                      T.C. Memo. 1997-162



                  UNITED STATES TAX COURT


         CORDES FINANCE CORPORATION, Petitioner v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 27258-93.               Filed April 1, 1997.



     O. Christopher Meyers, for petitioner.

     Gary Bloom, for respondent.



          MEMORANDUM FINDINGS OF FACT AND OPINION

     WHALEN, Judge:   Respondent determined the following

deficiency and penalties with respect to petitioner's 1990

taxable year:

                                Penalties
        Deficiency      Sec. 6662(a)   Sec. 6663(a)
        $1,530,128      $303,025.86     $32,726.25

   All section references are to the Internal Revenue Code

as amended and in effect during 1990.   All Rule references

are to the Tax Court Rules of Practice and Procedure.
                             - 2 -

     After concessions, the issues for decision are:    (1)

Whether respondent abused her discretion under section

446(b) in computing an adjustment to change petitioner's

method of accounting for interest income from its

automobile finance business; (2) whether petitioner is

entitled to deduct a loss of $336,912 that was claimed on

its amended return; (3) whether petitioner is liable for

the civil fraud penalty under section 6663(a); and (4)

whether petitioner is liable for the accuracy-related

penalty under section 6662(a) due to a substantial

understatement of income tax.


                        FINDINGS OF FACT

     Some of the facts have been stipulated by the parties.

The stipulation of facts, the supplemental stipulation of

facts, and the exhibits attached thereto are incorporated

herein by this reference.

     Petitioner was incorporated in Oklahoma on January 24,

1964, for the purpose of engaging in the business of

automobile financing.    At the time its petition was filed

in this Court, petitioner's principal place of business

was in Lawton, Oklahoma.    Petitioner reported income and

expenses for Federal income tax purposes on the basis of

the accrual method of accounting and used the calendar year

as its taxable year.
                                - 3 -

            During 1990, Mr. Edmund J. Cordes was

petitioner's president.       He oversaw all of petitioner's

activities.

His education included high school and 2 years of college.

He had studied accounting and business law in college and

had received instruction in accounting while serving in the

military.

     During 1990, Mr. Cordes owned or controlled, directly

or indirectly, all of the stock of petitioner and four

other corporations:      Cordes Building Corp., Edmund Cordes,

Inc., John Cordes, Inc., and Eddie Cordes, Inc.       These

corporations were engaged in the business of selling and

financing the sale of automobiles, except for Cordes

Building Corp., which was engaged in the business of buying

real property and constructing buildings for rental.

     During 1990, petitioner's stock was owned by Mr. Cordes'

wife, daughter, and son as follows:


                      Owner             Shares

            June J. Cordes                334
            Jean Ann Cordes Rigby         333
            Johnny J. Cordes              333

              Total                     1,000


     Mr. Cordes' automobile dealerships referred their

customers to petitioner to provide financing for the

purchase of automobiles.       If the customer was credit-
                             - 4 -

worthy, petitioner would issue a check to the dealership

for the purchase price of the car, and the customer would

issue a promissory note to petitioner under which the

customer would agree to pay the principal amount of the

note plus interest.   Payment of the customer's promissory

note was secured by a mortgage on the automobile that was

being financed.

     Petitioner's employees maintained a ledger card for

every lending transaction.   Each ledger card contained the

customer's name, the vehicle identification number of the

automobile that was being financed, the principal amount of

the loan, and the total interest that would accrue during

the life of the loan.   During the life of the loan,

petitioner's employees would record the date and amount of

each payment on the appropriate ledger card.   Petitioner

did not maintain a list of all loans outstanding, and

there was no way of knowing if a ledger card was lost or

misplaced, unless the borrower subsequently made a payment

on the loan.

     Since its inception as a finance company in 1964,

through and including the year in issue, petitioner has

used the same method of accounting to record loan

transactions on its books and records.   At the time

petitioner made a loan, petitioner's employees debited

petitioner's "Loan Receivable" account in an amount equal
                            - 5 -

to the sum of the principal amount of the loan and the

total interest that would accrue over the life of the loan.

They credited petitioner's "Cash" account in an amount

equal to the principal of the loan and credited "Deferred

Interest Income" in an amount equal to the interest to be

paid by the customer over the term of the loan.

