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taxable under section 1368 as gain from the sale or exchange of
property to the extent the distributions exceeded the shareholders’
bases in their stock. The Court found that the shareholders had
not established that their bases in their corporate stock at the
beginning of the first taxable year before the Court was other than
zero. But there was no question as to the shareholders’ ownership
of the stock of the corporation.
Petitioner next cites for support the following excerpt from
Rev. Rul. 71-86, 1971-1 C.B. 285: “The president and sole
shareholder, except for qualifying shares, of a closely held
corporation is an employee of the corporation for [Federal]
employment tax purposes, notwithstanding that he sets his own
salary and prescribes his own duties.” (Emphasis supplied by
petitioner.) Petitioner contends: (1) Rev. Rul. 71-86, supra,
exempts the sole shareholder of an S corporation from Federal
employment taxes with regard to any income distributed to the
“qualifying shares” shareholder, and (2) Dr. Sadanaga is such a
shareholder because he holds all of the stock in the corporation.
Petitioner again misreads the revenue ruling. The individual at
issue in that revenue ruling owned all the stock of the
corporation, except for qualifying shares. The revenue ruling did
not define “qualifying shares”. (We note, however, that the term
generally refers to shares issued to an individual in order to
qualify the individual as an incorporator or director where an
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