Recent Developments

■ S Corp 2^nd 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.