                        T.C. Memo. 1998-233



                      UNITED STATES TAX COURT



          JAMES L. AND LETA A. THURMAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16537-96.                       Filed June 30, 1998.



     James L. Magee and Thomas H. Nelson, for petitioners.

     Kay Hill, for respondent.


                        MEMORANDUM OPINION


     RUWE, Judge:   Respondent determined a deficiency of $43,564

in petitioners' 1992 Federal income tax.     The sole issue for

decision is whether respondent may employ the doctrine of

substantial compliance in order to treat petitioners' S
                                - 2 -


corporation as having made a valid election under section

1368(e)(3)(A).1


                             Background


     The parties submitted this case fully stipulated pursuant to

Rule 122.    The stipulation of facts is incorporated herein by

this reference.    Petitioners resided in Fairbanks, Alaska, at the

time they filed their petition.

     During the taxable year 1992 and previous years, petitioners

owned 90 percent of the shares of issued and outstanding common

stock of Earth Movers of Fairbanks, Inc. (EMFI).    Petitioners'

children owned the remaining 10 percent of the issued and

outstanding common stock.

     EMFI was incorporated under the laws of the State of Alaska

in 1974.    EMFI reported its taxes on a fiscal year basis

beginning on November 1 and ending on October 31.    Prior to the

taxable year commencing November 1, 1986, EMFI was actively

engaged in business as a C corporation and was taxable as such

under the internal revenue laws.    EMFI elected to be taxed as an

S corporation under the internal revenue laws for the taxable

year ending October 31, 1987, and years thereafter.


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -


     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
                               - 4 -


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
                              - 5 -


promissory notes as their share of the first and second

distributions paid by EMFI for its fiscal year ended October 31,

1993.

     EMFI's Form 1120S for the fiscal year ended October 31,

1993, indicates on line 20 of Schedule K, Shareholders' Shares of

Income, Credits, Deductions, etc., that EMFI made a distribution

other than dividends of $2,318,872.   Line 22 of Schedule K

provides a place for taxpayers to report "Total dividend

distributions paid from accumulated earnings and profits".     EMFI

did not report any amount on line 22.   EMFI's Schedule M-2,

Analysis of Accumulated Adjustments Account, Other Adjustments

Account, and Shareholders' Undistributed Taxable Income

Previously Taxed, for the same year indicates on line 7 that EMFI

made a nondividend distribution of $2,318,872.   Schedules K-1,

Shareholder's Share of Income, Credits, Deductions, etc., for the

same time period indicate on line 20 that EMFI made a nondividend

distribution to Mr. and Mrs. Thurman in the respective amounts of

$758,745 and $1,228,320.

     EMFI issued Forms 1099 to the shareholders for 1992

reflecting the first distributions for its fiscal year ended

October 31, 1993, as taxable dividends.   EMFI did not issue any

Forms 1099 for either 1992 or 1993 with respect to the second

distribution it declared for the fiscal year ended October 31,

1993.
                              - 6 -


     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.


     2
      Petitioners filed a second Form 1040X, dated Apr. 13, 1994,
in which they made an unrelated $5,427 adjustment to income.
                                - 7 -



                              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),
                                 - 8 -


1368(b)(1), (c)(1); Cameron v. Commissioner, supra at 384.

Section 1371 provides, for taxable years after 1982, that the

accumulated earnings and profits that an S corporation carries

over from preelection years when it was a C corporation,

generally are not adjusted for the taxable years during which the

S corporation election is in effect.     Sec. 1371(c)(1); Cameron v.

Commissioner, supra.

     Section 1368 sets out the ordering rules for the tax

treatment of S corporation distributions.     Section 1368(c)(1)

generally provides that an S corporation with earnings and

profits must treat its distributions as being first out of the

accumulated adjustments account, tax free to the extent of the

shareholder's adjusted basis in the stock.3    If the amount of the

     3
      Sec. 1368(c)(1) provides:

          (c) S Corporation Having Earnings and Profits.--In
     the case of a distribution described in subsection (a)
     by an S corporation which has accumulated earnings and
     profits--

               (1) Accumulated adjustments account.--
          That portion of the distribution which does
          not exceed the accumulated adjustments
          account shall be treated in the manner
          provided by subsection (b).


