# Ewing v. Commissioner > United States Tax Court · August 30, 1988 · 91 T.C. 396 URL: https://www.frixlaw.com/law-library/cases/4486167 ## Case - **Full name:** Philip M. Ewing and Marian S. Ewing, ¹ v. Commissioner of Internal Revenue - **Court:** United States Tax Court - **Decided:** August 30, 1988 - **Citations:** 91 T.C. 396; 91 T.C. No. 32; 1988 U.S. Tax Ct. LEXIS 117 - **Precedential status:** Published - **Opinion:** Opinion of the court by Shields - **Judges:** Shields - **Cited by:** 128 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4486167 ## How later opinions describe it (automated extraction) - noting Hunter’s fees for different close-out techniques ## Opinion text SHIELDS, Judge: In his notices of deficiency, respondent determined deficiencies in and additions to petitioners’ Federal income taxes as follows: Additions to tax Docket No./ petitioners Year Deficiency Sec. 6653(a)(1) 3 Sec. 6653(a)(2) 3896-84 1980 $63,008.00 $3,150.00 --- Ewing(s) 1981 56,444.00 2,822.00 --- 27900-84 1980 12,747.00 637.35 --- Leong(s) 1981 66,212.01 3,310.60 50% of interest due on $3,310.60 14511-84 1980 70,025.92 3,501.30 --- Czarneski(s) 1981 132,049.49 6,602.47 50% of interest due on $6,602.47 13442-84 Toll(s) 1980 85,283.00 --- Additions to tax Docket No./ petitioners Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) 13443-84 1980 146,041.70 Leavitt(s) By amended answers, respondent determined that all petitioners Eire liable for increased interest under section 6621(c), 4 petitioners in docket No. 3896-84 (Ewings) are liable for an addition to tax under section 6653(a)(2) in 1981 equal to 50 percent of the interest due on $2,822, and petitioners in docket Nos. 13442-84 (Tolls) and 13443-84 (Leavitts) are hable for additions to tax under section 6653(a)(1) in 1980 of $4,264.15 and $7,302.08, respectively. At trial, respondent orally moved that damages be awarded to the United States and against all petitioners under section 6673. After concessions, the issues remaining for decision are: (1) Whether certain transactions in gold futures were entered into by Mr. Ewing, Mr. Leong, Mr. Czarneski, Mr. Toll, and Mr. Leavitt for profit, and if so, whether their losses from such transactions Eire ordinary losses or short-term capital losses, and whether their gains from such transactions are long-term or short-term capital gains; (2) whether the fees paid by the male petitioners with respect to such transactions are deductible; (3) whether petitioners are hable for additions to tax under section 6621(c), section 6653(a)(1), and section 6653(a)(2) as determined by respondent; and (4) whether damages should be awarded under section 6673. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations and exhibits associated therewith are incorporated herein by reference. The Ewings, ToUs, and Leavitts resided in California at the time their petitions were filed, and their joint income tax returns for the years in issue were filed with the Internal Revenue Service Center at Fresno. The Czarneskis and Leongs resided in Texas at the time their petitions were filed, and their joint income tax returns for the years in issue were filed with the Internal Revenue Service Center at Austin. The returns of all petitioners were prepared utilizing. the cash receipts and disbursements method of accounting. As used hereinafter, the words “petitioner” and “petitioners” will refer only to the male petitioners unless otherwise indicated, and the use in our findings of such words and phrases as “loss,” “gain,” “forward contract,” “cancellation,” “assignment,” “spread,” “straddle,” “short position,” “long position,” “transactions,” and similar words and phrases are for convenience only, and are not to be construed as a determination of the nature of any act or thing. Each male petitioner herein is a successful professional or businessman who had a substantial sum of ordinary income from his profession or business during each of the years in issue. On their income tax returns, each petitioner claimed deductions from his professional or business income for losses from the “cancellation” of gold futures contracts in the amounts and for the years shown below: Petitioner Year Loss Ewing 1980 $107,563 1981 116,096 Toll 1980 103,835 Leavitt 1980 103,835 Czarneski 1980 227,400 1981 359,600 Leong 1980 35,000 1981 198,200 All of the above losses purportedly occurred with respect to transactions in gold futures conducted during 1980 or 1981 in the manner hereinafter