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and profits.5 Respondent contends that Resthaven paid certain
personal expenses of petitioner during the years at issue and
that these payments were dividends to petitioner. Petitioners do
not dispute that Resthaven paid these expenses. See, e.g., Old
Colony Trust Co. v. Commissioner, 279 U.S. 716, 729-731 (1929).
They claim, however, that Resthaven's earnings and profits should
be reduced by certain unbooked liabilities of the C corporation
and that the expense payments were not dividends. Petitioners
claim that 4,000 previously sold burial vaults which should have
been recorded on Resthaven's books in 1984 were not. The
unrecorded liabilities would have reduced the income reported for
sales in advance of need. Petitioners have the burden of proving
that these liabilities existed and that they should have been
recorded. Rule 142(a).
The unrecorded liabilities were discovered in connection
with a proposal to purchase Resthaven. In correspondence, the
undisclosed liabilities were expressed as the reason the proposal
did not come to fruition. The failure to record the liability
5 If an S corporation has earnings and profits,
distributions generally (to the extent of the shareholder's
basis) can be made tax free to the extent of the corporation's
accumulated adjustments account (AAA) to the extent of the
shareholder's basis. Sec. 1.1368-2(a), Income Tax Regs.,
promulgated in 1993, provides that an AAA is relevant for all tax
years beginning on or after Jan. 1, 1983, for which the
corporation is an S corporation.
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