Recent Developments

S Corp 2nd Class of Stock: Although LLCs are the entity of choice, 2 million+ S corporations still exist. One of the many requirement to qualify and maintain tax favored S corporation status is that the corporation can only have one class of stock. Economic turmoil has forced many S corporations to restructure debt. While that could run afoul of the single class of stock rule, there is some leeway. In a recent private letter ruling the IRS held that the restructure of debt in which the lender negotiated warrants to receive Class B non-voting common stock did not constitute a disqualifying second class of stock.  Reg. 1.1361-1(l)(4)(iii)(b)(1).  The IRS cited 3 factors influencing the favorable result: (1) The warrants were issued to induce the lender to restructure debt; (2) The lender is regularly engaged in the business of commercial lending; and (3) The warrants were issued in connection with a commercially reasonable loan. PLR 201043015 .

Split Dollar Loan Filings: A loan can be made under the split-dollar life insurance loan regime but it must have interest paid or accrued at the applicable federal rate (“AFR”). Most of these loans are non-recourse to the borrower, and the lender can only look to the life insurance policy and proceeds for repayment of the loan. This makes the loan contingent with adverse tax consequences. However, this unfavorable characterization can be avoided the borrower and lender must file a written statement (representation) with their tax returns in which they state that a reasonable person would expect the loan to be repaid. In these rulings neither the employer or employees filed the required representations concerning the nonrecourse nature of the split-dollar loans with their tax returns. The IRS has recently afforded some leniency by providing an extension of time to meet these filing requirements. PLR 201041006 – 201041024.

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