described on behalf of petitioners by F.G. Hunter & Associates. Petitioners did not engage in the transactions as dealers. Trading in Commodity Futures in General Trading in futures contracts occurs with respect to commodities including precious metals. In general, a futures contract is an agreement to either deliver (a short position) or receive (a long position) a specified quantity and grade of a designated commodity during a designated month in the future. A single position calling for the purchase or the sale of a designated commodity is described as an “open contract.” However, if the same person acquires a position calling for the purchase of a specified commodity and a different position calling for the sale of the same commodity, his position is described as a straddle and each of such positions is referred to as a “leg” of the straddle. Persons trading in commodity futures seldom hold contracts to the closing date so as to' make or receive delivery of the specified commodity. In fact, it is generally understood that less than 5 percent of all futures contracts actually result in the delivery of the underlying commodity. Instead, such contracts are generally disposed of by a “switch transaction,” which is the acquisition of an offsetting contract of purchase or sale of the same quantity of the commodity. Whenever an open position is held, price changes in the commodity future directly affect the economic position of the holder. By contrast, in a straddle, the holder is economically affected only by changes in the spread, i.e., the difference between the market price of each leg of the straddle. If the prices of the short and long legs of the straddle move exactly in tandem so that the spread does not change, the holder will suffer no economic consequence since his unrealized loss in one leg will be offset by his unrealized gain in the other. However, if the spread widens or narrows, the holder will incur either an economic gain or loss. The potential for gain or loss in a straddle transaction is a function of the change in the price relationship or differential between the delivery months. The price differential, in turn, is a function primarily of the changes in short-term interest rates and the value of the underlying commodity and secondarily of storage and commission costs. Because storage costs are trivial for precious metals, the major forces affecting a gold futures spread are movements in gold prices and short-term interest rates. Whenever a leg of a straddle is closed out by the purchase of an exactly opposite position, or in any other manner, tax consequences normally will result to the holder in either a realized gain or loss. In such a case, where the straddle consists of only two positions, that position which is not closed out becomes simply an open contract. As a general rule in tax-motivated straddle trading, the loss leg will be closed out first in order to generate a tax loss for the holder. When this occurs, the remaining leg of the initial straddle containing an unrealized gain, which is usually almost identical to the amount of loss in the closed leg, constitutes an open position for the holder, and as such, is subject to the increased risk of being directly affected by the market. To minimize this risk, the holder would be expected to obtain a new position similar to the one in the closed loss leg except for a different month. This substitution of one position for a similar position in a different month (switching) of the loss leg in the initial year in order to generate a tax loss which is offset by the unrealized gain in the other leg of the straddle is a pattern usually found in the trading of tax straddles. Straddle transactions having as their principal objective “deferrals” (postponing to a later year an already realized gain in an unrelated transaction) or “conversions” (changing a short-term capital gain on an unrelated transaction to a long-term capital gain) are commonly referred to as “tax straddles” in the industry. A “butterfly straddle” is a straddle consisting of at least three legs. It is essentially a combination of two straddles that, when drawn schematically, resembles a butterfly. For example, the following would be a butterfly straddle with four legs: Long March 1981 Long December 1981 Short July 1981 Short July 1981 The middle position or “body” of a butterfly straddle is exactly twice the size of each outside position or “wing.” In a butterfly straddle, each straddle is traded separately