internal_revenue_service number release date index number --------------------------------------------- ---------------------------- -------------------------------- ------------------------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-143620-07 date date ------------------------------------------------------------- -------------------------------------------------------- ---------------------------------------------------------- ----------------- legend company --------------------------------------------------- company official company official date date date sub sub entity a entity b entity c entity d entity e ----------------------- ------------------------ -------------------------- --------------------------- ------------------------------ --------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------- plr-143620-07 entity f entity g entity h entity i entity j a b c d e f g h i j k l m n o p q ------------------------------------------------------------ -------------------------------------------- ----------------------------------------------- --------------------------------------- ----------------------------------------------- ------------- ------------- ------------- --------------- ------------- ------------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ------------- ----------- -- ----------- ------------- --------------------------------------------- ---------------------------------------------------------------- plr-143620-07 r s t u v w class x class y dear --------------- this letter responds to a letter dated date requesting rulings under sec_382 of the internal_revenue_code additional information was submitted in letters dated january and date the material information submitted is summarized below summary of facts company a publicly traded corporation is the common parent of an affiliated_group_of_corporations including sub and sub which files a consolidated federal_income_tax return company is also a loss_corporation within the meaning of sec_382 on date the company and all of its domestic subsidiaries other than sub and sub filed a voluntary petition for relief under chapter of the bankruptcy code with the united_states bankruptcy court in order to use the court-supervised reorganization process to effectuate its recapitalization the company emerged from bankruptcy on date all of the outstanding capital stock of the company held by shareholders as of date was extinguished under the bankruptcy court order the new_capital stock authorized by the bankruptcy court order was distributed to persons that were in two classes of creditors filing claims in the bankruptcy - class x and class y creditors these two classes of creditors received a shares of company stock directly as a result of their claims and also received subscription rights permitting them to purchase b shares of additional company stock at a significant discount to the anticipated market plr-143620-07 price of the company stock these subscription rights provided the two classes of creditors additional value for their claims and the company with additional funding as it emerged from bankruptcy each subscription right required the holder to deposit the subscription price with the bankruptcy court’s appointed agent on or before date which was before date the shares issued in exchange for these subscription rights were distributed to the company shareholders on date or shortly thereafter the only other company stock issued as a consequence of the bankruptcy court’s order were c shares which were issued to a subset of the class x creditors who received subscription rights to purchase company stock in exchange for their agreement to act as backstop purchasers of any unsubscribed subscription right shares thus on date the date of emergence from bankruptcy or shortly thereafter the company had d shares of stock outstanding a shares b shares c shares this stock was held by the following shareholders class x creditors a issued directly in exchange for debt - a shares issued in exchange for debt-related subscription rights to original subscription b rights holders - s shares issued to backstop purchasers in exchange for debt-related subscription rights c acquired as a result of the backstop agreement - t shares issued to backstop purchasers in exchange for agreeing to act as backstop d purchasers - c shares class y creditors a b issued directly in exchange for debt - u shares issued in exchange for debt-related subscription rights - v shares immediately after the emergence of the company from bankruptcy four shareholders filed schedules 13d and 13g with the securities_and_exchange_commission sec with respect to the company entity a schedule 13d entity a filed a schedule 13d which noted that beneficial_ownership of e shares of company stock belonged to two funds for which entity a acted as investment_advisor - entity b and entity c - each of which represented ownership of more than five percent of the company stock entity b received f shares directly in exchange for its debt in the company and debt-related subscription rights and g shares in its capacity as backstop purchaser including shares received by reason of its agreement to act as a backstop purchaser entity c received h shares directly in exchange for its debt in the company and debt-related subscription rights and i shares plr-143620-07 in its capacity as backstop purchaser including shares received by reason of its agreement to act as a backstop purchaser entity d and entity e schedule 13d entity d and entity e filed a schedule 13d which noted that beneficial_ownership of j shares of company stock belonged to three funds for which entities d and e acted as investment advisors - entity f entity g and entity h - only one of which entity f owned more than five percent of the company stock entity f received k shares directly in exchange for its debt in the company and debt-related subscription rights and l shares in its capacity as backstop purchaser including shares received by reason of its agreement to act as a backstop purchaser entity g and entity h received in the aggregate m shares directly in exchange for their debt in the company and debt-related subscription rights and n shares in their capacity as backstop purchasers including shares received by reason of their agreement to act as backstop purchasers entity i schedule 13g entity i filed a schedule 13g which noted that beneficial_ownership of o shares of company stock belonged to an undisclosed number of funds for which entity i acted as investment_advisor none of the funds for which entity i acted as investment_advisor owned more than five percent of the company stock the entity i managed funds received o shares directly in exchange for their debt in the company and debt-related subscription rights the entity i managed funds did not act as backstop purchasers and therefore were not entitled to any portion of the backstop purchaser shares including shares available to persons agreeing to act as backstop purchasers entity j schedule 13d entity j filed a schedule 13d which noted that beneficial_ownership of p shares of company stock belonged to an undisclosed number of funds for which entity j acted as investment_advisor none of the funds for which entity j acted as investment_advisor owned more than five percent of the company stock the entity j managed funds received q shares directly in exchange for their debt in the company and debt-related subscription rights and r shares in their capacity as backstop purchasers including shares received by reason of their agreement to act as backstop purchasers company had d shares of stock outstanding on date or shortly thereafter out of these d shares w shares a number greater than percent were owned by beneficial owners owning less than percent of the stock not counting shares received by such owners in their capacities as backstop purchasers including shares received by reason of their agreement to act as backstop purchasers w shares is determined by reducing d shares by the number of shares owned by entity b entity c and entity f ie f shares g shares h shares i shares k shares l shares as well as by any other shares issued to persons in their capacities as backstop purchasers including shares received by reason of their agreement to act as backstop purchasers ie n shares r shares plr-143620-07 representations the company makes the following representations the stock of company is publicly traded company is a loss_corporation as defined in sec_382 company emerged from protection under chapter of the bankruptcy code with a net_operating_loss carryforward company emerged from protection under chapter of the bankruptcy code under a plan_of_reorganization that resulted in an ownership_change within the meaning of sec_382 on date each of entity a entity d entity e entity i and entity j is an investment_advisor as defined in cfr 13d-1 b ii e only entity b entity c and entity f are beneficial owners of five percent or more by vote or value of company stock taking into account the application of the attribution_rules of sec_318 as modified by sec_382 each of entity a entity d entity e entity i and entity j has the authority on behalf of its respective fund clients to vote company stock acquire or dispose_of shares of company stock use a common custodian to hold the stock file schedules 13d or 13g with respect to company stock communicate with company management regarding the company’s operations management or capital structure and communicate with fund clients or with prospective clients except as noted in the facts above the company has no knowledge of the specific fund clients of entity a entity d entity e entity i and entity j the existence of any group of persons who have or had a formal or informal understanding among themselves to make a coordinated acquisition of company stock using investments made by or through entity a entity d entity e entity i and entity j and their fund clients any sec filings affirming that entity a entity d entity e entity i and entity j fund clients should be treated as a group an entity or individual through application of the attribution_rules of sec_318 as modified by sec_382 that owns five percent or more by vote or value of company stock when such individual or entity’s direct ownership in company stock is combined with its ownership of company stock acquired by or through entity a entity d entity e entity i and entity j and their fund clients or any activities performed by entity a entity d entity e entity i or entity j that would be outside the scope of an investment_advisor beyond the information set forth above the management of the company has no actual knowledge relating to the ownership of company stock that is the subject of the schedule 13d and 13g filings made by entity a entity d entity e entity i and entity j plr-143620-07 company official and company official have each represented in affidavit form to the effect that nothing in the formulation of the bankruptcy plan_of_reorganization made it evident to the company that any of the class x or class y creditors who received stock in the company as a result of the bankruptcy court order had not beneficially owned the indebtedness that was the subject of such creditors’ claims for a period of months or more as of date entity a entity d entity e entity i and entity j further represent each of entity a entity d entity e entity i and entity j is an investment_advisor as defined in cfr 13d-1 b ii e the funds that each of entity a entity d entity e entity i and entity j manage did not acquire any company debt or equity securities for the purpose of any of the funds accumulating ownership of any particular minimum percentage of the total outstanding company debt or equity securities the funds that each of entity a entity d entity e entity i and entity j manage did not acquire the company debt or equity securities for the purpose of gaining control of the company each of entity a entity d entity e entity i and entity j is required to direct any dividend from the