Bushong, Inc., a calendar year S corporation, has a “tax cash-flow” provision in its shareholder agreement. Bushong must make annual distributions by the December 31 following a tax year in which there is an income pass-through. Each must be in an amount sufficient to enable shareholders to pay their state and Federal income taxes on the pass-through.
The agreement also provides that if an audit adjustment is made to items reported on the Schedule K-1, Bushong can make a discretionary to handle the increased taxes resulting from the adjustment.
The shareholders want to change the agreement. Under the proposal, if an audit adjustment is made and Bushong makes a discretionary payment, the payment would be in accordance with the shareholders’ ownership shares during the tax year of the adjustment, rather than as of the date.
Would the proposal create a second class of stock and terminate Bushong’s S election? Explain.
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