and will usually have two different spread price differentials. Such a straddle typically presents less chance of either an adverse or a favorable spread movement, and hence is less likely to produce a difference loss or difference gain than an ordinary straddle. Furthermore, a butterfly straddle containing delivery months encompassing only a brief period (e.g., a May 1981/July 1981/September 1981 straddle) typically presents less chance of loss or gain than a butterfly straddle spread over a longer period (e.g., a March 1981/July 1981/December 1981 straddle). It is generally understood that about 85 to 90 percent of trades in commodity futures result in losses. Nevertheless, there are opportunities for realizing profits in such trading, including trading in straddles. The use of a straddle tends to minimize the risk of loss, but at the same time, it reduces the opportunity for profit. This is true because every position held by one holder is matched by an exactly opposite position (or group or series of positions) held by one or more other holders. Thus, a loss realized by one holder on closeout will be matched by the realization of a gain in the same amount by the holder or holders of the opposite position, provided the opposite position was acquired at the same time and held to the closeout. The Program Participated in by Petitioners In late 1979 or early 1980, Avram Salkin (Salkin), a member of the law firm of Hochman, Salkin & DeRoy, Los Angeles, California, organized F.G. Hunter & Associates (Hunter) as a Nevada limited partnership for the purpose of operating a commodities brokerage firm. Subsequently, on February 20, 1980, Hunter was registered with the Commodities Futures Trading Commission (CFTC) as a Futures Commodity Merchant. As such, Hunter was authorized during 1980 and 1981 to execute trades for its customers through member brokers on Commodity Exchange, Inc. (COMEX). All of the transactions at issue in this case were executed on Hunter’s behalf on COMEX by A.G. Becker, a member broker. COMEX has been designated a “board of trade” by CFTC, and futures contracts Eire regularly traded on COMEX on weekdays pursuant to rules and regulations approved by CFTC. The mechanics of trading in commodity futures on COMEX is discussed in detEiil in Smith v. Commissioner, 78 T.C. 350 (1982), affd. without published opinion 820 F.2d 1220 (4th Cir. 1987). Beginning in 1980, and continuing through 1981, Hunter was engaged in a promotion known as An Investment Program in Spreading the Gold Futures Market. A substantial portion of the materials used in the promotion was devoted to “certain technical services which should provide clients with some substantial tax benefits,” and prospective investors had access to a brochure entitled “Spreading the Gold Futures Market,” which contains the following claims: By utilizing certain techniques which have been developed the client can reasonably expect to profit from both a cash and tax standpoint. This is not to imply that every client will make both a cash and tax profit. With any investment program the risk of loss is commensurate with the opportunities for profit. However, the opportunity for profit can be considerably enhanced and the risk of loss substantially reduced by taking advantage of the Company’s tax saving techniques. The price of gold can move up or down $100/oz. in a matter of months. If for example, a client invested $18,500 in 20 Gold Bull Spreads with the CFIR at 20% and the price of gold went up $100 and interest rates increased 4%, the client would make $14,680 cash profit and have an additional $114,120 of net ordinary losses to shelter other income. However, had the market gone against him in the above conditions, he would have lost $14,680 in cash and would have $134,680 of net ordinary losses to shelter other income. In a section entitled “Questions and Answers on Gold Futures” the brochure provided the following information: 2. How can I expect to gain? By wisely selecting the sequence of your long and short contracts, you may realize a substantial profit from a change in either the price of gold or generally prevailing interest rates. 3. Can I lose my investment? Yes. As with any investment, the risk of loss is commensurate with the opportunities for profit. However, the opportunity for profit can be considerably enhanced, and the risk of loss is almost eliminated by our tax saving techniques. * * J|5 * S( o a> «'o'c ®¿ « <<;<30p0Qpfcfefe00 Delivery date $4,375 4,375 297 2,500 1,000 2,500 1,000 231 2,000 1,000 2,500 1,000 3,300 33 66 99 2,000 2,500 99 $2,500 125 250 250 Date Position 1980 1. 