     As mentioned above, after the loan was initially

recorded, petitioner's employees entered the date and

amount of each payment made by the customer on the ledger

card for the loan.   Under petitioner's method of account-

ing, however, petitioner did not accrue interest income

while the loan was outstanding and the customer was making

payments.   Interest was not accrued until the principal

amount of the loan was fully paid or petitioner repossessed

the automobile securing the loan.   At that time, petitioner

recognized for book and tax purposes all of the interest

that had been paid on the loan.

     As of the end of 1990, petitioner had approximately

1,300 loans outstanding.   According to petitioner's balance

sheet at the end of 1990, there was a debit balance of

$17,315,315.59 in petitioner's loan receivable account and

a credit balance of $7,772,543 in petitioner's deferred

interest income account.   Thus, at the close of 1990,

petitioner's balance sheet reflected interest of $7,772,543

to be realized after 1990 on petitioner's portfolio of
                             - 6 -

loans.   The balances of petitioner's deferred interest

account for the years 1984 through 1990, as reported on

the balance sheets attached as Schedule L to petitioner's

Federal income tax returns, are as follows:

                          Deferred Interest
                Year       Per Schedule L

                1984         $5,045,821.33
                1985          5,354,536.83
                1986          5,799,020.10
                1987          6,564,988.00
                1988          7,569,183.00
                1989          7,485,966.00
                1990          7,772,543.00


Prior to respondent's audit, petitioner's employees had

not reconciled the deferred interest income account with

the customer ledger cards for approximately 20 years.

     Mr. Robert Hinman, the managing principal of the

Lawton office of an accounting firm, was responsible for

the preparation of petitioner's tax returns from 1987

through the year in issue.   At no time did Mr. Hinman

examine petitioner's method of accounting for interest

income to determine whether it was consistent with

generally accepted accounting principles, the Internal

Revenue Code, or applicable Treasury regulations.

     Petitioner reported interest income for Federal income

tax purposes for the years and in the amounts as follows:


                Year          Amount

                1984       $923,185.00
                1985      1,007,549.50
                            - 7 -

                1986      1,132,417.73
                1987      1,065,843.73
                1988        995,475.00
                1989        959,489.00
                1990        855,861.00


     During respondent's audit of petitioner's 1990 return,

respondent's agent learned of petitioner's practice of

recording interest income on its books and records only at

the time a loan was paid off or at the time an automobile

was repossessed.   In order to recompute petitioner's

interest income for Federal tax purposes, the agent

sought and obtained from petitioner's representatives the

customer ledger cards for all loans outstanding at the

end of 1990.   From the documents supplied by petitioner's

representatives, including the ledger cards and certain

loan documents that had been prepared at the time the

loans were made, the agent computed the amount of deferred

interest on each outstanding loan, the interest that

should have been reported on that loan using the accrual

method of accounting, and the amount of deferred interest

with respect to that loan at the end of 1990.   The totals

computed by the agent for all the loans outstanding are as

follows:


     Aggregate deferred interest
       per ledger cards             $6,175,575.00
     Interest earned
       through end of 1990           3,084,179.12

     Ending deferred interest        3,091,395.88
                            - 8 -


In passing, we note the stipulation of the parties that

the ending deferred interest as calculated by respondent

in the amount of $3,091,395.88 should be increased by

$437,800.   We also note the stipulation that the earned

interest as calculated by respondent in the amount of

$3,084,170 should be increased by $295,200.   In this

opinion, we shall continue to refer to the amounts

originally calculated by respondent and used in the notice

of deficiency in order to avoid confusion.

     Based upon the agent's analysis, respondent determined

that petitioner's interest income had been understated in

the amount of $3,084,179.12.   Respondent also determined

that petitioner's interest income had been understated by

the difference between the aggregate deferred interest

computed from the ledger cards as shown above, $6,175,575,

and the deferred interest shown on petitioner's books and

records, $7,772,543, or $1,596,968.   Accordingly,

respondent determined that petitioner's interest income

had been understated in the aggregate amount of $4,681,147

(i.e., $3,084,179 plus $1,596,968).

     During the audit, respondent's agent asked Mr. Cordes

to provide certain information pertaining to petitioner's

bank deposits at Citizens Bank in Lawton, Oklahoma.

