DocketNumber: Docket Nos. 5529-86; 5530-86; 27170-86.
Citation Numbers: 56 T.C.M. 764, 1988 Tax Ct. Memo LEXIS 579, 1988 T.C. Memo. 550
Filed Date: 12/5/1988
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
TANNENWALD,
Docket No. | Petitioner | Year Ended | Deficiency |
5530-86 | Three G Trading | Sept. 30, 1980 | $ 1,325,876 |
Corp., Transferor | Sept. 30, 1981 | 37,588 | |
June 30, 1982 | 4,276 | ||
5529-86 | Gary Glass, | Sept. 30, 1980 | 1,325,876 |
Transferee | Sept. 30, 1981 | 37,588 | |
June 30, 1982 | 4,276 | ||
27170-86 | Gary Glass and | Dec. 31, 1982 | 298,624 |
Dale Glass |
By amendment to answer, respondent determined that there is a deficiency due for 1982 2 from Three*581 G Trading Corp., Transferor, and Gary Glass, Transferee, of $ 938,892, with respect to the nonapplication of section 337 3 to the 1982 transactions involved herein, and that, under
After concessions, the issues for decision are whether Three G Trading Corp. is entitled to deduct certain losses incurred in trading commodity futures contracts during 1980, and, if so, whether it is required to recognize certain gain realized from trading commodity futures contracts during 1982 and whether part or all of the underpayment, if any, for 1980 is attributable to a tax-motivated transaction. 4
*582 Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference. For convenience, we have combined our findings of fact and opinion.
Three G Trading Corp. (hereinafter referred to as petitioner) was a New York corporation with taxable year ending September 30, and Gary Glass and Dale Glass were residents of Merrick, New York, at the time their petitions were filed.
Petitioner dissolved on June 30, 1982, pursuant to a plan of liquidation adopted on September 30, 1981. Mr. Glass was president and sole shareholder from its inception to its dissolution. All of its assets, subject to liabilities, were distributed to Mr. Glass on June 30, 1982. The parties have stipulated that Mr. Glass was transferee of petitioner for Federal income tax purposes.
From December 15, 1975, through December 31, 1981, petitioner was a clearing member of the New York Mercantile Exchange (NYMEX). It had no customers, maintained no inventory of commodity futures contracts and did not engage in hedging operations. During the years in issue, Mr. Glass was a member of the Commodity Exchange, Inc. (COMEX) and NYMEX. Mr. Glass traded commodities*583 futures contracts only for petitioner during the years in issue.
A commodity futures contract is a commitment to deliver or receive a specified quantity of a commodity during a designated future month. Where a person selling a commodity futures contract is obligated to deliver the commodity, it is known as a short position. Where a person buying a commodity futures contract is obligated to accept delivery, it is known as a long position. The obligation to accept or make delivery may be avoided by purchasing or selling an offsetting contract.
A straddle 5 is a simultaneous holding of a long and a short position (each of which is a leg) in the same commodity for different delivery months. A long straddle is a straddle where the distant leg (that is, the leg with the later delivery month) is the long position; a short straddle is one in which the distant leg is short. A straddle has less risk than an outright position, because the prices for each leg tend to move together. The price at which the straddle trades is the differential between the prices of the two legs; prices for the individual legs are set by the traders, and under the COMEX rules must fall within the daily*584 trading range of prices for each leg. A butterfly straddle is a combination of two straddles with the middle legs, either both long or both short, in the same month. A butterfly straddle typically has less risk than a straddle. 6
On its Form 1120 (Corporation Income Tax Return) for 1980, petitioner reported ordinary income of $ 3,237,260 and ordinary loss of $ 3,321,200, for a net loss of $ 83,940. If allowable, the loss is a capital loss. See
Petitioner's claimed loss arose from a series of trades, including straddles and butterfly straddles, in gold futures contracts, all of which were executed on COMEX and cleared through Heinold Commodities, Inc. (Heinold). 7 All of the trades, except for the January 19, 1982 trades, were executed personally by Mr. Glass on petitioner's behalf. Each trade was entered into after open outcry on the COMEX trading floor, and prices assigned to the legs were within the limits imposed by COMEX. Each required margin, and petitioner complied with the COMEX margin requirements.
