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that Hamalee's gross profit percentage for each year was 12
percent. Respondent determined that Hamalee constructively
distributed its unreported sales income to Mr. Lee during his
1985, 1986, and 1987 taxable years.4 Of the $577,488 in
unreported income for Hamalee's 1985 taxable year ($4,812,404 x
12%), respondent determined that $433,116 was distributed to
Mr. Lee in 1985, and $144,372 was distributed to him in 1986. Of
the $554,815 in unreported income for Hamalee's 1986 taxable year
($4,623,455 x 12%), respondent determined that $416,111 was
distributed to Mr. Lee in 1986, and $138,704 was distributed to
him in 1987. With respect to all of these distributions,
respondent determined that Mr. Lee received: (1) A dividend of
$269,407 and a return of capital of $163,709 in 1985; (2) a
dividend of $349,960, a return of capital of $86,291, and a
capital gain of $124,232 in 1986; and (3) a dividend of $86,719
and a capital gain of $51,985 in 1987. For Hamalee's 1987 and
1988 taxable years, respondent determined that the unreported
income of $387,504 ($3,229,199 x 12%) and $550,763 ($4,589,694 x
12%) was taxable to Mr. Lee as income from an S corporation.
4 Respondent determined that all of these distributions
occurred when Hamalee was a C corporation.
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