Rev. Rul. 78-390

May a small business corporation have more than 10 shareholders during a taxable year if it has no more than 10 shareholders at any particular time?

FACTS

For its 1976 taxable year a corporation whose shareholders were 10 unrelated individuals elected to be treated as a small business corporation under subchapter S of the Internal Revenue Code of 1954. During its 1978 taxable year, one of the original 10 shareholders sold all the shareholder's stock in the corporation to an individual who was not already a shareholder in the corporation. The corporation paid cash dividends during its 1978 taxable year to 11 individuals, the original 10 shareholders and the individual who acquired shares during 1978.

HOLDING

For purposes of section 1371(a)(1) of the Code, the corporation had no more than 10 shareholders during its 1978 taxable year because the requirement in section 1371(a)(1) limiting the number of shareholders in an electing small business corporation to 10 means that no more than 10 persons may own stock in an electing small business corporation at any particular time during the taxable year.