Pro rata liquidating distribution

We go from Section 1361 to the underlying treasury regulations, and we find the following explanation regarding this “one class of stock” rule: By reading this line, we should infer the general rule that distributions from S Corporations to shareholders should be proportional to each shareholder’s ownership interest.

After all, if there is only one type of stock with “identical rights to distribution” proceeds, you cannot meet this rule by allowing a shareholder to have the rights to a higher ratio of the distributions than that shareholder’s ownership right would entitle him/her to. The regulations contain a few examples of when a disproportionate distribution would not harm the status of the business as an S Corporation.

S distributes ,000 to A in the current year, but does not distribute ,000 to B until one year later.

The circumstances indicate that the difference in timing did not occur by reason of a binding agreement relating to distribution or liquidation proceeds…

In a private letter ruling (PLR) issued back in May of 1995, an S Corporation had a “misunderstanding of the regulations” regarding S Corporations and had made disproportionate distributions to some shareholders over others.

The S Corporation intended “…to make a distribution to its shareholders to equalize the cumulative amount of per share distributions, including interest, to correct for the distributions made…” during 1995.

So going back to our initial example, may we conclude that TJ Engineering may make the disproportionate distributions to satisfy the desires of both shareholders?

Again, the IRS ruled here that because the corporation had only one class of stock with equal rights to distributions, in the end the distributions made had not adversely impacted the S status of the corporation.

Well, the simple answer is no, but there are possibilities for “timing differences” between distributions.

First, let’s explain why disproportionate distributions would be disallowed.

each shareholder owns 50% of the stock of the S Corporation).

TJ Engineering has been profitable for a number of years and has approximately

Again, the IRS ruled here that because the corporation had only one class of stock with equal rights to distributions, in the end the distributions made had not adversely impacted the S status of the corporation.

Well, the simple answer is no, but there are possibilities for “timing differences” between distributions.

First, let’s explain why disproportionate distributions would be disallowed.

each shareholder owns 50% of the stock of the S Corporation).

TJ Engineering has been profitable for a number of years and has approximately $1,000,000 of retained earnings that can be distributed.

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Again, the IRS ruled here that because the corporation had only one class of stock with equal rights to distributions, in the end the distributions made had not adversely impacted the S status of the corporation.Well, the simple answer is no, but there are possibilities for “timing differences” between distributions.First, let’s explain why disproportionate distributions would be disallowed.each shareholder owns 50% of the stock of the S Corporation).TJ Engineering has been profitable for a number of years and has approximately $1,000,000 of retained earnings that can be distributed.

,000,000 of retained earnings that can be distributed.

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