Linda K. Minton - Page 1

                                 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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