Mr. Cordes refused the agent's request.   Accordingly, the

agent issued an administrative summons to obtain the
                            - 9 -

information directly from Citizens Bank.   Pursuant to the

summons, the bank produced petitioner's deposit records for

the months of January, November, and December 1990.    After

comparing petitioner's deposits during these 3 months with

the cash amounts recorded in petitioner's cash receipts

journal, the agent found that petitioner had omitted

$127,889 of income from its 1990 return.   Respondent's

agent found the following omitted amounts:


             Month        Omitted Amount

            January          $56,893
            November          38,246
            December          32,750

             Total           127,889


     Respondent's agent also found that the above-omitted

income had been posted to a liability account, account

312, characterized as a shareholder loan account, as if

petitioner's stockholders, members of the Cordes family,

had advanced funds to petitioner.   Mr. Cordes had

instructed petitioner's bookkeeper to post certain receipts

as credits to account 312 and not as income.   This was true

for bankruptcy collections with respect to debts that had

been written off, late charge fees related to outstanding

loans, and sundry other receipts.   Mr. Cordes and his

family were able to draw upon account 312 to pay personal

expenses.   Petitioner concedes that it omitted the above

amounts from its 1990 return.
                            - 10 -

     Sometime after respondent's agent brought the above-

omitted amounts and certain disallowed deductions to

Mr. Cordes' attention during the audit, petitioner filed

Form 1120X, Amended U.S. Corporation Income Tax Return,

with the Internal Revenue Service Center, Austin, Texas.

On that return, petitioner reported additional gross

receipts in the aggregate amount of $425,955, composed

of the following items:


     Deposits to account No. 312        $179,005.00
     Late charges & collection fees       56,712.00
     Bankruptcy collections               15,745.15
     American Express payments           168,854.36
     Martin's Restaurant payments          5,638.94

       Total                             425,955.45


     The above items designated as payments to American

Express and Martin's Restaurant are payments for personal

expenses of Edmund J. Cordes and his family that were

deducted on petitioner's 1990 return as "Repossession

Costs".

     Petitioner's amended return for 1990 claims a loss

in the amount of $336,912 to offset the additional

income reported on the return, and it makes reference to

an adding machine tape to explain the nature of the loss.

In substance, the adding machine tape states as

follows:

     Cordes Finance Corp.
     12-31-90
                           - 11 -

     Cash in Bank                      (31,446.70)

     Notes Rec.                      9,542,772.59

     Notes Payable:
     E & June Cordes                (4,108,408.00)
     Edmund Cordes, Inc               (600,000.00)
     Bldg Corp                        (100,000.00)

     Capital Stock                    (100,000.00)
     Surplus                        (4,000,000.00)
     Retained Earnings                (939,829.92)

     Loss                             (336,912.03)

     Interest Earned                   855,861.00

     Chg off & Rep Loss                796,073.50
     Salaries                           77,750.00
     Payroll Taxes                       6,172.88
     Repo Exp                          266,424.55
     Legal & acctg                      17,489.33
     Postage                             4,205.00
     Misc                                2,374.77
     Taxes                               7,056.25
     Int. Paid                           2,772.60
     Group Ins.                         12,454.15

                                            (0.00)


     The amount of the loss identified on the adding

machine tape is the same as the "Net income per books"

reported on Schedule M-1, Reconciliation of Income per

Books With Income per Return, of petitioner's 1990

return.   According to Schedule M-1, petitioner's loss

of $336,912.03 was offset by income in the amount of

$344,827.64 attributable to changing petitioner's method

of accounting for bad debts from the reserve method to

the specific charge method.   The difference between those

amounts, $7,915.61, is the taxable income reported by
                             - 12 -

petitioner for 1990.   Thus, the loss of $336,912 claimed

by petitioner on its amended return for 1990 had already

been claimed on petitioner's return for 1990.

     On May 5, 1992, petitioner issued a check to itself in

the amount of $246,950.45, as reimbursement for the amounts

paid from account 312 for the personal expenses referred to

above.   On September 14, 1992, petitioner issued a second

check to itself in the amount of $179,005, as reimbursement

for the receipts that had been misclassified as funds

contributed to petitioner by Edmund J. Cordes and deposited

to account 312 during 1990.    Both of these checks, in the

aggregate amount of $425,955.45, were charged to

petitioner's account 312.

