- 206 -
Iran to the reported retained earnings per the financial
statements approximates $5 million in earnings and profits.
Because Diesel Power's earnings and profits through 1974
were in excess of $5 million, the $3,925,000 amount determined by
respondent to be petitioner's gain from the sale of his Diesel
Power stock is deemed to be ordinary dividend income, rather than
long-term capital gain, pursuant to section 1248.
We note that petitioner does not contend that Diesel Power
lacked sufficient earnings and profits. It is not mentioned in
his brief. Instead, petitioner claims that section 1248 is
inapplicable because he sold 60 percent of his Diesel Power stock
in 1971; therefore, Diesel Power was not a controlled foreign
corporation within 5 years of petitioner's 1977 stock sale. This
in incorrect. The parties stipulated that petitioner owned 100
percent of Diesel Power's stock until at least Novemer 1974;
petitioner filed Forms 2952 to that effect; and petitioner
testified that he owned 100 percent of Diesel Power until at
least June 1974.
Accordingly, we hold that petitioner had a gain of
$3,925,000 on the sale of his Diesel Power stock in 1977 and that
such gain is taxable as ordinary income.
V. Issues 8 and 9--Claimed Reduction in 1979 Reported Income
Under a Claim of Right and Section 1341 Tax Computation for
1981
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