David C. Enrici Marianne Enrici Lawrence H. Easterling Phyllis Easterling v. Commissioner Internal Revenue Service

This appeal mainly involves the issue of whether the losses and fees from certain “forward straddles” are deductible. The Tax Court disallowed these deductions and assessed a negligence penalty because it held that the forward contracts were sham transactions. The particular facts are exhaustively detailed in the published opinion below. Forseth v. Commissioner, 85 T.C. 127 (1985). The Enriéis and the Easter-lings, taxpayer-petitioners before the Tax Court, appeal.

In essence, the Tax Court held that Interact, LMEI and LMEC were taking advisory fees and margin “deposits” from the taxpayers; entering into sham forward contracts with the client taxpayers at terms unconnected to any real market, and without laying off the contracts with any real third-party brokers; creating artificial losses for the taxpayers by closing out “losing” positions at prices and terms set by LMEI/LMEC to generate a tax loss that largely offset the type and amount of in come the taxpayers needed to shelter; and closing out the “winning” position in a subsequent year at a price set by LMEI/LMEC to generate a net loss that conveniently equaled the margin deposit, which was really a disguised fee for…