                         T.C. Memo. 1997-414



                       UNITED STATES TAX COURT



         ALAN M. RESSER AND MELINDA B. RESSER, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 18606-88.                 Filed September 18, 1997.



     Steven D. Blanc, for petitioner Melinda B. Resser.

     Joseph T. Ferrick, for respondent.



         SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION


     WRIGHT, Judge:    This matter is before the Court on remand

from the Court of Appeals for the Seventh Circuit.    Resser v.

Commissioner, 74 F.3d 1528 (7th Cir. 1996), revg. and remanding

T.C. Memo. 1994-241.


     *
       This opinion supplements Resser v. Commissioner, T.C.
Memo. 1994-241, revd. and remanded 74 F.3d 1528 (7th Cir. 1996).
                               - 2 -

     Petitioners filed a joint Federal income tax return for

taxable year 1982.   Respondent determined a deficiency in

petitioners’ 1982 Federal income tax in the amount of $391,113,

and an addition to tax under section 66611 in the amount of

$97,778.50.   Respondent also determined that petitioners were

liable for an increased rate of interest pursuant to section

6621(c) due to a substantial underpayment attributable to a tax-

motivated transaction.   The deficiency, addition to tax, and

increased interest relate solely to Alan M. Resser’s stock option

trades.

     The primary issue presented at trial was whether losses from

Alan M. Resser's stock option spread transactions should be

disallowed because the transactions were not entered into for

profit.   After trial, in Resser v. Commissioner, T.C. Memo. 1991-

423 (Resser I), we held that the losses generated by Alan M.

Resser's stock option trades were not deductible under section

165 because Mr. Resser lacked the requisite profit motive.

Consequently, we sustained respondent's determinations with

respect to the deficiency, addition to tax, and increased rate of

interest.

     Prior to trial of Resser I, Melinda B. Resser filed a Motion

to Sever Issue of Innocent Spouse.     We granted the motion, and a

     1
       All section references are to the Internal Revenue Code in
effect for the year in issue, unless otherwise indicated. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -

separate trial was held in Chicago, Illinois, on the issue of

whether Melinda B. Resser qualifies for relief under the innocent

spouse provision of section 6013(e).

     In Resser v. Commissioner, T.C. Memo. 1994-241 (Resser II),

we concluded that Melinda B. Resser did not qualify as an

innocent spouse because she did not satisfy section 6013(e)(1)(C)

and (D), two of the four requirements of the innocent spouse

relief provision.   Because we found that Melinda B. Resser did

not satisfy the requirements of section 6013(e)(1)(C) and (D), we

did not address whether the understatement resulted from a

grossly erroneous item, as required by section 6013(e)(1)(B).

     On appeal, the Court of Appeals for the Seventh Circuit

reversed our decision and held that Melinda B. Resser did satisfy

section 6013(e)(1)(C) and (D).    The Court of Appeals remanded the

case to this Court solely to determine whether Melinda B. Resser

satisfies section 6013(e)(1)(B).    The parties agree, and we have

found that, for taxable year 1982, petitioners filed a joint

return and that there was a substantial understatement of tax

attributable to Alan M. Resser.    Consequently, the issue before

us is whether the substantial understatement is attributable to

grossly erroneous items.   For the reasons set forth below, we

find that the substantial understatement is attributable to

grossly erroneous items of Alan M. Resser and hold that Melinda

B. Resser has satisfied section 6013(e)(1)(B).
                                   - 4 -

                             FINDINGS OF FACT

        We adopt in full the findings of fact in our prior

memorandum opinions.       For convenience, we repeat below some of

the important findings of fact, and we make additional findings

of fact.       Petitioners resided in Highland Park, Illinois, at the

time their petition was filed.

        From 1973 through 1982, Mr. Resser was a member of the

Chicago Board of Options Exchange (CBOE), a registered national

securities exchange.       Mr. Resser held market maker status in

appointed stock options that he traded at the CBOE.2

        During taxable year 1982, Mr. Resser executed stock option

trades3 at the CBOE in two accounts, account AMR and account

QRF.4       Account AMR was registered in the name of Bichon Venture

(Bichon), an Illinois limited partnership.        Mr. Resser was the

managing general partner of Bichon.        Account QRF was a joint

account registered in the name of Mr. Resser and Rialcor

Securities Corp. (Rialcor), the CBOE member firm through which

        2
       See Resser I for detailed descriptions of both the CBOE
and the market maker function.
        3
       See Resser I for a discussion of the fundamentals of CBOE
option trading.
        4
       For the first 3 months of 1982, account QRF was designated
RSR. It was changed to QRF because of a CBOE rule change. In
February 1982, Mr. Resser entered into 27 option transactions on
7 different days, each involving Superior Oil (SOC) stock
options. Respondent did not challenge the SOC transactions in
account RSR because the transactions merely closed option
positions that were open as of Dec. 31, 1981.
                                - 5 -

