                            T.C. Memo. 1996-350



                          UNITED STATES TAX COURT



         JAMES M. RANKIN AND SHIRLEY RANKIN, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 26270-93.                       Filed July 31, 1996.



       David M. Kirsch, for petitioners.

       Thomas G. Schleier and Elaine Sierra, for respondent.



                  MEMORANDUM FINDINGS OF FACT AND OPINION


       WELLS, Judge:     Respondent determined the following

deficiency in, and additions to, petitioners' 1988 Federal income

tax:

                                       Additions to Tax
       Deficiency             Sec. 6651(a)(1)     Sec. 6653(a)(1)

       $155,255                   $38,485              $7,856
                                 - 2 -

     Unless otherwise indicated, all section references are to

the Internal Revenue Code as in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions, the principal issue we must decide

centers around whether a change in the practice of offsetting,

against the gross receipts of petitioner James M. Rankin's

(petitioner) bail bond business, payments made into certain

accounts maintained for him as part of that business is a change

in a method of accounting.   If the change in the practice is a

change in a method of accounting, then respondent may, pursuant

to section 481(a), make an adjustment increasing petitioners'

income in connection with the change.

                        FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91 and are incorporated herein by reference.   We find as

facts herein the facts stipulated by the parties.

     At the time of filing the petition in the instant case,

petitioners resided in Union City, California.   Petitioner

Shirley Rankin is a petitioner solely by reason of having filed

joint returns with petitioner.    Petitioner maintained his books

and filed his Federal income tax returns using the cash receipts

and disbursements method of accounting.

     Petitioner is licensed as a bail bond agent by the

California Department of Insurance and, since 1968, has been
                               - 3 -

engaged in the bail bond business in that State.   During 1988,

petitioner operated his bail bond business at five different

locations in California:   Redwood City, San Jose, Oakland,

Hayward, and Vallejo.   On petitioners' 1988 Federal income tax

return, petitioner reported income from his bail bond business on

four Schedules C.

     From the beginning of his bail bond business, petitioner's

primary surety company has been Associated Bond & Insurance

Agency (Associated), and, during 1988, petitioner executed bail

bonds as an agent of Associated.   The terms of petitioner's

agency for the period from October 1, 1981, through the time of

trial are set out in a written agreement with Associated

(agreement).   In prior years, petitioner had a similar agreement

with Associated.

     A bail bond is a performance bond requiring the appearance

of a criminal defendant at judicial proceedings.   The principal

on the bond is the defendant; the obligee is California, which

requires the defendant's appearance; and the surety is the

insurance company writing the bond, which guarantees performance.

As a bail bond agent, petitioner is permitted to solicit,

negotiate, and execute bail bonds on behalf of a surety company

(an insurance company) with which he is affiliated and which he

represents when he executes a bond.    Petitioner functions as the

agent of the surety company, executing bonds, collecting
                              - 4 -

premiums, and attempting to assure performance of the bonds on

behalf of the surety.

     When petitioner writes a bond, he collects 10 percent of the

face amount of the bond from a defendant as his earned premium.

Pursuant to the agreement, petitioner:   (1) Pays 13 percent of

the premium collected to Associated, the surety, as a bond cost;

(2) pays an additional 10 percent of the premium collected, or 1

percent of the face amount of the bond, to an indemnity fund

known as a "Build Up Fund" (BUF); and (3) keeps the remainder of

the premium.1

     The surety company that issues a bond is principally liable

to California for assuring a defendant's court appearance.     In

the event a defendant fails to appear, the surety company has to

pay a late surrender fee or forfeiture to California.   If a

defendant is not brought to court within 180 days of a failure to

appear, the court issues a summary judgment in the amount of the

bond, resulting in a loss on the bond.   The agreement, however,

shifts ultimate liability for expenses and forfeitures on each

bond from Associated to petitioner, who is personally liable for


1
     During 1988, petitioner executed bonds in the amount of
$5,995,543, earning premiums on such bonds in the amount of
$599,554. Petitioner collected $581,567 of the earned premiums.
During that year, petitioner paid bond costs to Associated in the
amount of $77,942 (representing 13 percent of the premiums earned
on the bonds sold) and paid $59,955 into his BUF accounts
(representing 10 percent of the premiums earned on the bonds
sold).
                                - 5 -