     Respondent mailed a notice of deficiency pertaining

to petitioner's 1990 return in which respondent determined

the deficiency in income tax and penalties set out at the

beginning of this opinion.    In computing the subject

deficiency, respondent made the following three adjustments

to petitioner's 1990 return:


     Other income                     $5,107,102
     Other deductions--                  175,104
       repossession costs
     Bad debts                           (736,331)

         Total adjustments               4,545,875

The adjustment labeled other income is composed of the

following items:

            Additional interest income       $3,084,179
                          - 13 -

          Reconciliation of deferred
            interest account              1,596,968
          Additional income reported
            on amended return               425,955
            Other income                  5,107,102


Parenthetically, we note that the tax deficiency determined

by respondent was computed without taking into account the

limitation in tax provided by section 481(b), and

petitioner has not raised that as an issue in this case.

     In reference to the additional income reported on

petitioner's amended return, $425,955, respondent concedes

that two of the items of additional income, the aggregate

payments to American Express of $168,854.36 and the

aggregate payments to Martin's Restaurant of $5,638.93,

duplicate the "Repossession Costs" adjustment of $175,104

determined in the notice of deficiency.   We note that the

sum of the payments to American Express and Martin's

Restaurant is $174,493.29, or $610.71 less than the

adjustment for repossession costs.   Petitioner concedes

that the remaining items reported on its amended return in

the aggregate amount of $251,462.15 are additional income.


                          OPINION

Change of Method of Accounting for Interest Income

     The first issue for decision in this case involves

petitioner's method of accounting for the interest earned

on its portfolio of car loans.   At the time each loan was
                             - 14 -

made, petitioner credited its deferred interest income

account by the full amount of the interest to be earned

over the term of the loan.    However, petitioner did not

debit that account or otherwise take interest income into

account for book or tax purposes until the loan was paid

off or it repossessed the automobile securing the loan.

In effect, petitioner did not accrue interest with respect

to any loan that was outstanding at the end of the year.

     Respondent determined that petitioner's method of

accounting for interest income did not clearly reflect

income.   Pursuant to respondent's authority under section

446(b), respondent further determined an increase in the

income reported by petitioner in 1990 in the amount of

$4,681,147 to effect a change in petitioner's method of

accounting for interest.

     As described above, respondent's adjustment is

composed of two elements.    First, based upon petitioner's

records of all loans outstanding at the end of 1990,

respondent determined that the interest earned on those

loans through the end of 1990 is $3,084,179.    Respondent

computed this amount by taking interest into account

ratably over the life of each of the subject loans.    The

parties have stipulated that the following is a summary

of the earned interest on loans outstanding at the end of

1990 as computed by respondent:
                            - 15 -

                Year             Amount

                1990           $1,440,821
                1989              923,274
                1988              488,357
                1987              179,881
                1986               43,181
                1985                8,470
                1984                  195

                                3,084,179

Petitioner's trial memorandum makes the following statement

concerning this element of respondent's adjustment:


          Respondent's schedule indicates it totals
     $3,084,179, but it actually foots to $3,079,767.
     Aside from this small difference, petitioner
     agrees that if a change in accounting method is
     required here, this is the correct method to use
     and that it arrives at the correct starting point
     to compute 1990 income.


Petitioner did not specifically take issue with this

element of respondent's adjustment, either at trial or

in its post-trial briefs.

     The second element of respondent's adjustment is based

upon the discrepancy in petitioner's deferred interest

account.   On the one hand, the balance sheet submitted

with petitioner's 1990 return as Schedule L reports

$7,772,543 as the balance of petitioner's deferred interest

account at the end of 1990.   On the other hand, the

aggregate deferred interest recorded on the ledger cards

for all of the loans outstanding at the end of 1990 is

$6,175,575.   Thus, petitioner's balance sheet reports
                           - 16 -

deferred interest of $1,596,968 more than the amount

recorded on petitioner's loan ledger cards.   In order to

reconcile this discrepancy, and to bring the balance of

petitioner's deferred interest account in line with the

ending balance computed by respondent from petitioner's

loan ledger cards, viz $3,091,395.88, respondent increased

petitioner's income in the amount of $1,596,968.   The

effect of both elements of respondent's adjustment on

petitioner's deferred interest account can be summarized

as follows:


     Deferred interest--ending
       balance per tax return            $7,772,543.00
     Less: Earned interest
       per respondent                     3,084,179.12
     Less: Amount to reconcile
       discrepancy in deferred
       interest amount                    1,596,968.00
     Deferred interest--ending
       balance per loan ledger cards      3,091,395.88


