                         T.C. Memo. 1998-127



                       UNITED STATES TAX COURT



         CHEN C.AND VICTORIA R. WANG, ET AL.,1 Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 10511-94, 10512-94,           Filed March 31, 1998.
                 19176-94, 19177-94,
                  3857-95, 3858-95.



     Martin A. Schainbaum, for petitioners.

     David B. Porter (specially recognized), for petitioners.

     Patricia A. Golembiewski and Thomas G. Schleier, for
respondent.




     1
      Cases of the following petitioners are consolidated here-
with: EIC Group, Inc. and Subsidiary, docket No. 10512-94; EIC
Group, Inc. and Subsidiaries, docket No. 19176-94; Chen C. and
Victoria R. Wang, docket No. 19177-94; Chen C. and Victoria R.
Wang, docket No. 3857-95; and EIC Group, Inc. and Subsidiaries,
docket No. 3858-95.
                                   - 2 -


                  MEMORANDUM FINDINGS OF FACT AND OPINION


     FAY, Judge:       These consolidated cases involve the following

determinations by respondent of deficiencies in, and penalties on

petitioners' Federal income taxes:

Docket Nos. 10511-94, 19177-94, 3857-95
            Chen C. & Victoria R. Wang
                                                       Penalty

                                                         Sec.
           Year                 Deficiency             6662(a)
           1989                   $76,529              $15,306
           1990                   398,475               79,695
           1991                     7,309                1,461

Docket Nos. 10512-94, 19176-94, 3858-95
            EIC Group, Inc. and Subsidiaries
                                                       Penalty

                                                         Sec.
           Year                 Deficiency             6662(a)
           1989                 $5,469,221            $1,093,844
           1990                  1,919,053               383,811
           1991                    977,776               195,555
           1992                  1,171,312               234,262


     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.

     These cases were consolidated for trial, briefing, and

opinion.    Prior to trial, the parties settled a number of
                               - 3 -


issues.2   As a result, the deficiencies now asserted by

respondent have been reduced from those set forth in the notices

of deficiency.   After concessions, the issues remaining for

decision are:

     1.    Whether petitioners improperly elected to use the

installment method of accounting to report income from sales of

real property; and, if the elections were improper, whether

petitioners should use the accrual method as determined by

respondent or the cost recovery method advocated by petitioners;3

     2.    whether petitioner Chen C. Wang's closely held corpora-

tion, EIC Group, Inc. (EIC), is entitled to deduct as reasonable

compensation commissions of $901,428 and a bonus of $500,000 paid

to Chen C. Wang in 1989 and 1990, respectively;

     3.    whether expenditures of $550,663 made in 1990 by EIC

for the benefit of the Wangs represent loans to the Wangs or

constructive dividends; and

     4.    whether petitioners are liable for the accuracy-related

penalties under section 6662(a).


     2
      In connection with the settlements, the parties filed with
the Court the first stipulation of settled issues, followed by
the second, third, fourth, fifth, sixth, and seventh stipulations
of settled issues.
     3
      If we find that petitioners must use the accrual method,
there are several subissues concerning the proper calculation of
income under the accrual method. See infra discussion.
                               - 4 -


                         FINDINGS OF FACT

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

The stipulation of facts, the first supplemental stipulation of

facts, the second supplemental stipulation of facts, and the

exhibits attached thereto are incorporated herein by this

reference.   Petitioner Chen C. Wang (petitioner) and his wife,

petitioner Victoria R. Wang, resided in Woodside, California, at

the time their petitions were filed.   At the time its petitions

were filed, the principal place of business for EIC was located

in Redwood City, California.

     Petitioner moved to the United States from Taiwan nearly 40

years ago.   He has a degree in electrical engineering from San

Jose State University and a Masters in Business Administration

from the University of California at Berkeley.    After completing

his education, petitioner went to work for IBM.    While at IBM,

petitioner investigated ways to increase his income, and he

ultimately decided that the best way to make money was to invest

in real estate.   Thereafter, petitioner began investing in real

estate, eventually leaving IBM to devote more of his time and

energy to increasing his real estate business.    In 1982, peti-

tioner incorporated EIC and used it as the vehicle to effectuate

his real estate investment strategy.   Nevertheless, occasionally

petitioner personally purchased and sold land for his own

account.
                               - 5 -


     Petitioner's real estate strategy focused on purchasing raw,

undeveloped land and reselling it to investors.    Typically,

petitioner advised his investors that they would have to hold the

land at least 7 to 10 years in order to realize profitable

returns.   Petitioner believed that the most profitable land was

located on the outskirts of a large metropolitan center.    Based

on this belief, during the years at issue, petitioner had decided

that the land with the best investment potential was located in

Lancaster, California, and Palmdale, California, areas well

outside of Los Angeles.   Petitioner felt that this land was well

positioned, given the expected population growth for Los Angeles.

     The property petitioner purchased in Lancaster and Palmdale

was generally flat, semi-arid, undeveloped land.    At one time,

the land may have been used as farmland, but, by 1989 it had

reverted to desert.   The land was zoned for agricultural use,

with a density that allowed for one house to be built on every 2

acres of land.   There were no improvements to or on the land

petitioner purchased, such as utilities, streets, curbs, or

gutters.   The land was not subdivided, but simply consisted of

"raw" land in the desert described by metes and bounds.

     Typically, either petitioner or EIC would acquire the raw

land by paying 10 or 20 percent down, and giving the seller a

note for the balance.   Then petitioner would sell the land at a

substantial markup in what was described at trial as the "retail
                                - 6 -


land market".   The markup could range anywhere from 4 to 6 times

the amount paid for the land.   The buyer would make a sizeable

downpayment to EIC and take the property subject to an all-

inclusive deed of trust.   An all-inclusive deed of trust includes

the promissory note made by EIC in favor of the original seller.

Under this arrangement, as the buyer made payments on the promis-

sory note to EIC, a part of the payment was used by EIC to make

the payments due on EIC's promissory note given to the original

seller.   EIC also used what is termed an "agreement of sale".       An

agreement of sale is different than a trust deed because, unlike

a trust deed, the agreement of sale is not recorded.      Rather, in

the agreement EIC simply promised to transfer the deed to the

buyer at some future time, presumably after the buyer had made

all the payments due on its promissory note to EIC.

     The promissory notes held by EIC were secured by the land.