the amount of the loss.   In the agreement, petitioner agrees to

bring a defendant to court as required by the bond, or, if he

fails, to indemnify the surety for any expenses incurred,

including a forfeiture.   If petitioner brings the defendant to

court within the required time, the bond is exonerated and there

is no loss.   A loss occurs only when petitioner is unable to

bring the defendant to court.   Petitioner's liability for

expenses associated with a bond forfeiture does not arise prior

to his obligation to indemnify Associated.2

     As security for petitioner's promise to indemnify

Associated, the agreement requires petitioner to contribute to a

BUF account, and amounts paid into the BUF accounts are derived

from bond premiums collected.   Associated established and

maintained BUF accounts for petitioner with the Bank of America

and functioned as trustee for petitioner with respect to the BUF

accounts.   The BUF accounts are required as a necessary condition

of petitioner's doing business as a bail bondsman.   In accordance

with the agreement, the funds in the BUF accounts were

accumulated in proportion to the volume of outstanding bonds

executed by petitioner on behalf of Associated.   Accrued

2
     Because of his potential liability to Associated in the
event of a loss, petitioner's normal practice is to attempt to
obtain collateral from his customers as security for such
liability. When he is able to obtain collateral, petitioner's
normal custom is to accept only cash or a deed of trust on real
property. If the collateral is inadequate to pay a loss,
petitioner is required to pay the difference from either personal
resources or the BUF accounts.
                                - 6 -

interest, which belonged to petitioner, was accumulated in the

accounts.   Although Associated is not required to give petitioner

notice of any draw on the BUF accounts, petitioner typically

received quarterly or semiannual reports and periodically

inquired about the status of his accounts.

     Only Associated, and not petitioner or California, had the

right to withdraw funds from the BUF accounts maintained for

petitioner.   Although Associated had the right to draw on the BUF

accounts, those funds could be used only to satisfy petitioner's

obligation to indemnify it, and so its control of the funds'

disposition was very restricted.   When Associated became liable

for a bond forfeiture, it could, but was not required to, draw

from a BUF account to pay its obligation to California.    Pursuant

to the agreement, Associated could forgo indemnity from the BUF

account.    When a loss occurred, Associated would customarily ask

petitioner whether he wanted it to be paid from one of the BUF

accounts or from other sources.    If petitioner elected to pay the

loss from other sources, the BUF account would not be drawn upon,

and petitioner would reimburse the surety directly.

Historically, petitioner has had a very low rate of payments for

forfeitures made from his BUF accounts.    During 1988, Associated

drew only the amount of $4,633.35 from the BUF accounts

maintained for petitioner to satisfy any of petitioner's

liabilities pursuant to the agreement.    Petitioner paid all of
                                 - 7 -

his other expenses associated with bond forfeitures in 1988 from

sources other than the BUF accounts.

     Petitioner does not have access to his BUF accounts until

the agreement is terminated and all outstanding bonds and all

other liabilities petitioner may have to Associated are

satisfied.   Either petitioner or Associated may terminate the

agreement, with or without cause, subject to certain notice

requirements.   Upon termination of the agreement and satisfaction

of all liabilities secured by the BUF accounts, the balance in

the BUF accounts is required to be released to petitioner.

     On his tax returns since 1968, petitioner offset his gross

receipts by the amount contributed to his BUF accounts as a

portion of cost of goods sold.    However, the parties have

stipulated that the offsets claimed by petitioner for payments to

the BUF accounts are not properly claimable in any taxable

period.   Rather, if a forfeiture occurs and Associated is paid

out of a BUF account, the amount so paid is properly deductible

in the year payment is made.   Petitioner reported most, but not

all, of the interest accumulated on his BUF accounts on his

Federal income tax returns for the taxable years 1968 through

1988.

     Pursuant to the practice used by petitioner for accounting

for his BUF accounts from 1968 through 1988, petitioner did not

claim as deductions on petitioners’ tax returns forfeitures or

summary judgments paid from the BUF accounts maintained for him.
                               - 8 -

Rather, the deductions claimed for forfeitures or summary

judgments represented only those amounts paid from other sources.

Pursuant to that practice, petitioner did not intend to report as

income the balances remaining in the accounts upon termination of

the agreement and satisfaction of all liabilities secured by

them.

     As of January 1, 1988, Associated maintained seven separate

BUF accounts for petitioner.   As of that date, the surety's

ledgers for petitioner's BUF accounts reflected the following

balances:

            Account                     Balance

     Rankin-Johnson                    $20,075.58
     Rankin-Vallejo                     10,986.80
     James M. Rankin (Ann)              71,420.02
     James M. Rankin-Hayward             5,360.87
     James M. Rankin #2                 92,180.28
     Rankin-Carter                      10,294.23
     Rankin-Williams                     1,803.70

     The opening balance of petitioner's BUF accounts as of that

date shown in the surety's ledgers was $212,122 (rounded).     The

amount of accumulated interest on the BUF accounts as of January

1, 1988, shown in the surety's ledgers was $65,623 (rounded).

For purposes of calculating the adjustment of petitioners' income

to be made pursuant to section 481(a), the opening balance of the

BUF accounts as of January 1, 1988, is considered to be $146,499

(rounded), which does not include the amount of $65,623 (rounded)

that represents interest accumulated on the BUF accounts as of

that date.
                                - 9 -

     As of January 1, 1988, petitioner wholly owned the following

BUF accounts:    James M. Rankin (Ann); James M. Rankin-Hayward;

and James M. Rankin #2.

                               OPINION

     Because section 481(a)3 applies only if there is a change in

a method of accounting, the parties’ dispute in the instant case

centers on whether the change in the treatment for tax purposes

of payments into and disbursements from the BUF accounts

maintained in the course of petitioner’s bail bond business is a

change in method of accounting.    If so, respondent may make an




3

     Sec. 481(a) provides:

     SEC. 481.   ADJUSTMENTS REQUIRED BY CHANGES IN METHOD OF
                 ACCOUNTING.

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

               (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.
                              - 10 -

adjustment4 increasing petitioners’ income pursuant to section

481(a).

     As set forth in our findings above, from 1968 through 1988,

petitioner treated the payments made into the BUF accounts as a

cost of goods sold, offsetting the gross receipts of his

business.   Petitioner did not deduct from his taxable income

disbursements from those accounts to reimburse Associated for

losses and expenses incurred as a result of bond forfeitures.    In

Sebring v. Commissioner, 93 T.C. 220, 224-227 (1989), we held

that payments into BUF accounts were not deductible when made and

that deductions are allowed only for disbursements made to

satisfy liabilities.5   We reasoned that payments into the

accounts were “in the nature of a security deposit held for

payment of future liabilities.”   Id. at 226.   Petitioners concede

that Sebring controls the tax treatment of payments into and

disbursements from petitioner’s BUF accounts and that

petitioner’s prior practice of offsetting payments made into the

BUF accounts against gross receipts was incorrect.

     We must accordingly consider whether the change that was

required by respondent for purposes of bringing the tax treatment

4
     The amount of the adjustment, $146,499, essentially
represents the Jan. 1, 1988, opening balances of the BUF accounts
maintained in connection with petitioner’s bail bond business,
less interest accumulations.
5
     The taxpayer in that case, like petitioner, used the cash
receipts and disbursements method of accounting. Sebring v.
Commissioner, 93 T.C. 220, 221 (1989).
                              - 11 -

of petitioner’s BUF accounts into conformity with our holding in

Sebring constitutes a change in petitioner's method of accounting

for those accounts.   A change in method of accounting is defined

as a “change in the overall plan of accounting for gross income

or deductions or a change in the treatment of any material item

used in such overall plan.”   Sec. 1.446-1(e)(2)(ii), Income Tax

Regs.   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.”   Sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs.   The

regulations further provide that “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 in income or the taking of a deduction.”

Sec. 1.446-1(e)(2)(ii)(b), Income Tax Regs.   Accordingly, where a

taxpayer’s practice permanently avoids reporting of income and

therefore distorts its lifetime income, the practice is not a

method of accounting, and section 481(a) is inapplicable to a

change of the practice.   Schuster’s Express, Inc. v.