     Petitioner objects to the second element of

respondent's adjustment.   Petitioner's position is that

this element has the effect of requiring petitioner to

include in its income for 1990 interest that would

otherwise not accrue until after 1990.   Petitioner's

post-trial brief states as follows:


     The Commissioner's proposed method of accounting
     requires that any interest which has not already
     been recognized and which could possibly be
     earned at any time in the future on any contract
                            - 17 -

     outstanding at the end of 1990 be recognized as
     income in 1990. [Petitioner] objected to this
     proposed change in accounting because it required
     the inclusion in income in 1990 of interest on
     installment note payments that are not due at
     the end of 1990 and won't be due for months or
     even years in the future.


According to petitioner, respondent has, in effect, placed

petitioner on an erroneous method of accounting to the

extent that respondent computes petitioner's income by

reference to unearned interest and has, thus, exceeded her

authority to change petitioner's method of accounting under

section 446(b).

     We disagree.    Neither the purpose nor the necessary

effect of respondent's adjustment is to include in

petitioner's gross income for 1990 interest that will

accrue after 1990.    As described above, petitioner treated

interest as having been earned only when a loan was fully

paid off or petitioner repossessed the automobile securing

the loan and the loan was closed on petitioner's books.

The change of accounting method that was made by respondent

is to require interest to be ratably included in

petitioner's income over the life of the loan.    Based upon

petitioner's records of loans outstanding at the end of

1990, respondent's agent found that interest in the amount

of $3,084,179 had been earned through the end of 1990.

Petitioner does not attack that computation.
                               - 18 -

     Under petitioner's method of accounting, the amount of

interest earned during the year is reflected as a decrease

(debit) in the balance of the deferred interest account.

The ending balance of the deferred interest account is

nothing more than the interest that potentially will be

earned on petitioner's portfolio of loans in the future.

Therefore, it was necessary for respondent's agent to

decrease the ending balance of petitioner's deferred

interest account by the additional earned interest that she

computed for the year.      However, respondent's agent found

that there was a discrepancy in the ending balance of

petitioner's deferred interest account.              According to

petitioner's balance sheet, the balance was $7,772,543 but,

according to petitioner's loan ledger cards, the balance

was $6,175,575, or $1,596,968 less.          Obviously, the same

discrepancy is found after the account is reduced by the

amount of additional earned interest computed by

respondent, as shown in the following schedule:

                                       Petitioner     Respondent    Difference

Deferred interest--ending balance      $7,772,543     $6,175,575    $1,596,968
Additional interest                    (3,084,179)    (3,084,179)       --

Deferred interest--corrected balance   4,688,364      3,091,396     1,596,968


     The above difference of $1,596,968 is the amount of

petitioner's deferred interest that is not substantiated by

petitioner's loan ledger cards.          Respondent determined that

this amount represents additional interest that petitioner
                           - 19 -

had failed to take into income.     To overcome respondent's

determination as to this accounting adjustment, petitioner

bears a heavy burden of proof in that it must show that

respondent's determination is arbitrary and unsupported by

any basis in law.   RCA Corp. v. United States, 664 F.2d

881, 886 (2d Cir. 1981); Prabel v. Commissioner, 91 T.C.

1101, 1112 (1988), affd. 882 F.2d 820 (3d Cir. 1989).

     Petitioner's position that respondent's adjustment

does not comport with the accrual method of accounting

and is an erroneous method of accounting is based upon

the premise that the above difference is interest that

did not accrue in 1990 or in any prior year.     However,

petitioner has not introduced any evidence to rebut

respondent's determination or to explain the difference.

Contrary to the premise of petitioner's argument, the

ledger cards for loans outstanding at the end of 1990

substantiate deferred interest of $1,596,968 less than

the ending balance of the deferred interest account as

shown on petitioner's balance sheet.     We find that

petitioner has not proven that respondent abused her

discretion by determining that the difference described

above is interest that accrued prior to 1991.     Accordingly,

we hereby sustain respondent's determination.     See Prabel

v. Commissioner, supra.

