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To request relief, the corporation or shareholder can request a let- single-class-of-stock requirement to be
must prepare a statement of all the rele- ter ruling. an S corporation, because that determi-
vant facts, signed by a corporate officer, nation is inherently factual.
and each applicable shareholder must Principal-purpose
consent to the election. The corpora- determinations regarding the Disproportionate distributions
tion will prepare an explanation of how one-class-of-stock requirement The governing provisions of an S cor-
each nonidentical governing provision A corporation with more than poration cannot provide for dispro-
was discovered and each action taken one class of stock does not qualify portionate distribution or liquidation
to correct or remove it. To demonstrate as a small business corporation rights among any shares of stock, or
reasonable cause for relief, the descrip- (Sec. 1361(b)(1)(D) and Reg. else the S corporation will have two
tion must include each action taken by Sec. 1.1361-1(l)(1)). Generally, a classes of stock and will be ineligible to
the corporation and each applicable corporation is treated as having only have an S election. This is further bro-
shareholder to establish that the cor- one class of stock if all outstanding ken down between a permanent and a
poration and shareholder acted reason- shares of stock confer identical rights timing difference in distribution rights.
ably and in good faith in correcting or to distribution and liquidation pro- An S corporation is not allowed to
removing each nonidentical governing ceeds. The determination of whether have permanent differences in distribu-
provision upon discovery. all outstanding shares of stock confer tion and liquidation rights. However,
Applicable shareholders include identical rights to distribution and there can be timing differences of
the corporation’s current or former liquidation proceeds is based on the when the distributions among different
shareholders who own or owned stock corporate charter, articles of incor- shares of stock are allowed. For a tim-
of the corporation at any time during poration, bylaws, applicable state law, ing difference to be acceptable to the
the period (1) beginning on the date and binding agreements relating to IRS, there must be “an appropriate tax
on which the nonidentical governing distribution and liquidation proceeds effect in accordance with the facts and
provision was adopted and (2) ending (collectively, the governing provisions). circumstances” (Regs. Sec. 1.1361-1(l)
on the date on which the nonidentical A commercial contractual agreement (2)(i)).
governing provision was removed or is not a binding agreement relating to A factual question arises whether
modified to comply with the one-class- distribution and liquidation proceeds an appropriate tax effect has been
of-stock requirement. and therefore is not a governing provided to a timing difference in the
The IRS provides an example provision, unless its principal purpose distributions and, if not, whether this
of a corporate governing provision is to circumvent the one-class-of- will terminate the S election. The IRS
statement in the revenue procedure’s stock requirement. in the revenue procedure clarified its
Appendix A and an example of a share- Other agreements and ar- position, stating that it will not treat
holder statement in Appendix B. rangements between or among an any disproportionate distribution
The corporation will retain the S corporation and its shareholders as violating the one-class-of-stock
corporate governing provision state- may be treated as second classes of requirement so long as the governing
ment, the shareholder statement(s), stock under the relevant regulations provisions provide for identical distri-
and the revised governing provisions (e.g., buy-sell agreements among bution and liquidation rights among
in its corporate records. There is no shareholders, agreements restrict- shares of stock. In addition, the IRS
need to notify the IRS of the corpora- ing the transferability of stock, and provided a no-rule area on whether an
tion’s identification of the nonidentical redemption agreements; see Regs. appropriate tax effect has been provid-
governing provisions, the change in Secs. 1.1361-1(l)(2)(iii)(A)). How- ed when there are timing differences
governing provisions, or the qualifica- ever, this depends partly on whether in distributions.
tion for relief under Rev. Proc. 2022-19. the agreement or arrangement’s This eliminates the risk of how to
Rather, if the IRS examines the cor- principal purpose is to circumvent apply the appropriate-tax-effect rule
poration, then the corporation will the one-class-of-stock requirement from a second-class-of-stock analysis,
provide the documentation to support or otherwise change shareholders’ but it does not eliminate it from an
meeting the requirements for relief rights to proceeds of distributions income tax perspective. A taxpayer
under the revenue procedure. and liquidation. should still consider how to give ap-
If the S corporation or applicable The IRS also added a no-rule pro- propriate tax effect to timing differ-
shareholder does not qualify under Rev. vision on whether a principal purpose ences in distributions, based upon the
Proc. 2022-19, then the S corporation of an arrangement is to avoid the specific facts and circumstances that

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