                        T.C. Memo. 1999-355



                      UNITED STATES TAX COURT



                PHILIP L. FIRETAG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4021-97.                    Filed October 25, 1999.



     Irvin J. Slotchiver, for petitioner.

     James E. Gray, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GALE, Judge:   Respondent determined the following

deficiencies in petitioner’s Federal income tax:

               Year            Deficiency

               1992             $219,032
               1993               46,944
                                - 2 -

After concessions, we must decide the following:   (1) Whether

petitioner is required to recognize as income in the years in

issue amounts deposited into certain accounts as described below.

We hold that he is.   (2) Whether recognition of the deposited

amounts in the year of deposit constitutes a change in accounting

method, requiring an adjustment to petitioner’s income under

section 481.1   We hold a section 481 adjustment is required.

                         FINDINGS OF FACT

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

incorporate by this reference the stipulation of facts, the

supplemental stipulation of facts, and the attached exhibits.    At

the time of filing the petition, petitioner resided in

Charleston, South Carolina.

     Petitioner was a licensed professional bail bondsman, and

before trial he had been in the bonding business for more than 20

years.   Petitioner conducted his bonding business as a sole

proprietorship.   The proprietorship income was reported using the

accrual method of accounting.   Petitioner wrote bonds for

criminal defendants to ensure their future appearance in court.

The bonds varied in amount and were set by the court.    The

defendants, or someone on their behalf (collectively,



     1
       Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -

petitioner’s clients), would pay petitioner a fee (usually equal

to 10 percent of the amount of the bond, sometimes less), and in

exchange petitioner would assume liability under the bond,

guaranteeing the defendant’s appearance at court proceedings.

Under the standard bonding agreement used by petitioner, the fee

was due from a client when the agreement was signed.    In

addition, the bonding agreement provided that the fee was earned

upon execution of the agreement.   If petitioner was unable to

perform on his guaranty, i.e., if the defendant failed to make

the court appearance, petitioner was liable to the court for the

full amount of the bond.2

     As a professional bail bondsman, petitioner was required to

comply with chapter 53 of title 38 of the Code of Laws of South

Carolina.   Pursuant to these provisions, petitioner was required

to maintain, with the clerk of court of the relevant South

Carolina jurisdiction, passbook savings accounts or certificates

of deposit in an amount equal to 25 percent of all outstanding

bonds on which he was liable in that jurisdiction.3    The amount

required to be maintained was recomputed as of the first day of



     2
       Petitioner’s practice generally was to obtain a co-
guarantor on the bond, such as a family member or friend of the
defendant.
     3
       In addition, no single bond written by petitioner could be
in an amount greater than 50 percent of the amount maintained
with the clerk of court. See S.C. Code Ann. sec. 38-53-330 (Law.
Co-op. 1989).
                                - 4 -

each month, on the basis of the bonds outstanding on that date,

and petitioner had until the 16th of the month to make any

additions required to ensure that the amounts maintained with the

clerk were equal to at least 25 percent of the face amount of

bonds outstanding on the first of the month.      See S.C. Code Ann.

sec. 38-53-270 (Law. Co-op. 1989).      The savings accounts or

certificates of deposit were held in trust in the name of the

clerk of court for the “sole protection and benefit of the holder

of bail bonds” and functioned as security for petitioner’s

potential liability on outstanding bonds.      S.C. Code Ann. sec.

38-53-280 (Law. Co-op. 1989).   In the event of a forfeiture,

i.e., the failure of a defendant to appear for trial, making

petitioner liable for the bond amount, petitioner had the option

of meeting his liability using funds maintained with the clerk of

court or from some other source.

      Under South Carolina law, petitioner was entitled to a

return of the excess whenever the amounts maintained with the

clerk exceeded 25 percent of petitioner’s bonds outstanding and

was entitled to the return of all such amounts when his bond

obligations in the jurisdiction were completely satisfied.        See

id.

      Pursuant to the foregoing provisions of South Carolina law,

petitioner maintained various savings accounts and certificates

of deposit with the Clerk of Court for Charleston County, South
                                 - 5 -

Carolina, prior to and during the years in issue, in connection

with his activities as a professional bail bondsman.       We shall

hereinafter refer to these savings accounts and certificates of

deposit held by the Charleston County Clerk of Court as the

Charleston County Court account.     At no point during the years in

issue, or in any year prior thereto, were funds from the

Charleston County Court account used to satisfy a forfeiture.

