James L. and Leta A. Thurman - Page 3

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               As of November 1, 1986, EMFI had C corporation book retained           
          earnings of $3,739,980 related to prior years.  On December 27,             
          1988, at a special meeting of the board of directors, EMFI                  
          declared and paid a $3 million cash dividend to its shareholders.           
          EMFI prepared a "Statement of election to treat distributions to            
          shareholders as not made first out of the accumulated adjustments           
          account", and Mr. Thurman signed the statement on December 29,              
          1988.  EMFI also prepared a "Statement of consent of affected               
          shareholders to election by Earth Movers of Fairbanks, Inc. to              
          treat distributions to shareholders as not made first out of the            
          accumulated adjustments account".  Each of the shareholders who             
          received a distribution signed the statement on December 29,                
          1988.  EMFI did not file the election statement or the statement            
          of consent with the Internal Revenue Service (IRS).  EMFI                   
          recorded its C corporation book retained earnings balance at                
          $739,979 as of October 31, 1989.                                            
               On their 1988 Federal income tax return, petitioners                   
          reported the distributions paid by EMFI in December 1988 as                 
          taxable dividend distributions.  Petitioners have not filed                 
          claims for refund in relation to the dividend distribution made             
          in December 1988 by EMFI.                                                   
               EMFI made two distributions to its shareholders during the             
          fiscal year ended October 31, 1993.  At EMFI's annual meeting of            
          directors held on December 13, 1992, the board resolved to make a           





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