T.C. Memo. 2007-372
UNITED STATES TAX COURT
LINDA K. MINTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6641-03. Filed December 26, 2007.
P was a 50-percent shareholder in LPP, which had
claimed S corporation status since it elected that
status in 1975. By 1986, P’s father and founder of the
business had sharply reduced his participation in the
conduct of LPP’s business affairs, which were then run
by P’s brother and P. In that year, P, her brother,
father, and mother (the directors and shareholders of
LPP) agreed that LPP would begin to make fixed, monthly
distributions to P’s father. Prior to filing her 1998
return, P was advised that that agreement had created a
second class of LPP stock, which negated LPP’s S
corporation status in 1986 and for all subsequent
years. See sec. 1361(b)(1)(D), I.R.C. On that basis,
P failed to report on her 1998 return the LPP income
listed on the 1998 Schedule K-1, Shareholder’s Share of
Income, Credits, Deductions, etc., issued to her by
LPP. The issue for decision is whether the 1986
agreement caused LPP to lose its S corporation status.
Held: P has failed to prove that the 1986
agreement constituted a “binding” agreement “relating
to distribution * * * proceeds” within the meaning of
sec. 1.1361-1(l)(2)(i), Income Tax Regs., and,
therefore, that that agreement created a second class
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