         Petitioner received any interest earned on the funds in the

Charleston County Court account.

     Petitioner also kept two other accounts, one with respect to

the U.S. District Court and another which the parties refer to as

the “in-house account”.     The record does not establish what

provisions of law or contract terms governed the U.S. District

Court account.4    In particular, the record does not disclose

under what schedule petitioner was required to deposit, or was

entitled to return of, amounts in the U.S. District Court

account.

     As for the in-house account, it was not required by any law

or contract.     It was established at the suggestion of

petitioner’s father, a bookkeeper, who kept petitioner’s books

and prepared his tax returns.     All fees collected by petitioner


     4
       In his opening statement at trial, petitioner’s counsel
indicated that no statute governed the U.S. District Court
account, and that an amount equal to the entire face value of the
bond was required to be deposited therein. However, no evidence
was adduced regarding the foregoing.
                                - 6 -

for bonding services were deposited into the in-house account.

The moneys from the in-house account were then disbursed for four

purposes:    To satisfy petitioner’s liability in the event of

forfeitures, to satisfy required increases in the amounts in the

Charleston County Court and U.S. District Court accounts, to pay

petitioner’s business expenses, and to pay petitioner a

“salary”.5

     Petitioner reported gross receipts from his bonding business

of $80,456 in 1992 and $100,467 in 1993.    However, for taxable

years prior to and including 1992 and 1993, petitioner did not

report as income the amounts that were deposited into the three

accounts.    The balances in the accounts were as follows on the

dates indicated:

                             1/1/92     12/31/92    12/31/93

Charleston County           $393,000    $537,000    $628,000
  Court account
U.S. District Court           55,000      30,000      30,000
  account
In-house account             107,909       79,636     92,699

  Total                      555,909     646,636     750,699


     In the notice of deficiency, respondent determined that

petitioner’s method of reporting bail bond fees did not clearly

reflect income, and that a change in method of accounting was


     5
       Petitioner’s testimony regarding his salary is limited and
vague. On the basis of his testimony, the amount of the salary
appears to have been either a percentage of the fees he collected
or a percentage of the amount in the in-house account.
                                - 7 -

necessary.   Respondent determined that section 481 applied, and

that petitioner was required to include in income in 1992 the

combined balance of the three accounts as of January 1, 1992;

namely, $555,909.   In addition, respondent determined that

petitioner was required to include in income the net increases in

the combined balances of the Charleston County Court and U.S.

District Court accounts in the amount of $119,000 in 1992 and

$91,000 in 1993.

                               OPINION

     Section 446(b) provides as follows:   “If no method of

accounting has been regularly used by the taxpayer, or if the

method used does not clearly reflect income, the computation of

taxable income shall be made under such method as, in the opinion

of the Secretary, does clearly reflect income.”   For an accrual

method taxpayer, “it is the right to receive accrual basis

income, not its actual receipt, that determines the time of its

inclusion as gross income.”    Stendig v. United States, 843 F.2d

163, 165 (4th Cir. 1988) (citing Commissioner v. Hansen, 360 U.S.

446, 464 (1959)); see Johnson v. Commissioner, 108 T.C. 448, 459

(1997), affd. in part, revd. in part and remanded on another

ground 184 F.3d 786 (8th Cir. 1999); secs. 1.446-1(c)(1)(ii),

1.451-1(a), Income Tax Regs.   Generally, all the events that fix

the right to receive income have occurred when the earliest of

the following occurs:   The income is (1) actually or
                                - 8 -

constructively received, (2) due, or (3) earned by performance.

See Johnson v. Commissioner, supra at 459.     In the instant case,

all three of these occurred when petitioner received a fee from a

client:    It was actually received; it was due under the terms of

the bonding agreement; and it was earned by the execution of the

bond agreement.   Thus, the fees were income when received.

