Disproportionate liquidating distributions a quick and dirty dating guide to foreign girls
This article will briefly summarize the one class of stock rule and discuss a few of the most common business transactions that may violate the rule. Treasury Regulations (“Regulation”) § 1.1361-1(l) provides rules interpreting the one class of stock requirement.In general, a corporation does not have an impermissible class of stock if all of its outstanding shares of stock confer identical rights to distribution and liquidation proceeds (“Proportionate Distributions”).The Regulation does not establish a magic formula for determining fair market value.Rather, the Regulation merely requires that taxpayers make that determination in good faith.More often than not, the cost of the appraisal will be far less than the professional fees required to defend an Internal Revenue Service (“IRS”) challenge to a purchase price determined without an appraisal.The Regulation provides a safe harbor for determining book value.
For example, assume S issues a note to 3 of its 5 shareholders.
They also know that S corporation status generally allows the corporation’s shareholders to avoid double taxation on the corporation’s income when it is passed through to them in the form of a dividend (with a few exceptions).
Not surprisingly, many small business owners are unaware of the many traps awaiting them after making the S corporation election. Perhaps the most common, as well as the most limiting, of these traps is the requirement that all classes of S corporation stock must confer rights to distribution and liquidation proceeds, they often fail to appreciate the types of everyday agreements that could be treated as an impermissible second class of stock (which, of course, will cause the termination of the company’s S corporation tax status).
In short, a buy-sell agreement or redemption agreement should jeopardize S corporation status only when the shareholders are either ill-advised or intentionally ignore the Regulation’s guidance in order to save the cost of an appraisal. As in the case of buy-sell agreements and redemption agreements, the Regulation provides a safe harbor for certain types of loan agreements.
For example, unwritten advances from a shareholder to her S corporation not exceeding ,000 in the aggregate at any time during the S corporation’s taxable year will not be treated as a second class of stock as long as the parties treat the advance as debt and the advance is expected to be repaid during a reasonable period of time.