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Homes and Chapel were engaged immediately after the
distribution in the active conduct of the funeral business.
The funeral business was actively conducted by Homes
throughout the 5-year period ending on the date of the
distribution.
In 1993 Mr. Deckard paid his first annual installment of
$45,570.13 to Mr. Pulliam under the Agreement. Petitioners
timely paid taxes on that installment payment.
Mr. Deckard defaulted in 1994 on the installment sale. His
employment by Chapel then ended. He demanded that Mr. Pulliam
return the payments he had made, but later settled for $5,000.
After defaulting, Mr. Deckard abided by his covenant not to
compete with Chapel, which prevented him from working as a
funeral director in Oblong. Mr. Pulliam reacquired almost all of
Chapel's common stock as the result of Mr. Deckard's default
under the terms of paragraphs 1 D and E of their Agreement.
At all times after Chapel was created as a professional
corporation, Mr. Pulliam was president and majority owner of
Chapel's stock, and was in ultimate control of its operations.
In the notice of deficiency respondent determined that Mr.
Pulliam received dividends of $789,500 from Homes, which were not
reported on petitioners' Federal income tax return for 1992.
Therefore, their taxable income was increased $789,500.
OPINION
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