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Respondent relies principally on Rankin v. Commissioner,
T.C. Memo. 1996-350, affd. 138 F.3d 1286 (9th Cir. 1998), to
support his determination applying section 481. In Rankin, the
taxpayer, who used the cash receipts and disbursements method of
accounting, was a bail bondsman associated with an insurance
company surety. The bonds were contracts between the criminal
defendant, the State, and the insurance company. The insurance
company was principally liable to the State if the defendant
failed to appear at trial and the bond was forfeited or a late
fee was charged. However, the taxpayer had a contract with the
insurance company under which the taxpayer would indemnify the
insurance company for the amount of any forfeited bonds or late
fees. The taxpayer collected 10 percent of the face amount of
the bond as a fee, paid a portion of the fee to the insurance
company, deposited a portion of the fee into a specific account
known as the Build Up Fund or BUF account, and kept the
remainder. The BUF account served as security for the taxpayer’s
promise to indemnify the insurance company. The amount
accumulated in the BUF account was a percentage of the amount of
the outstanding bonds. The insurance company functioned as
trustee of the BUF account and had the sole power to withdraw
funds from the BUF account but could use any withdrawn funds only
to satisfy the taxpayer’s indemnity obligations. The insurance
company gave the taxpayer the option of indemnifying from the BUF
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