Mr. Resser cleared all his trading activities at all times

relevant to this case.    Mr. Resser was a one-third owner of

Rialcor.    Pursuant to an oral agreement, Mr. Resser received 90

percent of the profits and losses realized in account QRF and

Rialcor received the balance.

       A typical workday for Mr. Resser began with a breakfast

business meeting with a co-owner of Rialcor.    After the business

meeting, Mr. Resser reviewed the daily trading sheets of

approximately 40 traders in his performance of risk management

duties for Rialcor.    Next, Mr. Resser would analyze his own

trading positions and prepare for the day's trading.    Mr. Resser

spent approximately 6-1/2 hours a day trading options for Bichon

in account AMR.

       The vast majority of Mr. Resser's option trading in taxable

year 1982 was done for Bichon in account AMR.    He engaged in

trading activities with respect to account AMR on an almost daily

basis.    During 1982, Mr. Resser entered into transactions

involving Baxter Travenol Laboratories, General Foods Corp.,

Honeywell, Inc., and International Business Machines in account

AMR.    From April 1 through December 31, 1982, Mr. Resser entered

into a total of 10,077 option transactions in account AMR.      For

this same period, Mr. Resser entered into only 29 option

transactions in account QRF, each involving Teledyne (TDY) stock

options.    Mr. Resser traded only TDY options in account QRF and
                                - 6 -

did not execute any TDY option transactions in account AMR.       The

exact amount of time spent by Mr. Resser trading for account QRF

is not known, but it appears to have been de minimis.5

     The TDY transactions executed by Mr. Resser for account QRF

were known as "spreads".6   The basic strategy of a spread

transaction is utilizing one option in the spread to offset the

risk of another option in a spread.     Theoretically, a spread

position reduces, to some extent, both risk and profit potential.

This reduction in the risk and profit potential of a spread may

be altered by exercise, by assignment, by offsetting a position,

or through a market event affecting the underlying stock.

     TDY stock prices were volatile during 1982.    On September

30, 1982, Mr. Resser entered into the following TDY box spread:

         Option             Long (Short) Quantity

     April   65   Call             200
     April   65   Put             (200)
     April   70   Call            (200)
     April   70   Put              200




     5
       Mr. Resser testified that a trade could take seconds to
execute.
     6
       A "spread" is a position consisting of both long and short
options in all puts, all calls, or a combination of puts and
calls. See Resser I for an explanation of options and option
trading. Though it was not explicit in the record, we infer that
Mr. Resser was known at the CBOE as a "spreader", that is, a
trader whose specialty was engaging in option spread
transactions.
                                - 7 -

TDY stock closed at 89-3/4 on September 30, 1982.    If the price

of TDY stock declined from 89-3/4 to 70 or below, the September

30 box spread would be profitable.

     On September 30, 1982, Mr. Resser established the following

butterfly spread position:

        Option             Long (Short) Quantity

     April 75 Call                 95
     April 80 Call               (190)
     April 85 Call                 95

This butterfly spread would achieve its optimum profitability if

the TDY stock price decreased to 80.     The September 30 TDY stock

option transactions all occurred within a 10-minute period.

     On October 1, 1982, Mr. Resser established a position that

could be described as a "double box" spread or as two butterfly

spreads.    The spread consisted of the following:

        Option             Long (Short) Quantity

     Jan   65   Call             (129)
     Jan   65   Put               129
     Jan   70   Call              258
     Jan   70   Put              (258)
     Jan   75   Call             (129)
     Jan   75   Put               129

As with the September 30 spreads, the October 1 position would be

able to generate profit if the price of TDY declined.    The

October 1 transactions were reported as having occurred within a

16-minute period.
                               - 8 -

     On October 11, 13, and 14, 1982, Mr. Resser entered into 12

positions comprising 4 butterfly spreads.   From these 4 spread

trades, Mr. Resser closed certain positions and realized net

losses in the amount of $1,121,148.    A portion of these losses,

$188,896, was generated on October 11, 1982, when Mr. Resser

closed out the January 65 call leg from his October 1 TDY

transaction.   On October 13, 1982, Mr. Resser closed out an April

70 call leg from a September 30 spread and realized a $275,181

loss.

