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Nonresident aliens, potential current beneficiaries of electing small business trusts

Nonresident aliens, election small business trusts

The U.S. Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-117062-18) as guidance under measures enacted in December 2017 that expand the class of permissible potential current beneficiaries of an electing small business trust (ESBT) to include nonresident aliens.


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The proposed regulations [PDF 248 KB] are intended to provide that the income of an S corporation will continue to be subject to U.S. federal income tax when a nonresident alien is a deemed owner of a grantor trust that elects to be an ESBT.


The U.S. tax law (Pub. L. No. 115-97 enacted December 22, 2017) amended section 1361(c)(2)(B)(v) to allow nonresident aliens to be potential current beneficiaries of ESBTs.

The legislation provided that nonresident aliens as potential current beneficiaries will not be taken into account for purposes of the S corporation shareholder-eligibility requirement that otherwise prohibits nonresident alien shareholders.

Proposed regulations

The proposed regulations intend that with respect to situations in which a nonresident alien is a deemed owner of a grantor trust that has elected to be an ESBT, the S corporation income of the ESBT would continue to be subject to U.S. federal income tax.

As noted in the preamble, the proposed regulations specifically would modify the allocation rules under

Reg. section 1.641(c)-1 to require that the S corporation income of the ESBT be included in the S portion of the ESBT if that income otherwise would have been allocated to a nonresident alien-deemed owner under the grantor trust rules. Accordingly, this income would be taxed to the domestic ESBT by providing that, if the deemed owner is a nonresident alien, the grantor portion of net income must be reallocated from the grantor portion of the ESBT to the ESBT’s S portion.

The proposed regulations also would implement the statutory amendment to section 1361(c)(2)(B)(v) by making conforming revisions to Reg. section 1.1361-1(m). For instance, the proposed regulations would update:

  • The description of potential current beneficiaries in Reg. section 1.1361-1(m)(4)(i) to reflect the ability of nonresident aliens to be potential current beneficiaries of ESBTs
  • Other provisions in Reg. section 1.1361-1(m) to reflect that ability

Effective date

Under the exception provided to the effective date rules of section 7805(b)(2) (that is, regulations filed or issued within 18 months of the date of the enactment of the statutory provision to which they relate are not prohibited from applying to tax periods prior to those described in section 7805(b)(1)), these proposed regulations are proposed to apply to all ESBTs after December 31, 2017.

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