Commissioner, 66 T.C. 588, 596-598 (1976), affd. without

published opinion 562 F.2d 39 (2d Cir. 1977).

     Petitioners attempt to bring themselves within the rule of

Schuster’s Express by arguing that petitioner's practice of

offsetting payments into the BUF accounts against gross receipts

was not a method of accounting but simply involved the claim of

offsets not allowable in any period.   Petitioners argue that,
                               - 12 -

because (1) payments into the BUF accounts were not offsettable

against gross receipts or deductible in any year, and (2)

petitioner had no intention of including those amounts in his

income in any future year, the offsets claimed with respect to

the payments into the accounts effected a permanent avoidance of

reporting of income and a distortion of petitioner’s lifetime

income.

     In response to petitioners’ arguments regarding Schuster’s

Express, respondent argues that the change in petitioner’s

practice of offsetting payments into the BUF accounts against

gross receipts involves the appropriate time for taking those

amounts into account and therefore constitutes a change in

accounting method.   Respondent contends that the offsets claimed

with respect to the payments into the BUF accounts would

eventually be matched by payments of actual liabilities from the

accounts and the receipt by petitioner of the remaining balances

of the accounts when they were terminated by Associated,

petitioner’s surety.   Thus, according to respondent, any balances

refunded would be required to be included in petitioner’s income

pursuant to the relevant case law and the tax benefit rule.

     Petitioners argue that:   (1) Respondent has raised the issue

of the tax benefit rule for the first time on brief; (2) they

have been denied the opportunity to present evidence concerning

its applicability, such as evidence concerning the extent to

which prior deductions did not result in a tax benefit and expert
                                - 13 -

testimony concerning whether a recovery would occur on the

termination of petitioner’s relationship with Associated; and (3)

respondent should bear the burden of proof with respect to the

applicability of the tax benefit rule.

     We do not consider petitioners to be prejudiced by

respondent’s limited and responsive reliance on the tax benefit

rule.     We note that petitioners have placed in evidence their tax

returns from 1970 through 1988 (petitioners could not produce

copies of their 1968 and 1969 returns) and the surety ledgers for

the BUF accounts in issue, which permits as complete an

evaluation as practical of the extent of any tax benefit

resulting from the deductions claimed by petitioners.     We also

consider petitioners to have been aware of the relevance of the

tax benefit rule to the instant case.     In their opening brief,

petitioners discuss whether the balances of petitioner’s BUF

accounts must be included in income when the accounts are closed

and attempt to distinguish Knight-Ridder Newspapers, Inc. v.

United States, 743 F.2d 781, 799 (11th Cir. 1984), which noted

that the previously deducted balance of a reserve account is to

be included in income when the account ceases to be used.     The

portion of Knight-Ridder Newspapers that petitioners attempt to

distinguish is based on an application of the tax benefit rule.

        We further fail to see the value of expert testimony on the

matter of whether a recovery would occur on the refunding of the

BUF account balances to petitioner.      Finally, by relying on the
                             - 14 -

tax benefit rule, respondent has not raised a new matter for

which respondent bears the burden of proof.    Colonnade

Condominium, Inc. v. Commissioner, 91 T.C. 793, 795 n.3 (1988).

We accordingly reject petitioners’ attempt to limit our

consideration of the applicability of the tax benefit rule in the

instant case.

     We do not find merit in petitioner’s reliance on Schuster’s

Express, Inc. v. Commissioner, supra.   In Schuster’s Express the

taxpayer maintained insurance expense accounts on the basis of a

predetermined percentage of gross receipts and deducted the

amount so computed even though its actual insurance expense was

less than the estimated amount.   The difference between the

estimated and actual expense was credited to a reserve account.

