Reference no: EM13486961

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 distribution must be in an amount sufficient to enable shareholders to pay their state and Federal resulting income taxes on the pass-through.

The agreement also provide that if an audit adjustment is made to items reported on the schedule K-1, Bushong can make a discretionary distribution 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 distribution date.

Would the proposal create a second class of stock and terminate Bushong's election? Explain.