-23-
Petitioners' reliance on Epps and Stovall as authority for
the method of calculating the amount of the annual distributions
is well placed. However, petitioners' interpretation of the
holdings in these cases is erroneous. Federal income tax is
computed on the basis of an annual accounting. Sec. 441; Burnet
v. Sanford & Brooks Co., 282 U.S. 359 (1931). Consistent with
annual accounting, Epps and Stovall hold that the distributed
amount is the net amount distributed each year, not the net
amount distributed over multiple years. See also Leaf v.
Commissioner, 33 T.C. 1093, 1096 (1960) (repayment in later year
had no effect on the taxpayer's control over the funds in year at
issue), affd. 295 F.2d 503 (6th Cir. 1961).
Thus, the amount distributed by Development to petitioner is
the excess of the total amount he withdrew during each year less
the amount he paid to the corporation during the same year.16
Accordingly, we find that in 1989, 1990, and 1991 the amount
that petitioner paid to the corporation in any year in excess of
the amount that he withdrew in that year is a contribution to
capital, and the amount that he withdrew in any year in excess of
the amount that he repaid in that year is taxable to petitioner
in accordance with section 1368. A Rule 155 calculation, made in
16
Consistent with this calculation, the amount paid to the
corporation in excess of the amount withdrawn in any year is a
contribution to capital. See Stovall v. Commissioner, T.C. Memo.
1983-450, affd. 762 F.2d 891 (11th Cir. 1985).
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