                         T.C. Memo. 1997-24



                      UNITED STATES TAX COURT



               STEPHEN AND JANE MARRIN, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3040-95.                 Filed January 14, 1997.



     Stephen Marrin, pro se.

     Mark A. Ericson, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     GALE, Judge:   Respondent determined the following

deficiencies in, and additions to, petitioners' Federal income

taxes:

                                                 Addition to Tax
     Year               Deficiency               Sec. 6651(a)(1)
     1989                $28,341                     $1,305
     1990                 31,777                      8,009
                               - 2 -


Unless otherwise noted, 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.   The issues for decision are as follows:   (1) Whether

petitioners are entitled to claim their 1989 and 1990 losses from

transactions in securities and futures contracts as ordinary

losses.   We hold that they are not.   (2) Whether petitioners are

liable for additions to tax for failure to file timely returns

under section 6651(a)(1).   We hold that they are.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.     We

incorporate by this reference the stipulation of facts and

attached exhibits.   Petitioners resided in Baldwin, New York, at

the time they filed their petition.    They filed joint Federal

income tax returns for 1989 and 1990, the taxable years in issue.

     Stephen Marrin (petitioner) had substantial experience in

trading and underwriting securities, having been employed in this

capacity by several securities firms starting in 1969, becoming a

registered securities principal in 1978, and starting a

securities firm, Egan Marrin and Rubano, Inc. (EMR), in 1983,

where he also dealt in securities as a registered securities

principal.   All firms at which petitioner worked were registered

broker-dealers, and he undertook transactions on their behalf.
                                - 3 -


At times, petitioner also bought and sold securities for his own

account.

     Petitioner left EMR in 1987, largely for reasons of health.

In October 1988 petitioner commenced employment as a registered

securities principal with Cadre Consulting Services, Inc.

(Cadre), a registered broker-dealer.    Petitioner was a full-time

employee of Cadre.   In 1988, in addition to the securities

transactions undertaken on behalf of his employer, petitioner

bought and sold securities, as well as futures contracts, for his

own account.   During 1988, petitioner began to employ the "on the

book" method of bid and asked when buying and selling securities

for his own account.

     Under the "on the book" bid and asked method, petitioner

would place orders to buy securities (bids) and to sell

securities (asks) with his broker at specified bid and asked

prices.    A maximum quantity to buy or sell would be specified, as

well as an agreement to accept quantities that only partially

filled an order.   Petitioner would endeavor to set his bid and

asked prices at levels slightly better than prevailing prices.

Most significantly, the orders were required to be handled "on

the book", which deprived those handling the order of any

discretion to delay filling it in anticipation of improvements in

the market.    Moreover, if petitioner's bid or ask constituted the

best price for a security, "on the book" treatment would result
                                 - 4 -


in his price being displayed on the appropriate securities

exchange.   Petitioner's goal in employing the "on the book" bid

and asked method was to derive a profit from the "spread"

prevailing between bid and asked prices on the market.

Petitioner also purchased and sold futures contracts during 1988.

     Petitioners reported all of their transactions in securities

and futures contracts on Schedule D of their 1988 Federal income

tax return as capital gains and losses, claiming a net capital

loss of $87,377 from such transactions.

     In 1989, petitioner continued to serve as a registered

securities principal for Cadre until March of that year.

Petitioner was then unemployed until November 1989, when he began

working for Overseas Shipyards, Inc. (Overseas), shipyard

representatives providing ship building and repair services.

Petitioner served as a full-time employee of Overseas, working

approximately 35 hours a week.    Petitioner's position with

Overseas did not involve dealing in securities.

     Also during the 1989 taxable year, petitioner received a

$100,000 pension distribution (from which no Federal income tax

was withheld).   In addition, petitioners reported as income on

their 1989 Federal income tax return $35,056.13 in wages, $5,635

in unemployment income, and $6,441 in interest and dividend
                                 - 5 -


income.     During the year, petitioner bought and sold securities1

for his own account only, and used the "on the book" bid and

asked method exclusively in such transactions.     Petitioner also

bought and sold futures contracts for his own account.

Petitioner purchased securities from and sold securities to

registered broker-dealers only.     Petitioners claimed losses of

$224,355 from transactions in securities on Schedule C of their

1989 Federal income tax return.

     In 1990, petitioner continued full-time employment with

Overseas.     During the 1990 taxable year, petitioner received a

$152,000 individual retirement account (IRA) distribution (from

which no Federal income tax was withheld).     In addition,

petitioners reported as income on their 1990 Federal income tax

return $52,062 in wages and $3,566 in interest and dividend

income.   Petitioner continued to use the "on the book" bid and

asked method for securities transactions undertaken for his own

account during the year.     Petitioner had no transactions in

futures contracts in 1990.     Petitioners claimed losses of $98,378




     1
      During 1989 and 1990, the taxable years in issue,
petitioner primarily transacted in a variety of options positions
which, by the nature of such securities, expired within 6 months.
In one instance during the years in issue, petitioner purchased
actual stock; all remaining transactions involved options
positions. The options positions taken and the stock purchased
are together referred to as "securities" hereinafter.
                                 - 6 -


from transactions in securities on Schedule C of their 1990

Federal income tax return.

     During the years in issue, petitioner purchased and sold

securities and futures contracts for his own account only, and

not for the account of others.    With respect to petitioner's

transactions in securities and futures contracts, petitioner made

all purchases from, and all sales to, registered broker-dealers.

Petitioner spent a substantial amount of time each week

researching, reading trade publications, and devising trading

strategies.   This activity was conducted from petitioner's home.

Petitioner did not have an established place of business for

conducting securities transactions for his own account.    During

such time petitioner did not have a license to be a dealer in

securities and did not advertise himself as a dealer in

securities, nor did he maintain any customer accounts.

     Petitioner was charged a commission on every security

transaction made on his behalf during the years in issue.    All of

the gross receipts reported by petitioners on Schedule C of their

Federal income tax returns for 1989 and 1990 were derived from

sales of securities to broker-dealers, and none of the gross

receipts were derived from commissions from the sale of

securities to or on behalf of individual investors.

     The dollar amounts of the losses from transactions in

securities and futures contracts reported by petitioners on their
                               - 7 -


1989 and 1990 Federal income tax returns can be summarized as

follows:

                                 1989            1990

Gross Receipts                 $118,209         $33,422
Cost of Goods Sold            ( 224,712)       ( 51,733)
Gross Loss on
  Securities                  ($106,503)       ($18,311)
Loss on Futures
  Contracts                   ( 117,852)           0
Net Operating Loss
  Carryover                        0           ( 80,067)
Total Claimed
  Ordinary Losses             ($224,355)       ($98,378)

     Petitioner continued to use the bid and asked method of

buying and selling securities during part of 1991, although he

ceased securities activities in that year because of his

accumulated losses.   Petitioners reported all of their 1991

transactions in securities on Schedule D of their 1991 Federal

income tax return, claiming a net capital loss of $8,157.

     Petitioners filed an application for automatic extension of

time to file their 1989 Federal income tax return extending their

time to file until August 15, 1990.     However, the 1989 Federal

income tax return was not filed until April 15, 1992.      The 1990

Federal income tax return was also filed on that date.

                              OPINION

     In her notice of deficiency, respondent determined that the

securities and futures contracts purchased and sold by petitioner

during the taxable years 1989 and 1990 were capital assets within
                                - 8 -


the meaning of section 1221, and not inventory or property held

primarily for sale to customers in the ordinary course of a trade

or business.    Based upon this determination, respondent concluded

that the losses on securities and futures transactions claimed by

petitioners on Schedule C of their Federal income tax returns

were reportable on Schedule D, and calculated petitioners'

deduction for net capital losses subject to the limitation under

section 1211.   Petitioners contend that their losses incurred

during 1989 and 1990 were reportable on Schedule C because

petitioner functioned as a dealer due to the frequency of

transactions, the large dollar volume, the extensive time

devoted, and the methods used for transacting in the market.

     Section 165(f) provides a deduction for losses from sales or

exchanges of capital assets, but only to the extent allowed under

sections 1211 and 1212.   Section 1211(b) limits the allowance of

such losses to the extent of gains from such sales or exchanges,

plus the lower of (1) $3,000 ($1,500 in the case of a married

individual filing a separate return), or (2) the excess of such

losses over such gains.

     The principal issue we must decide, therefore, is whether

the losses reported by petitioners for the years in issue from

dealings in securities and futures contracts are ordinary or

capital losses.
                                - 9 -


     We turn first to the securities.    The proper treatment of

these losses depends on whether the disposed assets were "capital

assets".    Section 1221 defines "capital asset" very broadly as

"property held by the taxpayer (whether or not connected with his

trade or business)" and then provides several exclusions from

this definition.    One such exclusion, section 1221(1), covers:

     stock in trade of the taxpayer or other property of a
     kind which would properly be included in the inventory
     of the taxpayer if on hand at the close of the taxable
     year, or property held by the taxpayer primarily for
     sale to customers in the ordinary course of his trade
     or business * * *

Petitioners contend that the securities disposed of in the years

in issue are excluded from the definition of capital assets under

section 1221(1) because petitioner essentially functioned as a

dealer in such securities, and thus the securities were stock in

trade or inventory or property held primarily for sale to

customers within the meaning of section 1221(1).

     With one exception, petitioner's securities transactions

were in options.    Section 1234(a)(1) provides that gains and

losses from options take on the same character that the property

to which the option relates would have in the hands of the

taxpayer.    However, this general rule does not apply to options

which constitute property described in section 1221(1).    Sec.

1234(a)(3)(A).    Thus, the proper characterization of the losses

from the options, as well as the one stock transaction, turns
                                - 10 -


upon whether these assets come within the meaning of section

1221(1).

     Securities generally cannot be classified as stock in trade

or inventory unless they are held primarily for sale to customers

in the ordinary course of business.       Van Suetendael v.

Commissioner, 152 F.2d 654 (2d Cir. 1945); accord Tybus v.

Commissioner, T.C. Memo. 1989-309.       Whether securities are held

for sale primarily to customers is a question of fact, Stern

Bros. & Co. v. Commissioner, 16 T.C. 295, 313 (1951), and it has

been long established by this Court that the phrase "to

customers" is of paramount importance.       King v. Commissioner, 89

T.C. 445, 457-458 (1987); Kemon v. Commissioner, 16 T.C. 1026,

1032 (1951); Wood v. Commissioner, 16 T.C. 213, 219-220 (1951);

Tybus v. Commissioner, supra.    The importance of the phrase "to

customers" lies in the fact that Congress amended the predecessor

of section 1221(1) in the Revenue Act of 1934 (1934 Act), ch.

277, 48 Stat. 680, to add these words (as well as the word

"ordinary"), with securities trading specifically in mind, for

the express purpose of denying ordinary loss treatment to

speculators in securities.   The legislative history of the "to

customers" amendment in the 1934 Act has been explained at length

in prior opinions of this Court.    See King v. Commissioner,

supra; Kemon v. Commissioner, supra; Wood v. Commissioner, supra.

By adding the phrase "to customers", Congress intended to make it
                               - 11 -


"impossible to contend that a stock speculator trading on his own

account is not subject to the [capital loss limitation]

provisions of section 117."    H. Conf. Rept. 1385, 73d Cong., 2d

Sess. (1934), 1939-1 C.B. (Part 2) 627, 632.

       Given its clearly stated purpose, this Court and others have

used the "to customers" requirement to distinguish between

securities "dealers" who are intended to come within the capital

asset exclusion of section 1221(1) and mere "traders" who are

not.    As this Court explained in Kemon v. Commissioner, supra at

1032: "The theory of the [1934 Act] amendment was that those who

sell securities on an exchange have no 'customers' and for that

reason the property held by such taxpayers is not within the

* * * exclusionary clause [of the predecessor of section 1221]."

       All of the securities transactions of petitioner for the

years in issue were undertaken on an exchange and effected

through broker-dealers.    All such transactions were for

petitioner's own account.    Lacking customers, petitioner cannot

qualify under section 1221(1) for ordinary loss treatment for his

securities transactions.

       Petitioner argues that he satisfies the "to customers"

requirement either because the broker-dealers who handled his

orders were his customers, or because the customers of his

broker-dealers should, under principles of agency law, be treated

as his customers.    For the proposition that his broker-dealers
                               - 12 -


were his customers, petitioner cites Commissioner v. Stevens, 78

F.2d 713 (2d Cir. 1935).   Stevens was the Court of Appeals for

the Second Circuit's affirmance of the Board of Tax Appeals'

opinion in Estate of Hall v. Commissioner, 29 B.T.A. 1255 (1934).

However, the facts in the Stevens and Estate of Hall cases are

clearly distinguishable from the facts of this case.    The

partnership found to be a securities dealer in those cases had an

established place of business, held itself out to the general

public as a securities dealer, dealt in the stock of 14

companies, and was the principal dealer in the stock of one such

company, participating in nearly 70 percent of all transactions

in that stock in one of the years in issue.   The Commissioner had

challenged the partnership's dealer status because most of its

customers were brokers on the New York Stock Exchange.    Finding

that the partnership dealt in the stocks involved "primarily as a

merchant", the Board concluded: "We see no reason why a broker,

in such circumstances, may not properly be regarded as a customer

of the partnership."   Estate of Hall v. Commissioner, supra at

1259.   The Board also noted that the partnership purchased from

and sold to persons other than brokers.   Estate of Hall v.

Commissioner, supra at 1260.   The Court of Appeals for the Second

Circuit affirmed, stating: "Another broker may well be considered

a customer."   Commissioner v. Stevens, supra at 714.
                              - 13 -


     The facts in this case are different in all important

respects, and this Court has previously rejected an

interpretation of the Estate of Hall and Stevens cases that would

make the dealers through whom a taxpayer buys and sells

securities for his own account his "customers" for purposes of

section 1221(1).   Frankel v. Commissioner, T.C. Memo. 1989-39.

     In Frankel, the taxpayer's purchases and sales of various

government securities had all been made through primary dealers,

and this Court found unpersuasive the taxpayer's invocation of

Estate of Hall for the proposition that the dealers were his

customers.   Estate of Hall, we concluded, was "distinguishable on

its facts" because the partnership therein was

     "clearly shown by the evidence to have dealt in the
     stocks involved primarily as a merchant. While it
     purchased through brokers who were members of the stock
     exchange and sold to brokers as principals or
     customers, it held itself out as a merchant of
     securities * * *. It also purchased from and sold to
     others than brokers." * * *

Frankel v. Commissioner, supra (quoting Estate of Hall v.

Commissioner, supra at 1260); accord Swartz v. Commissioner, T.C.

Memo. 1987-582, affd. 876 F.2d 657 (8th Cir. 1989).

     Likewise, petitioner's argument that the customers of his

broker-dealers should, under principles of agency, be treated as

his customers for section 1221(1) purposes has been considered

and rejected by this Court and the Court of Appeals for the
                               - 14 -


Second Circuit.    As the latter observed in Seeley v. Helvering,

77 F.2d 323, 324 (2d Cir. 1935):

     So far as * * * [the taxpayer] traded in securities on his
     own account, his sales were on the exchange to persons whom
     he did not even know; these were not his customers, but
     customers of the brokers who bought of him. * * *

 Faced more recently with the same argument, this Court stated:

     [The taxpayer] would have us look through Merrill Lynch
     and Prudential-Bache [the taxpayer's brokers] to the
     nameless members of the commodity markets who
     ultimately purchased the commodity contracts * * * [the
     taxpayer] sold and sold the commodity contracts * * *
     [the taxpayer] purchased. Even were we to so look
     through Merrill Lynch and Prudential-Bache, * * * [the
     taxpayer] would fare no better, as members of an
     organized exchange who buy and sell securities from a
     taxpayer are not the taxpayer's "customers" within the
     meaning of section 1221(1). * * * [Swartz v.
     Commissioner, supra.]

Accordingly, neither petitioner's broker-dealers nor their

customers constitute petitioner's customers for purposes of

section 1221(1).

     In Kemon v. Commissioner, 16 T.C. 1026, 1032-1033 (1951),

this Court provided a delineation of the customer requirement and

its bearing on the dealer/trader distinction for holders of

securities as follows:

          In determining whether a seller of securities
     sells to "customers," the merchant analogy has been
     employed. Those who sell "to customers" are comparable
     to a merchant in that they purchase their stock in
     trade, in this case securities, with the expectation of
     reselling at a profit, not because of a rise in value
     during the interval of time between purchase and
     resale, but merely because they have or hope to find a
     market of buyers who will purchase from them at a price
     in excess of their cost. This excess or mark-up
                              - 15 -


     represents remuneration for their labors as a middle
     man bringing together buyer and seller, and performing
     the usual services of retailer or wholesaler of goods.
     Such sellers are known as "dealers."

          Contrasted to "dealers" are those sellers of
     securities who perform no such merchandising functions
     and whose status as to the source of supply is not
     significantly different from that of those to whom they
     sell. That is, the securities are as easily accessible
     to one as the other and the seller performs no services
     that need be compensated for by a mark-up of the price
     of the securities he sells. The sellers depend upon
     such circumstances as a rise in value or an
     advantageous purchase to enable them to sell at a price
     in excess of cost. Such sellers are known as
     "traders." [Citations omitted.]


     Petitioner apparently relies on the merchant analogy in

Kemon in arguing that he should be treated as a dealer because,

like a dealer, he attempted to derive his profit from the

"spread" between the bid and asked prices of the securities in

which he transacted, and in his view also performed a

merchandising function.   Petitioner claims that his "on the book"

method of bid and asked for transacting in securities was highly

unusual, indeed unique, for an individual.   When placing an order

to buy and/or sell securities with his broker-dealer, petitioner

would propose prices that were "inside" the prevailing market

spread between bid and asked prices.   If petitioner's bid or

asked price were the best available, the exchange would be

required to display it.   In petitioner's view, if he consummated

a transaction at a price that was "inside" the spread being

offered by conventional dealers, he was thereby "getting in their
                              - 16 -


way" and functioning as a dealer because (i) he was deriving

profit from the spread, as dealers do; and (ii) he was performing

a merchandising function by causing transactions to occur that

might otherwise not, as dealers do.

     However novel petitioner's strategy for dealing in

securities may have been, we do not believe he has taken himself

outside Congress's clearly expressed intention in the 1934 Act to

make it "impossible to contend that a stock speculator trading on

his own account is not subject to the [capital loss limitation]

provisions" of the predecessor of section 1211.   H. Conf. Rept.

1385, 73d Cong., 2d Sess., at 22 (1934), 1939-1 C.B. (Part 2)

627, 632.   Regardless of the extent to which petitioner's

strategy may have captured the spread, or facilitated market

transactions, he has still failed to show he had customers.    One

could imagine any number of trading strategies designed to profit

from the spread between bid and asked prices, or that might

enhance market liquidity, but use of them would not confer dealer

status on one trading for his own account.   In conducting his

research, and attempting to place bid and ask orders that would

become the best price on an exchange, petitioner was functioning

like the "trader" described in Kemon "whose status as to the

source of supply is not significantly different from that of

those to whom [he sells]."   Kemon v. Commissioner, supra at 1033.
                              - 17 -


     Other factors confirm that petitioner was not a dealer in

the years at issue.   Besides customers, petitioner also lacked an

established place of business and licensing as a dealer.   He did

not hold himself out as a dealer or otherwise advertise such

status.2   For nearly half of 1989 and all of 1990, petitioner was

a full-time employee elsewhere.

     The tenuous nature of petitioner's claim of dealer status is

reflected by the inconsistencies in his position.   He commenced

using the "on the book" method of bid and asked, his principal

grounds for claiming to be a dealer, sometime in 1988.   Yet on

his 1988 return, he treated all losses from his securities

transactions--which were sizable, exceeding $96,000--as capital

losses, reporting them on a Schedule D.   In 1989 and 1990, he

continued using the "on the book" method and treated the

substantial losses therefrom3 as ordinary losses in each year on

a Schedule C, claiming to be a securities dealer.   During 1991,

petitioner continued using the method, but ceased buying and

     2
      After first stipulating that he did not advertise as a
dealer, petitioner claimed at trial that his offers to buy and
sell, when they were the best price for a security and therefore
displayed on an exchange, constituted advertising.
     3
      In 1989, petitioner claimed losses from transactions in
stock options and stocks of $106,503 and from futures contracts
of $117,852, for a total of $224,355 claimed on the Sched. C for
that year. (The losses from futures contracts are discussed
infra.) These losses resulted in an $80,067 loss carryforward,
which was claimed on Sched. C of the 1990 return, together with
1990 securities losses of $18,311, for a total of $98,378 of
Sched. C losses claimed in 1990.
                             - 18 -


selling securities in that year.   On his 1991 return, petitioner

treated the losses from securities transactions, which in this

year were only $8,157, as capital losses, on a Schedule D.

Questioned about his treatment of securities losses on the 1988

and 1991 returns, petitioner testified that he had been

"experimenting" with the "on the book" method in 1988, but did

not use it for the entire year4, and that he did not believe the

level of his activities in 1991 was sufficient to make him a

dealer.5

     We find petitioner's efforts to distinguish his situation in

the respective years unpersuasive.    We find more persuasive

respondent's contention that the difference between taxable year

1988 and taxable years 1989 and 1990 was that in the latter two

years, but not in 1988, petitioner had otherwise "unsheltered"

pension and IRA distributions of $100,000 and $152,000,

respectively.

     There are also inconsistencies in the theory petitioner

advances for the tax treatment of his losses from futures


     4
      Petitioner's own witness, however, his broker for all stock
option and stock transactions, testified that once petitioner
commenced using the "on the book" method in 1988, he used it
virtually exclusively until he ceased transactions in securities
in 1991.
     5
      The level of activity, in any event, goes to the question
of whether petitioner was engaged in a trade or business, a
different inquiry from whether he was a dealer. See King v.
Commissioner, 89 T.C. 445, 458 (1987).
                              - 19 -


contracts reported in 1989.   Petitioner claims that the losses

are ordinary because he entered into the futures contracts as a

hedge against the risks in his "inventory" of securities that he

held as a dealer.   However, petitioner also entered into futures

contracts in 1988, when he did not claim to be a dealer, but did

not enter into such contracts in 1990, when he did claim dealer

status.   Moreover, petitioner offered no evidence to indicate the

link between the risks in his securities "inventory" and their

offset in the futures contracts, other than his bald assertion

that the futures contracts were entered into as hedges.

     In addition to its evidentiary shortcomings, petitioner's

hedging theory founders on the law as well.   Futures contracts

are, generally speaking, capital assets.   Petitioner's hedging

theory attempts to garner ordinary loss treatment for his futures

contract losses under the Corn Products doctrine.6   Arkansas Best

Corp. v. Commissioner, 485 U.S. 212 (1988), clarifies that the

Corn Products doctrine "[stands] for the narrow proposition that

'hedging' transactions that are an integral part of a business'

inventory-purchase system fall within [section 1221(1)]".

Arkansas Best Corp. v. Commissioner, supra at 212-213.    Since we

have concluded that petitioner was not a dealer in the years in

issue, he did not have inventory within the meaning of section



     6
      Corn Prods. Ref. Co. v. Commissioner, 350 U.S. 46 (1955).
                             - 20 -


1221(1) with respect to which a hedge could be taken, under the

holding of Arkansas Best.

     Petitioner also cites section 1236 to support his contention

that he is entitled to ordinary loss treatment, on the grounds

that he did not identify any securities sold in 1989 and 1990 as

held for investment, as provided in that section.   Section 1236

does not help petitioner's case.   The operative provisions of

section 1236 do not confer dealer status; they presuppose it, and

go on to provide a mechanism under which a dealer can obtain

capital treatment for certain assets in inventory by identifying

them in advance as held for investment.   Failure to make a

designation under section 1236 is simply not probative in

determining whether a taxpayer is or is not a securities dealer.7

     The second issue for decision is whether petitioners are

liable for an addition to tax under section 6651(a)(1) for each

of the taxable years in issue.   Section 6651(a)(1) provides an

addition to tax for failure to file a Federal income tax return

by its due date (determined with regard to extensions), unless

the taxpayer shows that such failure was due to reasonable cause

     7
      Sec. 1236 itself contains no definition of a securities
dealer. However, the regulations thereunder, at sec. 1.1236-
1(c)(2), Income Tax Regs., cross-reference the regulations under
sec. 471 for a definition of a dealer in securities. The latter
regulations, like Kemon v. Commissioner, 16 T.C. 1026 (1951), use
a merchant analogy and require an "established place of
business." See sec. 1.471-5, Income Tax Regs. To the extent
this regulatory definition bears on this case, we believe
petitioner cannot meet it.
                                - 21 -


and not willful neglect.   The taxpayer bears the burden of

proving both.   United States v. Boyle, 469 U.S. 241, 245 (1985).

A showing of reasonable cause requires that the taxpayer

demonstrate that he exercised ordinary business care and

prudence, but nevertheless was unable to file the return within

the prescribed time.   Sec. 301.6651-1(c)(1), Proced. & Admin.

Regs.; see also United States v. Boyle, supra at 246.

     Petitioner claims to have reasonable cause for failing to

timely file his 1989 and 1990 Federal income tax returns based

upon his belief that a return was not required because his

securities losses exceeded his income in such years.    The mere

fact that petitioner mistakenly believed he owed no tax does not

constitute reasonable cause for failure to file a return on or

before its due date.   Linseman v. Commissioner, 82 T.C. 514, 523

(1984).   Moreover, there is no evidence that petitioner obtained

professional advice in forming his belief that he owed no tax.

Cf. Cohen v. Commissioner, T.C. Memo. 1996-546.

     Petitioner also argues that reasonable cause exists based

upon the fact that he was "depressed", although his testimony was

quite sketchy in this regard.    In order for such condition to

constitute reasonable cause, petitioner must show that his

depression incapacitated him to such a degree that he was unable

to file his returns.   Williams v. Commissioner, 16 T.C. 893, 906

(1951).   The fact that petitioner was functioning as a full-time
                              - 22 -


employee and actively transacting in the securities market during

this period indicates that he was not incapacitated to such a

degree.

     Additionally, no evidence has been presented with respect to

petitioner Jane Marrin's failure to file.    Where a taxpayer has

not taken steps to assure that a spouse has filed their joint

return in a timely manner, the mere fact that one spouse assumed

the responsibility for filing, and failed to do so, does not of

itself provide the other spouse with reasonable cause for failure

to file.   Belk v. Commissioner, 93 T.C. 434, 447 (1989).

     Petitioners have failed to show that their failure to timely

file their returns during the years in issue was due to a

reasonable cause and not willful neglect, and, therefore,

petitioners are liable for the addition to tax under section

6651(a)(1) for each of the years in issue.

     To reflect the foregoing,

                                       Decision will be entered

                                 for respondent.
