Electing Small Business Trusts With Nonresident Aliens as Potential Current Beneficiaries, 16415-16419 [2019-07919]
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16415
Proposed Rules
Federal Register
Vol. 84, No. 76
Friday, April 19, 2019
This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
1. Overview
Internal Revenue Service
26 CFR Part 1
[REG–117062–18]
RIN 1545–BO93
Electing Small Business Trusts With
Nonresident Aliens as Potential
Current Beneficiaries
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This notice of proposed
rulemaking provides rules regarding the
recent statutory expansion of the class
of permissible potential current
beneficiaries (PCBs) of an electing small
business trust (ESBT) to include
nonresident aliens (NRAs). In particular,
these proposed regulations would
ensure that the income of an S
corporation will continue to be subject
to U.S. Federal income tax when an
NRA is a deemed owner of a grantor
trust that elects to be an ESBT.
DATES: Comments and requests for a
public hearing must be received by June
3, 2019.
ADDRESSES: Submit electronic
submissions via the Federal Rulemaking
Portal at www.regulations.gov (indicate
IRS and REG–117062–18) by following
the online instructions for submitting
comments. The Department of the
Treasury (Treasury Department) and the
IRS will publish for public availability
any comment received to its public
docket, whether submitted
electronically or in hard copy. Send
hard copy submissions to:
CC:PA:LPD:PR (REG–117062–18), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–117062–
18), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW,
Washington, DC 20224.
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SUMMARY:
15:55 Apr 18, 2019
Concerning the proposed regulations,
Cynthia Morton, (202) 317–5279;
concerning submissions and the
hearing, Regina Johnson, (202) 317–
6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
DEPARTMENT OF THE TREASURY
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FOR FURTHER INFORMATION CONTACT:
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This document contains proposed
amendments to the Income Tax
Regulations (26 CFR part 1) under
sections 641 and 1361 of the Internal
Revenue Code (Code).
Section 13541(a) of ‘‘An Act to
provide for reconciliation pursuant to
titles II and V of the concurrent
resolution on the budget for fiscal year
2018,’’ Public Law 115–97,131 Stat.
2054, 2154 (TCJA) amended section
1361(c)(2)(B)(v) of the Code to allow
NRAs to be PCBs of ESBTs. As
amended, section 1361(c)(2)(B)(v)
provides that NRA PCBs will not be
taken into account for purposes of the
S corporation shareholder-eligibility
requirement that otherwise prohibits
NRA shareholders. See section
1361(b)(1)(C).
A. S Corporations and NRAs
An S corporation is a ‘‘small business
corporation’’ for which an election,
made under section 1362(a), is in effect.
Section 1361(b)(1) defines the term
‘‘small business corporation’’ as a
domestic corporation that (i) is not an
ineligible corporation (as defined in
section 1361(b)(2)); (ii) does not have
more than 100 shareholders; (iii) does
not have a shareholder who is not an
individual, estate, a certain type of trust,
or a certain type of tax-exempt
organization; (iv) does not have more
than one class of stock; and (v) as
relevant to these proposed regulations,
does not have an NRA as a shareholder.
Section 7701(b)(1)(B) defines an NRA
as an individual who is neither a citizen
of the United States nor a resident of the
United States, within the meaning of
section 7701(b)(1)(A). Section
7701(b)(1)(A) provides that an alien
individual is 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 section
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7701(b)(3); or (iii) makes the first-year
election provided in section 7701(b)(4).
B. Categories of Trusts Permitted To Be
S Corporation Shareholders
Only certain trusts are permitted to be
an S corporation shareholder.
Specifically, sections 1361(c)(2) and
(d)(1)(A) provide that the following
trusts may be an S corporation
shareholder: (i) A grantor trust wholly
owned by an individual who is a citizen
or resident of the United States; (ii) a
voting trust; (iii) certain grantor trusts
that continue to exist for a period
generally not longer than two years after
the grantor’s death; (iv) certain
testamentary trusts for two years after
the S corporation stock is transferred to
it; (v) a qualified subchapter S trust; (vi)
certain individual retirement accounts
under section 408(a) that hold certain
bank or company stock; and (vii) as
relevant to these proposed regulations, a
domestic trust that qualifies as an ESBT.
C. Overview of ESBTs
To expand the categories of trusts
permitted to be S corporation
shareholders under section 1361(c)(2)
and thereby, in particular, to facilitate
family financial planning, Congress
added ESBTs to the list of permitted
categories of S corporation shareholders
over two decades ago. See H. Rept. 104–
586, at 82 (1996); S. Rept. 104–281, at
46 (1996). An ESBT must be a domestic
trust based on the flush language under
section 1361(c)(2)(A), which provides
that a foreign trust cannot be an eligible
S corporation shareholder. Read
together with section 1361(e)(1), an
ESBT is any domestic trust that satisfies
the following requirements: (i) The trust
does not have as a beneficiary any
person other than an individual, an
estate, or an organization described in
section 170(c)(2) through (5), or an
organization described in section
170(c)(1) that holds a contingent interest
in such trust and is not a PCB; (ii) no
interest in the trust was acquired by
purchase; and (iii) an election has been
made under section 1361(e) with respect
to the trust. An ESBT may hold S
corporation stock as well as other
property, and may accumulate trust
income. In addition, and as relevant to
these proposed regulations, (i) a PCB
may be one of multiple beneficiaries of
an ESBT, and (ii) a grantor trust may
elect to be an ESBT.
