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The yearend balances in Central’s accumulated adjustments
account6 reported on Central’s Federal income tax returns for the
years 1991 through 1996 show undistributed earnings as follows:
Year Account Balance
1991 $8,378,797
1992 9,893,868
1993 10,693,387
1994 7,333,838
1995 6,449,973
1996 6,592,738
On several occasions, Charles L. Odom, a certified public
accountant and Mr. Honbarrier’s tax and financial adviser,
recommended that Central make distributions to shareholders if
such funds were not needed in Central’s business. In a
memorandum to attorney Charles Lynch, dated November 5, 1993, Mr.
Odom stated: “Central has $10 million in undistributed S Corp
earnings and would like [to] make a significant distribution to
shareholders, but needs its capital for expansion and replacement
of aging equipment.”
Unlike Colonial, Central did not invest in tax-exempt bonds.
Central held passive investments in the form of short-term liquid
investments, such as certificates of deposit, because it needed
cash and cash equivalents to operate its business. As of yearend
1991 through yearend 1996, Central held cash and short-term
investments in the following amounts:
6The accumulated adjustments account reflects undistributed
earnings of Central on which Central’s shareholders had paid tax.
See sec. 1368.
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