As outlined supra, typically EIC or petitioner would purchase

large parcels of real estate and then sell undivided interests in

the property to various investors.      These fractional interests

were less attractive as security because an owner would have to

receive the consent of the remaining property owners before

making use of the property.   However, it appears that people who

purchased land from EIC only held it as an investment, and few

buyers, if any, actually built any structures on, or made any

improvements to the property.
                               - 7 -


     During the years at issue, petitioner and his wife owned

approximately 98 percent of the stock in EIC.   Further, during

this period, petitioner was the chief executive officer, chair-

man, and, except for a brief period, the president of EIC.    Since

its inception, Mrs. Wang has been the secretary, treasurer, and

chief financial officer of EIC.   Petitioner typically worked 10

hours a day, 6 days a week.   Petitioner is very driven, and he is

involved with nearly every sale transaction that occurs at EIC.

     The success enjoyed by EIC and petitioner is a reflection of

petitioner's industry and dedication.   Revenues reported in EIC's

financial statements grew from $4,118,262 in 1985 to $29,411,411

in 1989, while assets grew from $23,343,200 to $46,231,210.

Recent promotional materials for EIC indicate that the company

owns investment property worth in excess of $60,000,000, and that

investors have enjoyed an average annual appreciation of 25.9

percent on their investments, based on a sampling of prices over

a 15-year period.   At the peak of operations, approximately 12

people were employed at EIC's headquarters full time.   In addi-

tion, there were 11 branch offices located throughout California,

and as many as 50 sales agents worked at these branches.    Most of

the agents were independent contractors, although a few were

classified as employees of EIC.

     The market for raw land suffered a downturn in 1990.    How-

ever, EIC was able to continue selling land despite this down-
                                - 8 -


turn.    Companies that were able to sell land, like EIC, did so by

developing superior marketing techniques or by utilizing connec-

tions with overseas buyers.

Accounting Methods

     EIC keeps its books and records on the accrual basis for the

purpose of preparing its financial statements.     For tax purposes,

during the years in issue, EIC and petitioner elected to use the

installment method for reporting income in their tax returns.

     This is the second instance where petitioner has been

involved in litigation before the Tax Court.     Previously,

respondent issued petitioner and Mrs. Wang notices of deficiency

for their 1979 and 1980 Federal income tax returns.     The most

significant portion of the deficiencies for the 2 years related

to the income and expenses respondent determined in connection

with the Wangs' land sales activities.     Petitioner and Mrs. Wang

presented these issues to this Court in a trial that was held on

November 30, 1989, and December 1, 1989.     However, no opinion was

issued because all of the issues were resolved by the parties

after the trial.   The parties executed a closing agreement on

final determination covering specific matters for the 1979 tax

year (the 1979 closing agreement).4     A decision was entered

     4
      No closing agreement was executed for the 1980 tax year.
The following constitutes the closing agreement for 1979:
     WHEREAS, taxpayers' 1979 income tax return, Docket No.
                                                   (continued...)
                               - 9 -


pursuant to the terms of the 1979 closing agreement.

     Petitioner and Mrs. Wang timely filed their 1989 Federal

income tax return, which was received by the Internal Revenue

Service on October 11, 1990.   On their 1989, 1990, and 1991

Federal income tax returns, the Wangs elected to use the



     4
      (...continued)
     11281-83, is currently before the United States Tax
     Court;
     WHEREAS, the proceeds from sales of real estate in 1979
     were not fully recognized in 1979 or later years;
     WHEREAS, the parties hereto wish to determine with
     finality the taxpayers' tax liability for the tax year
     1979 and the timing of the recognition of the gains
     from those 1979 real estate transactions;
     NOW IT IS HEREBY DETERMINED AND AGREED for Federal
     income tax purposes, that:
     (1) there will be no recognition of the gain from the
     disputed sales of real estate in 1979;
     (2) there is no tax due from, nor refund due to, the
     taxpayers for the tax year 1979;
     (3) taxpayers are to recognize the gains from the
     disputed 1979 sales of real estate, resulting in
     increases to their income of $1,369,723 on the
     corporate income tax returns of EIC Group, Inc. as
     follows:
          (a) $500,099.50 income is to be included in the
          tax year 1989;
          (b) $500,099.50 income is to be included in the
          tax year 1990;
          (c) $369,524.00 is to be reported in the year it
          is paid by the buyer to, or for, the taxpayer;
     (4) there are no other items of income nor expense to
     be included as income, or taken as a deduction, with
     respect to the 1979 real estate transactions except as
     stated in (3) above.
                               - 10 -


installment method of accounting to report income from land

sales.    EIC also elected to report income based upon the install-

ment method.   However, in October 1994, the Wangs filed an

amended return for 1990, while EIC filed amended returns for the

years 1990 and 1992 in September and June of 1994, respectively.

On these amended returns, the Wangs and EIC reported income from

land sales based on the cost recovery method of accounting.    To

date, neither petitioner nor EIC has submitted to respondent a

Form 3115 requesting a change in their accounting method.

Transactions between the Wangs and EIC

     As discussed, supra, the financial success of EIC is due in

large part to the efforts of petitioner and Mrs. Wang.    Over the

years, the Wangs have been compensated for their hard work.

Petitioner and Mrs. Wang each received salaries of $223,250,

$283,200, and $114,417 from EIC in 1989, 1990, and 1991, respec-

tively.    Furthermore, in 1990, EIC paid petitioner a bonus of

$500,000.

     Petitioner has maintained a broker's license since the early

1970s, and he regularly acted as the broker in land sales

involving EIC.    A number of independent agents also worked with

EIC in selling land.

     EIC dealt almost exclusively in the purchase and sale of raw

land.    Real estate agent commissions on sales of raw land are

significantly higher than those paid in connection with a sale of
                              - 11 -


improved real estate.   In fact, EIC typically paid commissions

that were between 10-15 percent of the sales price.   During 1989,

on average, EIC paid commissions of 13 percent.

     Often, more than one agent would be involved with a particu-

lar sale.   In these cases, petitioner allocated the 13-percent

commission among the sales agents who participated in the sale,

based upon each agent's level of participation.   Petitioner is an

experienced sales agent, however, and many times he would be the

only person involved in a sale by EIC.    In those circumstances,

EIC paid the full 13-percent commission to petitioner alone.    For

1989, petitioner received $901,428 in commissions from EIC, and

EIC claimed a deduction for this amount.

     During the years in issue, the financial relationship

between petitioner and EIC was not limited to the compensation

paid to petitioner.   In fact, EIC's financial statements as of

December 31, 1989, disclose both "notes receivable" from peti-

tioner in the amount of $873,194 as well as "notes payable" to

petitioner in the amount of $1,010,895.    These amounts comport to

the figures reported in EIC's December 31, 1989, corporate income

tax return.   EIC maintained separate accounts in its general

ledger to track funds transferred to petitioner and funds

received from petitioner.   As of December 31, 1990, the corporate

income tax return for EIC reported "Loans from Stockholders" of

$1,312,199 and "Loans to Stockholders" of $1,717,892.   The
                                - 12 -


minutes of EIC's 1990 and 1991 annual board of director's meet-

ings reflect the board's formal approval and ratification of the

corporation's borrowing money from, and loaning money to, peti-

tioner and Mrs. Wang.

