S Corp Tax Shelter Disallowed

In Santa Clara Valley Housing Group, Inc., et. al. v. United States, the court held that the company's S corporation status was terminated by the pro rata issuance to shareholders of warrants to purchase additional stock. The corporation was using a tax shelter in which the shareholders of an S corporation donated non-voting stock to a charitable organization to avoid tax on the income, which was only taxed at the shareholder level. The stock would later be sold back to the shareholders, but warrants to purchase ten times as many shares were issued to shareholders as a safeguard against the charity refusing to resell the shares. These warrants were determined to be a second class of stock, which terminated the corporation's S corporation status.

See Santa Clara Valley Housing Group, Inc. et al. v. U.S., No. 5:08-cv-5097 (N.D. Cal. Sept. 21, 2011).

Posted by Adam Bair, Associate Editor, Wealth Strategies Journal