The IRS has ruled in PLR 2013-06-004 that an S corporation's distribution agreement with its shareholders would not create a second class of stock under Section 1361(b)(1)(D).
The private letter ruling addresses an S corporation and shareholders who intended to enter into an agreement that included provisions relating to minimum distributions to shareholders. The distributions would be based on i) the shareholder's varying interests in the S corporation's income in the current or immediately preceding tax year or earlier if such earlier tax year's taxable income is adjusted after the S corporation's original return for the earlier year is filed, or ii) a pro rata distribution to the shareholders based on the number of shares that the shareholder owns as of a record date.
Section 1361(b)(1)(D) provides, among other things, that an S corporation may not have more than one class of stock.
Treas. Reg. Sec. 1.1361-1(l)(2)(iv) provides that that a governing provision or document does not alter the rights to S corporation stock liquidation and distribution proceeds merely because the governing provision provides that, as a result of a change in stock ownership, distributions in a taxable year are to be made on the basis of the shareholders' varying interests in the S corporation's income in the current or immediately preceding taxable year. If distributions pursuant to the provision are not made within a reasonable time after the close of the taxable year in which the varying interests occur, the distribution may be recharacterized depending on the facts and circumstances, but will not result in a second class of stock.
The IRS ruled that the S corporation's distribution agreement with its shareholders would not create a second class of stock under Section 1361(b)(1)(D) based on all facts and circumstances presented.
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