The Notices of Deficiency

     Initially, EIC's 1989 corporate income tax return was

selected for audit.     The revenue agent first contacted EIC

personnel in December 1992.     After the revenue agent reviewed

some of the information obtained from the initial document

request and identified EIC's accounting method as a potential

issue, the examination was expanded to include the years 1990 and

1991 for EIC, as well as the Wangs' personal Federal income tax

returns for 1989 through 1991.     Some time later, EIC's 1992

corporate tax return was also opened for examination.

     By 1994, the revenue agent had identified a large number of

potential issues in EIC's corporate tax returns and the Wang's

individual returns.     However, the various statutory periods of

limitations were near their expiration dates, and petitioners

refused to grant extensions to respondent.     Consequently, at

different times from February 1994 through February 1995,

respondent issued a statutory notice of deficiency for each year

under audit.   As a result, the notices of deficiency contained

numerous items that could have been resolved in the examination.

For instance, the notice of deficiency relating to EIC's 1990 tax
                               - 13 -


return lists 21 items of adjustment, many of them due to lack of

substantiation.   Many of the adjustments determined in the

notices of deficiency have been resolved by the parties through

numerous stipulations of settled issues.

     The following determinations made by respondent in the

notices of deficiency remain in dispute.    First, respondent

determined that the accounting method used by EIC and the Wangs

in the returns as originally filed was improper.    Respondent

further determined that they should report income using the

accrual method, which is the method used for their financial

books and records.   Second, respondent determined that the

$901,428 in commissions for 1989, and the $500,000 bonus paid to

petitioner in 1990, represented unreasonable compensation and

therefore were not deductible by EIC.    Third, respondent

determined that, for 1990, expenditures made by EIC on behalf of

the Wangs, reported as loans, were in reality disguised dividends

and, accordingly, were includable in petitioner's income.

Finally, respondent determined that petitioners are liable for

the accuracy-related penalties under section 6662(a).

                               OPINION

Issue 1.   Method of Accounting

     The first issue for decision requires us to decide the

proper method of accounting for calculating gain on the sales of

real property.    EIC and the Wangs originally selected the
                              - 14 -


installment method to report income for tax purposes from the

sales of land.   In the notices of deficiency issued to EIC for

the taxable years 1989 through 1992, and to the Wangs for 1990,

respondent determined that the installment method was an imper-

missible method of accounting for tax purposes, and determined

that the accrual method was one that clearly reflected income.

Petitioner and EIC argue that the installment method is proper,

and therefore respondent improperly changed their accounting

method from one that clearly reflected income.

     Section 446(a) requires a taxpayer to compute taxable income

under the method of accounting it regularly uses in keeping its

books.   Section 446(b), however, provides that, if the method of

accounting regularly utilized by the taxpayer does not clearly

reflect taxable income, the computation of taxable income shall

be made under such method as, in the Commissioner's opinion, does

clearly reflect income.   The Commissioner's authority under

section 446(b) reaches not only overall methods of accounting but

also a taxpayer's method of accounting for specific items of

income and expense.   Ford Motor Co. v. Commissioner, 102 T.C. 87,

100 (1994), affd. 71 F.3d 209 (6th Cir. 1995); sec. 1.446-1(a),

Income Tax Regs.

     It is well recognized that section 446 grants the Commis-

sioner broad discretion in matters of accounting and gives the

Commissioner wide latitude to adjust a taxpayer's method of
                               - 15 -


accounting so as to reflect income clearly.     United States v.

Hughes Properties, Inc., 476 U.S. 593, 603 (1986); Commissioner

v. Joseph E. Seagram & Sons, Inc., 394 F.2d 738, 743 (2d Cir.

1968), revg. 46 T.C. 698 (1966).   To prevail in a dispute over

the Commissioner's determination on an accounting matter, a tax-

payer must establish that the determination is "clearly unlawful"

or "plainly arbitrary."    Thor Power Tool Co. v. Commissioner, 439

U.S. 522, 532-533 (1979) (quoting Lucas v. American Code Co., 280

U.S. 445, 449 (1930), and Lucas v. Structural Steel Co., 281 U.S.

264, 271 (1930)).

     Nonetheless, where a taxpayer's method of accounting does

clearly reflect income, the Commissioner cannot require the

taxpayer to change to a different method even if the Commis-

sioner's method more clearly reflects income.     Ford Motor Co. v.

Commissioner, 71 F.3d at 213; Ansley-Sheppard-Burgess Co. v.

Commissioner, 104 T.C. 367, 371 (1995); Molsen v. Commissioner,

85 T.C. 485, 498 (1985).   We limit our inquiry to whether the

accounting method at issue clearly reflects income, and we do not

decide whether one method is superior to other possible methods.

RLC Indus. Co. v. Commissioner, 98 T.C. 457, 492 (1992), affd. 58

F.3d 413 (9th Cir. 1995); see also Brown v. Helvering, 291 U.S.

193, 204-205 (1934).

     During the years at issue, EIC bought and sold undeveloped

real property in the outlying areas of Los Angeles and elected to
                                  - 16 -


use the installment method to report gains from sales of this

property.       In 1990, petitioner and Mrs. Wang engaged in the same

type of sales activity as EIC with property held in their own

names.       Like EIC, the Wangs elected to report gains on the

installment method.

       The installment sales provisions are contained in section

453.       Section 453(a) permits a taxpayer to report income from an

"installment sale" under the "installment method."         Under the

"installment method", a proportionate amount of income is

recognized in the year when a payment is received.         Sec. 453(c).

       An "installment sale" is defined as a "disposition of

property where at least 1 payment is to be received after the

close of the taxable year in which the disposition occurs."         Sec.

453(b)(1).       However, an "installment sale" does not include a

dealer disposition of property.       Sec. 453(b)(2)(A).    A dealer

disposition includes a disposition of real property which is held

by the taxpayer in the ordinary course of his trade or business.

