Tax Court Rules Disproportionate Distributions Do Not Violate S Corporation Status

The Tax Court recently held in Maggard v. Commissioner (T.C. Memo 2024-77) that an S corporation’s disproportionate distributions did not result in a disqualifying second class of stock. One of the requirements of an S corporation is that all its shares of stock have identical rights to distribution and liquidation proceeds, which is commonly referred to as the “single class of stock” requirement.  In Maggard, two of the three shareholders caused the S corporation to make distributions to the shareholders that were disproportionate with their share ownership percentages. The court focused its analysis on Treasury Regulation section 1.1361-1(l)(2) and concluded that whether shares of stock confer identical rights to distribution and liquidation proceeds is determined by the corporation’s articles, of incorporation, bylaws, and other governing documents. Furthermore, such determination is not based upon how distributions are actually made. The governing documents for the corporation in Maggard provided for only one class of stock with the same rights to distribution and liquidation proceeds. Consequently, despite many years or disproportionate distributions, the court ruled that the Corporation’s S election was not terminated. A link to the ruling is here.