A federal grand jury investigating use of the commodity markets to create fictitious income-tax deductions yesterday indicted 11 brokers at the New York Cotton Exchange for rigging prices, conspiracy, tax evasion and related charges.

In a 63-count indictment, the grand jury charged that the group of brokers arranged more than $1 million in artificial commodity trading losses then claimed the losses as tax deductions, cheating the government out of $500,000 in income taxes. The indictments stem from an investigation by the U.S. attorney's office in the Southern District of New York, the Internal Revenue Service and the Commodity Futures Trading Commission.

The indictments charge the brokers arranged in advance to lose money to each other, then those who profited on the transactions gave 80 percent of the money back to the losers.

The fradulent transactions were set up in the cotton, crude oil and liquified petroleum gas (LPG) futures markets, according to the indictments. lFutures contracts for all three commodities are traded on the New York Cotton Exchange.

Cotton Exchange officials yesterday declined to comment on the indictments.

One of those indicted, Frederick J. Dickson, 60, of Middletown, N.J., was identified by authorities as a member of the exchange's board of directors. w

Four others are on the board of managers of Petroleum Associates of the New York Cotton Exchange, a subsidiary of the Cotton Exchange that operates the crude oil and LPG futures market.

Along with the indictments, federal authorities disclosed that a former Cotton Exchange board member, Benjamin F. Tipton, secretly pleaded guilty to a misdemeanor tax-evasion charge last February. In a guilty plea that was sealed at the request of prosecutors, Tipton admitted Dickson helped him arrange a phony $5,000 tax deduction in 1974.

Dickson, a vice president of Dan River Cotton Co. -- one of the nation's biggest producers of cotton fabrics, sheets and towels -- reportedly is cooperating with federal investigators.

U.S. Attorney John S. Martin Jr. said a federal grand jury is continuing to investigate tax-evasion schemes "on New York commodities markets" in cooperation with the Internal Revenue Service and the Commodity Futures Trading Commission.

The probers reportedly are looking into not only the Cotton Exchange but also three other New York-based futures markets which share facilities in the World Trade Center with the Cotton Exchange. The other markets are the Commodity Exchange Inc., the New York Mercantile Exchange and the New York Cocoa, Coffee and Sugar Exchange.

Yesterday's 11 indictments were the second batch of federal charges filed for alleged tax evasion by Cotton Exchange traders. In April 1978 a grand jury indicted nine brokers for allegedly arranging artificial lose in crude oil futures.

The latest indictments charge the 11 brokers were part of a conspiracy that began on Sept. 10, 1974 -- the day the Cotton Exchange began trading crude oil futures.

Futures contracts are agreements to buy and sell a commodity for delivery at some future date. Futures contracts are used mainly by consumers and producers of commodities to protect themselves against unexpected changes in prices.

In recent years, however, futures market transactions have been used widely by wealthy Americans to avoid paying federal income taxes. The best-known commodity tax avoidance scheme is called "the silver butterfly" and involves simultaneously buying and selling silver futures contracts. The "butterfly" creates an artificial tax loss that can be deducted from this year's income and an identical profit that will be taxed next year at a lower rate. In effect, it can cut a wealthy taxpayer's income tax rate from 70 percent to 28 percent and delay payment of taxes for a year or more.

The Internal Revenue Service has refused to allow taxpayers to claim deductions for deliberate commodity futures losses, but the IRS ruling has been challenged in court and no final decision has been made. A bill was introduced in the last Congress to change the tax law to close what the sponsors claim is a $3-billion-a-year loophole.

If the IRS wins the case, now pending in U.S. Tax Court, thousands of taxpayers will be forced to pay the government millions of dollars in taxes. The IRS, however, has not accused users of "butterfly" transactions of criminal tax evasion.

Yesterday's indictment accused the New York Cotton Exhcange brokers of going beyond the use of a legal loophole to avoid taxes and violating several federal laws in an effort to cut their tax payments. The grand jury accused the professional commodity traders of conspiring to manipulate trading and create "fradulent" losses to hide profits they had made on other deals.

Cotton Exchange Board member Dickson, the indictments charge, set up a loss of $155,000 in 1976 that enabled him to avoid paying more than $100,000 in taxes. Nine other brokers were accused of evading smaller amounts of taxes and of helping the others arrange their own losses.