                  T.C. Memo. 2007-372



                UNITED STATES TAX COURT



            LINDA K. MINTON, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 6641-03.              Filed December 26, 2007.



     P was a 50-percent shareholder in LPP, which had
claimed S corporation status since it elected that
status in 1975. By 1986, P’s father and founder of the
business had sharply reduced his participation in the
conduct of LPP’s business affairs, which were then run
by P’s brother and P. In that year, P, her brother,
father, and mother (the directors and shareholders of
LPP) agreed that LPP would begin to make fixed, monthly
distributions to P’s father. Prior to filing her 1998
return, P was advised that that agreement had created a
second class of LPP stock, which negated LPP’s S
corporation status in 1986 and for all subsequent
years. See sec. 1361(b)(1)(D), I.R.C. On that basis,
P failed to report on her 1998 return the LPP income
listed on the 1998 Schedule K-1, Shareholder’s Share of
Income, Credits, Deductions, etc., issued to her by
LPP. The issue for decision is whether the 1986
agreement caused LPP to lose its S corporation status.

     Held: P has failed to prove that the 1986
agreement constituted a “binding” agreement “relating
to distribution * * * proceeds” within the meaning of
sec. 1.1361-1(l)(2)(i), Income Tax Regs., and,
therefore, that that agreement created a second class
                               - 2 -

     of stock, which caused LPP to lose its S corporation
     status.



     William A. Pesnell, for petitioner.

     Daniel N. Price, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:   Respondent has determined a deficiency of

$165,366 in petitioner’s 1998 Federal income tax liability and an

addition to tax of $16,484 for that year on account of

petitioner’s failure to file her 1998 return on time.    Petitioner

concedes the addition to tax and two of respondent’s adjustments

resulting in his determination of a deficiency.   Putting aside a

computational adjustment that requires no decision by us, there

remain two issues for decision:   (1) Whether, before 1998, by

creating a second class of stock, Long’s Preferred Products, Inc.

(LPP), lost its status as a pass-through entity (an S

corporation), thereby eliminating the requirement that petitioner

include her allocable share of LPP’s 1998 income in her 1998

income, and (2) whether the duty of consistency bars petitioner

from asserting that LPP lost its S corporation status before

1998.   Because we decide the first issue in respondent’s favor,

we need not (and do not) address the second issue.

        Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 1998, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
                               - 3 -

All dollar amounts have been rounded to the nearest dollar.

                         FINDINGS OF FACT1

     Some facts have been stipulated and are so found.   The

stipulation of facts, with attached exhibits, is incorporated by

this reference.2


     1
         In part, Rule 151 provides as follows:

     RULE 151. BRIEFS

                           * * * * * * *

           (e) Form and Content: * * *

                           * * * * * * *

          (3) * * * In an answering or reply brief, the
     party shall set forth any objections, together with the
     reasons therefor, to any proposed findings of any other
     party, showing the numbers of the statements to which
     the objections are directed; in addition, the party may
     set forth alternative proposed findings of fact.

     Petitioner has filed an answering brief, but she has failed
therein to set forth objections to the proposed findings of fact
made by respondent. Accordingly, we must conclude that
petitioner has conceded respondent’s proposed findings of fact as
correct except to the extent that respondent has failed to direct
us to any evidence in the record supporting those proposed
findings or those findings are clearly inconsistent with either
evidence in the record or petitioner’s proposed findings of fact.
See, e.g., Jonson v. Commissioner, 118 T.C. 106, 108 n.4 (2002),
affd. 353 F.3d 1181 (10th Cir. 2003).
     2
        At trial, the Court reserved judgment with respect to
respondent’s objection to two, and petitioner’s objection to one,
of the exhibits (Exs. 17-P, 22-P, and 35-R) attached to the
stipulation of facts. Before the conclusion of the trial, the
Court sustained respondent’s objection (hearsay) to Ex. 17-P.
The Court directed the parties to address on brief the
admissibility of the two other exhibits. Assuming arguendo that
we were to resolve the two remaining disputes in petitioner’s
favor, we would nonetheless find for respondent in this case.
Therefore, our findings of fact (and opinion) take into account
petitioner’s Ex. 22-P and exclude from consideration respondent’s
Ex. 35-R.
                                - 4 -

     At the time the petition was filed, petitioner resided in

Pineville, Louisiana.

