                           T.C. Memo. 1996-86



                         UNITED STATES TAX COURT



       ROBERT G. LESLIE AND MARILYN B. LESLIE, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 9814-87.            Filed February 28, 1996.


       Elliott H. Kajan and Steve Mather, for petitioners.

       Roger L. Kave, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION

       FAY, Judge:    By notice of deficiency dated February 20,

1987, respondent determined deficiencies in petitioners' Federal

income taxes and additions to tax and increased interest as

follows:

                          Additions to Tax and Increased Interest
                          Sec.       Sec.          Sec.      Sec.
Year     Deficiency     6621(d)   6653(a)(1)    6653(a)(2)   6661
                           1
1980     $1,064,080                $53,204          --       --
                                 - 2 -
                            1                    1
1981         49,501                 2,475                    --
                            1                    1
1982        366,677                18,334                 $91,669
       1
        To be determined.

       All section references are to the Internal Revenue Code in

effect for the taxable years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.

       This case involves Robert G. Leslie's (petitioner's) invest-

ments in gold straddle transactions through the futures commis-

sion merchant F.G. Hunter & Associates (Hunter).     This is the

same Hunter tax straddle program that was at issue in Ewing v.

Commissioner, 91 T.C. 396 (1988), affd. without published opinion

940 F.2d 1534 (9th Cir. 1991).

       On August 30, 1993, respondent filed a Motion for Order to

Show Cause why petitioners' case is different than Ewing v.

Commissioner, supra.    On October 18, 1993, petitioners filed

Petitioners' Response To Order To Show Cause.    In their response,

petitioners submit that their primary motive for engaging in gold

futures transactions with Hunter is distinguishable from that of

the taxpayers in Ewing v. Commissioner, supra.     Based on peti-

tioners' response, on December 6, 1993, this Court issued an

order discharging the order to show cause.   A trial was held

January 10 and 11, 1995, in Los Angeles, California, to resolve

the following issues for decision:
                                 - 3 -

       (1)   Whether certain transactions in gold futures were

entered into by petitioners for profit.       We hold that they were

not.

       (2)   Whether fees paid by petitioners with respect to such

transactions are deductible.     We hold that they are not.

       (3)   Whether petitioners are entitled to a deduction for the

taxable year 1982 for the amount by which the Hunter straddle

losses for the years at issue exceed the straddle gains for the

years at issue.     We hold that they are not.

       (4)   Whether petitioners, with regard to the Hunter straddle

transactions, are liable for increased interest pursuant to

section 6621(d).     We hold that they are.

       Respondent concedes that, based on the holding in Ewing v.

Commissioner, supra, petitioners are not liable for additions to

tax pursuant to section 6653(a)(1) and (2).      Respondent further

concedes that petitioners are not subject to an addition to tax

for the taxable year 1982 pursuant to section 6661.

                           FINDINGS OF FACT

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

The stipulation and exhibits associated therewith are incorpo-

rated herein by reference.

       At the time petition was filed, petitioners resided in Santa

Paula, California.     Petitioners' joint Federal income tax returns

for the years in issue were filed with the Office of the Internal

Revenue Service at Fresno, California.     Petitioners' returns were
                                 - 4 -

prepared utilizing the cash receipts and disbursements method of

accounting.

     On their joint Federal income tax returns for the 1980

taxable year, petitioners claimed ordinary losses from Hunter

transactions for the cancellation of long gold futures contracts

in the amount of $1,530,268, and short-term capital gains for

offset transactions of $198,030.    Petitioners also claimed as

miscellaneous itemized deductions for the taxable year ending

December 31, 1980, the following costs relating to their partici-

pation in Hunter transactions:    Investment advisory fees in the

amount of $14,000 and legal fees related to investments in the

amount of $3,500.

     On their joint Federal income tax return for the 1981

taxable year, petitioners claimed an ordinary loss from Hunter

transactions for the cancellation of long gold futures contracts

in the amount of $55,302 and net long-term capital gains from the

assignment and offset of Hunter gold futures contracts in the

amount of $97,160.

     On their joint Federal income tax returns for the 1982

taxable year, petitioners claimed net long-term capital gains

from Hunter transactions for the assignment and offset of gold

futures contracts in the amount of $1,172,950.

     All of the above claimed tax results purportedly occurred

with respect to transactions in gold futures conducted during

1980, 1981, and 1982 in the manner hereinafter described on
                                 - 5 -

behalf of petitioners by Hunter.     Petitioners did not engage in

the transactions as dealers.

Trading in Commodities Futures in General

         A gold futures contract1 is an agreement to either deliver

(a short position2) or receive (a long position3) a specified

amount of gold during a designated month at a price negotiated

when the contract is made.     The futures contract is ultimately

fulfilled when the commodity bought is delivered to the buyer by

the seller or when the contract is offset.     Less then 5 percent

of all futures contracts actually result in the delivery of the

underlying commodity.     Instead, most futures contracts are offset

rather than being executed by delivery.     Ewing v. Commissioner,

supra at 400.     An offset is the acquisition of an offsetting

contract of purchase or sale of the same quantity of the

commodity.

     A gold spread consists of a long position and a short

position, with each position having a different delivery date.

