Rev. Rul. 85-161

ISSUE

Will the stock purchase agreement described below cause a corporation to be treated as having more than one class of stock within the meaning of Section 1261(b)(1)(D) of the Internal Revenue Code?

FACTS

Corporation X has two classes of stock issued and outstanding: voting common stock and nonvoting common stock. The nonvoting stock is held by A, B, and C, siblings, and by D, an unrelated individual who is an officer of the corporation. A and B own all the voting stock. The voting and nonvoting shares are identical other than with respect to voting rights and other than as provided in a shareholder's agreement described below.

X and all the shareholders of X have entered into an agreement with respect to the transfer of D's stock. Under the agreement, D may transfer D's stock only after obtaining the consent of the holders of voting stock in X. If such consent cannot be obtained, D may sell the stock only to the corporation or the other shareholders at book value. Other provisions of the agreement give X or the other shareholders the right to purchase D's stock in the event of D's termination of employment or disability and upon D's death.

X filed an election to be an S corporation under section 1362 of the Code with respect to its taxable year beginning January 1, 1984.

LAW AND ANALYSIS

Section 1361(b)(1)(D) of the Code provides that the term `small business corporation` means a corporation that does not have more than one class of stock.

Section 1361(c)(4) of the Code provides that for purposes of section 1361(b)(1)(D), a corporation will not be treated as having more than one class of stock solely because there are differences in voting rights among the shares of common stock.

Although there may be differences in the voting rights among the shares of common stock, the outstanding shares of a corporation must be identical as to the rights of the holders in the profits and in the assets of the corporation. S. Rep. No. 97-640, 97th Cong., 2d Sess. 8 (1982), 1982-2 C.B. 718, 721.

In this case, all shares of X's stock are equal with respect to rights to profits and rights in the assets of the corporation. The agreement restricting the transfer of D's stock does not affect D's interest in corporate profits or corporate assets while D is a shareholder. Therefore, X does not have more than one class of stock within the meaning of section 1361(b)(1)(D) of the Code.

HOLDING

The stock purchase agreement with respect to stock held by D will not cause the corporation to be treated as having more than one class of stock for purposes of section 1361(b)(1)(D) of the Code.