Affiliated Foods, Inc. - Page 10

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               Almost all of the promotional accounts had a credit balance            
          at yearend.  In fact, petitioner did not use any of the money in            
          several promotional accounts during the years at issue, e.g.,               
          Conagra Banquet Food/Pritchard, American Home Food Products,                
          Tropicana, Ragu Foods, Inc., Quaker/Gordon-Murdock, and Gortons             
          of Gloucester/Pritchard.                                                    
               Mr. Terry Sheldon, a C.P.A., was petitioner's accountant               
          during the years at issue.  Around mid-1988, petitioner's                   
          management asked Mr. Sheldon to audit petitioner's advertising              
          department, because the department showed a large fluctuation in            
          income.  Upon audit, Mr. Sheldon discovered that petitioner had             
          started the promotional accounts sometime during 1988.  At that             
          time, petitioner was treating the promotional fund payments as              
          income when received and deducting expenses when incurred.  This            
          accounting treatment was applied for both financial reporting               
          purposes and tax purposes.  Beginning in 1989, petitioner stopped           
          treating promotional account payments as income on receipt.                 
          Rather, petitioner treated promotional account receipts as                  
          liabilities to the vendors.  Petitioner then reduced the                    
          liability to each vendor as it incurred expenses that were paid             
          from the promotional account.  Most of the offsetting costs                 
          incurred by petitioner were related to advertising costs.                   
               During 1989, petitioner had "art and printing department"              
          expenses of $1,712,656 and income of $1,562,855, resulting in a             

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