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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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