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First-Year Gain Deferred Overall Economic Economic Cost as
Tax Loss to Second Year Cost Percent of Tax Loss
$689,600 $667,685.40 ($38,280) 5.55%
The above transactions reflect the actual economic substance
of petitioner Keeler's investments in Merit's T-bill options. They
demonstrate that tax deferrals were the object of the trades, and
that there were no economic profits. The actual economic costs were
minimal when compared with the tax deferrals; in reality, the
economic losses represent a cost of obtaining tax benefits.
A more extensive examination of trade No. 74 underscores this
point. Five investors, other than Merit itself, engaged in trade
No. 74. Three of them, including petitioner Keeler, incurred
economic losses, but the other two can show that their trades in
trade No. 74 produced modest profits of approximately $3,000 each--
at least before commissions and forgone interest on margin accounts
are taken into account. In the context of this single trade, these
modest profits might be some evidence of economic substance.
Petitioners have made such arguments, pointing out occasional
positive changes in investors' Merit accounts. These arguments,
however, do not hold up when they are considered in the context of
the investors' total T-bill trading. With the exception of
petitioner Keeler, four other non-Merit investors engaged in T-bill
trading sequences in addition to trade No. 74. When all five
investors' overall trading in the T-bill market is considered, the
pattern of consistent yearend tax deferrals and overall economic
profits becomes obvious:
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