Sec. 453(l)(1)(B)5.      The sale of a residential lot in the


       5
      Sec. 453(l) defines the term "dealer disposition" for the
purposes of the installment sales rules. That section provides
in part:
            (l)   Dealer Dispositions.--For purposes of
       subsection (b)(2)(A)--
                    (1)   In general.--The term "dealer
               disposition" means any of the following
               dispositions:
                                                           (continued...)
                           - 17 -




5
 (...continued)
               (A) Personal property.--Any disposition
          of personal property by a person who
          regularly sells or otherwise disposes of
          personal property of the same type on the
          installment plan.
               (B) Real property.--Any disposition of
          real property which is held by the taxpayer
          for sale to customers in the ordinary course
          of the taxpayer's trade or business.
          (2)   Exceptions.--The term "dealer
     disposition" does not include--
                (A) Farm property.--The disposition on
          the installment plan of any property used or
          produced in the trade or business of farming
          (within the meaning of section 2032A(e)(4) or
          (5)).
                  (B) Timeshares and residential lots.--
                       (i) In general.--Any dispositions
                  described in clause (ii) on the
                  installment plan if the taxpayer elects
                  to have paragraph (3) apply to any
                  installment obligations which arise from
                  such dispositions. An election under
                  this paragraph shall not apply with
                  respect to an installment obligation
                  which is guaranteed by any person other
                  than an individual.
                       (ii) Dispositions to which
                  subparagraph applies.--A disposition is
                  described in this clause if it is a
                  disposition in the ordinary course of
                  the taxpayer's trade or business to an
                  individual of--
                            (I) a timeshare right to use
                       or a timeshare ownership interest
                       in residential real property for
                       not more than 6 weeks per year, or
                       a right to use specified
                       campgrounds for recreational
                       purposes, or
                                                 (continued...)
                                 - 18 -


ordinary course of a taxpayer's business is not considered a

dealer disposition.      Sec. 453(l)(2)(B)(ii)(II).

     Petitioners do not dispute that they were dealers in real

property.6    However, the Wangs and EIC argue that they satisfy

the exception for sales of residential lots.      Respondent asserts

that the land petitioner and EIC sold was not residential proper-

ty, because EIC's buyers never intended to build homes on the

property they purchased from EIC.      Petitioner argues that the

land was zoned in such a way that the buyers could have built a

house on the property if they had desired to do so.      Based upon

the evidence and the following analysis, we agree with respon-

dent.

     With the Tax Reform Act of 1986, Pub. L. 99-514, sec. 811,

100 Stat. 2365, Congress enacted section 453C which generally

denied installment sale treatment to dealer dispositions of

property but provided an exception for sales of residential lots.

See sec. 453C(e)(4)(A)(i)(II), applicable to sales between

March 1, 1986, and December 31, 1987.      The Omnibus Budget



     5
        (...continued)
                                  (II) any residential lot, but
                             only if the taxpayer (or any
                             related person) is not to make any
                             improvements with respect to such
                             lot.
     6
      In fact, in their respective petitions, both petitioner and
EIC state that they are dealers in real estate.
                                - 19 -


Reconciliation Act of 1987 (the 1987 Act), Pub. L. 100-203, sec.

10202, 101 Stat. 1330-388, repealed section 453C for sales after

December 31, 1987.   However, the 1987 Act created section 453(l),

which contains language nearly identical to that found in section

453C concerning the denial of installment sales treatment for

dealer dispositions, with an exception for sales of residential

lots.   See 1987 Act sec. 10202(b)(2), 101 Stat. 1330-388.     Thus,

in repealing section 453C and enacting section 453(l), Congress

did not alter the treatment for installment obligations arising

from the sale of residential lots.       H. Conf. Rept. 100-495 at 927

(1987), 1987-3 C.B. 193, 207.

     Respondent has not issued regulations in connection with

section 453(l) but previously had issued temporary regulations

for the now-repealed section 453C.       Since the relevant language

in section 453(l) is identical to that used in section 453C, we

turn to the regulations under section 453C for guidance in

interpreting the term "residential lots" contained in section

453(l)(2)(B).

     Section 1.453C-8T(4), Temporary Income Tax Regs., 53 Fed.

Reg. 34725 (Sept. 8, 1988), defines a residential lot as "a

parcel of unimproved land upon which the purchaser intends to

construct (or intends to contract to have another person con-

struct) a dwelling unit for use as a residence by the purchaser."

Petitioner argues that the land sold by EIC was zoned such that a
                              - 20 -


buyer would be permitted to construct a house on the property if

a buyer so desired.   While this fact is relevant to our decision,

for the following reasons we nonetheless conclude that the land

sold by petitioner and EIC does not satisfy the residential real

estate exception for dealer dispositions.

     It is abundantly clear that the land sold by EIC was

marketed to potential buyers as a speculative investment.   The

offering materials exclusively focused on financial factors such

as return on investment, capital preservation (safety), and tax

considerations.   Further, petitioner testified that neither he

nor EIC has ever represented to potential buyers that the land

being sold was suitable for use as residential lots.   There is no

evidence in the record to suggest that buyers purchased land from

petitioner or EIC with the intention of building dwelling units

on that land.   In fact, the overwhelming weight of evidence

strongly suggests that no buyer ever constructed a dwelling unit

on land purchased from EIC or petitioner.   We therefore find that

buyers did not purchase land from petitioner or EIC with the

intent to construct a dwelling unit on the property.   Accord-

ingly, we conclude that petitioner and EIC improperly elected to

use the installment sales method for reporting gain because they

are dealers in real estate and they failed to satisfy the resi-

dential real estate exception for dealer dispositions contained

in section 453(l)(2)(B).
                               - 21 -


       Petitioner also makes a second argument that the cost

recovery method is the proper method for reporting gain from the

sales of land.    In this regard, petitioner notes that the Wangs

and respondent used the cost recovery method to compute the

income contained in the 1979 closing agreement.    Petitioner

contends that both parties are now bound by the 1979 closing

agreement to use the cost recovery method.

       Respondent answers that EIC and petitioner failed to file a

Form 3115 when changing from the installment method to the cost

recovery method used in the amended income tax returns.       Tax-

payers are required to use this form in requesting the Commis-

sioner's consent to changes in accounting methods.    Sec.

1.446-1(e)(3)(i), Income Tax Regs.; Rev. Proc. 84-74, 1984-2 C.B.

736.    Respondent asserts that petitioners' failure to follow

established procedures is sufficient to deny their attempt to

change accounting methods.    We agree.   See Witte v. Commissioner,

513 F.2d 391 (D.C. Cir. 1975), revg. in part and remanding T.C.

Memo. 1972-232.

       Petitioner argues, however, that the use of the cost

recovery method is mandated by the 1979 Closing Agreement,

thereby obviating the need to file a Form 3115 and requesting the

Commissioner's consent.    The facts do not support petitioner's

contentions.
                              - 22 -


     The Secretary of the Treasury is authorized to enter into

written closing agreements with respect to the tax liability of

any person for any taxable period.     Sec. 7121(a).   Such closing

agreements are binding on the parties as to the matters agreed

upon and may not be annulled, modified, set     aside, or disre-

garded in any suit or proceeding unless there is a showing of

fraud, malfeasance, or misrepresentation of a material fact.

