NEW YORK, OCT. 9 -- Edward A. Markowitz, who has admitted to masterminding one of the largest income tax frauds in history from his former L Street offices in Washington, told a jury here today that when his scheme collapsed in 1983, he was drinking a quart of Irish whiskey daily and snorting $2,000 worth of cocaine every week.

Markowitz, who at the height of his fraud was a part owner of the Washington Capitals hockey team, an owner of Maryland racehorses, and the occupant of a mansion overlooking Rock Creek Park, described his addictions and personal collapse while testifying in the trial of a former business partner, Charles A. Atkins.

Atkins is charged with running a fraudulent tax shelter scheme that the government says generated $350 million in phony tax deductions for a panoply of wealthy Manhattan executives and Hollywood celebrities. Markowitz, an early partner in the firm, testified today for the prosecution.

Markowitz pleaded guilty in 1985 to four tax fraud counts relating to a similar but separate tax shelter scheme he ran in Washington. Markowitz founded his D.C. operation after a falling out with Atkins.

In his testimony today, Markowitz recounted his stormy relationship with Atkins and described how his former partner allegedly generated phony tax losses for his investors. Markowitz, who said he has been working for the past year as the general manager of a flight school in Gaithersburg, also talked about his own crimes and personal travails.

The alleged schemes sprung from a chance meeting 10 years ago between Atkins and Markowitz at a Connecticut Avenue branch of Merrill Lynch & Co. Inc., where Markowitz was working as a broker. Markowitz testified that Atkins, then in his early 20s and a fellow at the Brookings Institution, was looking for a broker and selected Markowitz after dropping by the Merrill Lynch office.

In meetings at Washington's Mayflower hotel, Markowitz said, the pair soon began concocting plans to start their own firm to generate tax deductions for investors by trading in government securities. Markowitz formed the idea after seeing a private investment prospectus being circulated by a similar company, he said.

"The initial primary purpose was to get tax writeoffs" not to commit fraud, Markowitz testified today.

Markowitz said that he and Atkins had clearly defined roles in their newly formed company: Markowitz would direct the actual securities trading operations, while Atkins -- the son of former Ashland Oil Co. chief executive Orin Atkins -- would raise the money and deal with customers.

By late 1978, Markowitz testified, Atkins had obtained start-up capital from his father and had solicited more than $3 million in investments. The new firm, called The Securities Groups, opened for business on Park Avenue in Manhattan. At the time, Markowitz said he had "a mild addiction" to alcohol and cocaine.

Problems at the new company developed quickly, Markowitz testified. He said that he had hoped to generate substantial tax deductions for investors by making legitimate securities trades, but found quickly that he was unable to create the tax losses without illegally rigging the trades. Moreover, Markowitz lost more than $330,000 of the firm's initial capital by trading in risky foreign currency futures contracts, he said.

Confronted with his failure to generate the tax deductions promised to investors, Markowitz testified that he asked other traders employed by The Securities Groups for help, and that one of them, Steven Hageman, said he could "arrange tax losses for a fee."

In the scheme described by Hageman, Markowitz said, "the only economic risk would be the fee paid {to another firm} for the loss." Hageman has pleaded guilty to tax fraud charges and testified against Atkins before Markowitz took the stand.

After investigating Hageman's proposal, Markowitz said that he "told Charlie {Atkins} I wasn't able to trade {legitimately} for the losses" and that a Wall Street firm had been found that was willing to generate fake losses for a 4 percent fee. Atkins later told Markowitz that he had negotiated an agreement with the firm to produce phony tax deductions, Markowitz said.

The partnership between Markowitz and Atkins ended abruptly in April 1979, just a few months after it had begun, Markowitz testified. He said that Atkins called him at home one Sunday and instructed him to attend a meeting the next day at Ashland Oil headquarters in Kentucky. At the meeting, Atkins accused Markowitz of incompetence and asked him to resign, Markowitz said.

"I think he actually handed me a resignation letter and asked me to sign it," Markowitz recalled.

Markowitz later sued Atkins over their falling out and received a settlement payment of several hundred thousand dollars, Markowitz testified today.

On cross examination, Atkins' attorney, James Moss, asked Markowitz to describe his steadily worsening addiction to alcohol and cocaine -- an addiction Markowitz said ended in 1983. Markowitz, bearded and rotund, recounted in a steady voice that his use of alcohol increased from two or three drinks daily in the late 1970s to a quart of whiskey by 1983. He also said that he went from using a gram of cocaine on weekends to ingesting a full ounce every week.

Moss also brought out on cross examination that, shortly after leaving The Securities Groups because of his dispute with Atkins, Markowitz was asked to resign from a job at Dean Witter Reynolds Inc. Markowitz admitted that he caused trading profits belonging to a Dean Witter customer to be placed in an "inappropriate" account -- not Markowitz's own account, he said, but not the customer's either.

After leaving Dean Witter, Markowitz returned to Washington and formed his own tax shelter company, with L Street offices. He eventually attracted a large stable of well-known investors, including actor Woody Allen and author Erica Jong. Separately in Manhattan, Atkins enjoyed similar success with The Securities Groups, attracting investors such as CBS Inc. chief executive Laurence Tisch and actor Michael Landon.

(None of the investors has been charged with any wrongdoing, but they have been required to pay back taxes, interest and, in some cases, penalties.)

By early 1984, however, The Securities Groups was in disarray. Atkins and the firm filed for federal bankruptcy protection, and Markowitz secretly entered into a cooperation agreement with prosecutors. Part of the agreement was that Markowitz would provide evidence against Atkins.

Markowitz has yet to be sentenced; he faces a maximum of 16 years in prison, he said today.