Question

1. Arthur owns all 90 shares of Class A voting common stock and all 90 shares of Class C nonvoting common stock of Clay Co. Bill owns all 10 shares of Class B voting common stock and all 10 shares of Class D nonvoting common stock of X. Does Arthur control Clay Co under § 368(c)? Can Clay Co make a Subchapter S election? What if the charter of Clay Co is amended so that Class D shares have 1/ 10 vote per share?

Answer 1

(1) US code 368 (c) relating to acquisition and reorganisation describes that acquisition of voting stock by one corporation substantially from of another company, acquisition of stock by one company in exchange of voting stock.

Control means 80% of ownership of combined all class of stock entitled to vote. Here Arthur owns all 90 shares of class A voting stock & all 90 shares of class c nonvoting stock of Clay Co. i.e 100% voting power with Arthur

Therefore it is considered that Arthur control Clay Co. under 368(c)

(2) Subchapter S is a state law corporation for united federal income tax , is a closely held corporation that makes valid tax election to pass losses, deductions, corporation tax to shareholders as per subchapter S under Internal Revenue Code. Corporations under subchapter S not required to pay taxes because the corporation under subchapter S divide tax among shareholders and pass taxes through shareholders.

To qualify as S corporation following requirements should meet

1. Corporation should be domestic

2. Shareholders should not more than 100.

3. have only one class of stock.

Stock means shares in which ownership of corporation divided.

4. Shareholders should be Individuals (except certain exempt org.)

In the present case (1) shareholders are not more than 100, (2) Corportaion is in US i.e domestic (3) all shareholders are Individuals (4) Have only one class of stock. (Non voting stock are not necessarily equal with certain class of stock. Non voting stock provides only little or no voting rights. Investment in these stock are for profitability only )

All qualifing requirements are met. Clay Co. can make a Subchapter S selection.

(3)

If charter of Clay Co. is amended for 1/10th voting power Class D shares then, there is required to hold 80% of voting power of combined all class of stock to exercise control.

To make Subchapter S election, should have only one class of stock. But due to amendment of character of Clay Co. there is not having only one class of stock to qualify as S corporation.