On June 13, 1980, petitioner entered into the following contracts:
Description | Number | Contract | Price 8 | New/Offset 9 |
Sold | 200 | December 1981 | 702.00 | New |
Bought | 400 | February 1982 | 713.00 | New |
Sold | 200 | April 1982 | 724.00 | New |
The trader*586 opposite petitioner in each of these trades was Richard Buccellato (Buccellato), who was trading for three accounts, one of which was his own. These contracts created a butterfly straddle.
On June 30, 1980, petitioner entered into the following transactions:
Description | Number | Contract | Price | New/Offset |
Sold | 200 | October 1981 | 756.00 | New |
Sold | 200 | October 1981 | 758.00 | New |
Bought | 200 | December 1981 | 770.00 | Offset |
Bought | 200 | April 1982 | 801.00 | Offset |
The trader opposite petitioner in each of these trades was Milton Kaufman (Kaufman). These transactions closed one of the two straddles that had made up the butterfly straddle entered into on June 13, 1980, leaving one open straddle (short 400 in October 1981 and long 400 in February 1982). Petitioner claimed a loss of $ 2,900,600 on these transactions. 10
*587 On July 2, 1980, petitioner entered into the following transactions:
Description | Number | Contract | Price | New/Offset |
Bought | 200 | October 1981 | 765.00 | Offset |
Bought | 200 | October 1981 | 770.00 | Offset |
Sold | 200 | December 1981 | 784.00 | New |
Sold | 200 | April 1982 | 808.00 | New |
The trader opposite petitioner in these transactions also was Kaufman. These transactions closed the October 1981 leg of the straddle that had resulted from the June 30, 1980, transactions and put back the butterfly that had been opened on June 13, 1980. The prices of the contracts for December and April were, however, higher. Petitioner claimed a loss of $ 420,600 on these transactions, for a total loss in 1980 of $ 3,321,200.
As of July 2, 1980, the settlement prices, which are the prices used to clear trades with the exchange's clearinghouse and are based on the range of closing prices for all contracts and delivery months, of the contracts making up the legs of the butterfly straddle held by petitioner were as follows:
Contract | Settlement Price |
October 1981 | $ 778.00 |
December 1981 | 792.20 |
April 1982 | 806.40 |
These prices resulted in an open*588 trade equity (the sum of the products of the differences between the prices assigned to the legs and the settlement prices multiplied by the number of contracts and the number of ounces involved in each contract) 11 of $ 3,320,000.
Subsequently, on November 20, 1981, petitioner entered into the following transactions:
Description | Number | Contract | Price | New/Offset |
Bought | 200 | December 1981 | 397.64 | Offset |
Sold | 242 | February 1982 | 404.32 | Offset |
Bought | 42 | June 1982 | 419.00 | New |
These transactions closed one straddle of the butterfly straddle entirely, partially closed another and opened a new straddle partially to replace the one that had been closed. Petitioner held a "tilted" butterfly -- one in which one leg has fewer contracts than the other -- at this point, because it held 158 February 1982 contracts and 42 June 1982 contracts. The net gain on the transactions was $ 256,481 in 1982.
On January 19, 1982, petitioner closed out the butterfly straddle, put in place on November 20, 1981, as follows:
Description | Number | Contract | Price | New/Offset |
Sold | 158 | February 1982 | 379.30 | Offset |
Bought | 158 | April 1982 | 386.40 | Offset |
Bought | 42 | April 1982 | 386.50 | Offset |
Sold | 22 | June 1982 | 394.40 | Offset |
Sold | 20 | June 1982 | 394.50 | Offset |
*589 The net gain on these transactions was $ 3,055,400.
