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required to pay interest on the deposits, and the funds were
available for general use by BMP.
At all relevant times, BMP used the cash method of
accounting. Prior to the years in issue, BMP reported the
downpayments received under the contracts as income in the year
in which the payments were received. Beginning in 1996, pursuant
to advice received from a newly hired accountant, BMP began
reporting the payments as income in the year in which the
contractual services were rendered. BMP did not file amended
returns for prior years and did not request consent from the
Secretary for a change in method of accounting.
BMP filed a Form 1120S, U.S. Income Tax Return for an S
Corporation, in each of the years in issue. In 1996, BMP
reported a loss of $103,217. In 1997, BMP reported income of
$9,741. Petitioners filed a joint Federal income tax return for
each of the years in issue. In 1996, they claimed a loss of
$103,217 for petitioner’s distributive share (100 percent) of
BMP’s loss. In 1997, they reported $9,741 for petitioner’s
distributive share (100 percent) of BMP’s income.
In the statutory notice of deficiency, respondent determined
that petitioners’ income as reported on their returns was
understated by $87,660 in 1996 and $22,865 in 1997--the amounts
of the deposits received by BMP but not included in income on its
returns.
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Last modified: May 25, 2011