Second Class of Stock

[buzzardbreath]

A client started a highly successful S corp years ago. He has managed to keep good management personnel, and a few of them own small portions of stock as a result of stock options.

Additionally, in later years he has gifted or otherwise divested shares to his wife and children to the extent that he now owns less than 50% of the stock.

His personality type is such that he will not give up control of the corporation. "The only to fix it where it won't happen is to fix it where it can't happen."

His lawyer (and the S corp CPA) maintain that he still has 100% of the "voting" shares, although less than 50% of ownership. From what I read, this is a "second class" of stock, and his S corp status should be invalidated.

What say ye??

[TaxGuyBill]

The S-corporation election is still okay.

IRC 1364(c)(4) states:

(4) Differences in common stock voting rights disregarded
For purposes of subsection (b)(1)(D), a corporation shall not be treated as having more than 1 class of stock solely because there are differences in voting rights among the shares of common stock.

[buzzardbreath]

Hit the Nail on the Head

We are sure getting a lot of answers since you joined us Mr. Bill.

And you are giving direct answers to direct questions, instead of waffling around like myself and some of the rest of us.

Thanks for your response.

[JON]

May be right,

but we are very careful not to let those type of situations happen. If he had gifted/given away stock it swounds like those shares have the same powers as his and some went to employees, right.. I am sure his wife, mnor kids and he all are controlled. If a second class does not exist the corporate records and stock shares better detail what they are...