In recent ruling letters, the IRS ruled that a company’s disproportionate distributions to shareholders did not terminate its subchapter S election. The IRS reasoned that the distributions did not create more than one class of stock under section 1361(b)(1)(D). The company even stated that it did not intend to create a second class of stock. With these facts at hand, the IRS concluded that the company did not have more than one class of stock though disproportionate and corrective distributions would get appropriate tax effect. The IRS also stated that this ruling would only be applicable to the taxpayer that requested it and could not be cited as precedent.
Posted by Aryane Garansi, Associate Editor, Wealth Strategies Journal