     On October 14, 1982, Mr. Resser established an April 70-80-

90 butterfly call spread (100 + 100 short on the wings/200 long

on the body) and realized losses of $448,040.   Mr. Resser also

entered into a January 65-75-85 butterfly call spread that netted

losses of $209,031.

     Mr. Resser's net losses claimed from the few trades

occurring on September 30, October 1, 11, 13, and 14, 1982,

amounted to $1,121,148.   Mr. Resser executed no other stock

option trades in account QRF until December 17, 1982.   On that

date, Mr. Resser entered into a TDY spread and realized a net

gain of $227,442.   The December 17 spread reduced Mr. Resser's

net trading losses in account QRF from $1,121,148 to $893,706.

Mr. Resser's 90-percent share of the $893,706 loss equaled

$804,335.   After the December 17 transactions, no other trades
                                 - 9 -

were executed by Mr. Resser for account QRF during the remainder

of 1982.

     For taxable year 1982, petitioners reported wage income of

$251,413, consisting of $236,550 earned by Mr. Resser as a risk

manager for Rialcor and $14,863 of compensation earned by Mrs.

Resser.    Mr. Resser also earned $42,975 as consulting and

director fees.

     For taxable year 1982, petitioners reported a $250,671 loss

from stock option investments on a Schedule C attached to their

Federal income tax return.    Included in the Schedule C loss were

$804,336 of losses and $555,176 of gains from stock option spread

transactions from account QRF.7    In addition to the $249,160 of

loss ($555,176 minus $804,336), a $1,511 deduction for expenses

related to Mr. Resser's trading activity was claimed, which

resulted in the Schedule C net loss of $250,671.

     Petitioners' 1982 taxable income was computed as follows:

     Income or Loss Item                  Amount

     Wages or salaries                   $251,413
     Interest income                       46,843
     Refunds of State taxes                 3,737
     Schedule C loss                     (250,671)
     Schedule E loss                      (28,599)
     Consulting, director fees             42,975
                                           65,698
     Schedule A and Schedule W
      deductions, exemptions              (62,172)
     1982 Taxable income                 $  3,526

     7
       This also includes the Superior Oil Corp. gains realized
in February 1982 which were not challenged by respondent.
                              - 10 -

Mr. Resser's Schedule C loss reduced petitioners' adjusted gross

income significantly.   Petitioners' 1982 Federal income tax

liability was zero.

     In the notice of deficiency, respondent disallowed Mr.

Resser's account QRF TDY stock option spread losses and expenses

on the basis that the transactions were "not profit motivated."

     At trial, respondent contended that Mr. Resser's trades were

motivated primarily by tax considerations and were a blatantly

obvious attempt to offset all earned wages and other income.

Petitioners argued that Mr. Resser entered into the TDY option

transactions to generate a profit and that his TDY option trading

constituted a trade or business.   Petitioners relied on Laureys

v. Commissioner, 92 T.C. 101 (1989), a case involving a

registered market maker with the CBOE who engaged in TDY option

spread transactions similar to Mr. Resser's TDY spreads.

     In Resser I, we held that the account QRF losses were not

deductible under section 165 because Mr. Resser lacked the

requisite profit motive when he engaged in the transactions.

With respect to section 165(c)(1), we found that Mr. Resser was

involved in four distinct income-earning activities during 1982:

(1) His employment as a risk analyst for traders clearing through

Rialcor (with compensation of $236,550); (2) his daily activities

on behalf of Bichon Venture Partnership (his portion of which was

reported on Schedule E of petitioners' 1982 Federal income tax
                               - 11 -

return); (3) his work as a consultant (earning $40,775); and (4)

his account RSR/QRF activity, described as "Investments" on

Schedule C of petitioners' return.      We found that Mr. Resser's

account QRF trading activity was separate and distinct from his

account AMR trading for Bichon and his other trading-related

activities.    We thus evaluated his account QRF activity

separately and held that Mr. Resser's personal trading activity

in account QRF was not conducted with the regularity or

continuity necessary to consider the activity a trade or

business.    Our holding was based on the fact that no trading

occurred in account QRF from the beginning of March 1982 until

September 30, 1982.    For the balance of the year, Mr. Resser

traded TDY in account QRF on only 6 days, establishing only nine

spreads.    Additionally, Mr. Resser failed to establish whether

his TDY trading consumed only a few minutes during the year or a

significant portion of several days.      We concluded that Mr.

