The opinion
SteeRett, dissenting: I have already indicated my agreement with the view set forth in Judge Raum’s cogent dissent, but I would like to add the following comments of my own.
Section 1371 (a) (4) explicitly limits the benefits of subchapter S to those corporations which do not “have more than one class of stock.” The thrust of the majority’s opinion seems to be, as indicated for example by the basis upon which it distinguishes the instant case from Pollack v. Commissioner, 392 F. 2d 409 (C.A. 5, 1968), that the pivotal factor in its conclusion is the fact that the action in issue was taken by the shareholders as differentiated from action by the corporation. Such a conclusion will no doubt now be cited as a precedent for permitting shareholders to do indirectly what they cannot do directly. Through the simple expedient of making a unanimous irrevocable agreement among themselves, the shareholders 1 can affix the rights of a stock issue as effectively as can be done by official corporate action. We have present here a case where 5 shares of stock were stripped permanently of their voting rights. These 5 shares have something less than the other 95 outstanding shares. From a substantive point of view they can reasonably be analogized to an issue of nonvoting common.
Further, if the shareholders may privately rearrange voting rights, what is to prevent them from rearranging the interests in the assets upon liquidation or providing for the payment of some prescribed amount to one particular shareholder, or group of shareholders, to the exclusion of others ? Such an arrangement could easily be required as an inducement to secure the participation of some particularly valuable individual. Would not such an arrangement as readily thwart the purpose of Congress, as found by the majority, “to avoid complexities in taxing income to shareholders with different preferences as to the distribution of profits” as would the direct issuance of differing stock interests by the corporation ? The answer must be in the affirmative.
If obeisance to the idiom “hard cases make bad law” is necessary, so be it, but let us not add to the cases which caused its birth.
Simpson, agrees with this dissent.
Under sec. 1371 (a) (1) this number can never exceed 10.