Each of the two positions constitutes a simple spread, often

     1
      Since modern gold futures trading began in 1974, gold
futures have been traded on four domestic exchanges: (1) The
Chicago Board of Trade (CBOE); (2) the International Monetary
Market (IMM), which is associated with the Chicago Mercantile
Exchange; (3) the Commodity Exchange, Inc. (COMEX), and (4) the
MidAmerica Commodity Exchange. The dominant exchange is COMEX.
     2
       A short position is held by a person who has sold one or
more futures contracts without having previously bought them.
     3
      A long position is held by a person who has bought and
holds one or more futures contracts.
                                - 6 -

referred to as a "leg".   Id.   If a trader merely bought a long

position or sold a short position, he would be said to have

acquired a "simple net position", and the trader would hope to

profit by a rise in the price of the commodity underlying the

long position or fall in the price of commodity underlying the

short position.   Traders who invest utilizing spread positions

hope to profit by a favorable change in the price relationship or

differential between their long and short positions.   The price

differential is a function primarily of the changes in short-term

interest rates and the value of the underlying commodity4 and,

secondarily, of storage and commission costs.   Since storage

costs for precious metals are trivial, the major forces affecting

gold futures spreads are gold prices and short-term interest

rates.   Id.

     A simple commodity spread that has one short leg with a

nearby delivery date and one long leg with a more distant

delivery date is often referred to as a "backward spread" since

it is profitable when the dollar difference between the price of

the two contracts increases after the position is established.

Since prices generally increase in a rising or bull market, back-


     4
      For example, if spot gold is $400 per ounce, and the
interest rate is 1 percent per month, a 6-month delivery will be
priced at $424 [$400 + (1 percent x 6 months x $400)]. Thus,
when the number of long contracts equals the number of short
contracts, the difference in price between the long and short
legs is entirely a function of the interest cost of carrying gold
from one futures delivery month to the other.
                               - 7 -

ward spreads are also referred to as "bull spreads".    Conversely,

a simple commodity spread that has a long leg with a nearby

delivery date and one short leg with a more distant delivery date

is referred to as a "forward spread" since it is profitable if

the dollar difference between the two contracts declines after

the position is established.   Since prices generally decline in a

falling or bear market, forward spreads are also referred to as

"bear spreads".

       Since a forward spread profits when the difference between

the two contracts narrows, a forward spread will profit when the

interest rates decline.   Conversely, a backward spread would

suffer a loss from the same change in interest rates.   Addition-

ally, since a forward spread profits when the spread difference

narrows, a forward spread will profit from a reduction in the

price of gold even if the interest rates do not change.   Con-

versely, a backward spread would suffer a loss from the same

reduction in the price of gold.

     Whenever a leg of a straddle is closed out by an offset, or

in any other manner, tax consequences normally will result in the

holder realizing either a gain or a loss.   Generally, in a 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
                                - 8 -

holder and thus is subject to the increased risk of being

directly subject to the market.   To minimize this increased risk,

the holder would 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.   Ewing v. Commissioner, 91 T.C. at 401.

     A "butterfly spread" has three legs maturing at different

times.   If the first and third legs are long, then the middle

position is short.   If the first and third legs are short, then

the middle position is long.    The outlying positions (first and

third legs) are referred to as wings and the center position as

the body, hence the term "butterfly".

     The center position or body of a butterfly spread is twice

as large as either wing, and the time periods for the delivery of

the commodity from the first wing to the body and from the body

to the second wing are equal.   Essentially, a butterfly spread

creates two spreads, one bullish and one bearish.    Thus, a

butterfly spread presents less chance of either an adverse or a

favorable spread movement and is, therefore, less likely to

result in a different loss or gain than an ordinary straddle.     An

example of a butterfly spread would be as follows:
                                    - 9 -
            WING                                      WING
Short 50 Contracts of June Gold     Short 50 Contracts of October Gold

                                    BODY
                      Long 100 Contracts of August Gold

     A "condor trade" is similar to a butterfly spread but has

four or more elements rather than three.          An example would be as

follows:

            WING                                      WING
Short 50 Contracts of June Gold     Short 50 Contracts of December Gold

                                    BODY
                      Long 50 Contracts of August Gold
                      Long 50 Contracts of October Gold

     The purpose of butterfly or condor spreads is to establish a

position that will create a significant profit or loss on the

long or short position if there is a major move in the price of

gold so a tax benefit can be achieved.         At the same time, such a

spread establishes a position that creates a complementary profit

or loss on the other side of the position, thereby creating tax

benefits while eliminating the possibility of gaining or losing

significant equity.

The Hunter Program

     Hunter was organized in late 1979 or early 1980 as a Nevada

limited partnership with its principal place of business in

Newport Beach, California.        On February 20, 1980, Hunter first

registered with the Commodities Futures Trading Commission (CFTC)

as a Futures Commission Merchant (FCM) and remained an FCM for

all years relevant hereto.        All regulated futures transactions
                               - 10 -

must be executed through an FCM which is a member of an exchange.

Since Hunter was not a member or clearing member of the Commodity

Exchange of New York (COMEX) or the International Money Market

(IMM), Hunter was not authorized to execute gold futures con-

tracts on the floor of either exchange.   Accordingly, Hunter

contracted with A.G. Becker, Inc., a clearing member of the

exchanges, to execute and clear the gold futures transactions

involved herein.

     Hunter delivered promotional literature to prospective

clients.   A majority of the promotional material was devoted to

showing clients the "significant tax advantages" they could

obtain through the Hunter investment program.

     Most of the "Questions and Answers" portion of the Hunter

promotional material relates specifically to tax benefits that

can be received by participating in the Hunter program.   Specifi-

cally, the materials state:

     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 con-
           siderably enhanced, and the risk of loss substan-
           tially reduced by the proper choice of alternative
           methods of liquidating your contracts.