Resser's insubstantial and infrequent trading in TDY stock

options did not constitute a trade or business and that

petitioners were not entitled to deduct Mr. Resser's account QRF

losses under section 165(c)(1).

     With respect to section 165(c)(2), we stated that the Court

has consistently held that, in order to deduct a loss under

section 165(c)(2), the taxpayer must show that profit was the

primary motivation for entering the transaction.      We then
                              - 12 -

articulated petitioners' burden as one of proving that Mr. Resser

executed the TDY stock option spread transactions "primarily for

the purpose of obtaining an economic profit independent of tax

savings".   Resser v. Commissioner, T.C. Memo. 1991-423.

     Despite Mr. Resser's testimony to the contrary, we held that

Mr. Resser did not prove that he entered into the TDY

transactions at issue primarily for profit:

          We are unpersuaded that * * * [Mr. Resser's]
     primary purpose for engaging in stock option spreads
     was to make a profit. In January 1982, * * * [Mr.
     Resser] failed to transact any stock option trades in
     the RSR account. In February, * * * [Mr. Resser]
     closed out one box spread that he had opened in 1981.
     From March until the end of September, * * * [Mr.
     Resser] did not enter into any stock option trades in
     the newly named QRF account. In a 2-week period, from
     September 30 to October 14, * * * [Mr. Resser]
     generated losses of $1,121,148. From October 15 to
     December 16, * * * [Mr. Resser] did not trade in the
     QRF account. On December 17, 1982, * * * [Mr. Resser]
     established his last spread for the year. The December
     17 three-way box spread resulted in a net gain of
     $227,442. This reduced * * * [Mr. Resser's] overall
     QRF trading losses to an amount which exceeded the
     account RSR/QRF trading gains and his wages from
     Rialcor. In addition, the TDY trading losses resulted
     in petitioners' paying zero tax for taxable year 1982.
          * * * [Mr. Resser] was an experienced,
     sophisticated trader in option transactions, with the
     knowledge and background to make his own trading
     decisions. To execute the loss generating trades, * *
     * [Mr. Resser] established and used an account other
     than the one in which he conducted his primary trading
     activities. * * * [Mr. Resser] was undoubtedly aware
     of the favorable tax consequences arising from the
     offset of losses reported on Schedule C, Form 1040,
     against other income and deferring trading gains to
     subsequent years. * * *
          * * * [Mr. Resser's] overall trading pattern also
     indicates that the transactions were primarily tax-
                              - 13 -

     motivated. * * * [Mr. Resser] traded on only 6 days in
     the QRF account, establishing a total of 9 spreads.
     The spreads established on September 30 and October 1
     did not close any previously acquired leg and no gains
     or losses were realized on those dates. On October 11,
     1982, * * * [Mr. Resser's] trading resulted in the
     realization of a $188,896 loss. On October 13, 1982,
     * * * [Mr. Resser] established a butterfly spread and
     simultaneously closed an April 70 call leg realizing a
     loss of $275,181. On October 14, 1982, * * * [Mr.
     Resser's] closing of prior transactions resulted in a
     net loss of $657,071.
          On October 14, 1982, * * * [Mr. Resser's] Customer
     Account Status Report disclosed that he had open
     positions in his [QRF] account containing unrealized
     profits totaling $1,139,837. If * * * [Mr. Resser]
     would have closed all his positions on October 14, the
     net economic gain would have been approximately
     $18,689. The record indicates that * * * [Mr. Resser]
     consistently liquidated his loss legs and left the
     majority of his profitable legs open until the next
     taxable year. * * * [Mr. Resser's] Customer Account
     Status Report for December 17, 1982, indicated that the
     open positions in his account contained unrealized
     profits of $872,075. The net gains realized in 1983
     resulting from the closure of those open option
     positions as of December 17, 1982, totaled $871,874.
     [Resser v. Commissioner, T.C. Memo. 1991-423.]