The Commissioner disallowed the deductions claimed for the

amounts credited to the reserve account in the taxpayer’s open

years and sought, pursuant to section 481(a), to include in the

taxpayer’s income for the earliest open year the balance of the

reserve account as of the end of the preceding year, which

comprised additions made in closed years.6    The Court found that

the applicability of section 481(a) constituted a new matter for

which the Commissioner bore the burden of proof, stating:

     [the Commissioner], the party on whom the burden of
     proof rests, has not established that under * * * [the

6
     Sec. 481(a) permits the making of an adjustment with respect
to amounts that were omitted in closed years. Graff Chevrolet
Co. v. Campbell, 343 F.2d 568, 571-572 (5th Cir. 1965).
                                - 15 -

     taxpayer’s] method of computing insurance expense there
     was any procedure or intention to restore the excessive
     deductions to income in future years so as to properly
     reflect * * * [the taxpayer’s] total lifetime income.
     * * * [66 T.C. at 596.]

Consequently, the Court concluded that the change in the

taxpayer’s practice of deducting insurance expenses did not

involve the question of the proper time for the taking of a

deduction, and therefore was not a change in a method of

accounting.   Id. at 596-597.   Accordingly, the Court concluded

that no adjustment to the taxpayer’s income could be made

pursuant to section 481(a) with respect to the balance of the

reserve account attributable to closed years.    Id. at 597-598.

     Subsequent cases have distinguished Schuster’s Express, Inc.

v. Commissioner, supra, concluding that the practices in question

involved issues of the timing of recognition of income, rather

than of the permanent avoidance of its reporting.    Knight-Ridder

Newspapers, Inc. v. United States, supra; North Cent. Life Ins.

Co. v. Commissioner, 92 T.C. 254 (1989); Copy Data, Inc. v.

Commissioner, 91 T.C. 26 (1988); Primo Pants Co. v. Commissioner,

78 T.C. 705 (1982); Connors, Inc. v. Commissioner, 71 T.C. 913

(1979).   Although petitioners argue that those cases are not

applicable to the situation presented in the instant case, the

circumstances noted by petitioners do not render the reasoning of

those cases inapposite.7   Knight-Ridder Newspapers, Inc. v.

7
     For example, certain of those cases involve accrual method
                                                   (continued...)
                                - 16 -

United States, supra, involved a reserve for anticipated

advertising rebate expenses.    The taxpayer added to the reserve

and deducted an amount based on its estimated liability for

rebates for the year; rebates paid were charged against, and

reduced, the reserve.    The court concluded that the rebate

reserve was an item affecting the proper timing of a deduction

because disbursements from the reserve would be deductible when

made and the taxpayer’s practice simply accelerated those

deductions.     Knight-Ridder Newspapers, Inc. v. United States,

supra at 798.    Similarly, in the instant case, a disbursement

from one of the BUF accounts in issue would properly be

deductible when made, Sebring v. Commissioner, 93 T.C. at 225,

and petitioner’s practice of offsetting payments into the BUF

accounts against the gross receipts of his business in effect

accelerated the deductions otherwise allowable.    The court in

Knight-Ridder Newspapers further analyzed whether the taxpayer's

use of the reserve permanently avoided the reporting of income,

reasoning as follows:

     though we talk about the timing of deductions, the
     basic issue is whether income is reflected and taxed.
     The reserve method determines when income will be

7
 (...continued)
taxpayers and/or claims of deductions based on estimates of
expenses or reserve accounts. Petitioners point out that
petitioner was a cash method taxpayer during relevant times and
further contend that the payments into the BUF accounts were not
based on estimates of expenses, but on a percentage of bail bond
premiums received and that the BUF accounts were not reserves in
an accounting sense.
                              - 17 -

     taxed. When deductions are taken early (at the time
     money is added to the reserve), an equal amount of
     income is obviously not taxed. That income is taxed,
     however, at the later time when deductions would have
     been taken under a different system (i.e., at the time
     rebates are paid, the absence of deductions means that
     an equal amount of income is taxed). Most important,
     at the time the company ceases to use the reserve
     (e.g., when the company closes out its business), any
     remaining balance in the reserve must be included in
     taxable income. * * * Thus, no income is avoided
     altogether. Any excess deductions in earlier years are
     offset by an equal amount of taxable income in the
     final day. The question becomes one of timing, whether
     the income is taxed when the amounts are added to the
     reserve or when the reserve is abandoned on the Day of
     Armageddon. * * * [743 F.2d at 799.]