           *       *       *       *       *       *         *

     8.    How can the probability of gain be increased by
           choice of liquidation methods (?) (See #3)
                         - 11 -

      Income tax treatment of your gains or losses on
      each contract will be different depending upon the
      way your contract is closed out. There are ways
      to close out a contract in which you have a gain
      so that it will be taxed as a long term capital
      gain. For the contract in which you have a loss,
      you may liquidate so as to have ordinary loss.
      Depending upon your tax bracket, your risk of
      after tax loss on both of these contracts will be
      very substantially reduced and will quite possibly
      be converted into an after tax gain. Any net pre-
      tax profit will be significantly increased.

9.    Can you give me an example ?

      On February 15, 1978, the price of November 1978
      gold was $188.30 per ounce (Wall Street Journal,
      February 15, 1978 CMX). On the same date, the
      price of February 1979 gold was 192.30 per ounce.
      Seven months later on September 20, 1978, the
      price of November 1978 gold was $212.70, and the
      price of February 1979 gold was $217.90. If you
      had sold November 1978 gold on February 15, 1978,
      and bought February 1978 gold at the same time
      then liquidated each contract on September 20,
      1978, you would have incurred a loss of $24.40
      ($212.70 - $188.30) per ounce on your short posi-
      tion and realized a gain of $25.60 per ounce on
      your long position. Based on current tax rates,
      and upon the assumption that you close out your
      positions as described above, your net after tax
      gain on your February 15, 1979 gold would have
      been approximately $20.48 per ounce, and your net
      after tax loss on November 1978 gold would have
      been approximately $12.20 per ounce. The combined
      after tax gain would have been $8.28 per ounce.
      Considering there are 100 ounces of gold per
      contract your net dollar profit would be $828.00
      per spread. These figures do not include sales
      and administrative fees which will be discussed
      later.

10.   What would have happened if I had bought November
      1978 gold and sold February 1979 gold instead?

      On your long (November) contract, you would have a
      before tax gain of $24.40 per ounce, and on your
                          - 12 -

      short (February) position a before tax loss of
      $25.60 per ounce. Your after tax gain on the long
      contract would be approximately $19.52 per ounce,
      and your after tax loss on your short contract
      would have been approximately $12.80 per ounce, if
      you follow the liquidation principles described in
      the answer to question #9 above. The combined
      after tax gain would be $6.72 per ounce, or
      $672.00 net after tax profit per spread.

11.   Would the same results be realized with other
      choices of dates?

      The results that would have been achieved with
      other choices of dates would be different.
      However, the principles are the same if these
      conditions apply. (1) The contracts are closed
      out after the expiration of the six months capital
      gains holding period. (2) The contract on which
      you have a gain is closed out in a way which will
      qualify for capital gains tax treatment, and (3)
      the contract on which you have a loss is closed
      out in a way which will qualify for ordinary
      income tax treatment.

12.   Precisely how do I meet conditions (2) and (3) in
      question # 11?

      If there is a gain in your long position, you
      should qualify for capital gains treatment by
      going short in the same delivery month. If you
      have a gain in your short position, you could sell
      it to an unrelated third party and qualify for
      capital gains treatment. If you have a loss in
      either your long or short contract, you should
      cancel it. If you do, your loss will be an
      ordinary loss rather than a capital loss.

      *       *       *       *       *       *       *

15.   Will I be required to close out my long and short
      positions simultaneously?

      By no means. They are separate contracts. You
      may choose to liquidate them in other ways. For
      example, you may wish to actually take delivery of
      the gold on your long contract and close out your
      short position by offsetting it with an identical
      long contract. Other combinations of liquidation
                             - 13 -

          are possible. You should select the one that ful-
          fills your economic goals and personal require-
          ments. Get the advice of your tax adviser.

     Included with the promotional material are four graphs which

show pre- and post-tax analyses of contract liquidation.    The

promotional material also contained a "Worksheet" which specifi-

cally allows for calculating the "Tax Savings" of contract

liquidation.

     Also provided with the Hunter promotional material was a

four-page document entitled "Summary of Federal Income Tax

Consequences of F.G. Hunter & Associates Investment Program",

giving a synopsis of the different tax implications of various

gold futures contract liquidation methods.

     The Hunter promotional materials included a 24-page opinion

letter, dated March 24, 1980, written by Attorney Avram Salkin.

The opinion letter was supplemented on June 13, 1980, and

modified on August 17, 1981, in light of the provisions of the

Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172.

The opinion letter described in detail, with supporting citations

of case law and statutes, the tax consequences, which in, the

opinion of Mr. Salkin, could be expected by Hunter investors from

the liquidation of the component positions of their future

straddles.

Petitioner's Business and Investment History

     At the time of trial, petitioner was 62 years old.    Peti-

tioner graduated from high school in 1950 and enlisted in the
                               - 14 -

U.S. Army.    After being honorably discharged from the Army in

1953, petitioner entered the construction business.     Petitioner

eventually became the president and sole shareholder of R&H

Paving, Inc., a paving contractor.

     Prior to making the commodity trades with Hunter, petitioner

held various investments during the 1970's and early 1980's.

Petitioner's basic requirement in an investment was a good cash-

flow, in order to counter the cyclical nature of his construction

business.    Petitioner was not averse to risk in an investment

since he was accustomed to a considerable amount of risk from the

construction industry.

     Generally, petitioner relied on either Roy Tolson, an

accountant and business adviser, or Joe Rasey, a business

associate, to locate investments which satisfied his investment

criteria.    Before making an investment, petitioner would

personally analyze the transaction.

     In June 1980, petitioner hired Donald Short (Short) to be

his personal business adviser and controller for R&H Paving, Inc.

