Harry D. Bledsoe and Annie L. Bledsoe - Page 19

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            additional contributions to Diamond made after the issuance of                              
            its 10,000 shares constituted contributions to capital which,                               
            while increasing the basis of the stock, are treated as                                     
            "allocable to stock which is not section 1244 stock."  Sec.                                 
            Dividend Income                                                                             
                  In March 1987, Resthaven merged with its parent and                                   
            converted from a C corporation to an S corporation.  The S                                  
            corporation included deferred gross profit of the former C                                  
            corporation in its income over the next 4 years, 1987 through                               
            1990, because Resthaven changed from the installment method to                              
            the cash method of accounting.  See sec. 481; sec. 1.1374-4(h),                             
            Income Tax Regs.  The gross profit of the former C corporation                              
            constituted earnings and profits to Resthaven.  Respondent                                  
            determined that Resthaven had made expenditures for the personal                            
            benefit of petitioner and members of his family, and, therefore,                            
            petitioners realized dividend income in 1987, 1988, and 1989 in                             
            the amounts of $106,212, $66,423, and $48,623, respectively.                                
                  Section 1368(c)(2) provides that distributions from an S                              
            corporation with accumulated earnings and profits are dividends                             
            to the extent that such distributions exceed the corporation's                              
            accumulated adjustments account (AAA) and do not exceed earnings                            

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