IRS written determination 201444021

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201444021
Release Date: 10/31/2014
Index Number: 1361.01-04
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---------------------, ID No. ----------------
Telephone Number:
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ReferReply To:
CC:PSI:B02
PLR-117357-14
Date:
May 21, 2014
Legend
X= ---------------------------
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State=------------
Date 1=-----------------------
Date 2=------------------------
Year 1=------
Year 2=------
Year 3=------
A=---------------------
SSN: ----------------
B=---------------------
SSN: ----------------
Dear ---- -------:
This responds to a letter dated April 21, 2014, submitted on behalf of X by its
authorized representative, requesting a ruling under subchapter S of the Internal
Revenue Code.

PLR-117357-14 2
The information submitted states that X was incorporated in Stateon Date 1. X
made an election to be treated as an S corporation effective Date 2. From Year 1to
Year 2, X made disproportionate distributions to its shareholders, grantor trusts owned
by A and B. X represents that it did not intend to create any differences in rights among
the shares. In Year 3, X made corrective distributions to A eliminating the cumulative
amount of the disproportionate distributions. As a result of the corrective distribution,
the cumulative distributions from X to its shareholders are proportionate to stock
ownership.
X represents that it did not intend to create a second class of stock. X and its
shareholders consent to make such adjustments consistent with the treatment of X as
an S corporation as may be required by the Secretary.
Section 1361(a)(1) of the Code provides that the term “S corporation” means,
with respect to any taxable year, a small business corporation for which an election
under § 1362(a) is in effect for such year.
Section 1361(b)(1)(B) provides that the term “small business corporation” means
a domestic corporation which is not an ineligible corporation and which does not have
as a shareholder a person (other than an estate, a trust described in § 1361(c)(2), or an
organization described in § 1361(c)(6)) who is not an individual.
Section 1.1361-1(l)(1) of the Income Tax Regulations provides that a corporation
is generally treated as having only one class of stock if all outstanding shares of stock of
the corporation confer identical rights to distribution and liquidation proceeds.
Differences in voting rights among shares of stock of the corporation are disregarded for
purposes of determining whether a corporation has more than one class of stock.
Section 1.1361-1(l)(2)(i) provides that the determination of whether all
outstanding shares of stock confer identical rights to distribution and liquidation
proceeds is madebased on the corporate charter, articles of incorporation, bylaws,
applicable state law, and binding agreements relating to distribution and liquidation
proceeds (collectively, the “governing provisions”). A commercial contractual
agreement, such as a lease, employment agreement, or loan agreement, is not a
binding agreement relating to distribution and liquidation proceeds and thus is not a
governing provision unless a principal purpose of the agreement is to circumvent the
one class of stock requirement.Although a corporation is not treated as having more
than one class of stock so long as the governing provisions provide for identical
distribution and liquidation rights, any distributions (including actual, constructive, or
deemed distributions) that differ in timing or amount are to be given appropriate tax
effect in accordance with the facts and circumstances.
Section 1362(d)(2) provides that (A) in general, an election under § 1362(a) shall
be terminated whenever (at any time on or after the first day of the first taxable year for
which the corporation is an S corporation) such corporation ceases to be a small

PLR-117357-14 3
business corporation and (B) any termination under § 1362(d)(2) shall be effective on
and after the date of cessation.
Based solely on the facts submitted and the representations made, we conclude
that because X’s stock has identical distribution and liquidation rights under its
governing provisions, the disproportionate distributions did not cause X to have more
than one class of stock for purposes of § 1361(b)(1)(D). Under these circumstances,
we conclude that X’s S corporation election did not terminate. However,
disproportionate and corrective distributions must be given appropriate tax effect.
Except as specifically ruled above, we express no opinion concerning the federal
tax consequences of the transactions described above under any other provisions of the
Code. In particular, we express no opinion regarding the validity of any §338(h)(10)
election. See Treas. Reg. § 1.338(h)(10)-1(c)(3).
In accordance with the Power of Attorney on file with this office, a copy of this
letter ruling will be sent to the taxpayer’s representatives.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the
Code provides thatit may not be used or cited as precedent.
Sincerely,
Bradford Poston
Senior Counsel, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
cc: