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cluster homes.
Respondent audited petitioner's Federal income tax returns
for the taxable years 1974 and 1975. Respondent made no changes
to petitioner's method of accounting as a result of that audit.
Petitioner filed its Federal corporate income tax return
(Form 1120) for the taxable year 1988, based on the calendar
year, using the accrual method of accounting. Since late 1985,
accountant David Worley (Worley) has prepared petitioner's
returns and financial statements; the accounting firm of
Deloitte, Haskins and Sells (DHS) had prepared those returns and
financial statements completed prior to that time. Worley's firm
reviewed the previous work of DHS, agreed with their preparation,
and followed the same method.
In reviewing petitioner's Federal income tax return for the
taxable year 1988, respondent determined that petitioner's method
of accounting for the entry fees did not clearly reflect income
in that the entire amount of the entry fees should have been
reported in the year of receipt. Respondent adjusted
petitioner's income to include $1,645,020 of unreported entry
fees received through December 31, 1987, plus $115,387 of
unreported entry fees received for taxable year 1988, for a total
adjustment of $1,760,407 related to the entry fees.
Respondent also determined that petitioner's method of
accounting for the cluster home transactions did not clearly
reflect income in that those transactions should have been
accounted for as sales. Respondent increased petitioner's
cluster home income by $5,001,633 based on petitioner's stated
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