company or proceeds from a sale of company stock to the specific funds that it manages less any fees that it is allowed to retain pursuant to such entity’s investment advisory agreements with its managed funds no single fund which entity j advises owns more than five percent of the ownership interests in the company rulings based solely on the information and representations set forth above we rule as follows a person who has the right to dividends and proceeds from the sale of stock economic ownership is the owner of the stock for sec_382 purposes economic owner thus an investment_advisor that has the power to acquire hold vote and dispose_of the stock reporting ownership but does not have economic ownership of the stock is not the economic owner of the stock for sec_382 purposes accordingly none of entity a entity d entity e entity i or entity j is an economic owner of company stock for sec_382 purposes plr-143620-07 unless the company has actual knowledge to the contrary the company can rely on the existence or absence of schedule 13d or 13g to identify all persons who directly own percent or more of the company’s stock sec_1_382-2t if an investment_advisor files a schedule 13d or 13g that reports reporting ownership on behalf of two or more economic owners of shares representing in the aggregate more than percent of company stock but does not affirm the existence of a group within the meaning of section d of the securities exchange act of exchange act u s c sec_78a et seq and the economic owners do not individually file a schedule 13d or 13g that affirms the existence of a group within the meaning of section d of the exchange act the company can rely on the absence of the filing of a schedule 13d or 13g by the economic owners to determine that the economic owners are not members of a group that constitutes an entity within the meaning of sec_1_382-3 unless the company has actual knowledge that the economic owners constitute such an entity see sec_1_382-3 and sec_1 2t k i the fund clients of each of entity a entity d entity e entity i and entity j are not collectively an entity of each within the meaning of sec_1_382-9 the company may treat the indebtedness beneficially owned by the class x and class y creditors except for the indebtedness beneficially owned by entity b entity c and entity f as always having been owned by the beneficial_owner of such indebtedness immediately before the ownership_change accordingly all class x and class y creditors other than entity b entity c and entity f are properly treated as qualified creditors as that term is defined in sec_1_382-9 company stock received by class x and class y qualified creditors upon the exercise of their subscription rights received in the chapter case except for the subscription rights received by the class x creditors for acting in the capacity as backstop purchasers including the subscription rights received for agreeing to act as backstop purchasers is properly treated as having been received in full or partial satisfaction of qualified indebtedness for purposes of applying the percent test of sec_382 sec_1_382-9 company may properly treat w shares of company stock as being owned on that date by persons who were qualified creditors of the company immediately before the ownership_change and as having been received by such qualified creditors in full or partial satisfaction of qualified indebtedness for purposes of applying the percent test of sec_382 and sec_1_382-9 accordingly the ownership_change of the company occurring on date is an ownership_change described in sec_382 and sec_1_382-9 with respect to which the limitation of sec_382 does not apply the company will reduce its tax_attributes as required by sec_382 and c plr-143620-07 caveats we express no opinion on the tax effect of any transaction or item discussed or referenced in this ruling letter under any other provision of the internal_revenue_code and regulations or the tax effect of any condition existing at the time of or effect resulting from the facts and circumstances herein described that are not specifically covered by the rulings set forth above procedural statements the ruling is directed only to the taxpayer requesting it under sec_6110 this ruling may not be cited or used as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely ___________________________________________ mark weiss assistant to the branch chief branch office of associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index no washington dc person to contact telephone number refer reply to cc psi plr-111439-02 date june re legend decedent spouse city country date date date dollar_figurex residence dear this is in response to your letter of date and prior correspondence requesting a ruling on the gift and estate_tax consequences of an inter_vivos transfer by decedent to his non-citizen spouse spouse the facts and representations submitted are summarized as follows decedent a citizen_of_the_united_states died on date survived by spouse spouse is a citizen and resident of country and is not a united_states citizen prior to his death decedent moved to city and remained a resident of country until his death after decedent moved to country decedent purchased a year leasehold interest in residence the leasehold interest entitled the decedent to all possessory rights as a lessee with respect to the property until the expiration of the lease_term on date on date approximately two months prior to decedent’s death on date decedent irrevocably transferred his entire leasehold interest in residence to spouse thereafter decedent continued to live in the residence with spouse until his death on date the estimated value of the leasehold interest at the time of the transfer was dollar_figurex it is represented that decedent’s transfer of the leasehold interest was valid and binding under country law you have requested a private_letter_ruling regarding the gift and estate_tax consequences of decedent’s transfer of the leasehold interest in residence to spouse under sec_2501 a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him no power to change its disposition whether for his own benefit or the benefit of another the gift is complete sec_2512 provides that where property is transferred for less than an adequate_consideration in money's worth the amount by which the value of the property exceeds the value of the consideration is deemed a gift sec_2523 provides the general_rule that where the donor transfers property to a donee who at the time of the gift is donor’s spouse then in computing taxable_gifts for the calendar_year a marital_deduction is allowed for the value_of_the_gift to the spouse however under sec_2523 the marital_deduction is not allowable if the spouse of the donor is not a citizen_of_the_united_states sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise under which the decedent has retained for life or for any period not ascertainable without reference to death or for any period which does not in fact end before death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income from the property sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 and provide that if the surviving_spouse is not a citizen_of_the_united_states then no deduction is allowed under sec_2056 unless the property passes to the surviving_spouse in a qualified_domestic_trust qdot described in sec_2056a sec_2056 provides that if any property passes from the decedent to the surviving_spouse of the decedent then for purposes of sec_2056 such property will be treated as passing to the surviving_spouse in a qdot if such property is transferred to a qdot before the date on which the return of tax imposed by chapter is made or such property is irrevocably assigned to a qdot under an irrevocable assignment made on or before such date which is enforceable under local law under sec_20_2056a-4 only assets included in the decedent’s gross_estate and passing from the decedent to the surviving_spouse or the proceeds from the sale exchange or conversion of such assets may be transferred to a qdot under this rule where a decedent transfers a residence to family members and then continues to reside in the residence until death the property will be includible in the decedent’s gross_estate under sec_2036 if the decedent continues to occupy the residence pursuant to an understanding between the parties either express or implied that the decedent would retain possession or enjoyment of the property see eg estate of maxwell v commissioner f 3rd 2d cir estate of trotter v commissioner tcmemo_2001_250 rev_rul 1970_1_cb_189 on the other hand where the decedent transfers the residence to his or her spouse the decedent’s continued co- occupancy of the residence with the spouse after the transfer does not raise any inference of an agreement or understanding as to retained possession or enjoyment of the property by the decedent such that the property would be subject_to inclusion under sec_2036 revrul_70_155 citing 46_tc_554 acq 1967_1_cb_2 in the instant case on date prior to his death decedent irrevocably transferred his leasehold interest in residence to spouse we conclude that the transfer on date was a completed_gift for gift_tax purposes under sec_2511 the value of the leasehold interest on date is subject_to gift_tax under sec_2501 under sec_2523 the transfer does not qualify for the gift_tax_marital_deduction further as discussed above under the facts presented the leasehold interest in residence is not includible in decedent’s gross_estate under sec_2036 accordingly sec_2056 and sec_2056a are not applicable with respect to the leasehold interest except as ruled above we express or imply no opinion concerning the federal tax consequences of this transaction under the cited provisions of the code or any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent george masnik chief branch office of the associate chief_counsel passthroughs and special industries sincerely yours enclosure copy of letter for sec_6110 purposes cc


t c no united_states tax_court estate of leon israel jr deceased barry w gray executor and audrey h israel petitioners v commissioner of internal revenue respondent jonathan p wolff and margaret a wolff petitioners v commissioner of internal revenue respondent docket nos filed date held fees paid in connection with cancellation of legs of commodity forward contracts treated as capital losses not ordinary losses the opinion of the u s court_of_appeals for the district of columbia circuit in 994_f2d_855 d c cir in its treatment of losses from cancellation and replacement and cancellation and termination of legs of commodity forward contracts as ordinary losses not followed and our opinion in stoller v commissioner tcmemo_1990_659 affd in part and revd in part 994_f2d_855 d c cir in its treatment of losses from cancellation and termination of legs of commodity forward contracts as ordinary losses modified herbert stoller and william l bricker jr for petitioners steven r guest mark j miller and edward g langer for respondent opinion swift judge respondent determined deficiencies in petitioners’ federal income taxes and increased interest as follows estate of leon israel jr deceased and audrey h israel year deficiency increased interest sec_6621 dollar_figure big_number big_number percent of interest accruing after date on portion of the underpayment attributable to a tax-motivated transaction jonathan p and margaret a wolff year deficiency dollar_figure big_number big_number increased interest sec_6621 briefs amicus curiae were filed by joel e miller as attorney for allan d yasnyi martin b boorstein and marilyn g boorstein and by eli blumenfeld as attorney for lesley yasnyi other partners against whom respondent has determined income_tax deficiencies relating to the same issue involved herein these other partners have filed petitions in this court and they have filed stipulations to be bound by the final resolution of the instant cases percent of interest accruing after date on portion of the underpayment