Charleston County Court and U.S. District Court Accounts

     In Stendig v. United States, supra, the Court of Appeals

held that rental receipts received by an accrual basis

partnership from its housing project but required by the lender

to be deposited into reserve accounts securing repayment to the

lender were nevertheless income to the partnership in the year

deposited.   The partners had argued that the amounts were not

income until a later year, when they obtained unrestricted access

to them.   The key question for the Court of Appeals was “whether

* * * the partnership acquired the ‘fixed right to receive the

[funds deposited in the] reserves.’”    Id. at 165 (quoting

Commissioner v. Hansen, supra).    The Court of Appeals held that

the partnership had acquired the fixed right, and hence must

accrue the amounts as income, “in the years of their deposit”

rather than at “the time of actual receipt.”     Id. at 166.   The

reason was that any use of the funds would inure to the benefit

of the partnership.   See id. at 166-167.
                                 - 9 -

     Petitioner, as an accrual method taxpayer with respect to

his business, was required to include in gross income of the

business amounts deposited into the Charleston County Court

account when he acquired the fixed right to receive those

amounts.   As in Stendig v. United States, supra, this occurred

when the amounts were received from his clients, even though some

of the proceeds may have been required to be deposited with a

third party.   The situation is virtually identical with the facts

in Stendig.    Like the partnership in Stendig, petitioner

collected receipts and was required to deposit a portion of them

as a necessary condition of doing business.6   Like the

partnership in Stendig, petitioner did not have access to the

funds while they were on deposit (except for interest earned),

but the funds would ultimately be his; i.e., the deposits would

inure to petitioner’s benefit.    The amounts on deposit either

would be returned to him because the level of outstanding bonds

had been reduced or would be used by the clerk toward

satisfaction of petitioner’s obligation under a bond.     See

Commissioner v. Hansen, supra at 466.    Therefore, we find that

petitioner was required to include in gross income the amounts

deposited into the Charleston County Court account in the year

received from clients.


     6
       Petitioner argues that in his case the deposits were
required by law rather than by contract. This is irrelevant.       In
either case, the deposits were necessary to do business.
                                - 10 -

     With respect to the U.S. District Court account, petitioner

has not adduced evidence regarding the terms under which amounts

were required to be deposited for bonds written for defendants in

U.S. District Court.   In his opening statement, petitioner’s

counsel indicated that deposits equal to 100 percent of the face

amount of the bond were required.    Presumably, these amounts were

either returned to petitioner when the defendant satisfactorily

appeared or forfeited if he did not.     In either case, the

deposited amounts would inure to petitioner’s benefit.     Because

petitioner has not come forward with the terms of the U.S.

District Court bonding arrangements, he has failed to carry his

burden of proving respondent’s determination erroneous.

In-House Account

     The in-house account appears, in part, to be an effort by

petitioner to set up a reserve for paying potential bond

forfeitures.   In other words, it acts, in part, as a reserve

against contingent liability.    The funds in the in-house account

were ultimately disbursed solely for petitioner’s benefit:     To

satisfy his obligations by paying bond forfeitures or increasing

the amounts on deposit in the Charleston County Court or the U.S.

District Court accounts; to pay his business expenses; or to pay

himself a “salary”.    As with the Charleston County Court account

and presumably with the U.S. District Court account, only two

things could happen to the funds in the in-house account:      They
                               - 11 -

could be paid to petitioner in cash or they could be used to pay

an obligation of petitioner.    See Commissioner v. Hansen, 360

U.S. at 465-466.    In either case, they would inure to his

benefit.    Thus, following Commissioner v. Hansen, supra, and

Stendig v. United States, 843 F.2d 163 (4th Cir. 1988), the

amounts deposited in the in-house account are income in the year

received from clients, notwithstanding their deposit.

     For the foregoing reasons, we sustain respondent’s

determination that petitioner must include in gross income the

net increase in the combined balances of the Charleston County

Court and the U.S. District Court accounts in the amount of

$119,000 in 1992 and $91,000 in 1993.7

Section 481 Adjustment

     In the notice of deficiency respondent determined that

section 481 applied, and that under section 481, petitioner was

required to include in income the amounts on deposit in the three

accounts as of the beginning of 1992.    We agree.