     Petitioners argued that the facts of their case were similar

enough to the facts of Laureys v. Commissioner, 92 T.C. 101,

(1989), to warrant a decision that Mr. Resser's motivation was

the same as the taxpayer's in Laureys.   As mentioned, Laureys

involved a registered market maker with the CBOE who engaged in

TDY option spread transactions similar to Mr. Resser's TDY

spreads.   In Laureys, this Court found that there was no direct

evidence of tax planning or motivation on the taxpayer's part and

concluded:
                             - 14 -

     [The taxpayer's] primary purpose in engaging in options
     transactions, spread transactions, butterflies, and
     specifically the transactions in issue, was consistent
     with and part of his overall portfolio strategy to make
     a profit. Thus, the transactions had sufficient
     economic substance to be recognized for tax purposes.
     See Yosha v. Commissioner, 861 F.2d [494 (7th Cir.
     1988), affg. Glass v. Commissioner, 87 T.C. 1087
     (1986)] at 499. [Laureys v. Commissioner, supra at
     134-133.]

As a result, we disagreed with the Ressers' assertion that the

facts of their case were similar to those of Laureys and

distinguished Laureys as follows:

          First, we note that the taxpayer in Laureys relied
     almost exclusively on his trading activities in stock
     options as his sole source of income. The taxpayer
     received practically no other income. In contrast,
     petitioners had wages of approximately $250,000 as well
     as consulting income in excess of $40,000.
     Petitioners' need for offsetting tax losses to reduce a
     substantial amount of taxable income is apparent.
     Moreover, with other sources of income, it is evident
     that petitioners were not forced to rely on the TDY
     trading gains to earn a living.
          The taxpayer in Laureys engaged in market making
     for his own account on a full-time basis. In the
     instant case, * * * [Mr. Resser] entered into just 9
     TDY spread transactions on only 6 days for his own
     account during the year (excluding the spread closed
     out in February 1982). * * * [Mr. Resser] spent the
     majority of his time as a risk analyst, consultant, and
     trading for the Bichon Venture Partnership/AMR account.
          The taxpayer in Laureys traded in at least eight
     different option classes whereas * * * [Mr. Resser]
     traded only TDY stock options in the QRF account. In
     Laureys, the taxpayer attempted to vary his strategy
     behind the trades in his account. He was sometimes
     bullish, sometimes bearish, and sometimes attempting to
     capture a dividend. * * * [Mr. Resser's] testimony is
     that he maintained a bearish strategy with respect to
     the TDY trades. * * * [Resser v. Commissioner, T.C.
     Memo. 1991-423.]
                              - 15 -

     In conclusion, we noted that tax benefits of Mr. Resser's

option spread strategy "so far outweigh[ed] the economic profit

potential" that we could not accept Mr. Resser's contention that

he was primarily motivated by the desire to earn a profit.     Id.

Consequently, we sustained respondent's determination and

disallowed the claimed losses from the account QRF TDY stock

option transactions.

     With respect to the section 6661 addition to tax, we held

that Mr. Resser's principal purpose for the stock option trading

in account QRF was the avoidance of Federal income tax, and,

therefore, the trading activity met the section 6661(b)(2)(C)

definition of a "tax shelter".   Because we concluded that Mr.

Resser had no substantial authority for the tax treatment of his

TDY trading in taxable year 1982, we sustained respondent's

determination.   We likewise sustained respondent's imposition of

increased interest under section 6621(c) because Mr. Resser's

stock option spread transactions were not entered into for profit

and thus any underpayment based on those transactions was

attributable to a tax-motivated transaction.

                              OPINION

     As mandated by the Court of Appeals for the Seventh Circuit,

we must decide whether the claimed losses generated by Mr.

Resser's account QRF stock option spread transactions are

"grossly erroneous items", as required by section 6013(e)(1)(B)
                                - 16 -

of the innocent spouse provision.    "Grossly erroneous items" are

defined, in relevant part, as "any claim of a deduction, credit,

or basis by such spouse in an amount for which there is no basis

in fact or law."   Sec. 6013(e)(2)(B).   A deduction has no basis

in fact when the expense for which it is claimed was never, in

fact, made.   Douglas v. Commissioner, 86 T.C. 758, 762 (1986).       A

deduction has no basis in law when the expense, even if made,

does not qualify as a deductible expense under well-settled legal

principles or when no substantial legal argument can be made in

support of its deductibility.     Flynn v. Commissioner, 93 T.C.