     Sec. 1368(b)(1) provides:


          (b) S Corporation Having No Earnings and
     Profits.--In the case of a distribution described in
     subsection (a) by an S corporation which has no
                                                   (continued...)
                              - 9 -


distribution out of the accumulated adjustments account exceeds

the adjusted basis of the stock, the excess shall be treated as

gain from the sale or exchange of property.   Sec. 1368(b)(2);

Williams v. Commissioner, 110 T.C. 27, 29-31 (1998).

     Section 1368(c)(2) provides that if a distribution by an S

corporation with accumulated earnings and profits exceeds the

amount of its accumulated adjustments account, the portion of the

distribution that exceeds such account will be treated as a

dividend to the extent it does not exceed the accumulated

earnings and profits of the S corporation.

     Section 1368(e)(3)(A) provides for an election to reverse

the order of distribution to allow a distribution of earnings and

profits first and accumulated S corporation earnings next.

Section 1368(e)(3)(A) provides:


          (A) In general--An S corporation may, with the
     consent of all of its affected shareholders, elect to
     have paragraph (1) of subsection (c) not apply to all
     distributions made during the taxable year for which
     the election is made.[4]


     3
      (...continued)
     accumulated earnings and profits--

               (1) Amount applied against basis.--The
          distribution shall not be included in gross
          income to the extent that it does not exceed
          the adjusted basis of the stock.
     4
      Sec. 1368(e)(3)(B) states "the term 'affected shareholder'
means any shareholder to whom a distribution is made by the S
corporation during the taxable year."
                               - 10 -


Generally, distributions by an S corporation making this election

are all treated as made first from earnings and profits under

section 1368(c)(2) and second from the accumulated adjustments

account under section 1368(b), (c)(1).

       Section 1368(e)(3) does not contain a description of the

time or method in which an election to distribute earnings first

from earnings and profits can be made.    However, the conference

report of the Technical Corrections Act of 1982, Pub. L. 97-448,

96 Stat. 2365, which added section 1368(e)(3)(A) to the Code,

states that "The procedures for electing dividend treatment will

generally be similar to the procedures of prior law (Treas. Reg.

sec. 1.1375-4(c)) allowing distributions out of earnings and

profits to be made prior to distributions of previously taxed

income."    H. Conf. Rept. 97-986, at 22 (1982), 1983-1 C.B. 498,

502.    Former section 1.1375-4(c), provided:   "For any taxable

year for which such election is made, a statement of election

shall be filed with a timely return".    T.D. 6432, 1960-1 C.B.

317, 345.    The conference report indicates that Congress intended

that an election statement must be filed with a timely filed

return.

       Proposed regulations clarifying the method of election under

section 1368 were issued in June 1992 prior to the due date or

filing of petitioners' and EMFI's respective tax returns for 1992

and fiscal year ended October 31, 1993.    Section 1.1368-1(f)(5),
                              - 11 -


Proposed Income Tax Regs., 57 Fed. Reg. 24435 (June 9, 1992),

related to the time and manner for making the election under

section 1368(e)(3)(A) and provided:


          (5) Time and manner of making elections. A
     corporation makes an election for a taxable year under
     this paragraph (f) by attaching a statement to a timely
     filed original or amended return required to be filed
     under section 6037 for that taxable year. The
     statement must state that the corporation is making an
     election under § 1.1368-1(f), identify the election,
     and be signed under penalties of perjury by an officer
     of the corporation on behalf of the corporation and by
     each shareholder of the corporation who receives a
     distribution during the taxable year * * *


The proposed regulation indicates that the Secretary interpreted

section 1368(e)(3) to require the attachment and filing of a

written statement indicating the intent of the shareholders of

the corporation that they unanimously agree to the treatment of

all distributions during the year of election as distributed

first from earnings and profits.5

     Final and proposed regulations indicate that the written

statement of election may be attached to a "timely filed original

or amended return".   Sec. 1.1368-1(f)(5)(iii), Income Tax Regs.;

