                         T.C. Memo. 1999-417



                       UNITED STATES TAX COURT



         HOWARD G. GRIDER AND ANNA C. GRIDER, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21303-97.                  Filed December 23, 1999.



     Howard G. Grider, pro se.

     David G. Hendricks and Michael J. O'Brien, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge: Respondent determined a deficiency in

petitioners’ 1994 Federal income tax of $40,464 and an accuracy-

related penalty under section 6662(a) for negligence of $8,093.

     After concessions,1 the issues for decision are:


     1
         Petitioners concede that respondent’s adjustments to their
                                                     (continued...)
                                - 2 -

     1.     Whether petitioners may deduct the amount of repairs

expenses they incurred in 1994 ($114,823), as petitioners

contend, or the amount they paid ($51,203), as respondent

contends.    We hold that petitioners may deduct only the amount of

repairs expenses that they paid in 1994.

     2.     Whether petitioners are liable for the accuracy-related

penalty for negligence under section 6662(a) for 1994.    We hold

that they are.

     References to petitioner are to Howard G. Grider.    Section

references are to the Internal Revenue Code in effect during the

year at issue.    Rule references are to the Tax Court Rules of

Practice and Procedure.

                          FINDINGS OF FACT

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

     Petitioners lived in Warren, Arkansas, when they filed their

petition.

A.   Petitioner’s Logging Business

     Petitioner has been in the logging business since 1951.

From 1951 to 1994, petitioner reported income from his logging

business on the cash method of accounting (i.e., he did not




     1
      (...continued)
gross receipts, interest expense, and cost of goods sold are
correct. The parties settled the depreciation issue, and agree
that computational adjustments will be required for petitioners'
self-employment tax for 1994.
                                - 3 -

report income until he received it), yet he accrued expenses

(i.e., he deducted expenses when he became liable for them).

     Petitioner has about 8-10 suppliers from whom he buys diesel

fuel, truck parts, and other items for his business.    Petitioner

generally pays his suppliers within 30 days.

     Petitioner incurred $114,823 of repair expenses for logging

machinery and equipment in 1994.    However, because he had a

dispute with one of his suppliers, petitioner paid $51,203 of

that amount in 1994 and $63,620 in 1995.

B.   Petitioners’ Tax Returns

     Petitioner prepared petitioners’ tax returns from 1951

through the year in issue.    He had no professional help in

preparing the 1994 return.

     Petitioner reported his logging income for 1994 based on

Forms 1099 issued to him.    Petitioner computed his expenses by

totaling his cash payments and check stubs for 1994.    Petitioner

reported on his Schedule C for 1994 that he used the cash method

of accounting.

     Petitioner deducted $94,723 for repairs and maintenance

expenses in 1994.   He arrived at this amount by reducing

$119,723, the amount of expenses he thought he had incurred in
                                - 4 -

1994,2 by $25,000.    He did so to increase petitioners’ income for

Social Security purposes.

     Petitioners understated gross receipts on their Schedule C

by $139,993, and purchases by $101,763.    Petitioners overstated

their fuel tax credit by $8,884 for 1994.

                               OPINION

A.   Whether Respondent Properly Disallowed Petitioners’
     Deduction of $63,630 of Repairs Expenses for 1994

     The first issue for decision is whether petitioners may

deduct more than $51,203 for repairs expenses for 1994.

Petitioners contend that they may deduct $114,823 for repairs

expenses for 1994.    Petitioners did not report income until they

received it, but they deducted some expenses before they paid

them.    Petitioners contend that this is a proper hybrid method of

accounting which they have consistently and properly used to

compute and report petitioner’s income and expenses from his

logging business.    Petitioners also contend that respondent’s

determination was an abuse of discretion because the cash method

of accounting does not clearly reflect petitioner’s income from

the logging business.

     We disagree.    First, petitioners did not explain why the

cash method would not clearly reflect their income.    Second,

petitioners did not use a valid hybrid method of accounting.


     2
         Petitioner incurred only $114,823 of repair expenses in
1994.
                                - 5 -

Petitioners improperly reported income on the cash method and

related expenses on an accrual method.    See sec. 1.446-

1(c)(1)(iv), Income Tax Regs.    A taxpayer’s method of accounting

that is plainly contrary to the regulations does not clearly

reflect income.    See Thor Power Tool Co. v. Commissioner, 439

U.S. 522, 523, 533 (1979).