Sec. 7121(b); Rink v. Commissioner, 100 T.C. 319, 324 (1993),

affd. 47 F.3d 168 (6th Cir. 1995).     A closing agreement is

binding only as to matters agreed upon for the taxable period

stated in the agreement.   Estate of Magarian v. Commissioner, 97

T.C. 1, 4 (1991).   Ordinary principles of contract law govern the

interpretation of closing agreements.      Rink v. Commissioner,

supra at 325.   These principles generally direct courts to look

within the "four corners" of the agreement, unless it is

ambiguous as to essential terms.     Id.

     Petitioner's own witnesses at trial were unable to discern

the method used for calculating the income in the 1979 closing

agreement by merely reviewing the agreement.     The words "cost

recovery method" are not present in the 1979 closing agreement.

Further, not one word of the 1979 closing agreement is devoted to

the purportedly agreed upon method for reporting income in future

years.
                               - 23 -


     Petitioner and EIC used the installment method to report

income in tax returns that were filed after the 1979 closing

agreement was executed.   This seriously undercuts petitioner's

contention that the parties intended that the 1979 closing

agreement would require them to use the cost recovery method in

future years.   See Pacific Portland Cement Co. v. Food Mach. &

Chem. Corp., 178 F.2d 541, 554 (9th Cir. 1949) (when interpreting

a contract, a court may look to the parties' actions in ascer-

taining their intent).    Therefore, we find that the 1979 closing

agreement does not cover the method for reporting income during

the years at issue.

     Based on the foregoing, we conclude that the attempts by

petitioner and EIC to change accounting methods by filing amended

tax returns are ineffectual.    After determining that the Wangs

and EIC used an impermissible accounting method to report income,

respondent may change their method of accounting to any method

that, in respondent's opinion, clearly reflects income.    Sec.

446(b).   Petitioner does not argue that respondent's use of the

accrual method is "clearly unlawful" or "plainly arbitrary."

Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532-533 (1979)

(quoting Lucas v. American Code Co., 280 U.S. 445, 449 (1930),

and Lucas v. Structural Steel Co., 281 U.S. 264, 271 (1930)).

Accordingly, we sustain respondent's determination that peti-
                                 - 24 -


tioner and EIC must report income based on the accrual method of

accounting.

     Since we have concluded that petitioner and EIC must report

income on the accrual method, there are a number of derivative

computational issues that we must address.     First, in the second

stipulation of settled issues, the parties indicate that they

have not reached an agreement as to the proper amount of income

EIC must report in 1989 under the accrual method.     Respondent

determined in the notice of deficiency dated April 1, 1994, that

the income is $19,584,214, while EIC contends it is $18,850,859.

After a concession of $100,000, respondent now contends that the

income should be $19,484,214.     Petitioner has failed to

adequately address this issue on brief7 or otherwise.     As a


     7
      In petitioners' reply brief, with respect to the different
calculations of accrual income, petitioner states "We maintain
that the parties must abide by the stipulations they previously
executed." The second stipulation of settled issues presents the
parties' computation of accrual income for EIC as follows:
              Income To Be Reported by Petitioner EIC

                 Cost Recovery        Installment
   Year              Method             Method      Accrual Method

   1989           $4,968,292          $10,093,843    To Be Determined
   1990            3,230,695            5,506,844     $9,990,901
   1991            3,253,218            3,072,503      2,801,850
   1992            2,213,590            1,978,872        670,700


In the stipulation, the parties indicate that the proper amount
of accrual income for 1989 will be presented to the Court for
                                                   (continued...)
                             - 25 -


consequence, we conclude EIC did not meet its burden and find

that the proper amount of income for 1989 under the accrual

method is $19,484,214.

     Second, respondent contends in the second stipulation of

settled issues that EIC is required to report the following

income from sales that occurred prior to March 1, 1986:

            Year                      Amount of Adjustment

            1989                            $337,668
            1990                             418,548
            1991                             292,745
            1992                             291,437


EIC contends that it does not have to report any income from

sales that occurred prior to March 1, 1986.   However, a witness

for EIC, Michael Cummins, a C.P.A. who had served as EIC's

interim controller, testified on cross-examination that EIC would

have to report these amounts if the accrual method were found to

be the proper method of accounting.   EIC did not address this

issue in its opening brief nor its reply brief.   Accordingly, we

treat this as a concession by EIC and find for respondent.

     Third, the parties disagreed in the fourth stipulation of

settled issues as to the proper amount of income that the Wangs



     7
      (...continued)
resolution. Nevertheless, on brief, petitioners do not further
address the differences between their calculation of accrual
income and the amount determined by respondent.
                                - 26 -


should report under each of the different methods of accounting.8

Respondent has conceded $226,170 of the difference in the amount

of income for 1990.    Other than documents pertaining to the

$226,170 conceded by respondent, petitioner did not put on any

evidence nor make any arguments on brief concerning the remaining

differences.    We treat this as a concession by petitioner and

Mrs. Wang, and find for respondent.

Issue 2.    Reasonable Compensation

     Section 162(a)(1) provides for a deduction for ordinary and

necessary business expenses including "a reasonable allowance for

salaries or other compensation for personal services actually



     8
      The fourth stipulation of settled issues sets forth the
following amounts as income from real estate sales under the
accrual method:
         Income to Be Reported by Petitioners Mr. & Mrs. Wang
                    (Per Petitioners' Computations)

               Year                       Accrual Method
               1990                          $663,739
               1991                           168,545
               1992                             -0-
             Post-92                            -0-

         Income To Be Reported by Petitioners Mr. & Mrs. Wang
                    (Per Respondent's Computations)

               Year                       Accrual Method
               1990                          $716,239
               1991                           183,141
               1992                             -0-
             Post-92                            -0-
                                - 27 -


rendered".    To fall within the ambit of section 162(a)(1), the

compensation must be both reasonable in amount and paid purely

for services.    Sec. 1.162-7(a), Income Tax Regs.   Typically, the

deductibility of compensation turns on whether the compensation

paid is reasonable in amount.     Elliotts, Inc. v. Commissioner,

716 F.2d 1241, 1243-1244, (9th Cir. 1983), revg. and remanding

T.C. Memo. 1980-282.    EIC bears the burden of proving the reason-

ableness of compensation.    Rule 142(a).

     The reasonableness of compensation is a question of fact to

be determined on the basis of all the facts and circumstances.

Pacific Grains, Inc. v. Commissioner, 399 F.2d 603, 606 (9th Cir.

1968), affg. T.C. Memo. 1967-7.    Many factors are considered in

determining whether compensation is reasonable, and no single

factor is decisive.     Mayson Manufacturing Co. v. Commissioner,

178 F.2d 115, 119 (6th Cir. 1949), revg. a Memorandum Opinion of

this Court.     In Elliots, Inc. v. Commissioner, supra at 1245-

1248, the Court of Appeals for the Ninth Circuit, the Court to

which these cases are appealable, arranged these factors into

five broad categories.

