F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
OCT 23 1998
FOR THE TENTH CIRCUIT
PATRICK FISHER
Clerk
CORDE FINANCE CORPORATION,
Petitioner-Appellant,
v. No. 97-9015
Appeal from U.S. Tax Court
COMMISSIONER OF INTERNAL (T.C. No. 27258-93)
REVENUE,
Respondent-Appellee.
ORDER AND JUDGMENT *
Before PORFILIO , KELLY , and HENRY , Circuit Judges.
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of
this appeal. See Fed. R. App. P. 34(a); 10th Cir. R. 34.1.9. The case is therefore
ordered submitted without oral argument.
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
Respondent Commissioner of Internal Revenue issued a statutory notice of
deficiency to petitioner Cordes Finance Corp., setting forth a deficiency in income
taxes for 1990 and a substantial understatement penalty under 26 U.S.C.
§ 6662(a). 1
In calculating the deficiency, respondent changed petitioner’s method
of accounting for interest income and, incident thereto, made certain adjustments
to petitioner’s 1990 income tax return. Petitioner filed a petition in Tax Court
disputing the deficiency and penalty. The Tax Court issued a memorandum
findings of fact and opinion in favor of respondent and later entered a decision
setting forth the amount of the deficiency and understatement penalty. Petitioner
appealed. We have jurisdiction to consider this appeal, see 26 U.S.C.
§ 7482(a)(1), and we affirm.
Petitioner first argues that the Tax Court erred in requiring it to change
from one erroneous method of accounting to another erroneous method of
accounting. According to petitioner, the change in accounting methods did not
accurately reflect income because respondent improperly included deferred
interest, which had not been received or realized, as income in 1990.
As petitioner concedes, the Commissioner has broad discretion to determine
the propriety of a taxpayer’s method of accounting, see Morrissey v. IRS (In re
1
The notice of deficiency also set forth a fraud penalty under 26 U.S.C.
§ 6663(a). Petitioner does not dispute the Tax Court’s determination that it is
required to pay the fraud penalty.
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EWC, Inc.) , 114 F.3d 1071, 1073 (10th Cir. 1997), and to require the taxpayer to
change its method of accounting if the method employed does not clearly reflect
income, see 26 U.S.C. § 446(b); Ralston Dev. Corp. v. United States , 937 F.2d
510, 514 (10th Cir. 1991). “The Commissioner’s discretion to prescribe a method
that clearly reflects income cannot be disturbed unless it is clearly unlawful or
plainly arbitrary.” Dayton Hudson Corp. v. Commissioner , 153 F.3d 660, 664
(8th Cir. 1998) (citing Thor Power Tool Co. v. Commissioner , 439 U.S. 522,
532-33 (1979)).
Respondent did not prescribe a method of accounting that was clearly
unlawful or plainly arbitrary. The only change in petitioner’s method of
accounting required petitioner to report its interest income on the accrual method.
Petitioner does not take issue with this change. The inclusion of the deferred
interest in income in 1990 was not a change in the method of accounting. Rather,
it was a one-time adjustment to include as income the discrepancy between the
deferred interest amounts shown on petitioner’s balance sheet and on its ledger
cards. See 26 C.F.R. § 1.446-1(e)(2)(ii)(b). Thus, we conclude respondent did
not abuse her discretion in changing petitioner’s method of accounting and the
Tax Court did not err in upholding the change.
Petitioner next argues that the Tax Court erred in requiring it to include the
deferred interest in its income for 1990. Contrary to respondent’s determination
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that the discrepancy between the amount of deferred interest shown on
petitioner’s balance sheet and that shown on its ledger cards represented interest
that petitioner had failed to report as income, petitioner contends the deferred
interest had not been realized at the end of 1990.
The Tax Court found that petitioner did not meet its burden of proof and
failed to rebut respondent’s determination or to explain the discrepancy. We
review the Tax Court’s factual findings under a clearly erroneous standard. See
Erickson v. Commissioner , 937 F.2d 1548, 1555 (10th Cir. 1991). Our review of
the record discloses no clear error. See Adolph Coors Co. v. Commissioner , 519
F.2d 1280, 1284 (10th Cir. 1975). Petitioner failed to support this argument with
any specific facts or legal authority. See id. Accordingly, we conclude the Tax
Court did not err in requiring petitioner to include the deferred interest in its
income for 1990.
Lastly, petitioner argues that the Tax Court erred in imposing an
accuracy-related penalty under § 6662(a) for the substantial understatement of
income. Petitioner does not dispute that it substantially understated its 1990
income tax liability. Rather, it maintains that it has reasonable cause to avoid the
penalty because it relied on the same accounting firm for thirty years for tax
advice and return preparation.
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The Tax Court determined that petitioner failed to prove that its
accountants had advised it to report its income under an erroneous method of
accounting or that the errors in the 1990 income tax return resulted from advice of
its accountants. Accordingly, the Tax Court concluded that petitioner failed to
show reasonable cause to avoid the penalty. Upon review of the record, we
conclude the Tax Court’s determination was not clearly erroneous. See Adolph
Coors Co. , 519 F.2d at 1284.
The decision of the United States Tax Court is AFFIRMED.
Entered for the Court
John C. Porfilio
Circuit Judge
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