attributable to a tax-motivated transaction unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after settlement the sole issue for decision is whether losses_incurred in connection with closing forward contracts in government securities should be treated as capital losses or as ordinary losses the parties submitted these consolidated cases fully stipulated under rule more specifically as factual evidence in these cases the parties stipulated the admissibility of the entire trial record of stoller v commissioner tcmemo_1990_659 60_tcm_1554 t c m p-h par big_number affd in part and revd in part 994_f2d_855 d c cir that case involved herbert stoller stoller petitioners' counsel in the instant cases and also a partner in holly trading associates holly a partnership in which leon israel jr israel jonathan p wolff wolff and other petitioners herein also invested and the treatment for federal_income_tax purposes of the identical losses of holly relating to the same forward contracts that are at issue in the instant cases a number of additional issues that were addressed in stoller v commissioner supra are not at issue herein we expressly incorporate into our findings_of_fact the background facts relating to holly's investments in forward contracts and commodity_straddle transactions as well as the specific facts relating to the particular commodity forward contracts that are at issue herein as those facts were found in our opinion in stoller v commissioner supra with one exception as to the ultimate finding of fact that we made in our stoller opinion with regard to the tax treatment of the losses_incurred on the commodity forward contracts that were closed by cancellation and termination as explained further below we also attach hereto and incorporate into our findings_of_fact as appendixes a-1 and a-2 certain schedules that were attached to our opinion in stoller v commissioner t c m cch pincite1 t c m p-h pincite3 to we note that appendixes a-1 and a-2 attached hereto were labeled appendixes b-1 and b-2 in our above stoller opinion these schedules among other data set out data relating to the three groups of forward contracts that are at issue in the instant cases the schedule below identifies lines of appendixes a-1 and a- that reflect specific information with regard to each of the three groups of forward contracts in issue and the amount of the losses claimed by holly with respect thereto transaction losses claimed appendixes a-1 and a-2 line nos first contracts -- dollar_figure second contracts -- dollar_figure third contracts -- dollar_figure a-1 line sec_5 a-2 line sec_1 a-2 lines the opinion of the u s court_of_appeals for the district of columbia circuit in stoller v commissioner supra provides only an abbreviated explanation of the particular forward contracts that were the subject of the appeal of our opinion in stoller v commissioner supra and that are at issue herein we also in light of the essentially legal nature of the issue before us set forth herein a somewhat abbreviated explanation of the details of the particular forward contracts that are at issue but we emphasize particular aspects of these forward contracts the significance of which appears to have been overlooked by the court_of_appeals in its analysis and opinion in stoller v commissioner supra we believe that the aspects of these transactions that we emphasize herein are significant and determinative of the narrow issue before us namely whether the losses in question are deductible as capital or as ordinary losses we also note that respondent has conceded the increased interest under sec_6621 and makes no contention herein that the forward contracts at issue were sham transactions or lacked a business_purpose or profit_motive further no issue is raised as to petitioners’ cost_basis in the forward contracts in question as indicated from to israel wolff stoller and other individuals were partners in holly which partnership invested nominally in interest-bearing government securities such as u s treasury bonds t-bonds and government national mortgage association bonds gnma’s by way of unregulated commodity forward contracts holly utilized forward contracts to conduct an arbitrage program involving the simultaneous purchase in one market and sale in another market with the expectation of making a profit on price differences in the different markets holly's program involved the establishment of long positions in government securities and the simultaneous establishment of short positions in different government securities with a difference in the interest rates or repurchase rates on the two positions that was calculated to yield a nominal net profit to holly when the positions were liquidated in this instance a long position represents a contract to purchase a government security in the future and a short position represents a contract to sell a government security in the future the establishment of both long and short positions in the same type of commodity is called a spread or a straddle in the minds of the partners of holly in actuality and in substance holly’s investments in commodity forward contracts involved nothing more than contracts to speculate in or to arbitrage -- for the short length of time that the forward contracts remained outstanding -- changes or shifts in the interest and discount rates associated with the particular type of government securities to which the forward contracts were pegged by entering into offsetting forward contracts to purchase and to sell these government securities holly effectively created synthetic short-term security investments by means of the straddles even though the underlying government securities to which the interest rate speculation was pegged constituted long-term government securities for example by entering into a contract to purchase at the current market or other specified price 15-year t-bonds for delivery in months and simultaneously entering into a contract to sell at the current market or other specified price 15-year t-bonds for delivery months later holly created the economic equivalent of a contract to purchase a 6-month t-bond holly then arbitraged these contracts against simultaneous contracts to sell gnma’s on the same specified date in months and to purchase gnma’s months later in economic terms and as between the parties the only important factors in such a straddle transaction are the initially specified price differential between the legs of the forward contracts or straddle and changes in interest and discount rates associated with the particular government securities to which the contracts are pegged that occur during the period of time that the contracts remain outstanding those factors will determine the entire net gain_or_loss whenever the position is settled or closed out no actual purchase or sale of the government securities to which the forward contracts are pegged is ever contemplated in fact no specific government securities are identified as being associated with the forward contracts in actuality the government securities to which the forward contracts are associated are more accurately described as hypothetical government securities that if they existed would have the same interest rates and other features as the type of government securities to which the forward contracts are pegged pricing of the forward contracts entered into by holly occurred in the following manner mr wolff on behalf of holly negotiated with acli government securities inc ags a dealer in government securities and a broker of commodity futures contracts the price differential -- as of the date the contracts were entered into -- between the long and short positions of each straddle and once that differential was agreed upon left it to ags to assign prices to the two legs of the straddle reflecting the initial price differential agreed upon when mr wolff negotiated with ags regarding offsetting positions again he would negotiate with ags only the price differential as of the date the offsetting contracts were entered into in the context of the straddle transactions of the type involved in these cases commodity forward contracts as with futures commodity contracts are not consummated by actual sale or purchase and delivery of the underlying securities or commodity actual delivery of the underlying securities is not contemplated rather forward contracts are generally closed by offset that is by entering into opposite forward contracts in the same commodity with the same or similar settlement dates when such opposite forward contracts in the same commodity are entered into the rights and obligations of the investor in the initial contracts are simply regarded as terminated the parties agree that in the above situation the termination by offset of the investor's respective positions constitutes a capital_transaction we emphasize that all that has happened in closing the transaction by way of offset is that the investor at whatever time during the length of the contract the investor chooses to terminate or lock in the gain_or_loss that has occurred with respect thereto as a result of changes in the price differential and in interest and discount rates relating to the relevant government securities from the day the forward contracts were first entered into until the day the contracts are closed simply notifies the other party of the investor’s desire to close the transaction by offset and in effect the contracts or positions are terminated as of that point in time occasionally an investor may wish to terminate or lock in the gain_or_loss on only a particular leg of a commodity forward_contract or straddle the procedure is essentially the same and the transaction is essentially the same regardless of which of a number of available methods is utilized to lock in the gain_or_loss on a particular leg of a commodity_straddle transaction that has occurred up until that point in time true cancellations of forward contracts where the transaction or contracts are vitiated ab initio only occur when forward contracts contain errors when interest rates change at any time during the period of time that forward contracts are open the value of the straddle increases or decreases but that increase or decrease is moderated by the fact that as one leg of the straddle increases in value the other leg decreases in value by a similar amount although the change in value of a given straddle remains fairly constant one particular leg of a straddle may reflect a large loss and the other leg may reflect a large gain when interest rates fluctuate widely and when the other leg of the straddle is not considered it was at such a point in time that holly for income_tax purposes occasionally would close by offset or by cancellation only a loss leg of a straddle and simultaneously replace the loss leg with a new contract for a slightly different delivery date thereby locking in the loss on the first leg and the gain on the second leg of the straddle that had occurred from the day the contracts had initially been entered into until the day the initial loss leg of the contract is closed in the above scenario when the loss leg is closed by cancellation and simultaneously replaced with a new forward_contract the purpose of going through the formality of canceling the loss leg of the forward_contract and replacing it instead of directly offsetting the loss leg was to attempt to convert the capital_loss that petitioners concede would have been associated with the offset procedure into an ordinary_loss that holly claims is associated with a cancellation when a loss leg of a straddle is closed by cancellation and terminated ie no replacement or offset contract is purchased as well as when a loss leg of a straddle is closed and a replacement contract is purchased as distinguished from closing by offset the loss leg of the contract is closed or terminated as of the date of the closing and the parties have effectively locked in the loss on that leg of the straddle reflecting simply the change due to shifts in the