     As noted above, petitioner’s practice of offsetting against

gross receipts the payments into the BUF accounts in issue

reduced the income of his bail bond business earlier than

otherwise would have been proper, and concomitantly eliminated

deductions at the proper time for claiming them; i.e., when

liabilities were paid from the BUF accounts.   Moreover,

petitioner’s practice did not avoid the reporting of income

because, notwithstanding his professed lack of intention to

include any of the balances of his BUF accounts in income when

they were refunded to him, at the termination of his association

with the surety, those balances, to the extent they represented

petitioner’s payments into those accounts which he treated as

current offsets to the gross receipts of his business, would be

includable in income.   Knight-Ridder Newspapers, Inc. v. United

States, supra at 799; see also Haynsworth v. Commissioner, 68

T.C. 703, 708-714 (1977), affd. without published opinion 609
                              - 18 -

F.2d 1007 (5th Cir. 1979).   The repayment of those balances to

petitioner would constitute a recovery or an event fundamentally

inconsistent with the premise of the original offsetting against

gross receipts of the payments into the BUF accounts, triggering

application of the tax benefit rule.8   Hillsboro Natl. Bank v.

Commissioner, 460 U.S. 370, 383-384 (1983); sec. 1.111-1(a)(2),

Income Tax Regs.   Consequently, petitioner's practice of

offsetting against gross receipts payments into the BUF accounts

in issue constitutes a method of accounting, and the change in

that practice is a change in method of accounting.   Accordingly,

an adjustment may be made pursuant to section 481(a) to prevent




8
     We note that this Court does not require a taxpayer to
include in income the recovery of an amount that was improperly
deducted in a prior year for which the period of limitations has
expired. 885 Inv. Co. v. Commissioner, 95 T.C. 156, 165 (1990).
Several Circuit Courts of Appeals, including the Ninth, to which
an appeal of the instant case would lie (barring stipulation to
the contrary), have rejected the so-called erroneous deduction
exception to the tax benefit rule. Id. Accordingly, pursuant to
the rule of Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445
F.2d 985 (10th Cir. 1971), we apply the law as announced by the
Court of Appeals for the Ninth Circuit. Consequently, for
purposes of the instant case, the recovery of the payments into
the BUF accounts would be included in petitioner's income
pursuant to the tax benefit rule notwithstanding that the offsets
against gross receipts claimed for those payments were improper.
Unvert v. Commissioner, 656 F.2d 483, 485-486 (9th Cir. 1981),
affg. 72 T.C. 807 (1979).
                              - 19 -

the omission9 or duplication10 of amounts solely by reason of that

change.

     Because we have decided that an adjustment to income

pursuant to section 481(a) is warranted, we must consider two

contentions advanced by petitioners concerning the amount of the

adjustment.   Petitioners contend that petitioner owned only a

one-half interest in certain BUF accounts,11 and that therefore

only one-half of the relevant balance of those accounts may be

included in the section 481(a) adjustment made with respect to

the change in the method of accounting for those accounts.   At

trial, petitioner testified that he made agreements with certain

of his office managers to share the profits and losses of their

respective offices, as well as the BUF account for the office.

Petitioner produced two agreements, only one of which was in

effect on January 1, 1988, the relevant time for purposes of the

9
     Although, even if, pursuant to the tax benefit rule, the
previously offset amounts in the BUF accounts would be reportable
in income at the time of their refund to petitioner, respondent
need not await that eventuality but may make the adjustment
provided by sec. 481(a) in the year of the accounting method
change. Western Casualty & Sur. Co. v. Commissioner, 571 F.2d
514, 519 (10th Cir. 1978), affg. 65 T.C. 897 (1976).
10
     A duplication could occur when, pursuant to the new method
of accounting, deductions are claimed when disbursements are made
from the BUF accounts in issue because the amounts disbursed (to
the extent they do not represent accumulated interest) could have
already been offset against gross receipts at the time they were
paid into the accounts pursuant to petitioner's old method of
accounting.
11
     Those accounts are identified as: Rankin-Johnson, Rankin-
Vallejo, Rankin-Carter, and Rankin-Williams.
                               - 20 -

section 481(a) adjustment.12   Petitioner contends that he made

similar agreements with other office managers but is unable to

provide copies of them.   Petitioner did not produce any of the

office managers as witnesses at trial to corroborate his

testimony.   Petitioners acknowledge that we are not bound to

accept petitioner's uncorroborated testimony.   Wood v.