     Before leaving this issue, we note that petitioner

made a halfhearted attempt at trial to argue that its
                           - 20 -

method of accounting for interest income is an

"appropriate" method of accounting.   In support of that

argument, petitioner noted that it had consistently used

the method for over 30 years, and it alleged that

historically it suffers an "unusually high incidence of

repossessions".   Petitioner did not prove the allegation

of a high incidence of repossessions and appears to have

abandoned the argument that its method of accounting was

appropriate.   Notwithstanding the abandonment of this

argument, it is clear that petitioner's method of

accounting for interest income did not clearly reflect

income.   Furthermore, it is well within respondent's

discretion under section 446(b) to change a taxpayer's

method of accounting which, although consistently used

over a period of years, is erroneous and does not

clearly reflect income.   E.g., Electric & Neon, Inc. v.

Commissioner, 56 T.C. 1324, 1333 (1971), affd. without

published opinion 496 F.2d 876 (5th Cir. 1974).


Loss Deduction From Amended Return

     The stipulation of facts states as follows:


     As an offset to the amounts reported in its
     amended return as increases to taxable income
     for 1990, the petitioner claimed a loss in
     the amount of $336,912.00. Said claimed loss
     remains in dispute between the parties.
                             - 21 -

As discussed in the findings of fact, and as acknowledged

by petitioner's accountant during his testimony at trial,

the loss claimed on petitioner's amended return for

1990 duplicates the deductions claimed on petitioner's

original return for the year.    There is no basis on which

petitioner is entitled to deduct the same amounts twice,

and we reject petitioner's claim to deduct the loss, as

reserved in the above-quoted stipulation.


Fraud Penalty

     Respondent determined that petitioner fraudulently

omitted income in the amount of $127,889 from its 1990

return and determined that petitioner is liable for a

civil fraud penalty under section 6663 in the amount of

$32,726.25.     The omitted amounts arise from the fact that,

upon Mr. Cordes' instructions, petitioner's bookkeeper

recorded bankruptcy receipts, late charge fees, and other

miscellaneous receipts as increases in account 312, a

shareholder loan account, rather than as income.     Although

petitioner admits the omission of $127,889 from income,

petitioner contends that it should not be subject to the

fraud penalty for two reasons.     First, petitioner contends

that it acted in good faith and with reasonable cause

because it "relied on the advice of [its] firm of Certified

Public Accountants."    Second, petitioner contends that
                           - 22 -

there is no underpayment of tax as defined by section

6664(a).

     Section 6663(a) provides that if any part of an

underpayment is due to fraud, there shall be added to

the tax an amount equal to 75 percent of the portion of

the underpayment which is attributable to fraud.   The

Commissioner bears the burden of proving fraud by clear

and convincing evidence.   Sec. 7454(a); Rule 142(b).

If the Commissioner establishes that any portion of an

underpayment is attributable to fraud, then the entire

underpayment shall be treated as attributable to fraud,

except as to any portion of the underpayment which the

taxpayer establishes, by a preponderance of the evidence,

is not attributable to fraud.   Sec. 6663(b).

     In this case, we construe respondent's statements at

trial and in her post-trial briefs to concede that the only

portion of the underpayment attributable to fraud is the

portion attributable to the omission of $127,889, as

determined in the notice of deficiency.   Accordingly, we

limit our discussion of the fraud penalty to the omission

of income in the amount of $127,889.

     To prove fraud, the Commissioner must show that an

underpayment exists, and that the taxpayer intended to

evade taxes known to be owing by conduct intended to

conceal, mislead, or otherwise prevent the collection of
                            - 23 -

taxes.   Stoltzfus v. United States, 398 F.2d 1002, 1004

(3d Cir. 1968); Rowlee v. Commissioner, 80 T.C. 1111,

1123 (1983).   The issue is one of fact to be determined

upon a consideration of the entire record.    Rowlee v.

Commissioner, supra; Beaver v. Commissioner, 55 T.C. 85,

92 (1970).

     In view of the fact that fraudulent intent can

seldom be established by direct proof of the taxpayer's

intention, fraud is usually established by drawing

inferences from the taxpayer’s entire course of conduct.

Parks v. Commissioner, 94 T.C. 654, 664 (1990); Estate of

Beck v. Commissioner, 56 T.C. 297, 363 (1971).    The courts

have developed several indicia or "badges" of fraudulent

behavior.    These “badges of fraud” include conduct such

as consistently understating income, Estate of Upshaw v.

Commissioner, 416 F.2d 737 (7th Cir. 1969); Parks v.

