Shareholder's move abroad causes inadvertent S corporation termination

Plain-English summary

An S corporation issued shares to a resident alien who later moved permanently to another country and stopped qualifying as a U.S. resident. The shareholder did not tell the corporation, so the company unknowingly became ineligible for S corporation status because it had a nonresident alien shareholder. After discovering the problem, the shareholder transferred all shares to a U.S. citizen. The IRS ruled that the termination was inadvertent and allowed the corporation to be treated as continuously maintaining S status, provided its election was otherwise valid and the required adjustments were made.

Ruling snapshot

• Question: Was an S corporation's termination caused by a shareholder becoming a nonresident alien inadvertent?
• Outcome: Approved, continuous S corporation treatment was restored.
• Key authorities: IRC §§ 1361(b)(1), 1362(d), 1362(f), 7701(b).

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201640001                                               Third Party Communication: None
Release Date: 9/30/2016                                         Date of Communication: Not Applicable
Index Number: 1362.04-00
                                                                Person To Contact:
---------------------------------------------------             --------------------------, ID No. ----------------
---------------------------                                     ----------------
-------------------------                                       Telephone Number:
 ------------------------------------                           --------------------
                                                                Refer Reply To:
                                                                CC:PSI:B03
                                                                PLR-100745-16
                                                                Date:
         LEGEND                                                 June 27, 2016

         X        =              ----------------------------
         --------------------------------------------------
         --------------------------------------------
         ----------------------------------------------

         State =                ---------

         Date 1 =                ---------------------------

         Date 2 =                -----------------------

         Date 3 =                -----------------

         Date 4 =                ------------------

         Date 5 =                ------------

         Date 6 =                --------------------

         Date 7 =                -----------------

         a          =              ----------------
         ------------------------------------------------

         Country =                ---------

Dear --------------:


      This responds to a letter dated December 18, 2015, and supplemental
information submitted on behalf of X by its authorized representative requesting a ruling
under § 1362(f) of the Internal Revenue Code (the Code).
PLR-100745-16                                 2



                                          FACTS

      X was organized on Date 1 as a corporation under the laws of State. Effective
Date 2, X elected to be treated as an S corporation.

        On Date 3 and Date 4, X issued shares to a. On Date 3, a was a resident alien
under § 7701(b)(1)(A). In Date 5, a permanently moved to Country, and no longer
satisfied the resident alien requirements under § 7701(b)(1)(A). At the time that a
permanently moved to Country, a did not inform X of a’s loss of resident alien status.

        On Date 6, a requested that X update a’s address in its corporate records to
reflect a’s residence in Country. Upon this request, X immediately inquired about a’s
status as a resident alien and it was at this time that X became aware that its
Subchapter S election had inadvertently terminated.

       Effective Date 7, a transferred all of a’s shares in X to a United States citizen.

        X represents that X and its shareholders intended for X to be an S corporation
effective Date 2 and that X has filed all returns consistent with X’s status as an S
corporation since Date 2. X and its shareholders agree to make any adjustments
required as a condition of obtaining relief under the inadvertent termination rule as
provided in § 1362(f) of the Code.

                                  LAW AND ANALYSIS

        Section 1361(a)(1) provides that the term “S corporation” means, with respect to
any taxable year, a small business corporation for which an election under § 1362(a) is
in effect for the year.

       Section 1361(b)(1) defines a “small business corporation” as a domestic
corporation which is not an ineligible corporation which does not (A) have more than
100 shareholders, (B) have as a shareholder a person (other than an estate, and a trust
described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is not an
individual, (C) have a nonresident alien as a shareholder, and (D) have more than one
class of stock.

        Section 7701(b)(1)(A) provides that an alien individual shall be treated as a
resident of the United States with respect to any calendar year if (and only if) such
individual: (i) is a lawful permanent resident of the United States at any time during such
calendar year; (ii) meets the substantial presence test of § 7701(b)(3); or (iii) makes the
election provided in §7701(b)(4).
PLR-100745-16                                3

       Section 7701(b)(1)(B) provides that an individual is a nonresident alien if such
individual is neither a citizen of the United States nor a resident of the United States
(within the meaning of § 7701(b)(1)(A)).

       Section 1362(d)(2)(A) provides than an election under § 1362(a) shall be
terminated whenever (at any time on or after the 1st day of the 1st taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation. Section 1362(d)(2)(B) further provides that the termination shall
be effective on and after the date of cessation.

        Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a)
by any corporation (A) was not effective for the taxable year for which made
(determined without regard to § 1362(b)(2)) by reason of a failure to meet the
requirements of § 1361(b) or to obtain shareholder consents or (B) was terminated
under § 1362(d)(2) or (3), (2) the Secretary determines that the circumstances resulting
in the ineffectiveness or termination were inadvertent, (3) no later than a reasonable
period of time after discovery of the circumstances resulting in the ineffectiveness or
termination, steps were taken (A) so that the corporation is a small business corporation
or (B) to acquire the shareholder consents, and (4) the corporation and each person
who was a shareholder of the corporation at any time during the period specified
pursuant to § 1362(f), agrees to make such adjustments (consistent with the treatment
of the corporation as an S corporation) as may be required by the Secretary with
respect to such period, then, notwithstanding the circumstances resulting in the
ineffectiveness or termination, the corporation will be treated as an S corporation during
the period specified by the Secretary.

                                      CONCLUSION

       Based on the facts submitted and the representations made, we conclude that
X’s S corporation election terminated in Date 5 because X had a nonresident alien as a
shareholder. However, we conclude that such termination was inadvertent within the
meaning of § 1362(f). Therefore, X will be treated as continuing to be an S corporation
from Date 5 and thereafter, provided X’s S corporation election was otherwise valid and,
apart from the inadvertent termination ruling described above, has not otherwise
terminated under § 1362(d).

         Except as specifically ruled upon above, we express or imply no opinion
concerning the federal tax consequences of the facts described above under any other
provision of the Code. Specifically, we express or imply no opinion regarding X’s
eligibility to be an S corporation.

      The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and is accompanied by a penalty of perjury statement
PLR-100745-16                                 4

executed by an appropriate party. While this office has not verified any of the material
submitted in support of this request, it is subject to verification on examination.

      This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of
the Code provides that this ruling may not be used or cited as precedent.

        Pursuant to a power of attorney on file with this office, we are sending copies of
this letter to your authorized representative.



                                              Sincerely,




                                              Bradford R. Poston
                                              Senior Counsel, Branch 3
                                              Associate Chief Counsel
                                              (Passthroughs and Special Industries)



Enclosures (2)
      Copy of this letter
      Copy for § 6110 purposes


cc: