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In October 1990, the IRS issued proposed regulations under Sec. 1361 on the one class of stock requirement for S corporations. Now, after receiving comments and holding a public hearing, the IRS has issued a new set of proposed regulations replacing the set issued in 1990.
Under the new regulations, a corporation is treated as having only one class of stock if all outstanding shares confer identical rights to distribution and liquidation proceeds and if the corporation has not issued any instrument or obligation, or entered into any arrangement, that is treated as a second class of stock. This is determined by the corporate charter, articles of incorporation, bylaws, applicable state law, and any binding agreements relating to distribution or liquidation proceeds (collectively, the "governing provisions"). It is the rights conferred by the governing provisions that are taken into account. A routine commercial contractual arrangement such as a lease, employment agreement or loan agreement will not be taken into account unless it is entered into to circumvent the one class of stock requirement.
Although...