Background
     Petitioner’s parents, Julian E. Long (Julian E.) and Alma

Kathryn Long (Alma), both of whom are now deceased (Alma in 1990,

Julian E. in 2005), operated LPP as a sole proprietorship in the

early 1950s.    Initially, no one else worked in the business.    LPP

sells janitorial and paper supplies.

     LPP was incorporated under Louisiana law on December 31,

1975.    From its inception through 1998, LPP had 100 shares of

stock issued and outstanding.    Pursuant to its articles of

incorporation, those 100 shares constituted its total authorized

capital stock.3   Julian E. and Alma were the initial shareholders

of LPP.    Shortly after its incorporation, LPP filed an election

with respondent to be treated as an S corporation.    Respondent

accepted that election.

     In 1964, petitioner’s brother, Julian W. Long (Julian W.),

began working on a full-time basis for LPP as a janitor.    He

later worked as a delivery driver, a salesman, and, finally, a

manager.    In early 1985, he became president of LPP.


     3
        The articles of incorporation do not specifically state
that those 100 shares of stock (the 100 shares) represent a
single class of stock with identical rights as to dividends or
distributions. The articles, however, do not state the contrary.
Also, petitioner’s argument that the allegedly disproportionate
distributions to Julian E. beginning in 1986 evidence the
creation of a second class of stock indicates her belief that the
100 shares constituted a single class of stock prior to 1986. We
think it a fair inference that the 100 shares constituted a
single class, at least until then, and we so find.
                                - 5 -

       In 1977, petitioner began working on a full-time basis for

LPP.    She worked in outside sales for approximately 7 years.

Thereafter, until the early 1990s, she was involved in the

management of LPP and was appointed vice president and

secretary/treasurer on February 24, 1992.

       Prior to 1977, Julian E. carried on the business of LPP.    By

the mid-1980s, however, he had ceased to be actively involved in

day-to-day operations and, essentially, had became a consultant.

LPP never paid him anything for his services that it labeled a

salary.    He did, however, draw money out of the corporation to

pay his and his wife’s living expenses as they needed it.

LPP’s Distributions to Julian E. Long Beginning in 1986

       During 1986, Julian E., Alma, Julian W., and petitioner

agreed (the 1986 agreement) that, from then on, Julian E. and

Alma would receive a monthly distribution from LPP, initially

fixed at $4,000, but which amount fluctuated thereafter.

       During 1993-95 (the last three full years in which Julian E.

was a shareholder in LPP), with the exception of two $5,000

payments in 1995, one to Julian W. and one to petitioner, and one

payment of $14,786 in 1995 on behalf of Julian W. for the

purchase of a boat, the only distributions from LPP to its

shareholders, other than in the form of payments (on their

behalf) of income taxes to either the Internal Revenue Service or

the Louisiana Department of Revenue, were made to Julian E.      In

each of 1993 and 1994, Julian E. received twelve $2,000

distributions.    In 1995, he received eleven $2,000 distributions
                               - 6 -

and, like Julian W. and petitioner, one $5,000 distribution.

Also, in 1993, LPP made four $522 payments to a bank on behalf of

Julian E.   In 1996, there were distributions to Julian E. in the

form of tax payments on his behalf.4

     For 1993-95, LPP’s total distributions to shareholders

closely approximated the 42-29-29-percent ownership interests of

Julian E., Julian W., and petitioner, respectively, as reflected

on LPP’s 1993-95 returns as filed.5
Petitioner’s 1998 and Amended 1996 and 1997 Returns and LPP’s
1997 and 1998 Returns

     During the course of litigation in the Louisiana State

courts instituted by petitioner against LPP, Julian E., Julian

W., and others with respect to the number of LPP shares owned by




     4
        The record contains no evidence as to the actual amounts
of the monthly payments to Julian E. from 1986 to 1992, and only
petitioner’s testimony that they, in fact, were made.
     5
        We make no findings of fact regarding ownership of the
100 shares between 1990, after Alma died, and 1996 when Julian W.
and petitioner each became the owner of 50 of the 100 shares. In
2001, LPP’s accountant represented to respondent that LPP’s
1986-95 returns show that Julian E. held 42 percent of its shares
and Julian W. and petitioner, 29 percent each, and that,
effective January 1996, Julian E. conveyed all of his LPP shares
to Julian W. and petitioner, one-half to each. That
representation is corroborated by trial testimony given in an
earlier Louisiana State court proceeding by LPP’s prior
accountant. There is, however, contradictory evidence in the
record indicating that (1) at the time of her death in 1990, Alma
owned a one-half community interest with Julian E. in 42 shares
of LPP stock, (2) she bequeathed the shares represented by that
interest (21 shares) to Julian W. and petitioner, 10.5 shares to
each, thereby giving each 39.5 shares or a 39.5-percent interest
in LPP as of 1990, and (3) in 1996, Julian E. transferred 21
shares to his children, not 42 shares.
                              - 7 -