Commissioner, 338 F.2d 602, 605 (9th Cir.), affg. 41 T.C. 593

(1964).

     The agreement in evidence that was in effect at the relevant

times, which pertains to the Vallejo office of petitioner's

business, contains, inter alia, the following provisions:    (1) A

pledge of collateral by the office manager, referred to in the

agreement as a bail agent, to secure payment to petitioner of

losses incurred by the manager; (2) an agreement to share equally

the profits of "James Rankin Bail Bonds" between petitioner and

the manager; and (3) an agreement that the two "will share the

separate reserve for the Vallejo office".   The agreement does not

further specify the nature of sharing intended by the parties or

the manner in which it is to be effected.   The agreement is

otherwise ambiguously drafted in that it suggests that all

profits made by James Rankin Bail Bonds, which, based upon the

Schedules C in petitioners' 1987 and 1988 returns, appears to be

a business operation different from the bail bond operation

12
     The other agreement was dated Sept. 1, 1988, and concerns
the same office as the first agreement.
                              - 21 -

carried on at the Vallejo office, are to be shared equally

between petitioner and the manager of that office.    Petitioner

testified, however, that he only shared the profits of the

Vallejo office with the other party to the agreement.    There is

no further evidence in the record as to the arrangements

concerning those purported partnerships.

     Other circumstances in the record are inconsistent with

petitioners' contention.   The BUF accounts were maintained by

Associated only for petitioner, and would be refunded to him

alone upon the termination of his association with that surety.

The full amount of those accounts was available to Associated for

the payment of any liabilities petitioner incurred to Associated.

Associated could draw on the BUF accounts without giving notice

to petitioner.   Moreover, the parties stipulated that the accrued

interest on the BUF accounts in issue belonged to petitioner.      As

far as Associated was concerned, the BUF accounts were not

jointly owned.

     We also note that petitioner's bail bond business is treated

as one or more sole proprietorships, and not partnerships, on his

income tax returns.   Statements in tax returns constitute

admissions that may be overcome only by cogent evidence that they

are wrong.   Waring v. Commissioner, 412 F.2d 800, 801 (3d Cir.

1969), affg. per curiam T.C. Memo. 1968-126; Mooneyham v.

Commissioner, T.C. Memo. 1991-178; Estate of McGill v.

Commissioner, T.C. Memo. 1984-292.     There is nothing in the
                              - 22 -

record that suggests that the office managers reported on their

tax returns a portion of the income and expense associated with

their respective offices.   Indeed, petitioners assert that

petitioners' income tax returns and the surety's ledgers with

respect to the BUF accounts in issue contain all the information

needed for purposes of the alternative method provided by section

481(b)(2), further discussed below, for computing the amount of

the additional tax to be paid as a result of the adjustment

required due to the change in the method of accounting for the

BUF accounts.   Petitioners' assertions and the record as a whole

indicate that the full amount of the payments into the BUF

accounts were taken as offsets against the gross receipts of

petitioner's bail bond business reported on petitioners’ tax

returns, and petitioners do not contend otherwise.   We conclude

that petitioners have not established that any of the BUF

accounts in issue were jointly owned.   Accordingly, no

modification of the amount of the section 481(a) adjustment is

required for this reason.

     Petitioners also contend that, in the event we decide that

section 481(a) applies in the instant case, the amount of tax

resulting from the adjustment should be limited to the amount

computed pursuant to section 481(b)(2).13   Respondent contends



13
     Petitioners do not rely on the limitation provided by sec.
481(b)(1), and we do not consider it.
                                - 23 -

that petitioners have not satisfied the conditions for employing

that method.

