Harry D. Bledsoe and Annie L. Bledsoe - Page 20

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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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