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Petitioners' original Federal income tax return for 1992
does not reflect any taxable dividends received from EMFI. On
June 18, 1993, petitioners filed a Form 1040X, Amended U.S.
Individual Income Tax Return, for 1992 reporting taxable
dividends of $665,981 from EMFI. On April 4, 1996, petitioners
filed a third Form 1040X removing from taxable income the taxable
dividends of $665,981 from EMFI and claiming a refund of tax
proportionate to the reduction of income.2 The IRS has not
allowed the claim for refund filed by petitioners in their third
amended return for the taxable year 1992.
Beginning in September 1995, EMFI was audited by the IRS for
the fiscal year ended October 31, 1993. In 1996, in the course
of discussions with Mr. Rockne Wilson, petitioners' accountant,
the revenue agent examining EMFI's return for the fiscal year
ended October 31, 1993, raised the issue of whether EMFI had made
an election under section 1368(e)(3). The revenue agent
determined that the amount of C corporation earnings and profits
as of November 1, 1992, was $3,555,271 rather than $739,979.
Although petitioners dispute this figure, the parties agree that
EMFI's correct accumulated C corporation earnings and profits, as
of November 1, 1992, exceed the total distributions of $879,979
by EMFI in 1992.
2Petitioners filed a second Form 1040X, dated Apr. 13, 1994,
in which they made an unrelated $5,427 adjustment to income.
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