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earnings and profits available for distribution in later years,
which, in turn, may reduce dividend income for shareholders in
these years. In this way, the percentage of completion method is
self-correcting when used consistently over the life of the
taxpayer's long-term contracts.
If this self-correcting mechanism had operated to adjust
Company's earnings and profits after October 31, 1988, the
unexpectedly high costs incurred and the revision of cost
estimates in the 1989 taxable year would apparently have had the
effect of reducing accumulated earnings and profits as well as
the dividends to petitioners in that year. That petitioners
could not take advantage of this mechanism to reduce their
dividend income for 1989 was the consequence of electing the
provisions of subchapter S, one of which is the freeze on
earnings and profits. Sec. 1371(c)(1). We do not find this
result to be inequitable to petitioners, considering that they
would have had no complaint about the accuracy of earnings and
profits measurement under the percentage of completion method had
Company overestimated its total contract costs as of the time of
its subchapter S election rather than underestimating them. The
normal operation of the tax laws will not be adapted to suit the
convenience of individual taxpayers.
Petitioners' argument that in the interest of accuracy they
should be entitled to use a different adjustment mechanism from
that provided for under the percentage of completion method finds
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