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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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