Short was a certified public accountant (C.P.A.), licensed to

practice in California.    Prior to being hired by petitioner,

Short was employed by Edward White & Co., the C.P.A. firm that

prepared petitioners' tax returns.      While Short worked at Edward

White & Co., he prepared petitioners' tax returns.     Short

testified that he was well aware of petitioner's tax position
                               - 15 -

during the years he prepared petitioners' tax returns at Edward

White & Co. and for all the taxable years at issue.

     Petitioner relied on Short to find investments that satis-

fied his investment criteria because petitioner did not have time

to personally investigate all of the potential investments in

which he was interested.    As part of Short's investigation of

potential investments for petitioner, Short read books, articles,

and periodicals relating to commodity trading which led Short to

believe that this type of investment met petitioner's investment

requirements.

     Since neither Short nor petitioner had prior experience with

commodity investments, Short searched for brokerage firms that

had commodity departments.    Short searched for a commodity broker

by contacting brokerage houses and persons he had worked for in

the past, including Edward White & Co.    These sources led Short

to Hunter and, in particular, to Russ Klein (Klein), who was

employed by and in charge of Hunter.

     Short met with Klein on three occasions before investing

with Hunter.    Petitioner only attended the last meeting.    The

initial meeting with Klein focused on commodity trading methods

and a projected potential return of 25-47 percent.    Short

believed that the Hunter trading methods met all of petitioner's

investment criteria.    Additionally, Short believed that Klein

would be able to educate him in commodity trading strategies in

order to enable him to assume increasing degrees of control over
                              - 16 -

trading decisions in the future on behalf of petitioner.   Short

was very interested in the Hunter program and advised petitioner

of the substance of the initial meeting with Russ Klein.   Short

testified that he did not receive the promotional material nor

learn about the favorable tax benefits of straddle trading in the

Hunter program until his final meeting with Klein, which peti-

tioner attended.

     Petitioner testified that he reviewed the Hunter promotional

material, including "Summary of Federal Income Tax Consequences"

and discussed the tax consequences of the Hunter program with

Short prior to making his actual Hunter investment.   Petitioner

did no further research regarding the Hunter program.   Petitioner

testified that he did not check into any of the credentials of

the individuals who wrote the Hunter promotional material.

     Petitioner decided to make his investment with Hunter in

December 1980 based on the information Short obtained from his

meetings and conversations with Klein and due to repeated calls

from Klein urging him to make an investment with Hunter immedi-

ately.   Klein's reason for wanting petitioner to invest at that

time was that the volatility of the gold market presented an

opportunity for immediate tax benefits.   Short testified that

some of the considerations for investing in Hunter programs at

that time were to maximize profits during a volatile market and

to take advantage of the tax benefits.
                                - 17 -

     Petitioner, as a participant in the Hunter gold futures

spread program, would have been required to sign the following

Hunter forms:    (a) New Account Application; (b) Account Agreement

and Risk Disclosure; (c) Risk Disclosure Statement; and

(d) Current Policies and Fees, setting forth the commissions and

fees payable by petitioner to Hunter.     Petitioner testified that

it was normal practice in his business to keep copies of signed

documents.    However, at trial, petitioner could not provide

signed copies of any of the Hunter documents listed above.

     Petitioner's initial commodity positions were created on

December 1, 1980, when he made the investment.     Petitioner paid

an initial deposit of $178,500.    Out of his initial deposit,

petitioner incurred the following costs:

            Legal fee                           $3,500

             Management fee                     35,000

             Commission to establish
                  initial spread positions      17,500


                Total costs                     56,000

Thus, petitioner's initial margin was $122,500 ($178,500 -

$56,000).

     Petitioner's trades with Hunter were initiated by FAX, Inc.

(FAX), a registered trading adviser.     In order for FAX to

initiate trades between petitioner and Hunter, petitioner would

have been required to sign both an "Investment Advisory Agree-

ment" and a "Special Power of Attorney" authorizing FAX to trade
                               - 18 -

commodities.   At trial, petitioner was unable to provide signed

copies of these documents and testified that he did not recall

signing either of the documents.

     The $35,000 management fee incurred by petitioner on

December 1, 1980 (see above), was for FAX's services.     Short

testified that he never investigated FAX because he felt that FAX

was just part of Hunter and that the $35,000 fee was just being

paid to Hunter.

     Through Hunter, petitioner established two spreads on

December 1, 1980.    The first was a simple bear spread consisting

of a long position of 30 contracts of October 1981 100-ounce gold

at a price of $723.80 per ounce and a matching short position of

30 contracts of February 1982 gold at $762.     The second position

was an imperfect butterfly spread.      The first wing consisted of

70 contracts of April 1982 gold bought at $785.10.     The body was

145 short June 1982 gold, of which 70 contracts were sold at

$804.50 on COMEX and 75 contracts at $803.50 on IMM.     The second

wing was comprised of 75 contracts of September 1982 gold bought

on IMM at $834.    The slight imperfection in the butterfly

occurred because there were only 2 months between the first wing

and the body, whereas there were 3 months between the second wing

and the body; and because the June/September part of the spread

consisted of 75 contracts, whereas the April/June part consisted

of 70 contracts.
                             - 19 -

     On December 10, 1980, petitioner's spread positions were

modified as a result of a recommendation from Klein that the

market was moving and that, by making additional trades, peti-

tioner could realize substantial tax losses and be in a better

position to later profit from the market movement.   Short and

petitioner approved the trades that resulted in a substantial tax

loss on December 10, 1980.

     On December 10, 1980, the three long positions (175 gold

contracts) established on December 1, 1980, were all canceled,

resulting in losses totaling $1,506,000.    Petitioner's original

equity in his Hunter account, however, was not significantly

affected because the value of the three remaining short positions

dropped about as much as the three liquidated long positions.

