Disproportionate liquidating distributions

Accordingly, under paragraph (l)(2)(i) of this section, S is treated as having more than one class of stock and does not qualify as a small business corporation. Under S’s bylaws, A and B are entitled to equal distributions.S distributes ,000 to A in the current year, but does not distribute ,000 to B until one year later.

The important point is that making disparate distributions will not automatically terminate an S election.The Commissioner grants permission to S, a corporation, to issue its stock subject to the restriction that any person who is issued stock in exchange for property, and not cash, must waive all rights to receive distributions until the shareholders who contributed cash for stock have received distributions in the amount of their cash contributions.(ii) The condition imposed by the Commissioner pursuant to state law alters the rights to distribution and liquidation proceeds conferred by the outstanding stock of S so that those rights are not identical. (i) S, a corporation, has two equal shareholders, A and B.(i) The law of State X requires corporations to pay state income taxes on behalf of nonresident shareholders.The law of State X does not require corporations to pay state income taxes on behalf of resident shareholders. S’s resident shareholders have the right (for example, under the law of State X or pursuant to S’s bylaws or a binding agreement) to distributions that take into account the payments S makes on behalf of its nonresident shareholders.In addition, S is not treated as having more than one class of stock by reason of the payment of fringe benefits. The facts and circumstances do not reflect that a principal purpose of the loan is to circumvent the one class of stock requirement of section 1361(b)(1)(D) and this paragraph (l).


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