The lack of economic substance of the Merit trades is evident
from an examination of the trades themselves. Petitioners executed
their trades for tax deductions, not for economic benefits. Their
tactics reveal many characteristics of tax-motivated, but
economically insubstantial, tax-straddle trades. Chief among these
is the deliberate incurring of first-year losses. In Glass v.
Commissioner, 87 T.C. 1087, 1172, 1176 (1986),20 we stated:
The one consistent thread which runs through all of the
cases consolidated in this proceeding is that losses,
either ordinary or capital, were intentionally incurred
in year one, followed by countervailing gains in year two
or in many instances later as a result of rollovers.
* * * * * * *
The intentionally realized losses in year one were not
necessary or helpful in profiting from difference gains
in * * * [the taxpayers'] commodity straddle
transactions. Put in this light, the * * * options
strategy was "a mere device which put on the form of [*
* * option and futures transactions] as a disguise for
concealing its real character," the obtaining of
unallowable loss deductions. As such, the * * * options
transaction lacked economic substance and was a sham.
[Fn. refs. and citations omitted.]
20 Glass v. Commissioner, 87 T.C. 1087 (1986), affd. sub
nom. Bohrer v. Commissioner, 945 F.2d 344 (10th Cir. 1991), affd.
sub nom. Lee v. Commissioner, 897 F.2d 915 (8th Cir. 1989), affd.
sub nom. Kielmar v. Commissioner, 884 F.2d 959 (7th Cir. 1989),
affd. sub nom. Dewees v. Commissioner, 870 F.2d 21 (1st Cir.
1989), affd. sub nom. Freidman v. Commissioner, 869 F.2d 785 (4th
Cir. 1989), affd. sub nom. Keane v. Commissioner, 865 F.2d 1088
(9th Cir. 1989), affd. sub nom. Ratliff v. Commissioner, 865 F.2d
97 (6th Cir. 1989), affd. sub nom. Killingsworth v. Commissioner,
864 F.2d 1214 (5th Cir. 1989), affd. sub nom. Kirchman v.
Commissioner, 862 F.2d 1486 (11th Cir. 1989), affd. sub nom.
Yosha v. Commissioner, 861 F.2d 494 (7th Cir. 1988), affd. sub
nom. Herrington v. Commissioner, 854 F.2d 755 (5th Cir. 1988).
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