Linda K. Minton - Page 12




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          of stock.”  See sec. 1361(b)(1)(D).                                         
               In pertinent part, and with exceptions not here relevant,              
          section 1.1361-1(l)(1), Income Tax Regs., provides that “a                  
          corporation is treated as having only one class of stock if all             
          outstanding shares of stock of the corporation confer identical             
          rights to distribution and liquidation proceeds.”  In pertinent             
          part, section 1.1361-1(l)(2)(i), Income Tax Regs., provides:                
               The determination of whether all outstanding shares of                 
               stock confer identical rights to distribution and                      
               liquidation proceeds is made based on the corporate                    
               charter, articles of incorporation, bylaws, applicable                 
               state law, and binding agreements relating to                          
               distribution and liquidation proceeds (collectively,                   
               the governing provisions).                                             
               Pursuant to section 1362(d)(2), S corporation status                   
          terminates when the corporation ceases to qualify as an S                   
          corporation, e.g., upon the creation of a second class of stock.            
               B.  Analysis                                                           
                    1.  Absence of a Binding Agreement                                
               Petitioner argues that (1) the 1986 agreement constituted a            
          “binding agreement”, within the meaning of section 1.1361-                  
          1(l)(2)(i), Income Tax Regs.,10 to make “guaranteed payments” to            


               10  We note that, pursuant to sec. 1.1361-1(l)(7), Income              
          Tax Regs., “sec. 1.1361-1(l) does not apply to:  an * * *                   
          arrangement * * * entered into before May 28, 1992, and not                 
          materially modified after that date”.  Sec. 1.1361-1(l)(7),                 
          Income Tax Regs., continues, however:  “a corporation and its               
          shareholders may apply this sec. 1.1361-1(l) to prior taxable               
          years.”  We consider petitioner’s 1998 return position and her              
          reliance upon sec. 1.1361-1(l)(1) and (2)(i), Income Tax Regs.,             
          in this case as an election by petitioner, in her capacity as a             
          shareholder of LPP, to apply sec. 1.1361-1(l), Income Tax Regs.,            
          to the 1986 agreement.  Therefore, we shall apply that regulation           
                                                             (continued...)           





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