Harry D. Bledsoe and Annie L. Bledsoe - Page 7

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            have been reflected on Diamond's books as loans from                                        
            shareholders.  The postincorporation amounts contributed by                                 
            Diamond shareholders were capital contributions which were not in                           
            payment of section 1244 stock.                                                              
                  On February 28, 1987, Resthaven's parent corporation,                                 
            Developer and Management, Inc. (Developer), ceased operation and                            
            merged with Resthaven.  On March 1, 1987, Resthaven became an S                             
            corporation.  During 1987, when S corporation treatment was                                 
            elected for Resthaven, the deferred gross profits of the prior C                            
            corporation were picked up and included in Resthaven's income                               
            over the next 4 years.  This occurred because Resthaven changed                             
            from the installment to the cash method of tax accounting.                                  
            Resthaven included these "built-in gains" in income:  $262,875,                             
            $197,156, and $139,831 in 1987, 1988, and 1989, respectively.                               
                  Respondent determined that Resthaven paid some of                                     
            petitioners' personal expenses and that the amount of those                                 
            expenditures should be treated as dividend income to petitioners.                           
            During the administrative proceeding, petitioner's accountant                               
            discovered that Resthaven had unrecorded liabilities for 4,000                              
            burial vaults.  He conducted a sampling of invoices and                                     
            determined that $150 was the average cost of a burial vault and                             
            that $50 was the cost of putting the vault into the ground.                                 
            Petitioner's accountant, accordingly, determined that Resthaven                             

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