interest rates in the nominal value of that leg from the day the leg was entered into until the day of the closing of the leg when holly closed a loss leg of a straddle and no replacement or offset contract was purchased holly paid ags what was referred to as a cancellation fee equal to and representing the loss that had been realized on just that leg of the straddle when holly closed a loss leg and replaced it holly also paid ags a cancellation fee equal to and representing the loss that had been realized on just that leg of the straddle and without taking into account the offsetting gain that also was realized and locked in as of that point in time via the replacement_leg of the straddle which cancellation fee represented the loss realized on the loss leg that was closed the closing or liquidation of loss legs of forward contracts by way of offset or by way of cancellation and whether or not cancellation is followed by replacement contracts is economically the same where cancellation of loss legs is followed by replacement contracts the replacement contracts simply serve to lock in the offsetting gain on other legs of the straddle that has occurred from the day the straddle was first entered into until the day the loss legs are closed the replacement contracts simply relate to the need to lock in the large gain in order to offset the large loss that is going to be claimed for tax purposes the replacement contracts in no way alter the character of the loss realized on the legs that are closed holly typically in the following year closed the gain legs of the straddle transactions by offset in order to qualify the gain as capital_gain the so-called cancellation fees that were due on closing the loss legs of forward contracts at least with regard to the first and second groups of forward contracts in issue were not paid_by holly at the time the investors' loss positions were locked in mere bookkeeping entries were made to reflect the so-called cancellation fees just prior to the end of each year the individual partners of holly obtained bank loans and made contributions to their partnership capital accounts in holly in amounts sufficient to pay the cancellation fees owed by holly holly then used such funds to pay the cancellation fees to ags and treated the fees as ordinary losses at the partnership level and passed through the claimed ordinary losses to the individual partners just after the first of each year ags paid to holly an amount essentially equivalent to the cancellation fees that holly had paid ags at the end of the prior year -- reflecting the gains that were locked in on the straddle transactions holly then distributed these funds to the individual partners as a return_of_capital and the partners used these funds to repay their bank loans approximately to weeks after having been loaned the funds on its federal_income_tax returns for the years in issue holly treated losses arising from forward contracts closed by offset as capital losses holly however reported losses arising from forward contracts closed by cancellation regardless of whether or not replacement contracts were purchased as ordinary losses in holly reported a capital_gain of dollar_figure from trading in commodity forward contracts and an ordinary_loss of dollar_figure relating to the cancellation of the first group of forward contracts in issue in holly reported capital_gains in the amount of dollar_figure relating to the straddle the above loss leg of which was closed in to produce the dollar_figure loss claimed in and an ordinary_loss of dollar_figure relating to cancellation of the second and third forward contracts in issue that were canceled in an dollar_figure loss relating to the second group of forward contracts closed by cancellation and replacement and a dollar_figure loss relating to the forward_contract canceled and terminated in holly reported a cumulative net_short-term_capital_loss of dollar_figure from trading in forward contracts the record is not clear as to the amount of the capital_gain holly reported in with respect to closing in the replacement contracts that holly acquired in on audit insofar as is pertinent to the sole issue before us in the instant cases respondent determined that holly’s claimed ordinary losses relating to the forward contracts canceled and replaced and to the forward contracts canceled and terminated should be treated as capital losses discussion the parties herein agree on two important points that the commodity forward contracts that holly entered into and created with ags constituted capital assets and that locking in by offset -- at any point in time during the duration or length of forward contracts -- the gain_or_loss relating to the overall straddle transaction or the gain_or_loss relating to a leg of the straddle transaction constitutes the sale_or_exchange of a capital_asset the issue in the instant cases is whether locking in -- at any point in time during the duration or length of a forward_contract -- a loss relating to a leg of a straddle transaction by two methods slightly different from the offset method namely by cancellation and replacement and by cancellation and termination also constitutes a sale_or_exchange of a capital_asset as respondent contends or whether the taxpayers can convert the capital_loss into an ordinary_loss by the use of either of such two different methods as petitioners contend as is often the case critical to resolution of the issue before us is the statement of the issue if the industry label and nomenclature are accepted at face value and if the issue herein is stated simply in terms of whether cancellation of a leg of a forward_contract gives rise to capital_gain or loss as distinguished from ordinary gain_or_loss one is directed quickly to certain case authority discussed below that addresses tax consequences of unexpected cancellations of commercial contracts which cases generally turn on whether property rights relating to or arising out of the original contract survived the cancellation and whether all rights relating to the contract vanished with the cancellation as explained below we believe such cancellation cases do not control the cancellation of commodity forward contracts by which investors simply settle or close out their position in a straddle or in a leg of a straddle transaction as stated the parties agree that forward contracts in commodity markets held for investment constitute capital assets under sec_1221 120_f2d_768 5th cir affg in part and revg in part 42_bta_601 80_tc_394 72_tc_206 although no delivery or physical exchange of the underlying commodity is contemplated the monetary settlements that occur between the respective parties holding the contra positions in forward contracts have long been recognized to constitute sales or exchanges under the tax laws as we explained in vickers v commissioner supra pincite involving futures contracts for our purposes not significantly different from forward contracts -- both the supreme court and the congress have had occasions to deal with commodity futures transactions have treated them as capital_transactions thus presupposing a sale_or_exchange and have never questioned our commissioner v covington supra or 47_bta_117 cases in which we found a sale_or_exchange in the netting or offsetting mechanism of the commodity exchanges we went on in vickers v commissioner supra pincite to explain further in the landmark 350_us_46 case in the supreme court even then was facing a consistent 20-year practice by respondent and the lower courts whereby speculative transactions in commodity futures received capital treatment the supreme court cited our battelle v commissioner supra case as part of that consistent practice u s pincite n moreover the congress too has assumed that gains and losses from speculative commodity futures transactions are capital in nature as shown by the legislative_history of the predecessor of sec_1233 dealing with short_sales of property and by the legislative_history of the recent legislation dealing with commodity futures and eliminating certain abusive practices involving commodity tax_straddles fn refs omitted in commissioner v covington supra pincite an early opinion of the court_of_appeals for the fifth circuit involving a taxpayer's losses from commodity futures contracts the fundamentals of such transactions from a tax standpoint were explained and it was concluded that such transactions in essence constitute sales or exchanges as follows the taxpayer argues that the investor doesn't by its dealing become the owner of any property it merely enters into executory contracts which are executed not by transfer of property but by closing them out at a profit or loss under the rules of the exchange without a sale_or_exchange of property being involved t he clearing house of the exchange to which all contracts are transferred extinguish es offsetting contracts and makes a money settlement of the price difference there is then neither the sale nor exchange of the commodity or of the contract there is only the extinguishment of a contract to buy and a contract to sell and a money settlement for the price difference this says the taxpayer is not a selling or buying of property speaking plainly the taxpayer argues it is simply an arrangement or device by which gains or losses are chalked up and settled for between speculators who have taken opposite positions in a rising and falling market it is difficult to see how if the taxpayer is right in this naive reduction to fundamentals of the transactions in which it has been engaged its activities can be distinguished from mere wagering or to be equally naive betting or gambling but they are so distinguished in law and in business contemplation and they are so distinguished because implicit in the transactions is the agreement and understanding that actual purchases and sales and not mere wagering transactions are being carried on commissioner v covington f 2d pincite emphasis added we believe the above statement from this early opinion is apropos to the facts of the transactions before us in this case and succinctly distills the essence of what is going on -- namely the purchase and sale of forward contracts or positions in a particular market in this case the market for interest-sensitive government securities whenever the investor during the length or duration of the forward contracts that have been purchased elects to settle close out extinguish or cancel the contracts or positions or one of the legs thereof and to realize the gain_or_loss associated with the contracts or with one of the legs thereof and regardless of whether the investor closes out or locks in the gain_or_loss by way of offset by way of cancellation and replacement contracts or by way of cancellation and termination the transaction is exactly the same -- in purpose in effect and in substance -- and produces exactly the same type of taxable gain_or_loss -- in the instant cases capital_gain or capital_loss as the u s court_of_appeals for the fifth circuit stated implicit in the realization or lock in of the gain_or_loss associated with straddle transactions or with legs thereof whether the lock in is effected by way of offset cancellation and replacement or cancellation and termination is the agreement and understanding that actual purchases and sales have occurred with respect to the price-differential and interest- sensitive risk for t-bonds and gnma’s that each party accepted when the commodity_straddle transaction was first entered into in each case the investor assumed the risk of swings in the price of such government securities for whatever time each leg of the contract was outstanding regardless of when and how a loss position in a commodity forward_contract is extinguished closed settled terminated or canceled at any one point in time during the length or duration of the contract the investor in fact has participated in exactly the transaction for which the investor contracted from the time the transaction was first entered into