     Section 481 provides as follows:

          SEC. 481(a). General Rule.--In computing the
     taxpayer’s taxable income for any taxable year
     (referred to in this section as the “year of the
     change”)--

                 (1) if such computation is under a method of
            accounting different from the method under which
            the taxpayer’s taxable income for the preceding
            taxable year was computed, then


     7
         See infra note 13.
                              - 12 -

               (2) there shall be taken into account those
          adjustments which are determined to be necessary
          solely by reason of the change in order to prevent
          amounts from being duplicated or omitted, except
          there shall not be taken into account any
          adjustment in respect of any taxable year to which
          this section does not apply unless the adjustment
          is attributable to a change in the method of
          accounting initiated by the taxpayer.

By its terms, section 481 applies only when there is a change in

method of accounting.   Section 1.446-1(e)(2)(ii)(a), Income Tax

Regs., describes a change in method of accounting as follows:

“A change in the method of accounting includes * * * a change in

the treatment of any material item * * *   A material item is any

item which involves the proper time for the inclusion of the item

in income or the taking of a deduction.”   In other words, a

change in method of accounting does not involve whether or not an

item of income is included, but when.   See Knight-Ridder

Newspapers, Inc. v. United States, 743 F.2d 781, 798 (11th Cir.

1984).   However, the regulations provide several specific

limitations:

     A change in method of accounting does not include
     correction of mathematical or posting errors, or errors
     in the computation of tax liability * * * . Also, a
     change in method of accounting does not include
     adjustment of any item of income or deduction which
     does not involve the proper time for the inclusion of
     the item of income or the taking of a deduction. * * *
     A change in the method of accounting also does not
     include a change in treatment resulting from a change
     in underlying facts. * * * [Sec. 1.446-1(e)(2)(ii)(b),
     Income Tax Regs.]
                               - 13 -

     Respondent relies principally on Rankin v. Commissioner,

T.C. Memo. 1996-350, affd. 138 F.3d 1286 (9th Cir. 1998), to

support his determination applying section 481.    In Rankin, the

taxpayer, who used the cash receipts and disbursements method of

accounting, was a bail bondsman associated with an insurance

company surety.    The bonds were contracts between the criminal

defendant, the State, and the insurance company.    The insurance

company was principally liable to the State if the defendant

failed to appear at trial and the bond was forfeited or a late

fee was charged.    However, the taxpayer had a contract with the

insurance company under which the taxpayer would indemnify the

insurance company for the amount of any forfeited bonds or late

fees.   The taxpayer collected 10 percent of the face amount of

the bond as a fee, paid a portion of the fee to the insurance

company, deposited a portion of the fee into a specific account

known as the Build Up Fund or BUF account, and kept the

remainder.   The BUF account served as security for the taxpayer’s

promise to indemnify the insurance company.    The amount

accumulated in the BUF account was a percentage of the amount of

the outstanding bonds.    The insurance company functioned as

trustee of the BUF account and had the sole power to withdraw

funds from the BUF account but could use any withdrawn funds only

to satisfy the taxpayer’s indemnity obligations.    The insurance

company gave the taxpayer the option of indemnifying from the BUF
                              - 14 -

account or from independent funds.     When the taxpayer terminated

his agreement and all outstanding bonds were satisfied, the

taxpayer would be entitled to the funds in the BUF account.    The

taxpayer deducted deposits into the BUF account as a portion of

cost of goods sold.   See Rankin v. Commissioner, supra.

     The parties in Rankin agreed that the taxpayer was not

permitted to deduct deposits into the BUF account.8    The parties

disagreed over the treatment of the amounts accumulated in the

BUF account prior to the years in issue.    In an attempt to avoid

the application of section 481, the taxpayer argued that the

change in treatment of the deposits into the BUF account that the

Commissioner was requiring was not a change in method of

accounting.   We held that it was, because the change affected

only the timing of inclusion, not the ultimate fact of inclusion.

See id.; see also Schuster’s Express, Inc. v. Commissioner, 66

T.C. 588, 596-597 (1976), affd. without published opinion 562

F.2d 39 (2d Cir. 1977); sec. 1.446-1(e)(2)(ii)(b), Income Tax

Regs. (“a change in method of accounting does not include

adjustment of any item of income or deduction which does not




     8
       The parties relied on Sebring v. Commissioner, 93 T.C. 220
(1989), an earlier case with virtually identical facts. The
issue in Sebring was whether a cash basis bail bondsman could
properly deduct deposits into a BUF account at the time of
deposit. We held that he could not deduct amounts when they were
deposited, even though the deposits were mandatory. See id. at
227.
                              - 15 -

involve the proper time for the inclusion of the item of income

or the taking of a deduction”).