06/18 Long 2. 06/18 Short 3. 06/18 Short 4. 06/19 Long 5. 06/19 Long 6. 06/19 Short 7. 06/19 Short 8. 06/19 Short 9. 06/25 Long 10. 06/25 Long 11. 06/25 Long 12. 06/25 Short 13. 06/25 Short 14. 06/25 Short 15. 06/25 Short 16. 06/25 Short 17. 06/25 Short 18. 06/25 Short 19. 06/25 Short 20. 06/25 Long 21. 06/25 Long 22. 06/26 Long 23. 06/26 Short 24. 06/26 Long $708.00 674.00 674.00 717.00 717.00 683.00 683.20 681.00 747.00 753.00 755.00 715.00 730.00 715.00 725.00 725.00 734.00 742.20 738.00 718.00 714.00 756.90 744.00 732.50 175 175 9 100 40 100 40 7 80 40 100 40 100 1 2 3 80 100 3 100 5 10 10 2 1026 1027 1028 1031 1033 1032 1034 1035 1185 1186 1187 1178 1180 1179 1181 1206 1184 1183 1182 1027 1028 1064 1065 1181 Contract No. Quantity Price F. G. HUNTER PROGRAM Cancellation/ Closes assignment (line) fee Commission (1,616) OL (1,500) Canceled ($445,000) OL (20,290) OL Canceled ($440,000) Canceled (20,000) Total amt. claimed (per return) and character Recognized gain or (loss) Method of disposition [[Image here]] [[Image here]] [[Image here]] [[Image here]] [[Image here]] Cancellation Cancellation Assignment Cancellation (118,975) (35,375) ' 118,575 (79,725) 375 375 250 375 (118,600) (35,000) 118,825 (79,350) 125 125 0 125 540.20 714.00 554.35 537.50 05/01/81 11/11/80 05/01/81 05/01/81 777.40 784.00 792.50 696.20 250 250 250 250 06/30/80 06/30/80 06/30/80 11/11/81 B B S B Feb. ’82 Feb. ’82 Apr. ’82 Dec. ’81 $115,425 Assignment Character of disposition claimed Net gain (loss) $250 Transaction costs $115,675 Gain (loss) before transaction costs Fees paid in conjunction with disposition $524.25 $755.60 05/01/81 Contract Disposition Disposition Commission paid on acquisition $250 06/30/80 Acquisition Number of contracts Month and year of Long/ contract short Oct. ’81 B RICHARD W./JUNE D. LEONG All section references are to the Internal Revenue Code of 1954 as in effect during the years in issue, unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise provided. Respondent cites to sec. 6621(d), which was redesignated sec. 6621(c) by sec. 1511(c)(1)(A) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2744. All such references made herein are to the redesignated section. The original version of sec. 108 provided, in pertinent part: Sec. 108(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, and (2) to which the amendments made by title V of the Economic Recovery Tax Act of 1981 do not apply, any loss from such disposition shall be allowed for the taxable year of the disposition if such position is part of a transaction entered into for profit. (b) Presumption That Transaction Entered Into for Profit. — For purposes of subsection (a), any position held by a commodities dealer or any person regularly engaged in investing in regulated futures contracts shall be rebuttably presumed to be part of a transaction entered into for profit. (c) Net Loss Allowed Whether or Not Transaction Entered Into for Profit. — If any loss with respect to a position described in paragraphs (1) and (2) of subsection (a) is not allowable as a deduction (after applying subsections (a) and (b)), such loss shall be allowed in determining the gain or loss from dispositions of other positions in the straddle to the extent required to accurately reflect the taxpayer’s net gain or loss from all. positions in such straddle. [Tax Reform Act of 1984, Pub. L. 98-369, sec. 108 , 98 Stat. 630 .] Sec. 1808(d) of the Tax Reform Act of 1986 amended sec. 108 as follows: (d) Section 108. — Section 108 of the tax reform act of 1984 is amended— (1) by striking out “if such position is part of a transaction entered into for profit” and inserting in lieu thereof “if such loss is incurred in a trade or business, or if such loss is incurred in a transaction entered into for profit though not connected with a trade or business”, (2) by striking out subsection (b) and inserting in lieu thereof the following: “(b) Loss Incurred in a Trade or Business. — For purposes of subsection (a), any loss incurred by a commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business.”, (3) by striking out the heading for subsection (c) and inserting in lieu thereof the following: “(c) Net loss allowed. — ”, * * * [Sec. 1808(d), Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2817.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4486167. Public record. Not legal advice.