until the day the investor chooses to close or terminate that leg the investor got exactly what was bargained for participation in this interest-sensitive risk transaction for a period of time and when the investor closed the leg or the position by whichever of the various alternative liquidation techniques that are made available to investors in commodities forward contracts see 91_tc_396 affd without published opinion 940_f2d_1534 9th cir the investor effectively sold off or extinguished and exchanged that right to participate and realized the gain_or_loss associated therewith up to that point in time when the investor chooses to dispose_of or terminate that risk or any part thereof and to lock in the gain_or_loss that has occurred on any leg of the straddle because of swings in interest rates on government securities that have occurred the investor elects a method to do so but each method produces exactly the same economic event and consequence only nominal differences in form and certainly as between the parties to the forward contracts a sale_or_exchange of the respective price- differential and interest-sensitive risk positions that their contracts represented from the time they first entered into the forward contracts up until the time that the risk is terminated and the gain_or_loss is locked in as we stated in 72_tc_206 in analyzing payments labeled as compensating_payments and in concluding that offsetting forward contracts in foreign_currency constituted capital_transactions these offsets clearly constitute both closure under sec_1233 and a sufficient sale_or_exchange under the general capital provisions to mandate capital treatment here id as use of the term compensate was not controlling in hoover co v commissioner t c pincite use of the term cancellation by petitioners in connection with the settlement of loss legs of their forward contracts is not controlling and should not mislead us here respectfully we believe that the court_of_appeals for the district of columbia circuit in 994_f2d_855 erred in not recognizing the above case authority and holdings that establish the closure or sale_or_exchange nature of the termination of offsetting forward contracts upon closing by offset of forward contracts the transaction is terminated and extinguished settlement between the parties occurs at that time and no contracts remain in effect this is illustrated clearly in appendix a-1 hereto under the caption straddles opened and closed -- the four forward contracts under this caption were opened on date and were settled and closed days later on date by four offsetting forward contracts after date in spite of the fact that four offsetting forward contracts were entered into with specified settlement dates in and the offsetting contracts extinguished each other the transactions were settled terminated and closed nothing survived as between the parties to these particular forward contracts into and whether 6-months’ offsetting forward contracts all of the legs of an entire straddle or simply one leg thereof are settled or closed week or month after they are entered into or not until the initially specified settlement_date and by whatever method used to settle or close the contracts in the instant cases by offset by cancellation and replacement and by cancellation and termination in each situation the capital_transaction that the parties entered into through the forward contracts the straddle and the legs thereof has been closed and the payment received if a gain is realized or made if a loss is realized represents exactly the same type of income or loss earned with regard to the contracts the straddle or the legs thereof for the length of time the forward contracts were outstanding other legs of the straddle may remain open and the parties may continue to be exposed to continuing shifts in interest rates and in price fluctuations of government securities for the duration or length of time that other legs of the straddle remain open but with regard to the leg that has been closed or canceled or offset the transaction is closed and a completed sale_or_exchange has occurred under sec_1221 with regard to the rights of the parties associated with that portion of the straddle that was closed with the benefit of further analysis it is our conclusion that our opinion in stoller v commissioner tcmemo_1990_659 affd in part and revd in part 994_f2d_855 d c cir in its treatment of a cancellation and termination of a leg of a straddle transaction and the opinion of the court_of_appeals for the district of columbia circuit in stoller v commissioner in its treatment of both cancellation and replacement and cancellation and termination of legs of straddle transactions erred in not recognizing the fundamental sale_or_exchange nature of these transactions in which simply stated the gain_or_loss -- at a certain point in time -- is locked in with regard to the portion of the straddle that is closed as the court_of_appeals for the fifth circuit early recognized in commissioner v covington f 2d pincite closing of the contracts at a profit or loss is the sum and substance of the transactions before us we perceive no difference for income_tax purposes and in determining the character of the gain_or_loss between closing a leg of a straddle and closing the entire straddle both events lock in the gain_or_loss on the interest rate shift that has occurred as of the point in time that a leg or legs of the straddle are closed courts often must address taxpayers' artful devices to convert ordinary gain into more favorable capital_gain or to convert capital_loss into more favorable ordinary_loss see 356_us_260 citing 350_us_46 that task should be accomplished on the basis not of the cancellation label used by the parties but on the realities of the transactions and expectations of the parties we reiterate what we stated in stoller v commissioner supra when presented with the identical facts as in the instant cases that to call the closing transactions in issue cancellations is a misnomer and is misleading as stated earlier we believe that cases involving unexpected and true cancellations of commercial contracts and vanishing or disappearing assets are not particularly helpful see 260_f2d_489 9th cir affg 27_tc_892 252_f2d_344 2d cir revg 26_tc_967 205_f2d_360 2d cir affg 17_tc_1517 204_f2d_673 2d cir revg 18_tc_149 those cases involve regular commercial contracts for the provision of goods or services and the unexpected cancellation of the contracts in midstream due to unusual circumstances not consistent with the continuation of the original contracts that had been entered into leh v commissioner supra termination of petroleum supply contract commissioner v pittston co supra termination of exclusive coal purchase contract general artists corp v commissioner supra cancellation of performance contract commissioner v starr bros supra termination of exclusive pharmaceutical sales contract it seems obvious to us that the cancellations involved in the above cases are fundamentally different from the cancellations of forward contracts that are involved herein where the cancellations lock in settlement or closing that occurred are exactly what the parties contemplated when they entered into the forward contracts namely holly and ags contemplated that holly would have the risk of price fluctuations on each leg of the straddle from the day the straddle was first opened until whatever day holly chooses to lock in the gain_or_loss holly received the benefit of that contract and now becomes liable for the burden namely the loss incurred on the legs holly chose to close holly received exactly what it contracted for ags did likewise in this sense the transactions in question with respect to the loss legs do not represent cancellations they represent consummations the cases therefore involving unexpected cancellations of commercial contracts are of limited applicability in a number of cases taxpayers and respondent have sought to invoke the disappearing asset theory but that theory was found to be inapplicable where a close scrutiny of the substance and reality of the transaction in issue indicated that much more was involved than mere vanishing assets in 304_f2d_125 2d cir revg and remanding 35_tc_617 the cancellation of a contract entitling the taxpayer to produce the play moulin rouge so that rights to produce the play could be transferred to another producer was treated as a sale_or_exchange in 320_f2d_929 5th cir a cancellation fee was treated as arising from a sale_or_exchange where in substance the underlying mortgage servicing contract was transferred to a third party that is the situation before us particularly with regard to the loss legs that were canceled and immediately replaced little if anything vanished upon holly’s closing or settling the loss legs to the contrary holly and the holly partners stayed around continued to participate in the straddle transactions postponed even paying the loss until the very end of the year with funds borrowed by holly closed or settled the offsetting gain leg of the forward contracts just after the new year and used the gain to repay the bank the last thing the investors would have wanted -- upon the cancellations in question -- is to vanish or disappear from the rest of these straddle transactions the consequence of which is that the investors might actually have had a real loss to pay more than anything else the investors wanted to stay around to be a part of the straddle transactions as they came to their predictable inevitable intended and planned closing we agree with the analysis set forth in our prior opinion in stoller v commissioner t c m cch pincite t c m p-h pincite0 -- the substance of the alleged cancellation transactions will be determined by looking to the entire spread arbitrage transaction and the economic consequences sought by the parties when the taxpayer requested the cancellation of a contract or series of contracts it was part of an ongoing straddle and was for the purpose of changing holly's window of risk he did not want to terminate holly's straddle with ags he just wanted to change the delivery date of one leg and accelerate the loss to be recognized by holly and its partners citation omitted respectfully we also believe that in stoller v commissioner f 2d pincite the court_of_appeals for the district of columbia circuit erred in its interpretation of the legislative_history accompanying the addition of sec_1234a to the internal_revenue_code id the legislative_history concerning sec_1234a states the following present law the definition of capital_gains_and_losses in sec_1222 requires that there be a sale_or_exchange of a capital_asset court decisions have interpreted this requirement to mean that when a disposition is not a sale_or_exchange of a capital_asset for example a lapse cancellation or abandonment the disposition produces ordinary_income or loss see 260_f2d_489 9th cir and 252_f2d_344 2d cir fn ref omitted reasons for change the committee believes that the change in the sale_or_exchange rule is necessary to prevent tax-avoidance transactions designed to create fully-deductible ordinary losses on certain dispositions of capital assets which if sold at a gain would produce capital_gains some taxpayers and tax_shelter promoters have attempted to exploit court decisions holding that ordinary_income or loss results from certain dispositions of property whose sale_or_exchange would produce capital_gain or loss some of the more common of these tax-oriented ordinary_loss and capital_gain transactions involve cancellations of forward contracts for currency or securities the committee considers this ordinary_loss treatment inappropriate if the transaction such as settlement of a contract to deliver a capital_asset is economically equivalent to a sale_or_exchange of the contract s rept pincite 1981_2_cb_412 according to the court_of_appeals for the district of columbia circuit the above language from the legislative_history indicates that congress thought that it was