Tax News

CCH (cch.taxgroup.com) reports:

  An S corporation's pass-through status was not terminated because payments made by the S corporation to its former owners were not made pursuant to a second class of stock; consequently, a shareholder was required to report her share of the corporation's income on her tax return. The monthly payments were not made pursuant to any legally binding agreement or formal corporate action that affected distribution and liquidation rights or established that the distributions were indicative of a second class of stock. Instead, it appeared more likely that the distributions were made on account of debt that the new owners incurred at the time of their share purchase, rather than payments to the previous owners as shareholders.

  The Tax Court erred by inferring an election to apply
Reg. §1.1361-1(1)(7). The retroactive application of that provision applied to prior tax years, not prior transactions. However, the error was harmless because the court did not find that a second class of stock had been created.

  Affirming, per curiam , the Tax Court, 94 TCM 606,
Dec. 57,207(M), TC Memo. 2007-372

L.K. Minton, CA-5, 2009-1 USTC ¶50,278

Other References:

 
Code Sec. 1361

  CCH Reference - 2009FED ¶32,026.45

  Tax Research Consultant

  CCH Reference - TRC SCORP: 162