Disproportionate liquidating distributions
The restriction relates to how businesses can be qualified to be treated as an S Corporation in the first place.
These rules are found in Internal Revenue Code Section 1361.
In a private letter ruling (PLR) issued back in May of 1995, an S Corporation had a “misunderstanding of the regulations” regarding S Corporations and had made disproportionate distributions to some shareholders over others.
The following example paints a picture of a situation where business owners may consider this possibility: Tom and Jeff own an S Corporation called TJ Engineering as equal shareholders (i.e.Tom and Jeff wonder whether they can make a cash distribution of 5,000 to Tom, but no distribution at all to Jeff, leaving the remaining retained earnings available to the business and thus satisfying the desires of both shareholders.