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incorporator or director is required to own stock in the
corporation. See, e.g., Roche’s Beach, Inc. v. Commissioner, 35
B.T.A. 1087 (1937); 2 Fletcher Cyclopedia of the Law of Private
Corporations, secs. 297-306 (perm. ed., rev. vol. 1998).) Here,
Dr. Sadanaga owns all the shares of petitioner’s stock, and there
is no evidence that any shares were issued solely to qualify Dr.
Sadanaga as a director or an incorporator. Rev. Rul. 71-86, supra,
supports respondent’s position; it does not provide an exception
for petitioner.
Finally, petitioner argues that section 1372 prohibits a 2-
percent shareholder of an S corporation from being treated as an
employee of the S corporation. Section 1372, however, applies only
to the provisions of subtitle A, income taxes, not subtitle C--in
which Federal employment tax provisions are located.
In Rev. Rul. 73-361, 1973-2 C.B. 331, an officer/stockholder
of a small business corporation performing substantial services as
an officer of the corporation was held to be an employee of the
corporation for purposes of Federal employment taxes. Rev. Rul.
73-361, supra, states:
Neither the election by the corporation as to the
manner in which it will be taxed for Federal income tax
purposes nor the consent thereto by the stockholder-
officers has any effect in determining whether they are
employees or whether payments made to them are “wages”
for Federal employment tax purposes.
In Rev. Rul. 74-44, 1974-1 C.B. 287, two sole shareholders of
an electing small business corporation arranged to receive
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