Sub S Banks and Director Qualifying Shares By: Joseph Press, CPA Date: 10/22/09   Any bank that has made, or is contemplating making, an S election is aware of the one-class-of stock rule.  The one-class-of-stock rule has existed since the inception of the S corporation rules and was intended to minimize complications in apportioning income, deductions and credits among shareholders.  To be in compliance with this rule, all outstanding shares of stock must confer identical rights with respect to distribution and liquidation proceeds.  If the only difference between two classes of stock is voting rights, then the corporation is deemed to be in compliance with the one-class-of-stock rule.  This rule presented an obstacle for some potential S elections where the bank (or holding company) had issued bank director qualifying shares as required by federal or state law.  Often, these shares were subject to provisions that violated the one-class-of stock rule e.g. requirements to sell back the stock at the original purchase price when the shareholder ceased to be a director. Banks received legislative relief from the situation with the passage of the Small Business and Work Opportunity Act of 2007.  This Act provides that "restricted bank director stock" is not taken into account in the application of the various S corporation rules.  Accordingly, the stock is not treated as a second class of stock, nor is the director treated as a shareholder of the S corporation because of the stock.  In addition, the stock is ignored when making the customary allocation of items among the shareholders and is also ignored for purposes of determining if an S corporation holds 100% of a QSub.  "Restricted bank director stock" is defined as stock in a bank that must (emphasis added) be held by an individual under federal or state law to permit that individual to serve as a director of the bank or holding company and that is subject to an agreement with the bank or holding company requiring the director to sell back the stock at the original acquisition price upon departure from the Board of Directors.  Any bank seeking relief under this provision should take note of this narrow definition.  The Act's relief from the one-class-of-stock rule for director stock is effective for taxable years beginning after December 31, 1996 (when banks first became eligible to elect S corporation status).