Petitioner's overall net loss on the entire series of transactions set forth above was $ 9,319.
During the period from October 1, 1979, through June 30, 1982, there were no investigations undertaken by the COMEX against either petitioner or Mr. Glass.
The threshold question that we must face is whether the loss claimed by petitioner in 1980 is allowable. Section 108 of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630, as amended by the Tax Reform Act of 1986, sec. 1808(d), Pub. L. 99-514, 100 Stat. 2085, 2817, which we will refer to as section 108, provides in pertinent part:
(a) General Rule. -- For purposes of the Internal Revenue Code of 1954, in the case of any disposition of 1 or more positions --
(1) which were entered into before 1982 and form part of a straddle * * * any loss from such disposition shall be allowed for the taxable year of the disposition if such loss is incurred in a trade or business * * *.
(b) Loss Incurred in a trade or business. -- For purposes of subsection (a), any loss incurred*590 by a commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business.
We note at the outset that, for purposes of the transactions herein, the term "dealer" has two different definitions. First, for purposes of characterizing gains and losses as capital or ordinary, a person is a dealer if he has customers.
Respondent has conceded that if section 108 applies, petitioner's losses are allowable. 12 For section 108 to apply, *591 however, petitioner must establish that the transactions were not fictitious, prearranged or in violation of the rules of COMEX.
*592 Respondent has not asserted that any of the COMEX transactions involved herein were fictitious, that is, that they did not take place. Respondent does argue that, based on the pattern and timing of the trades, as well as the alleged fact that they did not have a profit potential, the transactions were prearranged. Petitioner argues that the testimony of the two principal persons with whom he made the trades involved herein, the place and manner in which the trades were executed, and the prices at which they were executed shows that the trades were not prearranged. Whether the transactions were prearranged is a question of fact; petitioner bears the burden of proof.
Mr. Glass testified that he made no agreements concerning the trades at issue. We found much of his testimony, however, to be vague in several respects, particularly as to the specific reasons for entering into the straddles involved herein. Moreover, he failed to remember many details, particularly those involving asserted sanctions by the Commodities Futures Trading Commission, which respondent attempted to prove for impeachment. While we do*593 not believe that the alleged violations impeached Mr. Glass's credibility (particularly since respondent did not offer in evidence the documentary material which he used to cross-examine Mr. Glass in this respect), we are not required to accept Mr. Glass's testimony as gospel. See
At the outset, we recognize that, generally, in determining whether a commodity straddle activity was entered into for profit, consideration is given to the entire scheme. See, e.g.,
Although the facts that a transaction was executed by open outcry on a regulated exchange, cleared through normal channels, and priced within the daily limits imposed seem to indicate that it was not prearranged (see
*595 We find that, with respect to the June 30, 1980, and the July 2, 1980, transactions, the objective evidence is sufficient to overcome the other evidence of record that indicates that the transactions were not prearranged. Several facts influence this finding. First, all the transactions on these days were executed with Kaufman as the opposite trader. Thus, his results were an exact mirror of petitioner's. Second, from Kaufman's perspective, the transactions produced a complete wash in results (ignoring transaction costs) -- that is, the gain on the October legs is equal to the loss on the December and April legs. Similarly, if petitioner had not had the open positions from the June 13, 1980, transactions, it would have had wash results on the June 30 and July 2 transactions. To be sure, because some of the June 30 transactions offset positions from some of the June 13 transactions (the February 1982 position remained unaffected), petitioner seemingly realized a loss while being left with the potential for gain remaining in the newly acquired (December 1981 and April 1982 legs), albeit subject to the risk of the market. But the fact of the matter is that after the June 30 and*596 July 2 transactions were completed, petitioner was in the identical position in which it had been immediately prior to June 30, i.e., as it had been as a result of the June 13 transactions. Furthermore, petitioner's open trade equity was exactly equal to its claimed losses less transaction costs. Petitioner made no attempt either through Mr. Glass's testimony or on brief to deal specifically with any of these elements of the June 30 and July 2 transactions. In short, petitioner had no profit motive in entering into the June 30 and July 2, 1980, transactions and thus fails to meet the standard of
We hold that petitioner has not met its burden of showing that the June 30 and July 2 transactions were not prearranged, so that those transactions should be disregarded in determining the tax consequences of petitioner's commodity futures activity. 15
Respondent also argues that section 108 should not apply because these trades were wash trades and they were noncompetitive. Both situations would be violations of the COMEX rules and as such would constitute an independent ground for disallowing the claimed losses. In view of our holding that the June 30 and July 2 transactions were prearranged, we find it unnecessary to resolve the question of whether any of these transactions violated the COMEX rules.