changing the law and that this change in the law is strong evidence that cancellation of commodity forward contracts before the change in the law produced ordinary losses stoller v commissioner f 2d pincite we respectfully disagree with the court_of_appeals for the district of columbia circuit's analysis of the above legislative_history see our explanation of the above legislative_history in stoller v commissioner t c m cch pincite with which we agree it suffices here to reiterate what we stated in 80_tc_394 in the context of commodity futures contracts with regard to sec_1234a whether new sec_1234a is viewed as a change in the law in some areas or as merely removing all doubt that sales or exchange treatment is to be accorded to certain dispositions of property we think congress clearly did not intend to upset the sale_or_exchange treatment that had long been accorded to speculative commodity futures transactions of the type involved in the present case citation omitted petitioners argue that the proper venue for appeal of these cases is to the u s court_of_appeals for the district of columbia circuit and therefore that under 54_tc_742 affd 445_f2d_985 10th cir we are bound to follow the opinion of the u s court_of_appeals for the district of columbia circuit in stoller v commissioner supra at the time the respective petitions in these cases were filed however petitioners resided as follows petitioners residence audrey h israel barry w gray executor representing the estate of leon israel jr jonathan p and margaret a wolff new jersey new york new york leon israel jr died a resident of new jersey petitioners' counsel argues that docket no involving the estate of leon israel jr is appealable to the u s court_of_appeals for the district of columbia circuit because petitioners' counsel herbert stoller is also a co- executor of the estate of leon israel jr and resided in bermuda at the time the petition was filed in this regard we note that the petition in docket no was filed not by herbert stoller as executor of the estate of leon israel jr but by barry w gray as executor of the estate of leon israel jr sec_7482 provides that decisions of the tax_court may be reviewed by the u s court_of_appeals for the circuit in which is located a in the case of a petitioner seeking redetermination of tax_liability other than a corporation the legal residence of the petitioner because herbert stoller is not a petitioner in docket no it is unclear whether said docket would be appealable to the u s courts of appeals for the second and or third circuit or to the u s court_of_appeals for the district of columbia circuit accordingly we are not bound by the opinion of the u s court_of_appeals for the district of columbia circuit in stoller v commissioner supra decisions will be entered under rule reviewed by the court cohen chabot jacobs gerber parr wells ruwe colvin beghe laro foley vasquez and gale jj agree with this majority opinion explanation of columns aclix acli contract face face value of security rate rate of security o c closed by offset or canceled other abbreviations mm millions of dollar_figurecan canceled appendix a-1 chronology of holly’s straddle transactions trade_date date position established l s long or short price - purchase or sale price line tr beg cl line transaction begins or closes settlement_date delivery date scrty government security g l disp gain_or_loss on disposition when position closes gnma ginnie mae certificate tbond us treasury bond straddle transactions aclix line date trade settle date face l s scrty rate price g l o c line tr beg cl can929768 can929769 can918907 can918908 5mm 5mm 5mm 5mm 5mm 3mm 3mm 3mm 3mm 5mm 5mm 5mm 5mm 5mm 5mm 5mm 3mm 3mm 3mm 3mm 5mm 5mm 5mm 5mm 10mm 10mm 10mm 10mm l l l l l l s l s l s gnma s l s l s l s l s gnma gnma tbond tbond l l l l l s l s gnma gnma tbond tbond gnma gnma gnma tbond tbond tbond tbond gnma gnma tbond tbond gnma gnma tbond tbond gnma gnma tbond tbond dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number dollar_figure dollar_figure dollar_figure big_number dollar_figure c c c c c o o o o c o o c o c o o o o o o o o o o o o o straddles opened and closed -- 6mm 6mm 6mm 6mm 6mm 6mm 6mm 6mm l s gnma s l s l gnma l s o big_number dollar_figure gnma tbond dollar_figure tbond big_number gnma big_number big_number tbond dollar_figure dollar_figure tbond big_number big_number dollar_figure dollar_figure o appendix a-2 aclix line trade_date settle date face l s scrty rate price g l o c straddle transactions o o o o o o line tr beg cl c o c o can178424 can164941 can164943 can181467 can181466 can182250 can182281 10mm l gnma dollar_figure 10mm 10mm gnma tbond s l 10mm 9mm 10mm 10mm 1mm lmm lmm 1mm 1mm 1mm 1mm 1mm 5mm 9mm 5mm 6mm 4mm 9mm 1mm 9mm 9mm 9mm 9mm 9mm 10mm 10mm l l l l s l s l s l s l l l s s s l l s gnma gnma tbond tbond tbond tbond tbond tbond tbond tbond tbond gnma gnma gnma gnma gnma gnma tbond tbond tbond s tbond big_number dollar_figure o c big_number l s gnma gnma dollar_figure big_number gnma gnma tbond l l l dollar_figure dollar_figure dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure dollar_figure dollar_figure big_number big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number o o o c c c c c c c c o o o o o o o o o c c c dollar_figure big_number dollar_figure big_number big_number big_number big_number 1mm 5mm 5mm s l s tbond gnma gnma big_number dollar_figure big_number big_number big_number dollar_figure o o o gain figure represents gain realized by offsetting dollar_figure million of contract line by line sec_21 and sec_22 loss figure represents total loss realized on closing transactions on lines and by transactions shown on line sec_24 through gain figure represents total gain realized by offsetting transaction shown on line by transactions shown on line sec_27 and loss figure represents total loss realized by offsetting transaction shown on line by transactions shown on line sec_29 and gain figure represents gain realized by offsetting dollar_figure million of contract line and line by line beghe j concurring having joined the majority opinion i write separately to respond to some of the strictures in the dissenting opinion with all due respect the author of the dissenting opinion and the court_of_appeals for the district columbia circuit in 994_f2d_855 d c cir revg in part tcmemo_1990_659 have not paid proper heed to the body of judge-made law in the second and third circuits as well as this court that treats even true cancellations of some types of contracts as capital_gain or loss transactions this is just another area in which the capital character of the asset and other circumstances properly focus the analysis upon the nature of the contract rights in question rather than merely upon the structure of the transaction as a sale_or_exchange as opposed to a cancellation termination or relinquishment see eg 304_f2d_125 2d cir revg in part and remanding 35_tc_617 210_f2d_752 2d cir affg 19_tc_667 200_f2d_72 3d cir affg 16_tc_1450 see also 509_f2d_1220 2d cir affg 61_tc_723 225_fsupp_854 e d pa affd 350_f2d_293 3d cir other special circumstances present in the cases at hand provide a principled basis for looking beyond the conceded facts that the transactions in question were bona_fide had economic_substance and were entered into for profit--all of which only go to the economics of the amount of gain or loss--to recognize the also inescapable facts that holly and ags were related parties with no adverse interests insofar as the treatment of the closing transactions as offsets or cancellations was concerned the custom or usage of the trade among dealers and traders in forward contracts and the underlying commodities which holly and ags arbitrarily ignored is that true cancellations are only employed to correct mistakes not to close out forward contracts entered into and disposed of in the ordinary course of business see 85_tc_968 affd sub nom 843_f2d_351 9th cir stoller v commissioner tcmemo_1990_659 60_tcm_1554 t c m p-h par big_number pincite majority op p 1another fact shown in the stipulated record that points up the arbitrary treatment of the transactions between holly and ags insofar as the choice of tax consequences was concerned is that in the case of offsetting transactions holly and ags agreed to recognize both gains and losses as of the trade_date of the offset this would seem to be contradicted by the fact that both contracts remain in existence and a net_profit_or_loss is locked in but remains unrealized until the settlement_date when the securities are deemed delivered and received pursuant to both contracts and the net_profit_or_loss debited or credited to the trader's account i don't understand how agreement of the parties could change the tax consequences if such an agreement were efficacious the validity of short_sales against the box in not only locking in gain but also postponing realization would seem to be thrown into doubt in these circumstances the analysis in the majority opinion of the forward contracts in question and the ways in which they were handled by holly and ags is consistent with and supported by judge friendly's analysis in commissioner v ferrer supra and its ancestors and descendants the cases at hand then are the latest ones in which it is appropriate to observe that the 'formalistic distinction' between two-party and three-party transactions that was criticized in ferrer is fast becoming a footnote to history bittker mcmahon federal income_taxation of individuals par pincite chabot jacobs and parr jj agree with this concurring opinion halpern j dissenting i introduction i dissent because i believe that the majority is not justified in disregarding the actual transactions engaged in by holly the partnership in favor of hypothetical transactions that yield the largest tax for the government the majority justifies treating a cancellation as a sale on the ground that cancellations and offsets are economically equivalent even were i to accept that proposition the majority has failed to persuade me that a common reality of the two transactions is a sale in searching for that reality it is important to keep in mind that respondent has made the following concession respondent concedes for purposes of these cases that holly trading associates’ transactions in forward contracts with acli government securities inc during the years at issue were bona_fide had economic_substance and were entered into for profit emphasis added i cannot join in an opinion that taxes a cancellation as a sale without specific statutory authority and under what i consider a drastic extension of the doctrine_of substance over form ii anticipatory commodities transactions i believe that in part the majority misunderstands some of the complex arrangements by which persons arrange for the future purchase or sale of a commodity a certain amount of detail is necessary to appreciate what i believe the majority misunderstands many of the factual details of the various anticipatory arrangements for the purchase or sale of a commodity can be found in our opinion in stoller v commissioner tcmemo_1990_659 affd in part and revd in part 994_f2d_855 d c cir following are pertinent terms and concepts a regulated_futures_contracts a regulated_futures_contract rfc is a standardized executory_contract to buy or sell a designated commodity at a specific price on a fixed date in accordance with the rules of a commodity exchange the date the contract is to be performed is normally identified by its delivery month eg a date contract all rfcs start out as a contract between a buyer and seller at the end of each trading day the exchange’s clearing_organization substitutes itself as the other side of each contract so the clearing_organization becomes the buyer to each seller and the seller to each buyer the agreement made by or on behalf of the two parties on the floor of the exchange is thus broken down into a long rfc in which one party is the buyer and the clearing_organization is the seller and a short rfc my research