     Petitioners rely on G.C.M. 37,316 (Nov. 11, 1977) and G.C.M.

39,328 (June 8, 1984) for the proposition that use of an

accounting method for 2 years is sufficient to establish a

taxpayer’s right to use that method.    Petitioners’ reliance is

misplaced.   Neither G.C.M. permits a taxpayer to use an improper

accounting method.

     Petitioners must deduct business expenses in the taxable

year in which the expenses are paid.    See sec. 461(a); sec.

1.461-1(a)(1), Income Tax Regs.    Petitioners paid $63,620 of

repair expenses in 1995; thus, they may not deduct those expenses

in 1994.

     Petitioners contend that respondent improperly changed

petitioners’ method of accounting from a hybrid method to the

cash method.   We disagree.   Respondent may change petitioners’

method of accounting to another method that, in respondent’s

opinion, clearly reflects income if respondent determines that

they used an impermissible accounting method to report income.

See sec. 446(b).   As discussed above, petitioners used an

improper hybrid method of accounting in 1994, and respondent’s
                                 - 6 -

determination was not an abuse of discretion.     Thus, we sustain

respondent’s determination that petitioners must report income on

the cash method of accounting.

     Petitioners cite Hospital Corp. of Am. v. Commissioner, T.C.

Memo. 1996-105, for the proposition that taxpayers may use a

hybrid of cash and accrual methods.      The facts of Hospital Corp.

of Am. v. Commissioner, supra, are distinguishable from those in

the instant case.   In that case, we held that it was an abuse of

discretion for respondent to change the taxpayer’s method of

accounting because the taxpayer’s hybrid method clearly reflected

the taxpayer’s income.    In the instant case, however, petitioners

impermissibly mixed cash and accrual methods of accounting in

violation of section 1.446-1(c)(1)(iv)(a), Income Tax Regs.

     Petitioners contend that respondent’s disallowance of the

repairs expense for 1994 was an abuse of discretion because

petitioners have consistently used the same method of accounting

for more than 40 years.   We disagree; respondent is not estopped

by petitioners’ prior treatment of petitioner’s logging income

and expenses.   See Municipal Bond Corp. v. Commissioner, 41 T.C.

20, 32 (1963), revd. and remanded on other issues 341 F.2d 683

(8th Cir. 1965).
                              - 7 -

B.   Accuracy-Related Penalty Under Section 6662

     Respondent determined and contends that petitioners are

liable for the accuracy-related penalty for negligence under

section 6662(a) and (c) for 1994.

     Section 6662(a) and (b)(1) imposes a 20-percent penalty on

the portion of an underpayment attributable to negligence.

Negligence includes a failure to make a reasonable attempt to

comply with the Internal Revenue Code or to exercise ordinary and

reasonable care in that respect.    See sec. 6662(c).   Petitioners

bear the burden of proving that they are not liable for the

accuracy-related penalty imposed by section 6662(a).    See Rule

142(a).

     Petitioners contend that their underpayment was not due to

negligence or intentional and willful disregard of rules or

regulations because they have consistently used the same method

of accounting for more than 40 years.    They also contend that

respondent conceded this addition to tax.    Petitioners provided a

copy of an unsigned decision document that appears to have been

prepared by respondent which states that petitioners are not

liable under section 6662(a) for 1994.    We do not consider that

document because it is not in evidence.

     We believe that petitioners were negligent.    Petitioners

improperly mixed cash and accrual methods of accounting.    They

understated gross receipts on their Schedule C by $139,993 and
                               - 8 -

purchases by $101,763, and overstated their fuel tax credit by

$8,884 for 1994.   We conclude that petitioners negligently

disregarded the tax laws, and that they are liable for the

accuracy-related penalty for negligence under section 6662(a) for

1994.

C.   Section 481

     Petitioners contend that they are entitled to a section 481

adjustment.   Respondent did not respond to petitioners’ section

481 argument in posttrial brief.   We agree that section 481

applies because respondent’s adjustments sustained herein alter

the timing of certain of petitioners’ deductions, contrary to

petitioners’ traditional treatment of these items.       Therefore,

the parties shall apply section 481 in connection with the Rule

155 computation.


                                            Decision will be entered

                                       under Rule 155.