Commissioner, supra; failing to cooperate with tax

authorities, Zell v. Commissioner, 763 F.2d 1139, 1146

(10th Cir. 1985), affg. T.C. Memo. 1984-152; and any other

conduct likely to mislead or conceal, see Estate of

Schneider v. Commissioner, 29 T.C. 940, 954-955 (1958).

We note that since petitioner is a corporation, it can

act only through its officers.    Federbush v. Commissioner,

34 T.C. 740, 749 (1960), affd. 325 F.2d 1 (2d Cir. 1963).

     In this case, respondent has proven that $127,889 of

petitioner's income in 1990 was diverted to the personal
                            - 24 -

benefit and use of Mr. Cordes and his family.     Petitioner

concedes that it omitted gross receipts in the amount of

$251,462.15 from its 1990 return, including the $127,889

with respect to which respondent determined the fraud

penalty.    Respondent has also proven that the omission of

income in the amount of $127,889 was accomplished through

a scheme designed by petitioner's president, Mr. Cordes, to

divert petitioner's collection of late charges, bankruptcy

receipts, and miscellaneous other receipts to shareholder

loan account 312, and thereby to disguise the omitted

income as loans or advances from Mr. Cordes and his family.

Mr. Cordes instructed petitioner's bookkeeper to book the

subject receipts to account 312, rather than to an income

account.

       Furthermore, during the audit, respondent's agent

asked Mr. Cordes for petitioner's bank records in order

to make a bank deposits analysis.    Mr. Cordes refused the

agent's request and forced the agent to obtain the records

directly from the bank.    Mr. Cordes' refusal to cooperate

with respondent's agent suggests that he intended to

conceal petitioner's omission of the income in account

312.   Cf. Zell v. Commissioner, supra at 1146.

       We reject petitioner's contention that it relied in

good faith on the professional advice of its accountants.

There is no evidence in the record that petitioner's

outside accountants were aware of the omitted receipts or
                             - 25 -

that they advised petitioner or any of its employees to

book the omitted receipts to account 312 rather than to

an income account.   This was done on the instructions of

Mr. Cordes.   Under these circumstances, petitioner's

claim of reliance on its accountants is without merit.

Moreover, even if petitioner's certified public accountants

had given such advice with knowledge of all of the relevant

facts, the advice would have been so clearly wrong that we

could not find that petitioner relied upon the advice in

good faith.   See Laverne v. Commissioner, 94 T.C. 637,

652-653 (1990), affd. 956 F.2d 274 (9th Cir. 1992), affd.

without published opinion sub nom. Cowles v. Commissioner,

949 F.2d 401 (10th Cir. 1991); Horn v. Commissioner, 90

T.C. 908, 942 (1988).   Accordingly, we sustain respondent's

determination of the fraud penalty under section 6663(a) as

to the underpayment attributable to $127,889 of omitted

income.

     Finally, we reject petitioner's argument that the

fraud penalty under section 6663(a) should not be

imposed because there is no "underpayment".   The term

"underpayment" is defined by section 6664(a), as follows:


     the term "underpayment" means the amount by which
     any tax imposed by this title exceeds the excess
     of--

          (1) the sum of--

               (A) the amount shown as the tax
          by the taxpayer on his return, plus
                           - 26 -

               (B) amounts not so shown
          previously assessed (or collected
          without assessment), over

          (2) the amount of rebates made.


See also sec. 1.6664-2(a), Income Tax Regs.    Petitioner

argues that there is no underpayment because "(exclusive

of the accounting change issue) there were actually more

adjustments in Taxpayer's favor than adjustments which

would result in additional tax."    In effect, petitioner is

arguing that for purposes of determining the amount of the

underpayment, the "tax imposed", as that phrase is used in

section 6664(a), does not include the tax attributable to

the "accounting change issue".   Petitioner cites no

authority in support of that argument, and we reject it as

contrary to the statute and the regulations.    In this case,

respondent has proven that there is an underpayment of tax

and that a portion of the underpayment is attributable to

fraud.