has also led me to two helpful articles dealing with both the mechanical and tax aspects of anticipatory commodities transactions at least as those matters stood in which is about the date of the transactions involved herein donald schapiro commodities forwards puts and calls-- things equal to the same things are sometimes not equal to each other tax lawyer donald schapiro tax aspects of commodity futures transactions forward contracts and puts_and_calls 39th annual n y u institute in which the other party is the seller and the clearing_organization is the buyer trading in rfcs for a specific commodity and delivery month continues until the day of the month set by the exchange on which trading in contracts for that delivery month stops thereafter delivery of the commodity is made by holders of open short rfcs to holders of open long rfcs on the matched-up basis established by the clearing_organization up until the date trading stops the holders of both long and short rfcs can close out their contracts without making or taking delivery of the commodity by entering into inverse purchase or sale contracts on the exchange thus the holder of a long rfc can eliminate the risk of or offset his obligation to purchase and pay for the commodity by acquiring from another the promise to purchase and pay for the same commodity on the same exchange for the same delivery month that is by entering into an inverse short rfc such a transaction has been held to meet the code requirement of a sale_or_exchange which can give rise to capital_gain or loss on the ground that a fictional delivery is made on the offsetting inverse short rfc with the commodity acquired under the long rfc 120_f2d_768 5th cir affg in part and revg in part 42_bta_601 the holder of a short rfc can likewise offset his obligation to sell the commodity at the agreed price by acquiring from another a commitment to sell and deliver the same commodity on the same exchange for the same delivery month that is by entering into an inverse long rfc the commodity to be delivered under the long rfc is deemed received and used to satisfy the delivery obligation under the short rfc thus satisfying the sale_or_exchange requirement necessary for capital_gain or loss treatment id the special short_sale rules of sec_1233 are applicable to rfcs unless certain exceptions apply the gain_or_loss is capital sec_1233 it appears that under the usual exchange rules applicable to rfcs the offsetting contracts which are both with the exchange immediately cancel and are terminated with a money settlement for the difference in value commissioner v covington supra pincite gain_or_loss is thus realized on that the offset date b forward contracts a forward_contract is also an executory agreement calling for future delivery of a commodity forward contracts however are privately negotiated they are not traded on commodity exchanges or subject_to the rules of any board_of trade if the parties to any particular forward_contract agree the contract can be canceled before the delivery date normally any unrealized_gain or loss in the contract would then be accounted for because the party on the profitable end of the contract would demand payment for giving up a valuable right the character of that gain_or_loss is the question in this case a party may fix the amount of unrealized_gain or loss in a forward_contract by entering into an inverse contract to buy or sell the same commodity for delivery on the same date the settlement_date but at the then current market price for delivery on such date in 72_tc_206 we described the consequence of entering into offsetting forward contracts finally we note that the most common method of settling a forward sale contract has traditionally been to enter into a purchase contract and to offset the contractual obligations to sell and purchase meade v commissioner tcmemo_1973_46 38_tc_907 27_tc_1056 revd 251_f2d_764 7th cir offset of the contractual obligations by the seller has been held to be delivery under the sale contract chicago bd of trade v christie grain stock co 198_us_236 46_f2d_241 10th cir satisfying the sale_or_exchange requirement on the date the contract is settled see 42_bta_601 affd in part 120_f2d_768 5th cir cert_denied 315_us_822 there is thus an important distinction between the operation of offset in the contexts of rfcs and forward contracts by exchange rules offsetting rfcs cancel and are terminated on the offset date with a money settlement then for any difference in values offsetting forward contracts being privately negotiated do not automatically cancel and terminate on the offset date but unless the parties agree to the contrary coexist until the settlement_date when both contracts are deemed to have been executed with delivery taken on the long contract and delivery made on the short contract although not perfectly clear on that point hoover suggests that unless the parties earlier agree to settle up the settlement_date not the offset date is the date that gains and losses are realized with respect to forward contracts settled by offset in hoover there were forward contracts in issue that were settled by entering into inverse forward contracts of that number a debit or credit settlement payment was made after the offset date on the settlement_date in nine situations in one situation a settlement payment was made after the offset date but in advance of the settlement_date and in one situation a settlement payment was made after the settlement_date in two situations a settlement payment was made on the offset date in one situation it is clear that the settlement payment was made in a year beginning after the offset date nothing indicates that the taxpayer did not report and both the commissioner and the court accepted the date of the settlement payment as the date that gain_or_loss was realized indeed the court calculated the holding_period with respect to those transactions from the offset date those calculations seem to belie any assertion that the offset date is the date of realization hoover co v commissioner supra pincite c straddle a person who has entered into either a rfc or a forward_contract when no distinction is intended an anticipatory contract assumes the risk that the market price for delivery of the commodity on the agreed date will change changes in the market price for delivery of the commodity will result in changes in the value of an anticipatory contract for delivery in that month an anticipatory contract holder is described as being in a naked position when he bears the unalloyed risk of changes in the market price for delivery of the commodity market risk a straddle in its simplest terms is the simultaneous entry into two anticipatory contracts with respect to the same commodity one is a long contract to buy a given amount of the commodity for delivery at a specific time and the other is a short contract to sell the same amount of the commodity for delivery at a different time a straddle reduces market risk because as the value of one leg decreases the value of the other leg increases because the legs are for deliveries at different times the value changes will not necessarily be exactly offsetting there is thus the potential for profit or loss in a straddle d replacing a leg a participant in a straddle may replace one leg of the straddle with another contract of the same kind ie long or short for a different delivery date such replacement of one leg being referred to as a switch for example here in stoller v commissioner tcmemo_1990_659 with respect to the cancellations in question except for one group the november 25th group we found that the partnership wished to change delivery dates in order to shorten the window of risk of the straddle in the case of a straddle built on rfcs the mechanics of a switch would involve the taxpayer simultaneously entering into an inverse contract with respect to the long or short rfc being switched and a like long or short rfc to replace the rfc being switched except perhaps in the case of certain tax- motivated straddles see eg 78_tc_350 gain_or_loss on the long rfc component of the offsetting pair would immediately be realized and recognized 120_f2d_768 5th cir in the case of a straddle built on forward contracts the parties to the contract to be switched may agree to cancel that contract settling up with respect to any gain_or_loss in the contract to avoid being naked with respect to the remaining leg of the straddle the straddling party would immediately enter into a contract to replace the canceled contract and complete the switch the character of any gain_or_loss to be accounted for on the cancellation is the issue in this case but there seems to be no disagreement that cancellation is an event giving rise to an allowable loss in the case of a switch made by first entering into an inverse contract with the same party the suggestion of 72_tc_206 is that gain_or_loss is realized upon the hypothetical delivery under the short contract of the offsetting pair on the settlement_date or on any earlier date that the parties consummate a cash settlement that suggestion as to timing however is thrown into doubt by the majority there seems to be no disagreement however that the gain_or_loss is realized from a sale_or_exchange the second step in the switch would be exactly the same as if the switch were initiated by canceling the to-be-switched-leg ie entering into a replacement contract e canceling both legs the majority has not made clear that what it has called the third contract see majority op p the november 25th group involved straddles consisting of contracts that were all closed by cancellation on the same date there was no switch of any leg and consequently no continuing straddle investment after the cancellations all of which took place on date iii majority’s theory of equivalence i believe that the key to understanding the majority’s error is contained in the following sentence whenever the investor during the length or duration of the forward contracts that have been purchased elects to settle close out extinguish or cancel the contracts or positions or one of the legs thereof and to realize the gain_or_loss associated with the contracts or with one of the legs thereof and regardless of whether the investor closes out or locks in the gain_or_loss by way of offset by way of cancellation and replacement contracts or by way of cancellation and termination the transaction is exactly the same -- in purpose in effect and in substance -- and produces exactly the same type of taxable gain_or_loss -- in the instant cases capital_gain or capital_loss majority op pp emphasis added that sentence follows almost immediately after the majority’s citation to and quotation from commissioner v covington supra the majority emphasizes those parts of the court’s opinion describing the taxpayer’s argument that pursuant to exchange rules offsetting rfcs are extinguished and a money settlement made and finding that implicit in an exchange regulated offset is the agreement and understanding that an actual purchase and sale of the underlying commodity has taken place majority op p the majority finds that the agreement and understanding implicit in the exchange rules governing offsets of rfcs is apropos to the cancellations of the forward contracts here in issue id the majority states courts often must address taxpayers’ artful devices to convert ordinary gain into more favorable capital_gain or to convert capital_loss into more favorable ordinary_loss that task should be accomplished on the basis not of the cancellation label used by the parties but on the realities of the transactions and expectations of the parties majority op pp emphasis added the majority obviously concludes that the common reality of exchange regulated offsets the bilateral relationship of the two parties to offsetting forward contracts and the terminated relationship of the parties to a canceled forward_contract is a sale_or_exchange indeed the majority states that in stoller v commissioner tcmemo_1990_659 