The Service ruled, in PLRs 201834007, 201834008, and 201834009, that three S corporations did not violate prohibition on a second class of S corp stock due to the provisions of certain revocable trusts, which held the S corporation stock .
In each case:
- The S corporation’s stock was held by a revocable trust.
- A couple owned the stock, which was a marital asset subject to division as a result of the couple’s divorce
- The trust agreement was not a governing position that was required to be taken into account under Treas. Reg. §1.1361-1(l)(2)(i).
- Therefore, in each case, the service determined that the S corporation will not be considered as having more than one class of as a result of the trust agreement.
In addition, in each case, the spouses’ acquisition of its rights did not disqualify the trust from qualifying as an electing small business trust (ESBT).
Finally, in each case, provided that the transfer of the shares of the S corporation’s stock to the trust occurs within six years of the entry of final judgment and the terms of the trust as executed by the couple remain materially identical to those submitted, Code Sec. 1041(a) would apply and neither of the spouse will recognize any gain or loss on the transfer of the shares of the S corporation’s stock from the spouse’s grantor trust to the trust.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.