     Where it applies, section 481(b)(2),14 in general, limits

the increase in tax in the year of change attributable to a

section 481(a) adjustment to the net increase in income tax that

would result from allocating that portion of the adjustment to

prior consecutive taxable years to which it is properly allocable

pursuant to the new method of accounting, with the balance of the

14
     Sec. 481(b)(2) provides as follows:

     SEC. 481(b).   Limitation on Tax Where Adjustments Are
Substantial.--

                    *   *   *    *   *   *   *


          (2) Allocation under new method of accounting.--If--

               (A) the increase in taxable income for the year of
          the change which results solely by reason of the
          adjustments required by subsection (a)(2) exceeds
          $3,000, and

               (B) the taxpayer establishes his taxable income
          (under the new method of accounting) for one or more
          taxable years consecutively preceding the taxable year
          of the change for which the taxpayer in computing
          taxable income used the method of accounting from which
          the change is made,

     then the tax under this chapter attributable to such
     increase in taxable income shall not be greater than the net
     increase in the taxes under this chapter (or under the
     corresponding provisions of prior revenue laws) which would
     result if the adjustments required by subsection (a)(2) were
     allocated to the taxable year or years specified in
     subparagraph (B) to which they are properly allocable under
     the new method of accounting and the balance of the
     adjustments required by subsection (a)(2) was allocated to
     the taxable year of the change.
                               - 24 -

adjustment allocated to the year of change.    Sec. 1.481-2(b)(3),

Income Tax Regs.   A taxpayer must establish from its books of

account and other records what its taxable income would have been

pursuant to the new method of accounting for one or more of the

consecutive years immediately preceding the year of change.    Sec.

481(b)(2); sec. 1.481-2(b), Income Tax Regs.

     The record contains petitioners’ Federal income tax returns

for the years 1970 through 1987, but not for the years 1968 and

1969.   Petitioners could not produce copies of their 1968 and

1969 returns and concede that the portion of the section 481(a)

adjustment allocable to those years is to be taken into account

in 1988, the year of change.   The record also contains the

surety's ledgers for each of the BUF accounts in issue, which

reflect the payments into and disbursements from each account.

Petitioners maintain that those documents contain sufficient

information to perform the computations called for by section

481(b)(2) and that those computations may be performed as part of

the Rule 155 computation for the instant case.

     Respondent maintains that such evidence is insufficient to

verify the accuracy of any computation pursuant to section

481(b)(2) and to ascertain petitioners' correct tax for the prior

taxable years.   Respondent argues that there might be errors in

petitioners' prior year returns besides the incorrect method of

accounting for the BUF accounts that cannot be identified and

that prevent computation of the correct tax for those years.
                                - 25 -

Respondent contends that petitioners also have failed to provide

substantiation for the income and deductions claimed in their

returns for those years.

     We do not agree with respondent's suggestion that section

481(b)(2) requires a taxpayer to prove the accuracy of every item

affecting its tax liability in the years prior to the year of a

change in accounting method in order to qualify for the

provision's benefits.   Rather, a taxpayer need show only what its

taxable income would have been in those years using the new

method of accounting in order to obtain the benefit of that

provision.   We, however, do not find that the record contains

sufficient evidence to satisfy the requirements of section

481(b)(2).   Although we accept the evidence of the payments into

and disbursements from the BUF accounts in issue afforded by the

surety's ledgers, we do not accept petitioners' tax returns as

proof of the gross receipts of petitioner’s bail bond business

for the years preceding 1988.    It is well settled that a tax

return merely represents the claim of the taxpayer and does not

establish the truth of the matters set forth therein.     Wilkinson

v. Commissioner, 71 T.C. 633, 639 (1979); Roberts v.

Commissioner, 62 T.C. 834, 837 (1974); Halle v. Commissioner, 7

T.C. 245, 247-248 (1946), affd. 175 F.2d 500 (2d Cir. 1949).     We

construe the regulations pursuant to section 481(b)(2), which

provide for the use by a taxpayer of its "books of account and

other records" to establish its taxable income using the new
                              - 26 -

method, as contemplating the use of accounting records, rather

than tax returns, to carry the taxpayer's burden.     Sec. 1.481-

2(b), Income Tax Regs.   We accordingly find that petitioners have

failed to introduce sufficient evidence to establish their

entitlement to the benefits of section 481(b)(2).

     To reflect the foregoing and concessions,

                                         Decision will be entered

                                    under Rule 155.