     The first factor focuses on the employee's responsibilities

and duties in the organization.    Relevant considerations include

petitioner's qualifications, hours worked, duties performed, as

well as his importance to EIC's success.     American Foundry v.

Commissioner, 536 F.2d 289, 292 (9th. Cir. 1976), affg. in part
                               - 28 -


and revg. in part 59 T.C. 231 (1972).    The second factor compares

the employee’s compensation with that paid by similar companies

in similar industries for similar services.      Elliotts, Inc. v.

Commissioner, supra at 1246; see sec. 1.162-7(b)(3), Income Tax

Regs.   The third factor requires us to focus on EIC's size as

indicated by its sales, or capital value, the complexities of the

business, and the general economic conditions.      Elliotts, Inc. v.

Commissioner, supra at 1246.   The fourth factor considers whether

the relationship between the company and the employee whose

compensation is at issue might permit the company to disguise

nondeductible corporate distributions of income as compensation

deductible under section 162(a)(1).     Id.   A potential for such

abuse exists when the employee whose compensation is at issue is

the company's sole or controlling shareholder.      Charles Schneider

& Co. v. Commissioner, 500 F.2d 148, 152-153 (8th Cir. 1974),

affg. T.C. Memo. 1973-130; sec. 1.162-7(b)(1), Income Tax Regs.

The fifth factor focuses on whether the compensation was paid

pursuant to a structured, formal, and consistently applied

program.   Bonuses not paid pursuant to such plans are suspect.

Elliotts, Inc. v. Commissioner, supra at 1247; Nor-Cal Adjusters

v. Commissioner, 503 F.2d 359, 362 (9th Cir. 1974), affg. T.C.

Memo. 1971-200.   In the notices of deficiency, respondent

determined that commissions of $901,428 paid to petitioner in

1989 and the $500,000 bonus paid to petitioner in 1990 were not
                              - 29 -


deductible by EIC because the payments did not constitute

reasonable compensation.   With the foregoing five factors in

mind, we analyze the reasonableness of each payment.

     The Commissions of $901,428 Paid in 1989

     In EIC's notice of deficiency for 1989, respondent dis-

allowed the $901,428 deduction for real estate commissions paid

to petitioner.   Respondent argues on brief that EIC has not

produced evidence showing how it computed the commissions or

explaining why the commissions were paid to petitioner.   Peti-

tioner responds that the commissions relate to specific sales,

are consistent with the commissions paid to other salespeople,

and are therefore reasonable and fully deductible.

     Petitioner maintains a broker's license, and actively

participated in many of the land sales by EIC during 1989.     In

fact, petitioner's experience and ability as a salesman con-

tributed significantly to the success of EIC.   If petitioner

participated in a sale, he was eligible to receive a commission

on the sale.   If petitioner alone was responsible for making the

sale, he received the full 13-percent commission; otherwise, the

commission was allocated among all of the participants.   The 13-

percent rate of commission is standard in the industry for these

types of land sales.

     Considering the factors enumerated above, we conclude that

it was reasonable to pay petitioner a commission for each sale in
                                - 30 -


which he participated.   Petitioner was compensated for his role

as a salesman, and, as such, his activities and duties were

comparable to those of other salespeople.    The record indicates

that commissions paid by EIC conform with those typically paid in

the industry and were paid to petitioner based upon a formal and

consistently applied program.

     Respondent argues that EIC has failed to adduce specific

evidence concerning petitioner's actions relative to the sales on

which he earned commissions.    Respondent posits that, because

petitioner controlled EIC, he had the ability to pay himself the

full commission on a sale, to the detriment of any other sales-

person who might have worked on the sale.    We do not find merit

in respondent's argument.   The record indicates that, on several

occasions, petitioner split the commission on a sale with other

salespeople.   Moreover, petitioner's ability to take the full

commission on a sale is limited in those circumstances where

other salespeople participated in the sale.    A salesperson who is

losing commissions to petitioner would likely seek employment

with another real estate dealer where commissions are not being

appropriated by the business owner.

     We are unable to find, however, that the commissions paid by

EIC are reasonable in amount.    The commissions paid by EIC for

land sales in 1989 are substantiated by a schedule which lists,

in chronological order, all the land transactions for that year.
                                - 31 -


For each sale, the schedule allocates the commissions among the

various salespeople, including petitioner.    While not clear, it

appears that the schedule is produced from information contained

in EIC's general ledger accounting program.   The schedule does

not provide a summary of the total commissions paid to each

individual salesperson, but when added together, all of peti-

tioner's individual commissions for 1989 amounted to $506,986.

Near the bottom of the schedule, there are journal entries

totaling $901,428, the amount actually paid to petitioner.    The

journal entries, made at year end, do not reference any particu-

lar sales (as all the other entries do), but instead contain the

notations "all sales override" or "withdraw".   No explanation for

these entries was given at trial.

     On brief, EIC has not put forth any arguments concerning

compensation paid to petitioner in 1989 other than to assert that

the commissions were reasonable because they related to specific

sales.   As previously noted, no evidence was presented at trial,

nor was any argument made on brief, concerning the journal

entries totaling $901,428.   Accordingly, based on the entire

record before us, we conclude that $506,986 represents a reason-

able amount of compensation to petitioner for his efforts in

selling land for EIC in 1989.
                               - 32 -


     The $500,000 Bonus Paid in 1990

     In EIC's notice of deficiency for 1990, respondent dis-

allowed a deduction for the $500,000 bonus paid to petitioner at

yearend.   Respondent argues on brief that the bonus was excessive

and therefore not deductible as reasonable compensation under

section 162(a).   EIC responds that petitioner, a key employee at

EIC, was instrumental in the corporation's success and entitled

to higher compensation.   EIC therefore concludes that the bonus

was reasonable and fully deductible.

     We agree with EIC that petitioner played an important role

in the corporation's financial success.   Petitioner was a central

figure in managing the corporation and worked long hours to

increase its business.    Nevertheless, on the basis of the record

before us, we are unable to conclude that EIC has successfully

demonstrated that the bonus was reasonable in amount.