Penalty for Substantial Understatement of Income Tax

     Respondent determined that petitioner is liable for

the accuracy-related penalty under section 6662(a) in the

amount of $303,025.86 with respect to petitioner's 1990

taxable year.   Respondent determined that the penalty

applied to the entire underpayment, except for the portion

attributable to the omission of $127,889 with respect to

which respondent determined the fraud penalty.
                           - 27 -

     In general, section 6662(a) imposes a penalty equal

to 20 percent of the portion of an underpayment of tax

which is attributable to one or more of the items listed

in section 6662(b), including any substantial understate-

ment of income tax.   Sec. 6662(b)(2).   For this purpose,

an understatement of tax is defined as the excess of the

amount of the tax which is required to be shown on the

return for the taxable year over the amount of the tax

which is shown on the return, reduced by any rebates.

Sec. 6662(d)(2)(A).   In the case of a corporation, an

understatement is considered substantial if it exceeds

the greater of 10 percent of the tax required to be shown

on the return for the taxable year, or $10,000.    Sec.

6662(d)(1).

     Petitioner argues that the accuracy-related penalty

should not apply for the same two reasons that the fraud

penalty should not be imposed.   Petitioner argues, first,

that it acted in good faith and with reasonable cause

because it relied on the advice of its accountants and,

second, that there is no underpayment of tax because

"(exclusive of the accounting charge issue) there were

actually more adjustments in Taxpayer's favor than

adjustments which would result in additional tax."

Petitioner does not cite the reasonable cause exception

contained in section 6664(c)(1), but its argument that
                                - 28 -

it acted in good faith is consistent with an argument

under that provision.

     At the outset, we note that the deficiency determined

in the notice of deficiency is based upon the following

adjustments:

     Other income
       Earned interest                       $3,084,179
       Amount to reconcile
         discrepancy in deferred
         interest account                     1,596,968
       Income reported on
                                               1
         amended return                         425,955

     Other deductions
       Repossession costs                          175,104

     Bad debts                                 (736,331)

                                              4,545,875

     1
      We note that respondent has conceded $174,494 of this
amount and that $127,889 of this amount is subject to the
fraud penalty.


     In general, "The determination of whether a taxpayer

acted with reasonable cause and in good faith is made on a

case-by-case basis, taking into account all pertinent facts

and circumstances."     Sec. 1.6664-4(b)(1), Income Tax Regs.

In making this determination, the most important factor

is the extent of the taxpayer's effort to assess its

proper tax liability.     Id.    Circumstances that may

indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light

of the experience, knowledge and education of the taxpayer.
                           - 29 -

Id.   Reliance on a qualified professional such as an

attorney or accountant 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.   See Patin

v. Commissioner, 88 T.C. 1086, 1130 (1987), affd. without

published opinion 865 F.2d 1264 (5th Cir. 1989), affd. sub

nom. Gomberg v. Commissioner, 868 F.2d 865 (6th Cir. 1989),

affd. sub nom. Skeen v. Commissioner, 864 F.2d 93 (9th Cir.

1989), affd. without published opinion sub nom. Hatheway

v. Commissioner, 856 F.2d 186 (4th Cir. 1988); Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011

(5th Cir. 1990), affd. 501 U.S. 868 (1991).

      We acknowledge that petitioner had a longstanding

relationship with the same firm of certified public

accountants who had initially advised petitioner concerning

the creation of its accounting system.   However, in this

case, there is no evidence that the errors in petitioner's

1990 income tax return resulted from advice given to it by

its certified public accountants.   Mr. Hinman, who assumed

primary responsibility for petitioner's tax returns in

1987, testified that he did not review petitioner's method

of accounting for interest.   Similarly, there is no

evidence that he advised petitioner to omit income by

booking receipts to account 312 or in any other fashion,

or that he advised petitioner to deduct personal expenses
                             - 30 -

of Mr. Cordes as repossession costs.    Mr. Hinman was the

only member of petitioner's firm of outside certified

public accountants to testify at trial.    Moreover, none of

petitioner's employees who testified at trial attributed

the errors in petitioner's return to advice received from

its accountants.    Therefore, we reject petitioner's

contention that it acted with reasonable cause and in good

faith.

     We also reject petitioner's contention that the

accuracy-related penalty should not be imposed because

there was no underpayment.    As discussed above in

connection with the fraud penalty, petitioner cites no

authority for its contention that the underpayment in this

case must be determined "exclusive of the accounting change

issue".    The definition of underpayment contained in

section 6664(a) and the regulations promulgated thereunder,

section 1.6664-2(a), Income Tax Regs., requires otherwise.

     In light of the foregoing and concessions by the

parties,


                                      Decision will be entered

                                under Rule 155.