The result was a total "open" profit that approximately equaled

petitioner's closed transaction loss.   Petitioner's open profit

was protected by immediately replacing, on December 10, 1980, the

175 canceled long contracts with 175 new long contracts.

     The new long positions established on December 10, 1980,

consisted of 75 contracts of March 1982 gold at $685 and 100

contracts of August 1982 gold at $739.70.   The resulting position

in the account was an imperfect condor spread consisting of two

long outside wings of 75 contracts of March 1982 at $685 and 100

contracts of August 1982 at $739.70 and the body consisting of

two short positions, 30 contracts of February 1982 at $762 and
                               - 20 -

145 contracts of June 1982, of which 70 were established at

$804.50 on COMEX and 75 at $803.50 on IMM.

     Upon canceling the 175 gold positions on December 10, 1980,

Hunter charged petitioner a cancellation fee totaling $15,520.14.

As a result of the $1,506,000 tax loss, petitioner, for the tax

year 1980, was able to offset net ordinary income from numerous

sources totaling $1,449,151 and offset capital gains totaling

$56,849.

     On December 30, 1980, petitioner's position with Hunter was

reduced by selling 21 contracts of March 1982 long position while

at the same time liquidating 21 contracts of the June 1982 short

position.

     Short and petitioner were dissatisfied with the investment

advisory services rendered by FAX, and in February 1981 they

requested and obtained a refund of the $35,000 management fee,

which was recredited to petitioner's account by Hunter in incre-

ments of $28,000 and $7,000.

     Short and petitioner continued to be dissatisfied with the

services provided by Hunter.   Accordingly, Short contacted Bill

Kearney at Merrill Lynch to determine what commodity advising

services were available from Merrill Lynch.   Petitioner retained

Merrill Lynch and invested $100,000 in an oil and gas investment

in late 1981.   Merrill Lynch earned a $6,000 commission from the

investment.
                              - 21 -

     Short left petitioner's employ for approximately 1 year

during the second half of 1981 and early 1982.    During Short's

absence, petitioner continued his commodity trading activity

through Merrill Lynch and expanded into trading bonds, stocks,

and other commodities futures contracts.

     Also during Short's absence, petitioner continued to

maintain his accounts with Hunter, and, on December 31, 1981,

four of the March 1982 long positions were sold at $409, creating

a total loss in the amount of $110,400.    Two of the contracts

were disposed of by sale, for which petitioners claimed a long-

term capital loss in the amount of $55,200 on their 1981 Federal

income tax return.   Two of the contracts were disposed of by

"cancellation", for which petitioners claimed an ordinary loss

deduction in the amount of $55,302 on their 1981 Federal income

tax return.

     To keep the number of long and short positions of the condor

position balanced after the December 31, 1981, disposal of four

long contracts, four short contracts of June 1982 gold were

purchased at $422.55 for petitioner's account with Hunter.     This

purchase yielded a realized profit of $152,380.    The December 31,

1981, liquidation of four short positions was treated by

petitioner as an "assignment" to a third party, and the gain was

treated as a $152,380 long-term capital gain on petitioners' tax

return.
                               - 22 -

     In January 1982 petitioner and Hunter continued to reduce

the condor position.   This was made necessary by the fact that

all the remaining gold contract positions consisted of 1982

contracts and would have to be settled by delivery if held much

longer.   As a result of the impending delivery dates, petitioner

liquidated 30 of the remaining long August positions on Janu-

ary 26, 1982.   The repositioning resulted in an offset loss of

$1,007,100, which petitioner treated as a long-term capital loss.

     Also on January 26, 1982, an equivalent short position

consisting of 30 contracts of February 1982 gold was liquidated,

but, instead of being offset by a direct purchase on the trading

floor of COMEX, the short position was "assigned".    This assign-

ment resulted in a profit of $1,149,450, which petitioners

reported as a long-term capital gain on their 1982 Federal income

tax return.

     The liquidation continued on February 24, 1982, when 25 long

March contracts were sold, and 25 short June contracts were

assigned.   Petitioner recognized an $802,500 loss from the offset

of the March position, which he treated as a long-term capital

loss.   Simultaneously, petitioner recognized a $1,067,625 profit

from the assigned short June position, which petitioner treated

as a long-term capital gain.

     On February 25, 1982, an additional 25 contracts on each

side of the remaining spread position in the account were

liquidated.   Twenty-five long March 1982 contracts were offset at
                               - 23 -

a loss in the amount of $797,500.   Petitioner reported the loss

as a long-term capital loss.   Twenty-five short June 1982

contracts were liquidated by assignment at a gain in the amount

of $1,062,125.   Petitioner treated the gain as a long-term

capital gain.

     Petitioner liquidated his final positions with Hunter on

May 26, 1982.    This resulted in an offset loss of $2,814,700 from

the remaining long contracts and a gain from the assignment of

the remaining short contracts of $3,315,550.   The loss was

treated by petitioner as a long-term capital loss, and the gain

was treated as a long-term capital gain.

     Petitioners claimed on their 1982 joint Federal income tax

returns that the results of their 1982 Hunter trades were net

long-term capital gains from the assignment and offset of gold

futures contracts in the amount of $1,172,950.

                               OPINION

Losses on Straddle Transactions

     The primary issue in this case is whether petitioners are

entitled to deduct losses on the Hunter straddle transactions as

claimed on their Federal income tax returns for the taxable years

1980, 1981, and 1982.   Resolution of the issue turns on the

effect of section 108(a) of the Deficit Reduction Act of 1984

(DEFRA), Pub. L. 98-369, 98 Stat. 494, 630, as amended by section

1808(d) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat.
                              - 24 -

2817.   Hereinafter, our references to "DEFRA section 108" are to

that section as amended, unless otherwise stated.