     5
      Final regulations under sec. 1368 were adopted and became
effective for taxable years beginning on or after Jan. 1, 1994.
T.D. 8508, 1994-1 C.B. 219, 227. The new regulations contain
nearly identical language to the proposed regulations but,
specifically, refer taxpayers to the consent requirement of the
statute and simply require the statement to establish that the
affected shareholders have consented rather than expressly
requiring that they manifest consent by signing the statement.
Sec. 1.1368-1(f)(5)(iii), Income Tax Regs.
                              - 12 -


sec. 1.1368-1(f)(5), Proposed Income Tax Regs., 57 Fed. Reg.

24435 (June 9, 1992).   Thus, the regulations also allow for a

taxpayer to make the election on an amended return.   EMFI did not

attach an election statement in respect to section 1368(e)(3) to

its Form 1120S nor did it file an election with an amended Form

1120S.

     Notwithstanding the fact that EMFI did not file an election

statement with the Secretary under section 1368(e)(3), respondent

argues that we should apply the doctrine of substantial

compliance to find that EMFI elected to treat all distributions

in its fiscal year ended October 31, 1993, as taxable

distributions of earnings and profits.   Petitioners argue that

respondent may not invoke the doctrine of substantial compliance

to create a binding election when the taxpayer does not make and

file an election in accordance with the Secretary’s requirements

and procedures.

     Historically, this Court has, under limited circumstances,

excused taxpayers from strict compliance with procedural

regulatory requirements as long as the taxpayer "substantially

complied" by fulfilling the essential statutory purpose.    See,

e.g., American Air Filter Co. v. Commissioner, 81 T.C. 709, 720

(1983); Tipps v. Commissioner, 74 T.C. 458, 468 (1980); Taylor v.

Commissioner, 67 T.C. 1071 (1977); Hewlett-Packard Co. v.

Commissioner, 67 T.C. 736, 748 (1977); Sperapani v. Commissioner,
                               - 13 -


42 T.C. 308, 330-333 (1964).   However, there is no defense of

substantial compliance for failure to comply with the essential

requirements of the governing statute.      Prussner v. United

States, 896 F.2d 218, 224 (7th Cir. 1990); see also Tipps v.

Commissioner, supra at 468; Penn-Dixie Steel Corp. v.

Commissioner, 69 T.C. 837, 846 (1978); Rockwell Inn, Ltd. v.

Commissioner, T.C. Memo. 1993-158.      We have looked to the

specific requirements of the election provision to determine

whether they relate to the substance or "essence" of the

statutory and regulatory scheme.     Young v. Commissioner, 83 T.C.

831, 838 (1984), affd. 783 F.2d 1201 (5th Cir. 1986); Tipps v.

Commissioner, supra.   In ascertaining whether a particular

provision of a regulation must be literally complied with, it is

necessary to examine its purpose, its relationship to other

provisions, the terms of the underlying statute, and the

consequences of failing to comply with the provision in question.

Young v. Commissioner, supra; Hewlett-Packard Co. v.

Commissioner, supra at 748-749; Valdes v. Commissioner, 60 T.C.

910, 913 (1973).   In addition, the omission of the required

material must not operate to respondent’s prejudice.      Tipps v.

Commissioner, supra; Taylor v. Commissioner, supra, at 1079-1080;

Rockwell Inn, Ltd. v. Commissioner, supra.

     In the case at hand, respondent's determination that EMFI

elected to distribute earnings and profits is not based upon an
                               - 14 -


