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distribution arises, the amount (if any) of the distribution that
is taxable to the recipient shareholder is determined by
reference to section 301(c). Section 301(c)(1) provides that the
amount of the distribution that is a dividend is included in
gross income. Section 301(c)(2) provides that the amount of the
distribution that is not a dividend reduces the adjusted basis of
the related stock. Section 301(c)(3)(A) generally provides that
the amount of the distribution that is not a dividend, and that
exceeds the adjusted basis of the related stock, is gain from the
sale or exchange of property.
Petitioners argue that respondent's determination of the
constructive distributions is erroneous because the Lees did not
receive the subject distributions. In support of petitioners'
argument, the Lees, a number of their relatives, and Ms. Chong
testified: (1) The Lees did not receive any distributions from
Hamalee during the relevant years, and (2) most of the unreported
income was attributable to moneys and/or inventory stolen from
Hamalee by Mr. Won and his brother. With respect to petitioners'
latter contention, their witnesses generally testified that the
Lees learned in 1989 that Mr. Won and his brother had been
stealing money and/or inventory from Hamalee since 1986. To
attempt to support this testimony, petitioners presented some
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