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fewer shareholders, each of whom is a natural person or
an estate. * * * The limitation is applied to the
number of natural persons and estates that were
shareholders at any one time during the taxable year of
the corporation. * * *
(iii) Special rule. The exception provided
in paragraph (c)(2)(ii) of this section does not apply
to an S corporation for a taxable year if any
shareholder in the corporation during that taxable year
is a pass-through shareholder. For purposes of this
paragraph (c)(2)(iii), a pass-through shareholder is--
(A) A trust;
(B) A nominee; or
(C) Other similar pass-through persons
through whom other persons have an ownership
interest in the stock of the S corporation.
For purposes of the preceding sentence, a shareholder's
estate shall not be treated as a pass-through
shareholder. [Sec. 301.6241-1T(c)(2)(ii) and (iii),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 3003
(Jan. 30, 1987).]
In sum, section 301.6241-1T(c)(2), Temporary Proced. & Admin.
Regs., provides an exception to the unified audit and litigation
procedures for a small S corporation, which is defined as an S
corporation with five or fewer shareholders, each of whom is a
natural person or an estate. However, the small S corporation
exception does not apply for a taxable year if any shareholder in
the corporation during that taxable year is a pass-through
shareholder such as a trust, nominee, or similar pass-through
person.
Petitioner contends that the special rule set forth in
section 301.6241-1T(c)(2)(iii), Temporary Proced. & Admin. Regs.,
does not apply in this case because Primco's sole shareholders
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