her (the first Louisiana litigation),6 petitioner discovered an

audio tape of a purported 1986 LPP shareholders/directors meeting

attended by Julian E., Julian W., and Alma.   Her attorney, who is

also her counsel in this case, after listening to the tape and

having it transcribed, advised her that the participants at the

meeting, by providing for a fixed level of distributions to

Julian E., had created a second class of stock in LPP, thereby

negating LPP’s S corporation status.   Consistent with that

position, petitioner, on her 1998 Form 1040, U.S. Individual

Income Tax Return, which she filed on or about November 15, 1999,

omitted $229,292 of ordinary income and other pass-through items

reported on the Schedule K-1, Shareholder’s Share of Income,

Credits, Deductions, etc., issued by LPP to her for 1998.7    Along

with her 1998 return, petitioner submitted a Form 8082, Notice of

Inconsistent Treatment or Administrative Adjustment Request

(AAR), which purported to justify that omission on the basis that

the 1986 agreement created a second class of stock in LPP,


     6
        In an unpublished opinion, Minton v. Long’s Preferred
Prods., Inc., 829 So. 2d 669 (La. Ct. App. 2002), the court of
appeal held in petitioner’s favor in that litigation and
confirmed that she (1) purchased 19 shares of LPP stock in 1986
and (2) owned 50 shares (or 50 percent) of that stock as of 1996,
not 40.5 shares (or 40.5 percent) as had been alleged by Julian
E. and Julian W. and reported on the 1998 Schedule K-1,
Shareholder’s Share of Income, Credits, Deductions, etc., issued
to her by LPP.
     7
        Respondent’s adjustment for petitioner’s alleged omission
of LPP income is $283,077, based upon her ownership of 50 shares
of LPP stock, whereas the 1998 Schedule K-1 issued to her by LPP
reflects her ownership of only 40.5 shares, a position that was
subsequently rejected by the Louisiana Court of Appeal. See
supra note 6.
                                - 8 -

thereby causing it to lose its S corporation status in 1986.

Thereafter, petitioner filed amended 1996 and 1997 returns in

which she took a position, vis-a-vis LPP’s earnings, consistent

with that taken in her 1998 return.

     LPP’s 1997 Form 1120S, U.S. Income Tax Return for an S

Corporation, reports $160,562 of ordinary income from trade or

business activities, total distributions to shareholders of

$91,460, retained earnings at the start of the year of $582,933,

and yearend retained earnings of $649,035.   LPP’s 1998 Form 1120S

reports $566,153 of ordinary income from trade or business

activities, total distributions to shareholders of $32,946, and

yearend retained earnings of $1,182,242.   The 1998 Schedule K-1

issued to Julian W. and petitioner do not list any amount as

having been distributed to them.8

     LPP filed Forms 1120S for tax years 1976-98.   Except for her

amended 1996 and 1997 Federal returns, for all tax years prior to

1998 during which she was a shareholder in LPP, petitioner

included in income all LPP pass-through items in conformance with

the Schedule K-1 issued to her by LPP.

Petitioner’s 1999 Transfer of One Share of LPP

     On June 7, 1999, petitioner contributed one share of her LPP

stock to H.C. Chemicals, Inc. (HCC), which had been incorporated

by her daughter, Heather Minton Fuller (Heather), on June 4,

1999.    Heather became the president and sole shareholder of HCC,

     8
        LPP’s financial records for 1998, however, do reflect
1998 distributions to Julian W. and petitioner in the sum of
$32,946.
                                  - 9 -

the sole function of which has been to hold shares of LPP.   LPP

utilized June 7, 1999, as the date of termination of its S

corporation status.

Louisiana Court of Appeal Decision

     The first Louisiana litigation ended with an unpublished

opinion by the Louisiana Court of Appeal,9 affirming the decision

of the Louisiana (Rapides Parish) District Court that petitioner

did, in fact, purchase 19 shares of LPP stock from Julian E. in

1986.    The Court of Appeal stated:

     Linda could not remember what each document was
     entitled nor the terms of the [1986] sale [of 19 shares
     of LPP stock to her and 19 shares to Julian W.], other
     than to say that the consideration for the sale would
     come in the form of payments to Julian E. from the
     corporation.

Petitioner’s October 2, 2000, Affidavit

     In connection with the first Louisiana litigation,

petitioner executed an affidavit in which she made the following

representations:

     On September 23, 1986, Julian Edward Long sold 38
     shares of stock, in equal amounts, to affiant and
     Julian W. Long. They signed an Act of Sale, promissory
     notes and stock certificates to this effect.

                      *   *   *    *      *   *   *

     Thereafter, consideration for the sale of the stock was
     paid to Julian Edward Long monthly out of the profits
     of the corporation in the form of cash, house payments,
     car payments, payments on all monthly expenses and
     credit card bills, and other payments. * * *




     9
         Minton v. Long’s Preferred Prods., Inc., supra.
                                     - 10 -

Petitioner’s April 21, 2004, Deposition

     In connection with additional litigation in the Louisiana

courts, this time in a suit to rescind the 1986 sale of LPP stock

by Julian E. to petitioner (together with the first Louisiana

litigation, the Louisiana litigation), petitioner was deposed on

April 21, 2004, by plaintiffs’ counsel.           During the deposition,

petitioner testified that she executed a promissory note to

Julian E. in consideration for 19 shares of LPP stock.           In

testifying as to the manner in which she made payments on that

note, the following exchanges occurred between petitioner and

plaintiffs’ counsel:

     A [Petitioner]:           Okay, the payments to my father
                               were made on my behalf through
                               Long’s Preferred Products.

     Q [Counsel]:              In other words, you are saying that
                               the corporation paid your note, is
                               that correct, that was owed to your
                               father?

     A [Petitioner]:           He -- the stock that I purchased
                               from my father was paid on my
                               behalf through the corporation, and
                               that was the way that my father and
                               my brother and myself talked about
                               having it done.

                       *   *     *     *      *   *   *

     Q [Counsel]:              So you, as of this date -- have
                               you, yourself, personally, made any
                               payment towards the retirement of
                               this note?

     A [Petitioner]:           I have through the corporation of
                               Long’s Preferred Products.

                       *   *     *     *      *   *   *
                                 - 11 -

       Q [Counsel]:          If Long’s Preferred Products did
                             not make any payments on your
                             behalf, who else would have made
                             the payments?

       A [Petitioner]:       Mr. Lee, I know Long’s Preferred
                             Products did. I know I was
                             working. I know I had the meeting
                             with my father and my brother. I
                             know what took place. I know he
                             was not working. I know I was not
                             -- I mean, I was working, and I
                             know he was happy with the
                             arrangement. So I don’t know what
                             the books would reflect, but I know
                             what took place.

       Q [Counsel]:          When did this meeting take place?

       A [Petitioner]:       It would have been in 1986.

                                 OPINION

I.    Introduction

       We must determine whether, on account of a second class of

stock, LPP’s status as an S corporation terminated in 1986.        If

it did, then petitioner did not have to include in her 1998

income her allocable share of LPP’s 1998 income except to the

extent distributed to her.     Petitioner concedes that she bears

the burden of proof.     See Rule 142(a).

II.    Discussion
       A.   Internal Revenue Code and Regulations

       With respect to any taxable year, section 1361(a)(1) defines

an S corporation as “a small business corporation for which an

election * * * [to be an S corporation] is in effect for such

year.”      Section 1361(b) defines a “small business corporation” as

a domestic corporation which must satisfy a number of

requirements, one of which is that it not have “more than 1 class
                               - 12 -

of stock.”   See sec. 1361(b)(1)(D).

     In pertinent part, and with exceptions not here relevant,

section 1.1361-1(l)(1), Income Tax Regs., provides that “a

corporation is treated as having only one class of stock if all

outstanding shares of stock of the corporation confer identical

rights to distribution and liquidation proceeds.”   In pertinent

part, section 1.1361-1(l)(2)(i), Income Tax Regs., provides:

     The determination of whether all outstanding shares of
     stock confer identical rights to distribution and
     liquidation proceeds is made based on the corporate
     charter, articles of incorporation, bylaws, applicable
     state law, and binding agreements relating to
     distribution and liquidation proceeds (collectively,
     the governing provisions).

     Pursuant to section 1362(d)(2), S corporation status

terminates when the corporation ceases to qualify as an S

corporation, e.g., upon the creation of a second class of stock.