With respect to 1982, respondent has conceded*598 that the gains for that year should be reduced by the losses disallowed for 1980. See
We turn to respondent's determination that petitioner is liable under
To reflect the foregoing,
1. Cases of the following petitioners are consolidated herewith for trial, briefing and opinion: Three G Trading Corp., Transferor, docket No. 5530-86, and Gary Glass and Dale Glass, docket No. 27170-86.↩
2. We will refer to Three G Trading Corp.'s fiscal years by the year in which they ended. ↩
3. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
4. Respondent has conceded that there is no deficiency due from Gary and Dale Glass in docket No. 27170-86.↩
5. The parties use the synonymous term "spread" to refer to straddle positions. Because the relevant case law and statutes use the term "straddle," we will use that term as well. See
6. For a more complete description of trading commodity futures contracts and the strategy thereof, see
7. None of petitioner's transactions executed on NYMEX are at issue.↩
8. Each contract represented 100 ounces of gold. Prices are quoted in dollars per ounce. ↩
9. This column indicates for all transactions involved herein whether the trade opened a new position or was an offset that closed a position already held.↩
10. Gain or loss is the difference between the price per ounce in the opening contract and the price per ounce in the closing contract, multiplied by the number of contracts and the number of ounces per contract. All loss and gain figures also include transaction costs, which were $ 1.50 per closed position (that is, transaction costs were paid only when offsetting a position, not when opening a new position).↩
11. For example, the open trade equity of the December 1981 leg was (784.00-792.20) x 200 contracts x 100 ounces per contract.↩
12. In his trial memorandum, respondent states "respondent will not require petitioner to prove the * * * elements of being in a trade or business of trading commodities. Consequently, if petitioner's trades were found to be bona fide (not prearranged), the losses therefrom would be allowable as incurred in a trade or business under section 108."
In his brief, respondent seeks to withdraw the concession. We are not inclined to accept such withdrawal, however, as it would put petitioner at a disadvantage, since it tried and argued the case in light of the concession. Nor are we prepared to accede to respondent's attempts to extend the parties' stipulation that petitioner "was not a dealer in commodity futures contracts" to the section 108 definition. It is clear to us that this stipulation was included only as confirmation of our holding in
13. Petitioner's reliance on the testimony of the persons with whom he made the trade is misplaced, as neither's testimony pertained to the trades at issue herein.↩
14. Petitioner makes much of the fact that COMEX authorities neither imposed nor threatened sanctions in respect of, nor threatened sanctions during, the time period up to petitioner's liquidation. We give this fact only minimal weight in determining whether the transactions involved herein were prearranged, however, because the record does not reveal whether any such actions were taken after petitioner's liquidation or by some authority other than the exchange, e.g., the Commodities Futures Trading Commission.↩
15. As a result, there should be no adjustment for petitioner's related transaction costs nor any claim for higher cost for determining gain or loss from the subsequent closing of the December 1981 and April 1982 legs.↩
16. The net gains for 1982 were $ 3,055,400, and we have disallowed losses of $ 3,320,000 for 1980. The impact of the concession and our decision on 1981 can be accounted for in the Rule 155 computation.↩