- 66 -
existence, of the underlying commodities. Merit was "playing a
football game without the football". See Price v. Commissioner, 88
T.C. 860, 884 (1987).
Petitioners' counsel have ably compartmentalized the elements
of respondent's criticisms of the Merit program and then gone to
work on each singly. But in the end, we must bring all these
elements together. Treating the facts as a bundle, we cannot escape
the conclusion that the Merit markets lacked economic substance.
Although the form appeared as markets for particular financial
instruments, the substance was the creation of straddles to generate
loss deductions without corresponding economic losses. From an
objective standpoint, the straddles were unlikely to produce
economic benefits aside from tax deductions. In short, the Merit
trades lacked economic substance and cannot support the losses
claimed. See Casebeer v. Commissioner, 909 F.2d 1360 (9th Cir.
1990).25
Issue 2. Primary Profit Objective
Our holding as to economic substance may obviate the need to
discuss at length the question of petitioners' profit motives; in
25 Petitioners contend that, to the extent their
deductions are disallowed under the Merit programs because of a
lack of economic substance, the corresponding income should be
removed from taxable income as well. We agree. In a sham
situation, we must give effect neither to the deductions nor to
the income generated by the program at issue. Sheldon v.
Commissioner, 94 T.C. 738, 762 (1990); see Julien v.
Commissioner, 82 T.C. 492, 498, 508-509 (1984); see also
Goldstein v. Commissioner, 364 F.2d 734 (2d Cir. 1966), affg. 44
T.C. 284 (1965); cf. DEFRA sec. 108(c), 98 Stat. 630, as amended
by the Tax Reform Act of 1986 (TRA), Pub. L. 99-514, sec.
1808(d), 100 Stat. 2817.
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