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Discussion
Respondent argues that, notwithstanding the fact that EMFI
did not file an election statement for its fiscal year ended
October 31, 1993, the doctrine of substantial compliance operates
to treat EMFI as having made an election to first distribute
earnings and profits to petitioners. Petitioners argue that no
election was made by EMFI.
Generally, the "accumulated adjustments account" is a
corporate account of an S corporation which is adjusted in the
same manner as adjustments are made to a shareholder's basis
under section 1367. Sec. 1368(e)(1)(A). The accumulated
adjustments account generally contains a total of all
undistributed earnings of the corporation previously taxed to the
shareholders during the period in which the corporation has been
an S corporation.
The basic purpose of the earnings and profits account is to
keep track of the amount of corporate funds that have not yet
been taxed to shareholders. Cameron v. Commissioner, 105 T.C.
380, 383-384 (1995), affd. sub nom. Broadaway v. Commissioner,
111 F.3d 593 (8th Cir. 1997). When a corporation elects pass-
through treatment under subchapter S, its net income earned as an
S corporation is taxed currently to the shareholders and
thereafter is generally distributed tax free. Secs. 1366(a),
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