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 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 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 S election? Explain.