Pro rata liquidating distribution
Owners of beneficial interests in our common stock who are not also record holders of our common stock (for example, those who hold ownership interests in our shares in book-entry form through DTC and other persons with ownership interests held in "street name" by a broker, bank or other nominee) are not entitled to liquidating distributions directly from the Company.Instead, such owners must look to the ultimate record holder of shares to which their beneficial ownership relates.You should contact your broker or other nominee regarding payment of liquidating distributions.Answer: This is a commonly misunderstood area of tax law. Section 1.1361-1(l)(1) provide, in part, that “a corporation that has more than one class of stock does not qualify as a small business corporation.” The regulations go on to provide that a corporation is 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.
In short, S corporations have more flexibility than you realize to make distributions that are not perfectly pro-rata to its shareholders. Relevant Law: The genesis of the confusion is found in Section 1361(b)(1)(D), which provides that in order for a corporation to be eligible to make an S election, the corporation can only have one class of stock outstanding. As you can see, there is no prohibition on an S corporation having voting and nonvoting stock; rather, it simply can’t have shares of stock that offer the holders different rights to distribution or liquidation proceeds. Here’s the thing; there’s nothing in the statute or regulations that says you can’t make a disproportionate distribution; it simply says that the underlying stock can’t confer upon the shareholders different to distributions.
Practitioners often construe this requirement to be more restrictive than it really is, believing that a single disproportionate distribution will be an indication that you have more than one class of stock, and — Voila! Applying these concepts to our fact pattern above, if the S corporation makes a disproportionate distribution to A and B, the IRS would look to Treas. Section 1.1361-1(l)(2)(i) for guidance on whether the disproportionate distribution is indicative of multiple classes of stock.
Pro rata liquidating distribution comments