election that was attached to EMFI's Form 1120S for the fiscal

year ended October 31, 1993.   Instead, respondent's determination

disregards the lack of a filed election, asserts that EMFI

substantially complied with the election requirements, and,

therefore, asserts that EMFI has in fact made the election under

section 1368(e)(3).   This is the first instance we are aware of

in which we have been asked to find, under the doctrine of

substantial compliance, that a taxpayer is bound by an election

where no election statement was filed, and the taxpayer refuses

to file such election.6

      Respondent argues that it would be unfair to apply the

doctrine of substantial compliance so that only taxpayers may use

it.   We need not decide the issue of whether the doctrine of

substantial compliance may never be used to force a taxpayer to

be bound by an election where the taxpayer substantially complied

with the requirements to make the election.   Instead, for several

reasons, we do not believe that the facts of this case warrant an

application of the doctrine of substantial compliance to require


      6
      In Brody v. Commissioner, T.C. Memo. 1975-47, the taxpayer
argued that S corporation status may not be elected by filing an
S corporation return instead of the form prescribed by the
regulations. Relying on the fact that the returns filed were S
corporation returns, the Commissioner determined that the
corporation had elected to be taxed under subchapter S. In
sustaining the Commissioner's determination, we relied almost
exclusively on the taxpayers' failure to meet their burden of
proof. See Rockwell Inn, Ltd. v. Commissioner, T.C. Memo. 1993-
158.
                                  - 15 -


EMFI to treat the distributions in question as distributed first

from earnings and profits.

        Respondent's application of the doctrine of substantial

compliance on the facts in the instant case is not in consonance

with our previous application of the various factors used to

determine whether a taxpayer has substantially complied with the

essence of the governing statute.       In Tipps v. Commissioner,

supra at 468, we stated that "the omission of the required

material has not operated to respondent’s prejudice."       The

several factors in American Air Filter Co. v. Commissioner, supra

at 719, which we have used to determine whether the regulatory

requirements are "essential", may also be viewed in part as

hinging on whether the omission of such requirements harms the

IRS.7       In effect, respondent asks us to apply factors, which

heavily favor respondent's interests, to determine that

petitioners are bound by an election which, in the first place,

        7
      In American Air Filter Co. v. Commissioner, 81 T.C. 709,
719-720 (1983), we similarly listed various factors, which we
have used in determining whether strict compliance was required
as follows: Whether the taxpayer's failure to comply fully
defeats the purpose of the statute; whether the taxpayer attempts
to benefit from hindsight by adopting a position inconsistent
with his original action or omission; whether the Commissioner is
prejudiced by the untimely election; whether the sanction imposed
on the taxpayer for the failure is excessive and out of
proportion to the default; and whether the regulation provided
with detailed specificity the manner in which an election was to
be made. See Taylor v. Commissioner, 67 T.C. 1071 (1977);
Columbia Iron & Metal Co. v. Commissioner, 61 T.C. 5 (1973);
Denman Tire & Rubber Co. v. Commissioner, 14 T.C. 706 (1950),
affd. 192 F.2d 261 (6th Cir. 1951).
                              - 16 -


does not comply with the intent of the statute or the regulations

proposed by respondent.

     Applying existing law, substantial compliance with election

requirements normally entails, at a minimum, a clear expression

of the electing party's intention to elect appearing on either

its original return or, if the circumstances necessitating an

election arise after the filing of an original return, as soon as

practicable on an amended return.   Fisher Indus., Inc. v.

Commissioner, 87 T.C. 116, 122 (1986), affd. 843 F.2d 224 (6th

Cir. 1988); see also Young v. Commissioner, supra at 839

(electing party must exhibit in some manner his unequivocal

agreement to accept both the benefits and the burdens of the

election).

     Respondent argues that petitioners' signed statements of

election and consent provide clear and unequivocal evidence of

consent.   Respondent further argues that once EMFI made the

alleged elections, all its actions and those of petitioners are

consistent with having made the election.   Respondent contends

that EMFI's Forms 1120S showed reductions of C corporation

"earnings and profits" in 1988 and 1992.    Respondent asserts that

this is evidenced by EMFI's Forms 1120S, which showed a $3

million reduction on line 26 (Other retained earnings) of

Schedule L in December 1988, and elimination of the remaining

retained earnings in the same manner on EMFI's Schedule L in
                               - 17 -


December 1992.    Finally, respondent argues that the fact that

EMFI issued Forms 1099 to its shareholders for 1992 showing the

$739,979 distribution as a taxable dividend is evidence of EMFI's

intent to make the election.

     However, both EMFI and petitioners exhibited other actions

which militate against finding that the requisite intent to make

the election existed.   EMFI did not file an election to

distribute earnings and profits first as provided by section

1368(e)(3).    The schedules from EMFI's Form 1120S for the fiscal

year ended October 31, 1993, do not indicate an election to first

distribute earnings and profits or that such a distribution took

place.

     To the contrary, EMFI's Form 1120S for the fiscal year ended

October 31, 1993, indicates that EMFI did not intend to make such

an election.   Line 20 of Schedule K and line 7 of Schedule M-2

indicates that the distributions made were "other than dividend

distributions".   EMFI specifically reported $2,318,872 in

distributions other than dividends on line 20 of Schedule K and

line 7 of Schedule M-2.   Line 22 of Schedule K provides a

specific place for reporting total dividends paid to shareholders

from earnings and profits.    EMFI reported no amount on line 22

indicating that no dividends were distributed in the fiscal year

ended October 31, 1993.   Line 20 of Schedules K-1 for the same

time period indicates that EMFI made a nondividend distribution
                              - 18 -


to Mr. and Mrs. Thurman in the respective amounts of $758,745 and

$1,228,320.

     Moreover, EMFI actually made two separate distributions that

petitioners initially did not report as taxable income for 1992.

Petitioners amended their 1992 Form 1040, the year in which the

distributions were made and included the distributions in taxable

income and paid the related tax.   Ultimately, petitioners filed

another amended return in which they removed the distributions

from taxable income, made a claim for refund, and now assert that

EMFI did not make an election to first distribute earnings and

profits.

     With respect to petitioners' individual filings, evidence

that EMFI intended to file an election is further diminished by

the fact that petitioners filed their first amended return, which

represented the distributions as dividends, on June 18, 1993,

whereas EMFI was not required to file Form 1120S for the fiscal

year ended October 31, 1993, until long after petitioners filed

their amended return.   It is certainly conceivable that EMFI,

through its officers, made a decision as to whether or not to

file an election between the time that petitioners filed their

amended return in June 1993 and the time that EMFI filed its

corporate return.

     Although there appears to be some confusion in petitioners'

individual filings, it is clear that no election was filed by
                             - 19 -


EMFI on its corporate return, and petitioners have amended their

tax return in an effort to consistently reflect the assertion

that EMFI did not elect to treat its distributions as taxable to

the extent of earnings and profits.

     Of particular importance in this case is EMFI's

unwillingness to amend its return to include an election.     In

prior cases in which we have applied the doctrine of substantial

compliance to except taxpayers from literal compliance, taxpayers

have argued that they intended to make the required election.

Consistent with the assertion of substantial compliance,

taxpayers have in many cases amended their returns to include a

consistent election statement.8   The Commissioner has also

     8
      For examples of cases in which substantial compliance was
found, see, e.g., United States v. Van Keppel, 321 F.2d 717 (10th
Cir. 1963) (late filing of required agreement allowed); Taylor v.
Commissioner, 67 T.C. 1071 (1977) (taxpayer offered to amend to
comply with any election requirements); Hewlett-Packard Co. v.
Commissioner, 67 T.C. 736 (1977) (late filing required); Columbia
Iron & Metal Co. v. Commissioner, supra (required written
declaration filed subsequent to filing return); Cary v.
Commissioner, 41 T.C. 214 (1963) (election filed upon learning of
defect).

     For examples of cases in which substantial compliance has
been denied, see, e.g., Fisher Indus., Inc. v. Commissioner, 843
F.2d 224 (6th Cir. 1988), affg. 87 T.C. 116 (1986) (taxpayer
filed Form 970 late); Kerry v. Commissioner, 89 T.C. 327 (1987)
(taxpayer amended corporate returns to include sec. 48(d)
election); Estate of Gunland v. Commissioner, 88 T.C. 1453 (1987)
(taxpayer attached required agreement to amended return); Young
v. Commissioner, 83 T.C. 831 (1984) (election attached to amended
return), affd. 783 F.2d 1201 (5th Cir. 1986); Thorrez v.
Commissioner, 31 T.C. 655 (1958), affd. 272 F.2d 945 (6th Cir.
1959) (taxpayer amended return prior to notice of deficiency).
                                                   (continued...)
                              - 20 -