     DEFRA section 108(a) provides as follows:

          (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 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 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.

     By notice of deficiency, respondent determined that

petitioner's straddle losses are not deductible under section

165(c)(2) because the transactions were not entered into for

profit.   Petitioners contend that their entire course of conduct

before the investment, during the commodity trading with Hunter,

and after the initial Hunter investment through the time of the

investment with Merrill Lynch all reflect that petitioner's gold

straddle transactions were entered into for profit.

     Petitioners contend that all of petitioner's investment and

commodity trades were consistent with his long-standing invest-

ment history.   They argue that petitioner's commodity spread

trading was motivated primarily by petitioner's desire to find

investments with a modicum of risk in exchange for a large cash
                                  - 25 -

return on investment, and that tax benefits were purely coinci-

dental.    We disagree.

       This Court in Ewing v. Commissioner, 91 T.C. 396 (1988),

stated that the phrase "entered into for profit" as used in DEFRA

section 108(a) is to be interpreted by reference to the standard

applied under section 165(c)(2).       Ewing v. Commissioner, supra at

417.    The Court in Ewing used the guidelines provided in Fox v.

Commissioner, 82 T.C. 1001 (1984), to determine whether the

Hunter gold straddle transactions were entered into primarily for

profit.    Id.

       In Fox v. Commissioner, supra at 1021, this Court concluded

that section 165(c)(2) requires that profit be the primary motive

if a loss from a straddle transaction is to be deductible.         The

Court stated that profit need not be the sole motive for engaging

in a straddle transaction, but that a mere incidental profit

motive would be insufficient.       Id. at 1019 (citing Ewing v.

Commissioner, 20 T.C. 216, 233 (1953), affd. 213 F.2d 438 (2d

Cir. 1954)).      To determine whether a straddle transaction was

entered into for profit, Fox provides the following guidelines:

       (1) The ultimate issue is profit motive and not profit

potential.       However, profit potential is a relevant factor to be

considered in determining profit motive.

       (2) Profit motive refers to economic profit independent of

tax savings.
                              - 26 -

     (3) The determination of profit motive must be made with

reference to the spread positions of the straddle and not merely

to the losing legs, since it is the overall scheme which

determines the deductibility or nondeductibility of the loss.

     (4) If there are two or more motives, it must be determined

which is primary, or of first importance.   The determination is

essentially factual, and greater weight is to be given to

objective facts than to self-serving statements characterizing

intent.

     (5) Because the statute speaks of motive in "entering" a

transaction, the main focus must be at the time the transactions

were initiated.   However, all circumstances surrounding the

transactions are material to the question of intent.   Ewing v.

Commissioner, 91 T.C. at 418 (citing Fox v. Commissioner, supra

at 1018, 1022).

     Although petitioner testified that his sole motive for

investing with Hunter was to obtain a profit, a majority of the

circumstances surrounding the transactions points to the conclu-

sion that petitioner's primary motive was tax benefits.

     In determining petitioner's primary motive for entering the

Hunter program, "greater weight is to be given to objective facts

than to self-serving statements characterizing intent."     Ewing v.

Commissioner, 91 T.C. at 418; Fox v. Commissioner, supra at 1022.

The objective facts indicate that petitioner's primary motive was

tax considerations.   Thus, after applying the Fox guidelines to
                              - 27 -

the facts of this case, we find, for the reasons discussed below,

that petitioner did not enter into his straddle transactions

primarily for profit.

     First, although petitioner testified that Hunter representa-

tives never told him that canceling a commodities position would

give him an ordinary tax loss or that he could get long-term

capital gain treatment on the disposition of a short sale

position, it is clear that the objective facts contradict this

testimony.

      A majority of the promotional material was devoted to show-

ing clients the significant tax benefits that could be achieved

through the Hunter "cancellation" and "assignment" closing

procedures.   Petitioner testified that he read and received the

Hunter promotional material which explained the tax benefits to

Hunter's liquidation procedures.   Also, many of the "Questions

and Answers" portion of the Hunter promotional material related

specifically to tax benefits that can be achieved through the

Hunter program.   Furthermore, other Hunter promotional material

received and read by petitioner included graphs comparing pre-

and post-tax analyses of contract liquidation, a worksheet

specifically allowing for the calculation of "Tax Savings" of

contract liquidation, and a four-page document entitled Summary

of Federal Income Tax Consequences of F.G. Hunter & Associates

Investment Program.
                              - 28 -

     The Court in Ewing stated that the 24-page opinion letter,

written by attorney Avram Salkin, was the most influential item

in the Hunter promotional material.    Ewing v. Commissioner, 91

T.C. at 418.   Petitioner testified that he received and read the

opinion letter along with the other promotional material.   In

contrast to the substantial discussion of tax benefits, the

profitability of the Hunter program was neither seriously

discussed nor quantified.

     Second, petitioner's trades indicate a greater interest in

the tax advantages of the Hunter program than in obtaining a

profit.   Petitioner's expert, Edward Horowitz, testified that the

gold market was very volatile in December 1980 and that there is

a greater potential to profit in a volatile market.   Thus, Klein

was correct in advising petitioner to enter the market at that

time.   Mr. Horowitz also testified that petitioner's modification

of his straddle position on December 10, 1980, which resulted in

a substantial loss, actually increased petitioner's profit poten-

tial.   While the Court does not disagree with Mr. Horowitz's

opinion that the modification of petitioner's straddle increased

his profit position, the Court finds that the modification was

motivated by a desire to obtain a tax benefit.   Petitioner placed

his first straddle positions on December 1, 1980, and then, only

9 days later, he modified his positions as a result of a recom-

mendation from Klein that the market was moving and that, by

making additional trades, petitioner could realize substantial
                                  - 29 -

tax losses and be in a better position to later profit from the

market movement.       Petitioner's modifications resulted in a

$1,506,000 loss just before the end of the 1980 tax year.

       Petitioner argues that "the mere fact that tax benefits were

realized does not mean the tax benefits were the reason for the

transaction."       However, "It is a fundamental legal maxim that the

consequences of one's acts are presumed to be intended."          Fox v.

Commissioner, 82 T.C. at 1022.       We find that petitioner, like the

taxpayers in Ewing, "chose to 'cancel' the initial losing legs of

his straddles before the close of the 1980 tax year so as to

generate an ordinary loss."       Ewing v. Commissioner, 91 T.C. at

419.       Then, in the following year, on December 31, 1981, peti-

tioner chose to assign the profitable legs of his straddles which

resulted in a $152,380 long-term capital gain.

       Thus, with an initial investment of only $178,500, peti-

tioner attempted to offset $1,449,151 of his net 1980 ordinary

income5 with his $1,506,000 tax loss from the December 10, 1980,

cancellation of his gold futures transactions, and, by closing

out the profitable legs of his straddle positions on December 31,

1981, by means of assignments, petitioner attempted not only to

defer his straddle gains to 1981 but also to convert ordinary

income into 1981 long-term capital gain.



       5
      Petitioner was also able to offset capital gains (after
such capital gains had already been reduced by the 60-percent
long-term capital gain exclusion) by the amount of $56,849.
                               - 30 -

     Finally, the alternative liquidation techniques (i.e.,

cancellations and assignments) developed by Avram Salkin were

used by Hunter to sell prospective investors on a scheme to

achieve tax avoidance.   Id.   Specifically, the "cancellation"

technique was devised so that its proponents could claim ordinary

loss treatment rather than capital loss treatment.   The

"assignment" procedure was contrived so that Hunter investors

could characterize straddle gains as long-term capital gains

instead of short-term capital gains.    However, to utilize these

techniques and obtain their purported tax benefits, petitioner

paid more in commissions and fees than he would have incurred had

he liquidated his futures contract the usual way, by means of

offset.   Id. at 400, 419.

     For example, under Hunter's "Current Policies and Fees"

statement, petitioner was charged a fee of $15,520.14 for

canceling 175 gold futures contracts on December 10, 1980.    Had

petitioner offset his 175 gold contracts instead of "canceling"

those positions, his fee would have only been $1,750.   The Court

believes that petitioner was willing to pay substantially more

fees to obtain ordinary loss deductions in the amounts of

$1,506,000 and $55,200 for 1980 and 1981, respectively, espe-

cially since petitioners deducted the fees on their 1980 and 1981

Federal income tax returns.

     For the reasons stated above, we hold that petitioners'

motives in entering into these transactions, despite their
                              - 31 -

arguments to the contrary, were primarily to obtain substantial

tax benefits.   As we stated in Ewing:

     "we are cognizant of the fact that tax planning is an
     economic reality in the business world and the effect
     of tax laws on a transaction is routinely considered
     along with other factors, but nevertheless we reiterate
     that 'tax straddling * * * transactions can hardly be
     said to number among congressionally approved, sanc-
     tioned, or encouraged responses to the tax laws."

Ewing v. Commissioner, 91 T.C. at 420 (quoting Fox v. Commis-

sioner, supra at 1025).

Fees Paid With Respect to Straddles

     Petitioners deducted the following fees paid to Hunter in

regard to petitioner's Hunter transactions:



                               1980

     Cancellation fees                        $15,518
     Gold futures contract cost                 8,750
     Offset fees                                  420
     Investment advisory fees                  14,000
     Legal fees investment related              3,500

                               1981

     Cancellation fees                            102
     Offset fees                                   20

     Petitioners contend that these fees were incurred in

connection with the purchase and sale of capital assets.    As

such, petitioners argue that these fees are capitalized and form

part of the cost basis (for purchase commissions) and an offset

against the selling price (for disposition commissions).    Peti-

tioners cite section 1.263(a)-2(e), Income Tax Regs., and the

cases of Spreckles v. Helvering, 315 U.S. 626 (1942), and Soeder
                              - 32 -

v. Commissioner, a Memorandum Opinion of this Court dated

Mar. 11, 1954.   Petitioners state that, as part of the cost basis

and the selling price, such expenses form part of the loss from

the trading which is otherwise allowable under DEFRA section

108(c).

     Petitioner's reliance on section 1.263(a)-2(e), Income Tax

Regs., Spreckles v. Helvering, supra, and Soeder v. Commissioner,

supra, is unfounded since both the regulations and the cases

cited deal with taxpayers who were involved in securities or

commodities transactions entered into primarily for profit.

Since we have found that petitioner entered into the Hunter gold

futures program in order to obtain substantial tax benefits, the

above-listed fees paid by petitioner constitute payments to

purchase tax deductions and do not form part of the cost basis of

petitioner's gold contracts or reduce the selling price of those

contracts.   Therefore, the fees paid by petitioner are nonde-

ductible personal expenditures.   Ewing v. Commissioner, 91 T.C.

at 421; Brown v. Commissioner, 85 T.C. 968 (1985), affd. sub nom.

Sochin v. Commissioner, 843 F.2d 351 (9th Cir. 1988); Zmuda v.

