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).
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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.
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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).
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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.
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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
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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.
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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.
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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
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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.
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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
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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
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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-
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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:
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[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.]
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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)
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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
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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...)
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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.]
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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
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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:
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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
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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.