     We consider first the Charleston County Court and U.S.

District Court accounts.   Here, the instant case is

indistinguishable from Rankin.    As in Rankin, respondent’s change

of petitioner’s treatment of the amounts deposited into the

accounts was a change in method of accounting, because it

affected only the timing of inclusion, not the ultimate fact of

inclusion.   Under petitioner’s method, he would have been

required to include in income the funds in the accounts in the

year they ultimately became available to him.9   Any amounts

actually paid to satisfy forfeited bonds would not be included.10

Under respondent’s method, petitioner would be required to

include in income the funds in the accounts in the year of

deposit, but he would be entitled to deductions for amounts

actually paid to satisfy forfeited bonds, so the total amount

required to be included in income would be the same.   Thus,

respondent’s method alters only the timing of inclusion, not the




     9
       The evidence establishes that petitioner was entitled to
receive all of the amounts in the Charleston County Court account
when his bond obligations were completely satisfied. The same
appears to be true of the U.S. District Court account; at the
least, there is no evidence, or suggestion, to the contrary.
     10
       As we have found, no funds from the Charleston County
Court account were used to satisfy a forfeiture before or during
the years in issue.
                               - 16 -

fact of inclusion.    It is therefore a change in method of

accounting, and section 481 applies.

     We next consider the in-house account.    Under petitioner’s

method, he would have been required to include in income in the

year of disbursement any funds disbursed from the in-house

account for his benefit.11   He would be entitled to take

deductions for all allowable business expenses.    Further,

petitioner would ultimately receive any funds remaining in the

in-house account.12   Under respondent’s method, petitioner would

be required to include in income the funds in the account in the

year of deposit, but he would be entitled to take deductions for

amounts used to pay all allowable business expenses, so the total

amount required to be included in income would be the same.    Once

again, respondent’s method alters only the timing of inclusion,

not the fact of inclusion.    It is therefore a change in method of

accounting, and section 481 applies.

     Section 481(a)(2) authorizes “those adjustments which are

determined to be necessary solely by reason of the change [in

method of accounting] in order to prevent amounts from being


     11
       That is, any funds used to satisfy a liability in the
event of forfeiture, to satisfy required increases in the amounts
in the Charleston County Court and U.S. District Court accounts,
to pay business expenses, or to pay petitioner’s “salary”.
     12
       The precise nature of the in-house account is not clear.
In testimony, petitioner refers to it as an “escrow account”.
However, there is no evidence, or suggestion, that petitioner
would not receive any funds remaining in the account.
                               - 17 -

* * * omitted”.    Further, it is well established that section 481

supersedes the statute of limitations.   See Graff Chevrolet Co.

v. Campbell, 343 F.2d 568 (5th Cir. 1965); Superior Coach, Inc.

v. Commissioner, 80 T.C. 895, 912 (1983).    If petitioner merely

changed, starting in 1992, to an accounting method under which

amounts are included in income when received from clients, this

method would not result in the inclusion in income of amounts

previously excluded because deposited into the court and in-house

accounts.   Without section 481, such amounts would generally

escape taxation.    Section 481 allows respondent to prevent such

omissions by requiring petitioner to include in income in 1992

the amounts previously accumulated in the three accounts.

     Petitioner argues that section 481 does not apply because

there has been no change in method of accounting.   It is true

that a change in method of accounting is necessary to trigger

section 481, but petitioner’s attempts to show that there was no

change in method are unavailing.   Petitioner first argues that

there was no change in method of accounting, relying on section

1.446-1(e)(2)(ii)(b), Income Tax Regs., which provides that “A

change in the method of accounting * * * does not include a

change in treatment resulting from a change in underlying facts.”