Commissioner, 79 T.C. 714 (1982), affd. 731 F.2d 1417 (9th Cir.

1984); Houchins v. Commissioner, 79 T.C. 570 (1982); see also

Falsetti v. Commissioner, 85 T.C. 332 (1985).

The 1982 Deduction

     Petitioners contend that, if the Court determines that the

spread transactions were not entered into for profit, DEFRA
                              - 33 -

section 108(c) allows petitioners to take a net out-of-pocket

loss for 1982.   The net out-of-pocket loss would represent the

amount by which petitioner's straddle losses during the subject

years exceeded his straddle gains during the subject years.

Respondent contends that petitioners are only entitled to offset

petitioner's straddle gains by straddle losses to the extent of

his straddle gains.   See Ewing v. Commissioner, 91 T.C. at 421.

     DEFRA Section 108(c) provides as follows:

          (c) Net Loss Allowed.--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 disposi-
     tions 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.

     Further interpretation of DEFRA section 108(c) is provided

by section 1.165-13T, Q&A-3, Temporary Income Tax Regs., 49 Fed.

Reg. 33445 (Aug. 23, 1984), which states as follows:

          Q-3. If a loss is disallowed in a taxable year
     (year 1) because the transaction was not entered into
     for profit, is the entire gain from the straddle
     occurring in a later taxable year taxed?

          A-3.   No. Under Section 108(c) of the Act the
     taxpayer is allowed to offset the gain in the subse-
     quent taxable year by the amount of loss (including
     expenses) disallowed in year 1.

     This Court recently confronted this issue in Nolte v.

Commissioner, T.C. Memo. 1995-57, and held that DEFRA section

108(c) entitles taxpayers to offset straddle losses only to the

extent of straddle gains.   The taxpayers in Nolte, like peti-

tioner, were involved in the Hunter program.
                              - 34 -

     Petitioners argue that Nolte relies on interpretive section

1.165-13T, Q&A-3, Temporary Income Tax Regs., supra, for the

proposition that DEFRA section 108(c) allows the offset of

disallowed losses only against subsequent gains.    Petitioners

contend that the holding in Nolte is incorrect for two reasons.

First, petitioners believe that section 1.165-13T, Q&A-3,

Temporary Income Tax Regs., supra, does not imply that disallowed

losses may only offset subsequent gains.   Second, section

1.165-13T, Q&A-3, Temporary Income Tax Regs., supra, is invalid

to the extent that it implies a contrary result to the plain

language of DEFRA section 108(c).   Petitioners cite Jackson

Family Foundation v. Commissioner, 15 F.3d 917 (9th Cir. 1994),

affg. 97 T.C. 534 (1991), to support the position that an

interpretive regulation is not followed when it "fails to

'implement the congressional mandate in a reasonable manner.'"

Id. at 920 (citing Pacific First Fed. Sav. Bank v. Commissioner,

961 F.2d 800, 803 (9th Cir. 1992), revg. 94 T.C. 101 (1990)

(quoting National Muffler Dealers Association v. United States,

440 U.S. 472, 476 (1979))).   We disagree with petitioners'

position.

     Petitioners incorrectly contend that section 1.165-13T,

Q&A-3, Temporary Income Tax Regs., supra, does not imply that

disallowed losses may only offset subsequent gains.    The plain

language of the regulations states that result.    Section
                              - 35 -

1.165-13T, Q&A-3, Temporary Income Tax Regs., supra, specifically

states that "the taxpayer is allowed to offset the gain in the

subsequent taxable year by the amount of loss (including

expenses) disallowed in year 1."   Thus, the plain language of the

regulations is clear that a taxpayer can offset gain in a

subsequent year but does not state the taxpayer is entitled to a

net loss deduction.

     Petitioners also incorrectly contend that the Court's

reliance in Nolte v. Commissioner, supra, on section 1.165-13T,

Q&A-3, Temporary Income Tax Regs., supra, is unfounded; they

argue that the regulation is invalid to the extent it reaches a

result different from the congressional mandate of DEFRA section

108(c).   The Court in Nolte found that Congress designed DEFRA

section 108(c) as a relief provision so that the Commissioner

could not obtain a windfall by denying straddle losses and then

having taxpayers recognize straddle gains resulting from the

closing of a straddle.   Nolte v. Commissioner, supra.   Section

1.165-13T, Q&A-3, Temporary Income Tax Regs., supra, carries out

Congress' mandate to allow straddle losses but only to the extent

of, and against, straddle gains.

     Therefore, we find that DEFRA section 108(c) and section

1.165-13T, Q&A-3, Temporary Income Tax Regs., supra, make it

clear that petitioners are only entitled to offset their gains by

the amount of the losses.   Nolte v. Commissioner, supra; see also

Ewing v. Commissioner, 91 T.C. at 421.   Accordingly, petitioners
                               - 36 -

are not entitled to an additional deduction for their "net" loss

in excess of straddle gains.

Increased Interest Under Section 6621(c)

     Respondent seeks increased interest from petitioners pur-

suant to section 6621(c).   Rule 142(a).

     Section 6621(c) applies where the Commissioner has estab-

lished that there is an underpayment of at least $1,000 in any

taxable year "attributable to 1 or more tax motivated trans-

actions".   Sec. 6621(c)(2).   Section 6621(c)(3)(A)(iii) specifi-

cally includes any straddle as a tax-motivated transaction.

Thus, since petitioner's Hunter straddle transactions were not

entered into for profit, they are subject to increased interest

under section 6621(c).

     To reflect the foregoing, and the concessions made by the

parties,

                                           Decision will be entered

                                     under Rule 155.