affd in part and revd in part 994_f2d_855 d c cir both this court and the court_of_appeals for the district of columbia circuit erred in not recognizing the fundamental sale_or_exchange nature of cancellations of forward contracts majority op p the majority’s perception of fundamental reality is bottomed on the treatment accorded rfcs settled by offset as articulated in covington v commissioner supra there the taxpayer argued that the reality of an exchange regulated offset is the lack of any actual sale_or_exchange because there is an extinguishment of the rfc settled by offset the court_of_appeals for the fifth circuit however forced the taxpayer to abide by the form of the transaction he had chosen as sculpted by the exchange rules dealing with offsets and held that in effect he had entered into two contracts and realized a gain on closing the short contract that is a perfectly appropriate result see eg 57_tc_164 affd 496_f2d_1179 9th cir in which we stated a taxpayer cannot elect a specific course of action and then when finding himself in an adverse situation extricate himself by applying the age-old theory of substance over form the fiction imposed on a taxpayer that settles rfcs by offset however is not a ground to conclude that in reality a taxpayer not engaging in an exchange regulated offset indeed not engaging in an offset at all entered into a hypothetical contract to complete the purchase and sale of a commodity that he never owned assume for instance that the taxpayer has constructed a straddle in x commodity entering into a long may forward_contract and a short september forward_contract assume further that there is an unrealized_loss in the short contract and for legitimate business reasons the taxpayer wishes to switch the short contract to a december forward_contract the taxpayer cancels the short september contract makes a cash settlement payment and enters into a short december contract the reality that the majority would impose is that the taxpayer entered into a long september contract under which hypothetically he took delivery of the commodity which was used to satisfy the short september contract to me that is not reality it is a fiction built upon a fiction as a matter of tax policy perhaps the cancellation of a forward_contract should be treated as a zero dollar sale so as to satisfy the sale_or_exchange requirement of sec_1222 congress thinks so and has added sec_1234a which however is not effective with respect to the facts of this case the majority’s understanding of the nature of the termination of offsetting forward contracts majority op p is illustrated by certain forward contracts in this case that perspective is set forth as follows upon closing by offset of forward contracts the transaction is terminated and extinguished settlement between the parties occurs at that time and no contracts remain in effect id if that is intended as a general statement of fact or of legal consequence it is unsupported by any authority and is in apparent contradiction to our findings and opinion in 72_tc_206 certainly it is in contradiction to the understanding of the facts in this case by the court_of_appeals for the district of columbia circuit in reversing us in part the court said the problem with the tax court’s reasoning is that cancellation and offset are different in substance as well as in form when a contract is cancelled it simply ceases to exist when a contract is offset both the original contract and the offsetting contract remain in effect until the date for delivery stoller v commissioner f 2d pincite emphasis added the majority may be misled by the way the partnership accounted for offset transactions it appears that the partnership accounted for unrealized gains and losses in forward contracts as of the offset date the date of the inverse contract that may or may not have been correct but it is not evidence that the contracts were by agreement terminated on the offset date more to the point it is not evidence of general industry practice in addition the majority suggests that since little if anything vanished' upon holly's closing or settling the loss legs sale_or_exchange treatment of those contract cancellations is appropriate majority op p the majority recognizes that some contracts were not replaced the november 25th group nevertheless the majority explains that what remained after the contract cancellations was holly's continued participation in straddle transactions the last thing the investors would have wanted -- upon the cancellations' in question -- is to vanish or disappear from the rest of these straddle transactions the consequence of which is that the investors might actually have had a real loss to pay id by juxtaposing cases involving unexpected and true cancellations of regular commercial contracts for the provision of goods or services true cancellations with the forward_contract cancellations in issue the majority purports to discern a fundamental difference that distinguishes true cancellations and explains the capital_loss treatment appropriate for the contracts in issue id pincite the majority rejects true cancellation treatment for the contracts in issue by invoking what it considers judge friendly's substance and reality analysis in 304_f2d_125 2d cir revg and remanding 35_tc_617 believing that the situation here is the same as in the ferrer case the majority slaps together the whole of the partnership's straddle activities into a unitary endeavor that justifies disregarding partially each individual step i believe that the majority has failed to appreciate the significance of judge friendly's analysis in the ferrer case and therefore may not seek its blessing in that case involving the purported termination of certain dramatic production contract rights judge friendly stated tax law is concerned with the substance here the voluntary passing of property rights allegedly constituting capital assets not with whether they are passed to a stranger or to a person already having a larger estate so we turn to an analysis of what rights ferrer conveyed id pincite judge friendly then engaged in an examination of the nature of the various rights in issue in that case he believed that the principal distinction between a termination of contract rights that gives rise to capital_gain and a termination that does not is the existence of an equitable interest in the holder of the rights being terminated which interest is evidenced by the availability of equitable relief in the enforcement of the contract rights id pincite it is thus insufficient for the majority to consider all of the partnership's straddle investments each straddle transaction or even each forward_contract and to pronounce baldly that the partnership received exactly what it contracted for majority op p nor is it sufficient to rely on the parties' stipulation that the forward contracts in issue constitute capital assets what is required is a careful consideration of the partnership’s property interests in the subject matter of the contracts in question in light of congress’ admittedly indistinct purpose in providing for that understanding of judge friendly’s analysis has been stated by two commentators marvin a chirelstein capital_gain and the sale of a business opportunity the income_tax treatment of contract termination_payments minn l rev james s eustice contract rights capital_gain and assignment of income--the ferrer case tax l rev the exceptional treatment of capital_gains_and_losses in sum the majority has failed to examine the nature of the contract rights terminated by the cancellations of the forward contracts in issue in the manner contemplated by judge friendly and therefore is foreclosed from relying on commissioner v ferrer supra to support its substance and reality analysis another difficulty with the rationale of the majority is the majority’s failure to explain the steps by which it proceeded to conclude that the cancellation losses were losses from the sale_or_exchange of capital assets sec_1001 addresses the determination of gains and losses on the disposition of property the sale_or_exchange requirement for capital_gain or loss treatment is introduced in sec_1222 the majority has failed to explain exactly what property was disposed of when a forward_contract was canceled how the partnership’s adjusted_basis in the disposed-of property was determined or what amount was realized on such disposition i must admit that i am puzzled by those questions as i am puzzled by how judge friendly’s equitable interest analysis could be applied to find a capital_loss in a situation where the last thing the partnership intended was actual delivery of the underlying securities that were the subject of the forward contracts in question given congress' enactment of sec_1234a i see no reason to engage in an analysis that may result in consequences we cannot foresee iv conclusion professors bittker and lokken in their treatise on federal income gift and estate taxation address the principle that substance must govern over form in taxation bittker lokken federal taxation of income estates and gifts par pincite- 2d ed they begin their discussion by noting that the substance-over-form principle has been referred to as the cornerstone of sound taxation quoting 294_f2d_750 5th cir revg and remanding 31_tc_918 id in the course of their discussion they state without citation of authority but none is needed if a transaction is consummated in a form that fairly reflects its substance it ordinarily passes muster despite the conscious pursuit of tax benefits in this case the choice of form resembles an election provided by statute id pincite they caution however a rogue offshoot of the substance-over-form doctrine suggests that when a taxpayer selects one of several forms that have identical practical consequences in the real world the government can disregard the chosen form and tax the transaction as though the most costly of the alternatives had been employed id pincite they continue on close inspection the most-costly-alternative theory turns out to be a drastic extension rather than a mere restatement of the substance-over-form doctrine id pincite the majority has not invoked much of the substance-over-form jurisprudence it has however looked for the realities of the transactions and raised the specter of artful devices i believe that it is fair to say that the majority has looked to tax the cancellation transactions on the basis of what it considers to be their substance in searching for that substance however the majority has dug no deeper than the fiction that accounts for the tax treatment of exchange regulated offsets and forward contracts settled by offset and payment indeed with respect to offsetting forward contracts the majority appears to conclude wrongly that all such contracts cease to exist on the offset date the reality of the settlement of anticipatory contracts by offset is not that the contract holder took delivery under a long contract of a commodity that he then used to satisfy his delivery obligation under a short contract that is a fiction imposed on the taxpayer because of the way he chose to cast his transaction to impose that fiction on a taxpayer who for whatever reason chose not to cast his transaction that way seems to me to be wrong at least without some better explanation than what the majority gives from a policy perspective i can sympathize with the majority’s concern that a taxpayer should not be able to lower his tax bill simply on the basis of which form as between two economically equivalent or similar forms he chooses the majority’s concern is apparent in how in part it frames the issue in this case whether the taxpayers can convert the capital_loss into an ordinary_loss majority op p emphasis added that statement suggests that the proper inquiry is the proper tax characterization of the cancellations not whether tax questions aside form and substance agree to me that is a troublesome inquiry for the reasons stated by professors bittker and lokken