355, 364 (1989); Douglas v. Commissioner, supra at 762-763.       The

spouse seeking relief need only prove that an item of deduction

lacked either a basis in fact or a basis in law, but need not

prove both.   See Id. at 762-763.    Ordinarily, a deduction has no

basis in fact or law if it is "fraudulent", "frivolous", "phony",

or "groundless".   Bokum v. Commissioner, 992 F.2d 1132, 1142

(11th Cir. 1993), affg. 94 T.C. 126 (1990); Douglas v.

Commissioner, supra at 763.     Whether a claim of deduction is

grossly erroneous must be evaluated as of the time of filing of

the tax return.    Friedman v. Commissioner, 53 F.3d 523, 529 (2d

Cir. 1995), affg. in part, revg. in part, and remanding T.C.

Memo. 1993-549.

     The parties do not dispute that the deduction in question

had a basis in fact.   Consequently, our inquiry is whether the
                               - 17 -

deduction lacked a basis in law.    Mrs. Resser bears the burden to

prove that the loss deduction had no basis in law at the time

petitioners filed their 1982 Federal income tax return.    Rule

142(a); Busse v. United States, 542 F.2d 421, 425 (7th Cir.

1976).

     Mrs. Resser relies on our holding in Resser I to prove that

Mr. Resser's stock option spread losses are grossly erroneous

items.    Specifically, she argues that, because we found "pursuant

to well settled legal principles" that Mr. Resser's stock option

trades were "not engaged primarily for profit", there was no

legal basis for deducting the account QRF losses.

     Respondent's principal contention is that, because the

trades were legitimate, i.e., the trades were executed on a

regulated exchange and entered into using the open outcry auction

method during the regular trading period on the exchange, and, as

recognized by the Court in Resser I,8 the potential for both

     8
         In Resser I, we stated:

            It is uncontested that the potential for
            profit exists in stock option spread
            transactions like those engaged in by
            petitioner, as does the potential for
            economic loss. However, the fact that there
            is a reasonable expectation of profit is not
            determinative. Ewing v. Commissioner, [91
            T.C. 396,] 416. The relevant test is whether
            petitioner's primary purpose for entering
            stock option spread transactions was for
            profit. We agree with respondent that the
            TDY trades at issue were not primarily profit
                                                      (continued...)
                                  - 18 -

profit and economic loss exists in transactions like those

executed by Mr. Resser, there was a basis in law for the

deduction when petitioners filed their return.

       Profit motive is required by the provisions of the Internal

Revenue Code governing the option spread transactions at issue.

A loss incurred by an individual, to be deductible under section

165, must be "incurred in a trade or business" or "incurred in

any transaction entered into for profit".       Sec. 165(c)(1) and

(2).       To be engaged in a trade or business, a taxpayer must be

involved in an activity with continuity and regularity, and the

taxpayer's primary purpose for engaging in the activity must be

for income or profit.       Groetzinger v. Commissioner, 480 U.S. 23,

25 (1987).       With respect to section 165(c)(2), the term "for

profit" has been "interpreted to require that the 'nontax profit

motive predominates.'"       Yosha v. Commissioner, 861 F.2d 494, 499

(7th Cir. 1988), affg. Glass v. Commissioner, 87 T.C. 1087 (1986)

(quoting Miller v. Commissioner, 836 F.2d 1274, 1279 (10th Cir.

1988) revg. 84 T.C. 827 (1985)).       More specifically, profit

motive refers to the desire for economic profit, independent of

tax savings.       Fox v. Commissioner, 82 T.C. 1001, 1022 (1984);

Surloff v. Commissioner, 81 T.C. 210 (1983).



       8
        (...continued)
            motivated. [Resser v. Commissioner, T.C.
            Memo. 1991-423.]
                              - 19 -

     In Resser I, we held that Mr. Resser's "insubstantial and

infrequent" personal trading activity in account QRF was not

conducted with the regularity or continuity necessary for the

activity to be considered a trade or business.   Mr. Resser's

segregation of his personal trades into a separate account, the

methodical closing out of loss legs and the holding open of

unrealized gain legs, his trading of TDY options in account QRF

on only 6 days of the year, the establishment of only 9 TDY

option spreads on those 6 days, and his need to shelter

substantial earned wages and other income also persuaded the

Court that Mr. Resser was not motivated primarily by profit when

he entered the transactions, but motivated solely by tax

considerations.   Thus, as our opinion in Resser I makes clear,

deduction of Mr. Resser's account QRF losses was prohibited by

section 165(c)(1) and (2).   Moreover, the courts have

consistently held that a transaction entered into solely for

favorable tax consequences, having no commercial, legal, or

profit objective, will not be given effect for Federal income tax

purposes.   See, e.g., Frank Lyon Co. v. United States, 435 U.S.

