Washington Law Review




There has been considerable controversy over interpretation of the requirement that there be only one class of stock in a subchapter S corporation. It is a simple matter to draft instruments which conform literally with the statutory requirement. However, in certain situations, typically involving ostensible debt instruments, the Commissioner has challenged the formal designation, arguing that the facts indicate that for tax purposes there are at least two classes of stock. This Note will examine, primarily in relation to the one class requirement, the question whether for tax purposes a given instrument is to be treated as debt or stock. More specifically, the following will be considered: first, application of the so-called "thin capitalization" doctrine to find purported debt in fact to be a disqualifying second class of stock; second, the soundness of an alternative approach recently suggested by the Tax Court which would treat disputed advances as a non-disqualifying contribution to the existing class of stock; I third, the rationale of the one class requirement; fourth, a suggested approach to resolving controversies involving disputed debt instruments of subchapter S corporations.

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