     EIC has not related the bonus to any duties performed by

petitioner.   The record indicates that petitioner's administra-

tive functions with respect to EIC remained constant throughout

the years at issue, while petitioner's 1990 salary of $283,200

exceeded the salary he received in other years.    Thus, the bonus

did not serve to compensate petitioner for any unusual activities

in connection with his administrative functions.   Additionally,

no evidence was presented, nor any argument made, that this bonus

was derived from specific sales generated by petitioner.
                               - 33 -


     A number of the factors enumerated by the Court of Appeals

for the Ninth Circuit weigh against EIC.    EIC is a closely held

corporation, controlled by petitioner, which did not pay any

dividends for the year.   This presents the textbook case of a

corporation with the opportunity to disguise nondeductible

corporate distributions of income as compensation.    There is no

evidence to indicate that EIC paid any bonuses to any other

employees nor evidence to suggest that the bonus in question was

paid according to a structured, formal, and consistently applied

program.    EIC has not put on any evidence, through expert testi-

mony or otherwise, that compares the compensation paid by EIC

with that paid by companies in similar industries for similar

services.   Accordingly, we conclude that EIC has not met its

burden in demonstrating that compensation paid to petitioner in

excess of his $283,200 salary was reasonable in amount and

therefore find that the $500,000 bonus is not deductible under

section 162(a).

Issue 3.    Loan or Constructive Dividend

     During 1990, EIC made expenditures totaling $550,663 for

personal expenses of the Wangs.    The amounts so expended were

recorded as loans to shareholders in EIC's general ledger.

Respondent determined that these payments did not constitute bona

fide loans and instead were constructive dividends to the Wangs.
                              - 34 -


     We must determine whether payments made by EIC for the

benefit of petitioner and Mrs. Wang constitute loans, as

petitioner contends, or constructive dividends taxable under

sections 301 and 316, as respondent contends.   Sections 301 and

316 provide that a distribution of property made by a corporation

with respect to its stock is a taxable dividend to the extent of

the corporation's earnings and profits.   Petitioner does not

dispute that EIC had earnings and profits sufficient to support

the constructive dividends determined by respondent.

     Petitioner has the burden of proving that the amounts

expended for his benefit are bona fide loans and not constructive

dividends.   Rule 142(a), Welch v. Helvering, 290 U.S. 111 (1933).

Further, courts examine transactions between closely held corp-

orations and their shareholders with special scrutiny.     Turner v.

Commissioner, 812 F.2d 650, 654 (11th Cir. 1987), affg. T.C.

Memo. 1985-159; Electric & Neon, Inc. v. Commissioner, 56 T.C.

1324, 1339 (1971), affd. without published opinion sub nom.

Jiminez v. Commissioner, 496 F.2d 876 (5th Cir. 1974).

     Whether a distribution from a corporation to a shareholder

constitutes a dividend or a loan depends on whether, at the time

of the distribution, the shareholder intended to repay the

amounts received and the corporation intended to require repay-

ment.   See Chism's Estate v. Commissioner, 322 F.2d 956, 959-960

(9th Cir. 1963), affg. Chism Ice Cream Co. v. Commissioner, T.C.
                               - 35 -


Memo. 1962-6; Miele v. Commissioner, 56 T.C. 556, 567 (1971),

affd. without published opinion 474 F.2d 1338 (3d Cir. 1973).

This determination is to be made based on all of the facts and

circumstances of the case.    Chism's Estate v. Commissioner, supra

at 960.    Statements of intent, absent objective indicia of debt,

are less persuasive in situations involving stockholders of a

closely held corporation.    Turner v. Commissioner, supra at 654.

     A court may look to a variety of factors to determine

whether there was an intent to make a loan.    The following is a

nonexclusive list of the objective factors often considered in

deciding whether shareholder withdrawals from a corporation are

loans or constructive dividends:

     (1)   The taxpayer's degree of control over the corporation;

     (2)   the existence of restrictions on the amount of

           disbursements;

     (3)   the corporate earnings and dividends history;

     (4)   the use of customary loan documentation, such as

           promissory notes, security agreements or mortgages;

     (5)   the ability of the shareholder to repay;

     (6)   the treatment of the disbursements on the corporate

           records and financial statements;

     (7)   the presence of conventional indicia of legal

           obligations, such as payment of interest, repayment

           schedules, and maturity dates;
                               - 36 -


     (8)   the corporation's attempts to enforce repayment; and

     (9)   the shareholder's intention or attempts to repay the

           loan.

See Busch v. Commissioner, 728 F.2d 945, 948 (7th Cir. 1984),

affg. T.C. Memo. 1983-98; Dolese v. United States, 605 F.2d 1146,

1153 (10th Cir. 1979).   No single factor is determinative.

Boecking v. Commissioner, T.C. Memo. 1993-497.     After considering

all of the facts and circumstances, we conclude that the

expenditures made by EIC on behalf of petitioner and Mrs. Wang

constitute constructive dividends to the Wangs.

     Several factors support our conclusion.     The Wangs have

unfettered control over EIC, with the authority to make decisions

concerning the timing and extent of payments made on their

behalf.    See Epps v. Commissioner, T.C. Memo. 1995-297.   Despite

the growth in corporate earnings, EIC did not pay a dividend

during any of the years at issue, nor were any dividends dis-

closed in the financial statements for prior years.     Nothing in

the record indicates that there were any restrictions on the

amount of money lent to the Wangs.      See Crowley v. Commissioner,

962 F.2d 1077, 1081 (1st Cir. 1992), affg. T.C. Memo. 1990-636.

No loan documents, notes, or written instruments of indebtedness

were presented to the Court.    Id. at 1082.    Further, there were

no repayment schedules, maturity dates, or any indication that

the Wangs made interest payments to EIC in connection with the
                               - 37 -


purported loans.   There is no evidence that EIC ever attempted to

enforce repayment.   Additionally, there is no evidence that EIC

either requested or received any security or collateral for the

loans.   See Zimmerman v. United States, 318 F.2d 611, 613 (9th

Cir. 1963).

     Petitioner argues that, in later years, he and Mrs. Wang

repaid some of the loans.   Petitioner directs our attention to

EIC's Federal income tax returns for subsequent years, wherein

the reported balance in the "Loans to shareholder" account

decreased.    We are not persuaded that this evidence is sufficient

to carry the day for petitioner.   No evidence was introduced

concerning the form of the purported loan repayments made by

petitioner.   Cases have discounted the significance of repayments

that consisted merely of entries in the corporation's books, as

opposed to cash transfers made by the shareholder.   Compare

Boecking v. Commissioner, T.C. Memo. 1993-497 (shareholder's

bonuses that were credited to the shareholder's loan account were

simply bookkeeping entries and did not establish the existence of

bona fide loans), with M. J. Byorick, Inc. v. Commissioner, T.C.

Memo. 1988-252 (repayment is strong evidence that a bona fide

loan exists).

     Petitioner also argues that a debtor/creditor relationship

existed throughout the years at issue.   He asserts that

documentary evidence consisting of financial statements, minutes
                              - 38 -


of the board of directors, and corporate tax returns supports

this contention.   While consistent treatment on the books of the

corporation is a factor to be considered, "book entries and

records may not be used to conceal a situation which is not in

economic reality what it is made to appear."   Williams v.