561 (1978); Knetsch v. United States, 364 U.S. 361 (1960); Yosha

v. Commissioner, supra; Rice's Toyota World, Inc. v.

Commissioner, 752 F.2d 89 (4th Cir. 1985), affg. in part and

revg. in part 81 T.C. 184 (1983); Patin v. Commissioner, 88 T.C.

1086 (1987), affd. without published opinion 865 F.2d 1264 (5th
                              - 20 -

Cir. 1989). Hatheway v. Commissioner, 856 F.2d 186 (4th Cir.

1988), affd. sub nom. Skeen v. Commissioner, 864 F.2d 93 (9th

Cir. 1989), affd. sub nom. Gomberg v. Commissioner, 868 F.2d 865

(6th Cir. 1989); Bessenyey v. Commissioner, 45 T.C. 261 (1965),

affd. 379 F.2d 252 (2d Cir. 1967).     It was thus under well-

settled legal principles that we denied petitioners' deduction

for the losses generated by Mr. Resser's account QRF option

spread transactions.

     On brief, respondent cites two cases to support a finding

that, despite our holding in Resser I that Mr. Resser lacked the

requisite profit motive, the claimed option losses are not

grossly erroneous items.   Each, however, is distinguishable from

the instant case.   See Russo v. Commissioner, 98 T.C. 28, 29

(1992) ("London Options" commodity straddle tax shelter initially

sanctioned by several Internal Revenue Service private letter

rulings); Anthony v. Commissioner, T.C. Memo. 1992-133 (no

evidence presented by taxpayer, other than statutory notice of

deficiency, to prove that disallowed losses from computer-leasing

activity, which were eventually the subject of a compromise

settlement between the Internal Revenue Service and the

investors, were grossly erroneous).     Respondent also makes much

of our discussion in Resser I where, with regard to the section

6661 addition to tax, we stated:
                              - 21 -

     Section 1.6661-3(a)(2), Income Tax Regs., provides that
     the substantial authority standard is stricter than the
     reasonable basis standard. The regulation also states
     that a position with respect to the tax treatment of an
     item that is "arguable but fairly unlikely to prevail
     in court would satisfy a reasonable basis standard, but
     not the substantial authority standard." In the
     instant case, petitioners rely heavily on Laureys v.
     Commissioner, [92 T.C. 101 (1989)], to support the
     position that [Mr. Resser's] trading was profit
     motivated. Although we think [Mr. Resser's] position
     is arguable, the facts in Laureys are materially
     distinguishable from those of this case. Therefore,
     [Mr. Resser's] position might arguably satisfy the
     reasonable basis standard but falls short of satisfying
     the substantial authority standard. * * * [Resser v.
     Commissioner, T.C. Memo. 1991-423.]

We disagree with respondent that this mandates a finding that

there was some basis in law for the account QRF loss deduction.

In Laureys v. Commissioner, 92 T.C. 101 (1989), there was no

direct evidence of tax planning or motivation on the part of the

taxpayer.   Our statement in Resser I indicates that Mr. Resser

relied on Laureys with respect to the account QRF losses because

the possibility of profit does exist in these types of

transactions.   However, as we found in Resser I, Mr. Resser's

pattern of trading in account QRF clearly demonstrated his lack

of a profit motive.   Despite what respondent refers to as "the

economic viability and legality" of the option spread

transactions at issue, Mr. Resser's account QRF transactions were

neither conceived nor executed with the dominant objective of

making a profit.   Mr. Resser, a sophisticated and experienced

trader, designed his trades to produce a loss.   He engaged in
                              - 22 -

trades on only 6 days in the taxable year and generated enough

losses to offset almost completely both his and his wife's

taxable income from other sources.     Mr. Resser's pattern of

trading reveals that he received what he sought--tax benefits to

offset other income.   Mr. Resser's activities with respect to

account QRF were, fundamentally, a tax shelter.    As such, the

losses attributable thereto were not deductible under well-

settled legal principles.   Accordingly, the deduction derived

from the account QRF option spread losses constitutes a grossly

erroneous item as required by section 6013(e)(1)(B).

     We have considered all of respondent's arguments and, to the

extent not discussed above, find them to be without merit.

     To reflect the foregoing,



                                      An appropriate order and

                                 decision will be entered.