     B.   Analysis
           1.   Absence of a Binding Agreement

     Petitioner argues that (1) the 1986 agreement constituted a

“binding agreement”, within the meaning of section 1.1361-

1(l)(2)(i), Income Tax Regs.,10 to make “guaranteed payments” to


     10
        We note that, pursuant to sec. 1.1361-1(l)(7), Income
Tax Regs., “sec. 1.1361-1(l) does not apply to: an * * *
arrangement * * * entered into before May 28, 1992, and not
materially modified after that date”. Sec. 1.1361-1(l)(7),
Income Tax Regs., continues, however: “a corporation and its
shareholders may apply this sec. 1.1361-1(l) to prior taxable
years.” We consider petitioner’s 1998 return position and her
reliance upon sec. 1.1361-1(l)(1) and (2)(i), Income Tax Regs.,
in this case as an election by petitioner, in her capacity as a
shareholder of LPP, to apply sec. 1.1361-1(l), Income Tax Regs.,
to the 1986 agreement. Therefore, we shall apply that regulation
                                                   (continued...)
                              - 13 -

Julian E., beginning in 1986, in whatever monthly amounts would

be necessary to cover his and Alma’s living expenses, (2) those

payments “were made over time, and accounted for properly as

state law dividends”, and (3) because “[n]o other shareholder

received the monthly guaranteed payments that were received by

Julian E. Long”, LPP ceased to be an S corporation “from the

moment that the agreement was made”.

     We find that the evidence does not support petitioner’s

position.   She has failed to carry her burden of proving that the

1986 agreement constituted a “binding agreement” giving Julian E.

enhanced or disproportionate “rights to [LPP’s] distribution and

liquidation proceeds”, as required by section 1.1361-1(l)(1) and

(2)(i), Income Tax Regs.   Such an agreement is necessary in order

for us to conclude that LPP had a second class of stock.

     To begin with, petitioner has failed to establish that the

1986 agreement was in any way “binding”.   At best, petitioner

testified that that agreement was nothing more than an informal,

oral understanding among the board members/shareholders of LPP to

have LPP make monthly distributions to Julian E. in whatever

amounts he (and Alma) needed to cover their living expenses, a

practice similar to that which prevailed prior to 1986.    There is

no evidence that the family members, in their capacity as

directors and/or shareholders of LPP, took any formal corporate



     10
      (...continued)
in deciding whether the 1986 agreement created a second class of
LPP stock.
                               - 14 -

action to implement that understanding.11

     Louisiana corporation law specifically addresses the manner

in which directors or shareholders of a Louisiana corporation

shall act on behalf of the corporation.     Petitioner has cited no

provisions of Louisiana corporation law (and, therefore, no

authority) in support of her position that LPP was bound by the

1986 agreement with the result that it might be said to

constitute a “binding agreement” for purposes of section 1.1361-

1(l)(2)(i), Income Tax Regs.   Our own review of Louisiana

corporation law leads us to conclude that the procedures required

to (1) institute a board of directors’ or shareholders’ meeting

and (2) adopt binding resolutions at such meetings are either

governed by the articles of incorporation and/or the bylaws or by

the Louisiana corporation law itself.12

     11
        That absence of corporate action is inconsistent with
what appears to have been the normal practice of LPP’s
shareholders/directors to keep written minutes of directors’ and
shareholders’ meetings and of resolutions adopted at those
meetings.
     12
        With regard to board of directors’ meetings, see La.
Rev. Stat. Ann. sec. 12:81C(6)(a) (1994):

     [N]otice of meetings of the board shall be given as
     provided in the articles or bylaws. If not so
     provided:

          (i) Regular meetings of the board may be held
     without notice of the date, time, place, or purpose of
     the meeting, provided that the date, time, and place
     are fixed by the board or are determinable pursuant to
     the articles or bylaws.

          (ii) Special meetings of the board shall be
     preceded by at least two days notice of the date, time,
     and place of the meeting.
                                                   (continued...)
                             - 15 -

     LPP’s articles of incorporation do not address the

procedures for (1) instituting directors’ or shareholders’

meetings or (2) adopting binding resolutions at such meetings,

and petitioner has failed to place LPP’s bylaws into evidence.

Nor has she demonstrated compliance with the provisions of

Louisiana corporation law that pertain to those procedures in the

absence of controlling articles or bylaws.