However, although petitioner argues in general that there was a

change in underlying facts, he points to no such change, and we

have found none.
                               - 18 -

     Petitioner next relies on another provision of the same

regulation, which states:   “A change in method of accounting does

not include correction of mathematical or posting errors, or

errors in the computation of tax liability”.   Sec. 1.446-

1(e)(2)(ii)(b), Income Tax Regs.    Petitioner argues that the

accounting treatment of the deposits was not a method of

accounting but mere error, relying on Korn Indus., Inc. v. United

States, 209 Ct. Cl. 559, 532 F.2d 1352 (1976).   In Korn Indus.,

the taxpayer manufactured furniture.    The taxpayer used separate

inventories for raw materials, work-in-process, supplies, and

finished goods.   There were 14 kinds of material in the finished

furniture; e.g., lumber, mirrors, glue, nails.   During the years

in issue, 3 of the 14 materials costs had not been included in

the finished goods inventory, although they were included in the

other three inventories.    When the taxpayer later took account of

the three materials costs, the Government claimed there was a

change in accounting method, but the court found that the

taxpayer had merely corrected an error.   In the instant case,

petitioner’s “mistakes” are much more egregious and of a

different nature.   In 1992, petitioner reported gross receipts

from his business as a bail bondsman of $80,456, and increased

the balances in his three accounts by a combined total of

$90,727.   In 1993, petitioner reported gross receipts from his

business as a bail bondsman of $100,467 and increased the
                               - 19 -

balances in his three accounts by a combined total of $104,063.

In other words, in each year the bonding fees that petitioner

deferred reporting exceeded the amount reported.    The instant

case involves the systematic, consistent treatment of a

significant item, not a posting or computational error.    See sec.

1.446-1(e)(2)(ii)(b), Income Tax Regs.    Petitioner’s treatment of

the deposits was not “error” within the meaning of this

regulation.

Petitioner’s Additional Arguments

     Petitioner presents numerous additional arguments, none of

which are persuasive.    Petitioner directs his first argument to

the Charleston County Court account only and argues that, because

the receipt of fees and the subsequent deposit of moneys into the

account were interrelated, the receipt of amounts deposited was

of “no moment”, and petitioner was not required to include it in

income.   Petitioner is wrong on the facts.   Petitioner was

required to maintain deposits with the Clerk of Court of

Charleston County in the amount of 25 percent of outstanding

bonds.    He collected as a fee 10 percent (sometimes less) of each

bond he wrote.    There was no relationship between the deposits

and the fees.    There was no requirement that petitioner pay a

percentage of the fees he collected into the Charleston County

Court account, unlike the taxpayers in Sebring v. Commissioner,

93 T.C. 220 (1989), and Rankin v. Commissioner, T.C. Memo. 1996-
                                - 20 -

350, who paid a percentage of each fee into the BUF accounts.      In

the instant case, the amounts on deposit could come from

anywhere.    Thus, the receipts and deposits were not interrelated.

       Petitioner’s second argument is again directed only to the

Charleston County Court account.    Petitioner argues that the

deposits with the Charleston County Court were held in trust and

therefore were not income to him when received.    Petitioner cites

Angelus Funeral Home v. Commissioner, 47 T.C. 391 (1967), affd.

407 F.2d 210 (9th Cir. 1969), and Miele v. Commissioner, 72 T.C.

284 (1979).

       In Angelus Funeral Home, the taxpayer, which computed its

income on the accrual basis, operated a funeral home and

collected “pre-need” deposits from clients; i.e., payments for

future funeral services.    The deposits were held in trust for the

sole purpose of providing the funeral services, and the taxpayer

was obligated to use the entire amount on deposit for that

purpose.    See Angelus Funeral Home v. Commissioner, supra at 392-

393.    The Court held that the amounts on deposit were held in

trust for the client’s benefit and were not income to the

taxpayer until the funeral services were performed.    See id. at

397.

       In Miele, the taxpayer, which computed its income on the

cash receipts and disbursements basis, was a law partnership that

collected prepaid legal fees.    The fees were maintained in a
                               - 21 -

separate account until actually earned (i.e., when the legal

services were performed) and could not be used by the partnership

while they were in the separate account.    See Miele v.

Commissioner, supra at 285-286.    The Court held that the prepaid

fees were not includable in income (being neither actually nor

constructively received) until actually earned.    See id. at 290-

291.

       Petitioner’s argument for the existence of a trust is that

he is collecting and holding moneys in trust for the benefit of

the Clerk of Court for Charleston County.    Petitioner points to

the fact that the accounts or certificates of deposit were held

in trust in the name of the Clerk of Court for Charleston County

for the “sole protection and benefit of the holder of bail

bonds.”    However, the key question is whether petitioner acquired

a beneficial interest in the funds at the time of their deposit.

