Robert and Lisa Morganstein - Page 5




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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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