     Without evidence that the 1986 agreement constituted a

“binding agreement” within the meaning of section 1.1361-

1(l)(2)(i), Income Tax Regs., the most that can be said of the

monthly distributions to Julian E. is that they, in effect,

provided him with a timing benefit vis-a-vis LPP’s distributable

earnings, which, in total, have not been shown to belong to LPP’s

     12
      (...continued)
          (iii) The notice of a special meeting of the
     board shall describe the purpose of the special
     meeting.

See also La. Rev. Stat. Ann. sec. 12:81C(9) (1994):

     Any action which may be taken at a meeting of the board
     of directors * * * may be taken by a consent in writing
     signed by all of the directors * * * and filed with the
     records of proceedings of the board * * * .

With regard to shareholders’ meetings, see La. Rev. Stat. Ann.
sec. 12:73D (1994), which, in pertinent part, provides:

     Unless otherwise provided in the articles or by-laws,
     and except as otherwise provided in this Chapter, the
     authorized person or persons calling a shareholders’
     meeting shall cause written notice of the time, place
     and purpose of the meeting to be given to all
     shareholders entitled to vote at such meeting, at least
     ten days and not more than sixty days prior to the day
     fixed for the meeting. * * * Notice of any
     shareholders’ meeting may be waived in writing by any
     shareholder at any time * * *
                              - 16 -

shareholders on other than a pro rata basis (in accordance with

their respective stock ownership percentages).   See sec. 1.1361-

1(l)(2)(vi), Example (2), Income Tax Regs. (indicating that
differences in the timing of distributions to shareholders do not

cause an S corporation to be treated as having more than one

class of stock).13

          2.   Purpose and Nature of the Fixed Distributions to
               Julian E.

     The only support for petitioner’s argument that, in 1986,

the directors/shareholders of LPP agreed to make fixed

distributions to Julian E. in amounts necessary to cover his (and

Alma’s) living expenses is petitioner’s testimony to that effect.

But that testimony is contradicted by the Louisiana Court of

Appeal’s description of petitioner’s trial testimony and by

petitioner’s affidavit and a deposition given in connection with

the Louisiana litigation, all of which indicate that all or a

portion of the fixed distributions to Julian E., commencing in

1986, were made for the purpose of paying him (through LPP) for

his 1986 sale of LPP stock to Julian W. and petitioner.   If that

is so, it follows that some or all of the distributions to Julian

     13
        In this connection, we note the absence of evidence that
any disproportionate distributions to Julian E. prior to 1996,
when he ceased to be a shareholder in LPP, would not be offset by
future remedial distributions to the other shareholders out of
LPP’s substantial retained earnings, which totaled $582,933 at
the end of 1996. Moreover, the payment of $14,786 in 1995 on
behalf of Julian W. for the purchase of a boat indicates that
remedial payments could occur whenever Julian W. or petitioner
needed distributions in excess of LPP’s tax payments on their
behalf. That payment also indicates that all of the shareholders
were on equal footing vis-a-vis profit distributions from LPP in
that all were entitled to distributions on an as-needed basis.
                                 - 17 -

E. were from LPP profits that belonged, and were taxable, to

Julian W. and petitioner, not to Julian E.      See, e.g., Bitker v.

Commissioner, T.C. Memo. 2003-209 (partnership’s payments of

interest on the taxpayer-partner’s personal debt included in his

taxable distributions from the partnership).      Thus, assuming

arguendo that the 1986 agreement represented a binding agreement

on the part of LPP’s directors/shareholders to make

disproportionate distributions to Julian E., petitioner has

failed to establish that the payments did, in fact, constitute

distributions with respect to Julian E.’s shares rather than

distributions in discharge of Julian W.’s and petitioner’s

personal debts to Julian E. and, therefore, distributions with

respect to their shares.      Moreover, the conflicting evidence

regarding the purpose of the fixed distributions to Julian E.

raises the possibility that they were intended to achieve both of

those purposes and, therefore, that they were made, in part, with

respect to Julian E.’s shares and, in part, with respect to

Julian W.’s and petitioner’s shares.      In that event, they very

well may have constituted proportionate distributions, a result

fully consistent with the continued existence of one class of LPP

stock.

            3.   Conclusion
       Petitioner has failed to prove that LPP had more than one

class of stock in 1998.

III.    Conclusion

       In light of petitioner’s concessions and our disposition of
                             - 18 -

the more than one class of stock issue, we must sustain

respondent’s determination of a deficiency.


                                        Decision will be entered

                                   for respondent.