required that a consistent election be filed in order to meet the

requirements of substantial compliance.   In Priv. Ltr. Rul. 90-

43-010 (Oct. 26, 1990), on facts very similar to the instant

case, the Commissioner ruled that the taxpayer substantially

complied "Provided that no later than 30 days after the date of

this letter, [the electing party] files a section 1368(e)(3)(A)

election".9   Here, instead of causing EMFI to file a late

election in an effort to substantially comply, petitioners

amended their 1992 Form 1040 to report no taxable distributions

were received.10   We, therefore, find that the conflicting

     8
      (...continued)
     But cf. Bond v. Commissioner, 100 T.C. 32 (1993)
(substantial compliance found on information within the
originally filed return); Hoffman v. Commissioner, 47 T.C. 218
(1966), affd. 391 F.2d 930 (5th Cir. 1968) (revocation of S
corporation election allowed without amended or late filing).
     9
      Although private letter rulings are not precedent, sec.
6110(j)(3), they "do reveal the interpretation put upon the
statute by the agency charged with the responsibility of
administering the revenue laws." Hanover Bank v. Commissioner,
369 U.S. 672, 686 (1962); see Rowan Cos. v. United States, 452
U.S. 247, 259 (1981); Estate of Cristofani v. Commissioner, 97
T.C. 74, 84 n.5 (1991).
     10
      Respondent argues that if EMFI is treated as not having
made the election, then taxpayers in the future will be able to
whipsaw the Government. Respondent argues that taxpayers may
substantially comply except for filing the election form and,
later, depending on whether it is in the taxpayer's interest,
effectively revoke the election by amending the shareholder's
returns to request a refund. However, by requiring EMFI to file
an election, our decision in this case only reinforces the
Commissioner's regulatory requirement that an election statement
be filed. Moreover, the Commissioner's regulations provide for
an election to be made on a "timely filed original or amended
                                                   (continued...)
                               - 21 -


actions taken by EMFI and petitioners do not meet the minimum

requirement of a clear and unequivocal expression of their intent

to make the election.11   Fisher Indus., Inc. v. Commissioner,

supra; Young v. Commissioner, supra.

     For the above-stated reasons, we decline to apply the

doctrine of substantial compliance in this instance to force

petitioners and EMFI to treat distributions for their respective

1992 and October 31, 1993, years as distributions of earnings and




     10
      (...continued)
return". Sec. 1.1368-1(f)(5)(iii), Income Tax Regs.; sec.
1.1368-1(f)(5), Proposed Income Tax Regs., 57 Fed. Reg. 24435
(June 9, 1992). We do not see that the outcome of our decision
today is meaningfully different than the current regulatory
framework.
     11
      We also note that some courts have taken a narrow view of
the judicial doctrine of substantial compliance. See Prussner v.
United States, 896 F.2d 218, 224 (7th Cir. 1990); Credit Life
Ins. Co. v. United States, 948 F.2d 723, 726-727 (Fed. Cir.
1991); Rockwell Inn, Ltd. v. Commissioner, T.C. Memo. 1993-158.
In Prussner v. United States, supra at 224, the Court of Appeals
for the Seventh Circuit addressed the application of the doctrine
of substantial compliance, stating:


     The common law doctrine of substantial compliance
     should not be allowed to spread beyond cases in which
     the taxpayer had a good excuse (though not a legal
     justification) for failing to comply with either an
     unimportant requirement or one unclearly or confusingly
     stated in the regulations or the statute. * * *
     [Emphasis added.]


See also Bartlett v. Commissioner, 937 F.2d 316, 321 (7th Cir.
1991), affg. Estate of Grimes v. Commissioner, T.C. Memo. 1988-
576.
                              - 22 -


profits.   We hold that EMFI did not make a valid election under

section 1368(e)(3).



                                         Decision will be entered

                                    under Rule 155.