Commissioner, T.C. Memo. 1978-306, affd. 627 F.2d 1032 (10th Cir.

1980).

     In conclusion, we find that the amounts expended by EIC for

the benefit of the Wangs constitute constructive dividends.   The

purported loans originated because EIC paid personal expenses of

the Wangs and charged the payments to the shareholder loan

account.   It is apparent the petitioners used the loan accounts

to transfer money freely between EIC and the Wangs and, in

effect, permitted the Wangs to use EIC as their personal checking

account.   The nature of the payments are further evidence that

these transfers were not bona fide loans to the shareholder but

rather were dividends fully taxable under sections 301 and 316.

See Dolese v. United States, supra at 1154 (noting that the

"timing and the pattern" of advances to the shareholder "cannot

be ignored").   Accordingly, we sustain respondent's determin-

ation.

Issue 4.   Accuracy Related Penalties

     Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable to
                                - 39 -


one or more of the items set forth in section 6662(b).      Respon-

dent determined that the Wangs are liable for accuracy-related

penalties pursuant to section 6662 for 1989, 1990, and 1991; EIC,

for 1989-1992.    Respondent asserts that the section 6662 penal-

ties are due to either a substantial understatement of tax or

negligence or disregard of the rules or regulations.      Sec.

6662(b)(1) and (2).    Petitioners bear the burden of proving that

respondent's determination is erroneous and that they are not

liable for the accuracy-related penalties.      Rule 142(a);

Bixby v. Commissioner, 58 T.C. 757, 791 (1972).

     The term "negligence" includes a failure to make a rea-

sonable attempt to comply with the provisions of the internal

revenue laws.    Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax

Regs.    Negligence has also been defined as a lack of due care or

failure to do what a reasonable person would do under the circum-

stances.     Norgaard v. Commissioner, 939 F.2d 874, 880 (9th Cir.

1991), affg. in part and revg. in part on other grounds T.C.

Memo. 1989-390; Allen v. Commissioner, 925 F.2d 348, 353 (9th

Cir. 1991), affg. 92 T.C. 1 (1989).      "Disregard" includes any

careless, reckless, or intentional disregard of rules or regula-

tions.     Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.   With

respect to individuals, an understatement of tax is substantial

if it exceeds the greater of 10 percent of the tax required to be
                                  - 40 -


shown in the return or $5,000 ($10,000 for corporations).

Sec. 6662(d)(1)(A) and (B).

     The accuracy-related penalty does not apply with respect to

any portion of the underpayment if it is shown that there was

reasonable cause for such portion and that the taxpayer acted in

good faith.    Sec. 6664(c)(1).    The determination of whether a

taxpayer acted with reasonable cause and in good faith depends

upon the pertinent facts and circumstances, including the tax-

payer's efforts to assess his or her proper tax liability, the

knowledge and experience of the taxpayer, and reliance on the

advice of a professional, such as an accountant.      Sec.

1.6664-4(b)(1), Income Tax Regs.

     Petitioners contend that the accuracy-related penalties are

inappropriate in these cases because they relied on certified

public accountants to prepare their Federal income tax returns

accurately.9   Such reliance, petitioners claim, is evidence that

they acted with reasonable cause and in good faith.      Respondent

disagrees.

     Generally, the duty of filing accurate returns cannot be

avoided by placing the responsibility on a tax return preparer.

Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987).      While



     9
       Petitioners' 1989 tax returns were prepared by B.D.O.
Seidman. Petitioners' 1990-1992 tax returns were prepared by
Arthur Andersen & Co.
                               - 41 -


hiring an attorney or accountant does not insulate the taxpayer

from negligence penalties, good faith reliance on professional

advice concerning tax laws is a defense.      United States v. Boyle,

469 U.S. 241 (1985); Betson v. Commissioner, 802 F.2d 365, 372

(9th Cir. 1986), affg. in part and revg. in part T.C. Memo. 1984-

264.   Reliance on a qualified adviser may demonstrate reasonable

cause and good faith if the evidence shows that the taxpayer

contacted a competent tax adviser and provided the adviser with

all necessary and relevant information.      Collins v. Commissioner,

857 F.2d 1383, 1386 (9th Cir. 1988), affg. Dister v. Commis-

sioner, T.C. Memo. 1987-217; Jackson v. Commissioner, 86 T.C.

492, 539-540 (1986), affd. 864 F.2d 1521 (10th Cir. 1989).     In

order to prove such reliance, the taxpayer must establish that

the return preparer was supplied with all necessary information,

and the incorrect return was the result of the preparer's mis-

takes.   Weis v. Commissioner, 94 T.C. 473, 487 (1990).

       Respondent contends that all of the deficiencies were due to

negligence, disregard of the rules or regulations, or a substan-

tial understatement of income tax.      Petitioner and EIC provided

evidence of discussions that were held with their accountants

regarding the proper accounting method to be used by them.     With

regard to the remaining items, such as the reasonable compensa-

tion, constructive dividends, and numerous concessions by

petitioners, the record is silent as to what information peti-
                                - 42 -


tioner may have provided to his accountants, or what advice the

accountants may have given petitioner.     Accordingly, petitioner

and EIC have failed to establish that they relied on any advice

with respect to the remaining items.     Where no reliable evidence

exists in the record suggesting the nature of any advice given by

a preparer, we may conclude that the taxpayers have failed to

carry their burden in proving good faith reliance on that

preparer.    See Howard v. Commissioner, 931 F.2d 578, 582 (9th

Cir. 1991), affg. T.C. Memo. 1988-531; Skeen v. Commissioner, 864

F.2d 93, 96 (9th Cir. 1989), affg. Patin v. Commissioner, 88 T.C.

1086 (1987).     Consequently, we sustain respondent's imposition of

the accuracy-related penalties on the portion of the underpayment

attributable to these items for each of the years at issue.

     Petitioner presented evidence of discussions that were held

concerning the election of the installment method.     Petitioner's

accountant from Arthur Andersen & Co. testified about his reasons

for selecting the installment method.     He indicated that peti-

tioner was forthcoming with all necessary information.     On the

basis of this information, petitioner's accountant advised

petitioner to report income from land sales on the installment

method.     Petitioner is not a tax expert, and he relied on his

accountants for this type of advice.     Selecting an accounting

method is a sufficiently technical issue, and reliance on the

advice of an expert is reasonable under these circumstances.       See
                              - 43 -


United States v. Boyle, supra at 251 ("Most taxpayers are not

competent to discern error in the substantive advice of an

accountant or attorney").   Accordingly, we do not sustain

respondent's imposition of the accuracy-related penalties on the

portions of the deficiencies relating to the change in accounting

method.

     To reflect the foregoing,

                                         Decisions will be entered

                                    under Rule 155.
