The Final S Corporation Single-Class-of-Stock Regulations

By Barragato, Charles A. | The CPA Journal, May 1993 | Go to article overview

The Final S Corporation Single-Class-of-Stock Regulations


Barragato, Charles A., The CPA Journal


On May 28, 1992, final regulations were adopted in connection with the single-class-of-stock (SCOS) requirement of IRC Sec. 1361(b)(1)(D). These regulations are the IRS's third attempt at promulgating rules in an area that unexpectedly became quite controversial. The saga began back in October 1990, after the original version of Prop. Reg. Sec. 1.1361(1)(1) was issued. Commenters observed significant differences between many of the positions adopted by the proposed regulations and those considered acceptable under past practices. Two areas of concern surfaced immediately.

The first concern dealt with "nonconforming distributions"--those distributions that varied as to timing or amount. A corporation's failure to comply with the strict distribution guidelines of the proposed regulations would cause its S election to terminate.

The second concern dealt with the reclassification of certain debt instruments to equity (creating a second class of stock) if the instruments failed to qualify under the straight-debt safe harbor and could be treated as equity under general principles of tax law. To heighten the turbulence, these proposed regulations were given retroactive effect, thereby risking the termination of S elections on the basis of completed historical transactions. The IRS withdrew these proposed regulations after much pressure. In August 1991, revised proposed regulations were issued. The IRS incorporated many of the suggestions provided by commenters, and the proposed regulations were not retroactive in effect. About one year later, the evolution of the SCOS regulations was complete. The end result is a new and improved set of more pragmatic regulations that incorporate common sense.

IDENTICAL RIGHTS TO DISTRIBUTIONS

The definition of a small business corporation under IRC Sec. 1361(b) includes, among other requirements, that the corporation not have more than one class of stock. A corporation is treated as having one class of stock provided all outstanding shares confer identical rights to distributions and liquidation proceeds. Differences in voting rights are ignored for qualification purposes. Therefore, an S corporation can have more than one class, provided the distribution and liquidation principle is not violated. Examples of allowable differences include:

* Differences in voting rights,

* Irrevocable proxy agreements, and

* Groups of shares which allow for differences in rights to elect members of the board of directors.

The final regulations refer to a set of criteria (governing provisions) which must be considered collectively in determining whether an S corporation's outstanding shares confer identical rights in distribution and liquidation. These governing provisions consist of the corporation's by laws, charter, articles of incorporation, applicable state law, as well as binding agreements related to distribution and liquidation proceeds. With respect to binding agreements, commercial contractual agreements, such as leases or employment, and loan agreements, are not considered binding unless a principal purpose of an agreement is to circumvent the SCOS requirement.

Certain states require withholding income taxes from distributions to some or all of their S corporation shareholders. The final regulations address this by stating such laws are to be disregarded in determining whether shares of stock confer identical rights to distribution and liquidation proceeds. The timing of constructive versus actual distributions or withholdings between shareholders may also be ignored for this purpose.

BUY-SELL AGREEMENTS

Buy-sell agreements, agreements restricting the transferability of stock, and redemption agreements may also be ignored in determining whether shares confer identical distribution and liquidation rights unless-

* A principal purpose of the agreement is to circumvent the SCOS requirement, and

* The agreement establishes a purchase price that, at the time the agreement is entered into, provides for consideration considerably in excess of or below the fair market value of the stock. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Final S Corporation Single-Class-of-Stock Regulations
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.