See Johnson v. Commissioner, 108 T.C. at 475.     He clearly did:

The deposits would ultimately inure to his benefit.    First,

petitioner chose whether funds from the Charleston County Court

account, or some other funds, were used to pay any bond

forfeiture owed to the County.    Second, even if payments were

made from the account, they would be to petitioner’s benefit,

because they would satisfy an obligation of petitioner.    Finally,

petitioner ultimately would receive the amounts remaining on

deposit in the account.   On the other hand, in Angelus Funeral
                                - 22 -

Home and Miele, the beneficial interest in the funds on deposit

was retained by the taxpayer’s clients.     Thus, these cases are

distinguishable.

     Petitioner directs his next argument to both the Charleston

County Court account and the U.S. District Court account.       He

argues that section 461(f) applies, authorizing deductions for

the amounts on deposit.    Section 461(f) provides as follows:

          SEC. 461(f). Contested Liabilities.--If--

                       (1) the taxpayer contests an asserted
                  liability,

                       (2) the taxpayer transfers money or
                  other property to provide for the
                  satisfaction of the asserted liability,

                       (3) the contest with respect to the
                  asserted liability exists after the time of
                  the transfer, and

                       (4) but for the fact that the asserted
                  liability is contested, a deduction would be
                  allowed for the taxable year of the transfer
                  (or for an earlier taxable year) determined
                  after application of subsection (h),

     then the deduction shall be allowed for the taxable
     year of the transfer. This subsection shall not apply
     in respect of the deduction for income, war profits,
     and excess profits taxes imposed by the authority of
     any foreign country or possession of the United States.

The fundamental problem with petitioner’s argument is that

section 461(f) does not by itself create a deduction; it only

affects timing.    That is, it applies only to a deduction

otherwise allowed.    See sec. 461(f)(4).   But here, because of
                               - 23 -

Stendig v. United States, 843 F.2d 163 (4th Cir. 1988), no

deduction is allowed.    Thus, section 461(f) does not apply.

     Finally, petitioner argues that the fees he received from

clients were excludable because there was a chance that the court

would order the fee refunded to the client.    There is some

evidence in the record relating to petitioner’s argument; namely,

petitioner’s testimony and the testimony of an employee at the

Clerk of Court for Charleston County indicating that the judge in

a case has discretion to order fees returned.    On the other hand,

there is no evidence in the record establishing the circumstances

(including, for instance, the frequency) of returned fees.      But

there is a more basic defect with petitioner’s argument; namely,

exclusion of fees until resolution of any contingencies regarding

their return was not the method of accounting that petitioner

employed.    Rather, the method he actually used was entirely

different:    under his method, he excluded all amounts deposited

into the accounts, regardless of whether any fees so deposited

were subject to return or not.    Thus, this argument must fail.

     We have considered petitioner’s remaining arguments and find

them to be without merit.    We accordingly sustain respondent’s

determination that petitioner was required to include in income

in 1992 the combined balances in the Charleston County, U.S.
                             - 24 -

District Court, and in-house accounts as of January 1, 1992;

namely, $555,909.13

     To reflect the foregoing,


                                      Decision will be entered

                                 under Rule 155.




     13
       Because we sustain respondent’s determination that the
balance in the in-house account as of Jan. 1, 1992, must be
included in 1992 gross income, we believe the possibility exists
that certain amounts in the in-house account could be subject to
double taxation, although the record is not entirely clear on
this point.
     It would appear to the Court that the possibility of double
taxation exists because the balance in the in-house account
decreased between Jan. 1 and Dec. 31, 1992. The record
establishes that one possible disbursement from the in-house
account was to fund required increases in the Charleston County
Court or U.S. District Court account. The Charleston County
Court account in fact increased between Jan. 1 and Dec. 31, 1992,
and we have sustained respondent’s determination that that
increase must be included in petitioner’s 1992 gross income.
However, if any portion of the 1992 increase in the Charleston
County Court account was funded with a disbursement from the in-
house account, then the possibility appears to exist that this
disbursement was taxed both as a part of the existing Jan. 1,
1992, balance in the in-house account and as an increase in the
Charleston County Court account between Jan. 1 and Dec. 31, 1992.
     We expect the parties to address this problem as part of
their Rule 155 computations.
