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distribution of dividends in the amount of $739,979.25. 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 22,
1992. 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 22,
1992. EMFI did not attach to its Form 1120S for the fiscal year
ended October 31, 1993, or file separately with the IRS, the
election statement or the statement of consent.
In accordance with the board of directors' resolution, the
first distribution was made on December 22, 1992, in the amount
of $739,979 and was paid partially by checks totaling $229,394
and partially in promissory notes totaling $510,586.
Petitioners' share of the first distribution paid by EMFI on
December 22, 1992, totaled $665,981.
The second distribution was paid in the total amount of
$2,318,872. A portion of the second distribution was paid by
EMFI to the shareholders on December 22, 1992. Petitioners'
share of the first portion of the second distribution paid on
December 22, 1992, totaled $140,000. During the calendar year
1992, petitioners received a total of $805,981 in cash and
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