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i. PCB as an ESBT Beneficiary
For purposes of determining whether
a corporation is an S corporation, each
PCB of an ESBT is treated as a separate
S corporation shareholder. See section
1361(c)(2)(B)(v). A PCB, with respect to
any period, is any person who at any
time during such period is entitled to,
or at the discretion of any person may
receive, a distribution from the
principal or income of the ESBT
(determined without regard to any
power of appointment to the extent such
power remains unexercised). See
section 1361(e)(2). As relevant to these
proposed regulations, a PCB also can be
the deemed owner of a grantor trust that
elects to be an ESBT.
ii. ESBTs Divided Into Portions for Tax
Liability Determinations
An ESBT that owns stock of an S
corporation, as well as other property, is
treated as two separate trusts (S portion
and non-S portion, respectively) for
purposes of chapter 1 of subtitle A of
the Code (chapter 1), even though the
ESBT is treated as a single trust for
administrative purposes. See § 1.641(c)–
1(a). Specifically, section 641(c)(1)(A)
provides that the S portion, which
consists solely of S corporation stock, is
(i) treated as a separate trust for
purposes of chapter 1, and (ii) taxed in
accordance with section 641(c)(2). The
non-S portion of the ESBT remains
subject to the normal trust income
taxation rules of subparts A through D
of subchapter J of chapter 1 (subchapter
J) that govern simple and complex
trusts. In addition, the S portion or nonS portion (or both) can be treated as
owned by a grantor under § 1.641(c)–
1(b)(1), referred to as the ‘‘grantor
portion,’’ and is subject to the rules
under subpart E of subchapter J.
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iii. Effect of ESBT Election by a Grantor
Trust
A grantor trust generally is a trust
over which the grantor or other deemed
owner retains the power to control or
direct the trust’s income or assets. If a
trust is a grantor trust, then (i) the
deemed owner is treated as the owner
of the assets, (ii) the trust is disregarded
as a separate entity for Federal income
tax purposes, and (iii) all items of
income, deduction, and credit are taxed
to the deemed owner. Wholly or
partially-owned grantor trusts can make
an ESBT election but the grantor trust
taxation rules of the Code override the
ESBT provisions. Therefore, an ESBT
pays tax directly at the trust level on its
S corporation income and that income
is not passed through to the
beneficiaries, except for the amount that
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is taxed to the owner of the grantor trust
portion.
The Department of the Treasury
(Treasury Department) and the IRS
promulgated regulations in 2002 to
clarify that the items of income,
deduction, and credit of the portion of
an ESBT treated as owned by a grantor
or other person under the grantor trust
rules are taken into account by the
deemed owner (rather than the ESBT)
under section 671 in computing the
deemed owner’s taxable income. See
§ 1.641(c)–1(c). Therefore, under those
regulations, a wholly-owned grantor
trust can be an ESBT, but with no
immediate change to the grantor trust’s
taxation. While an ESBT may be divided
into a non-S portion, an S portion, and
a grantor trust portion, the statutory
definitions of an ESBT and of a PCB
focus on all the persons who are
beneficiaries or PCBs of the entire trust,
rather than beneficiaries of only the S
portion. As relevant to these proposed
regulations, the deemed owner of the
grantor trust portion is treated as a PCB
of the ESBT.
2. TCJA Expansion of Qualifying
Beneficiaries of ESBTs
A. Prior Law and TCJA Change
Prior to the enactment of the TCJA, a
change in the immigration status of a
PCB of an ESBT that owns S corporation
stock from resident alien to NRA would
have terminated an ESBT election, and
therefore also terminated the
corporation’s election as an S
corporation. This result would have
occurred because, prior to the TCJAenacted exception to the section
1361(b)(1)(C) eligible-shareholder
requirement, section 1361(c)(2)(B)(v)
provided, in relevant part, that each
PCB of an ESBT must be treated as a
shareholder of the S corporation. As
discussed in part 1(A) of this
Background section, if a purported S
corporation has an NRA shareholder,
such S corporation would fail the
qualification requirements listed in
section 1361(b)(1), resulting in the
termination of its status as an S
corporation.
Section 13541(a) of the TCJA
amended section 1361(c)(2)(B)(v) to
provide that the rule treating each PCB
of an ESBT as a shareholder does not
apply for purposes of the eligibleshareholder requirement of section
1361(b)(1)(C). As a result of that TCJA
amendment, if a resident alien PCB of
an ESBT becomes an NRA, the status of
that PCB as an NRA will not cause the
S corporation of which the ESBT is a
shareholder to fail the requirement in
section 1361(b)(1)(C), which otherwise
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would terminate its S election. While
Congress amended section
1361(c)(2)(B)(v) to expand the scope of
qualifying beneficiaries of ESBTs,
Congress left unaltered the rule under
section 1361(b)(1)(C) that an S
corporation cannot have an NRA as a
shareholder.
B. TCJA Expansion
Prior to the TCJA, only individuals
subject to Federal income taxation could
receive an ESBT’s share of S corporation
income because a grantor trust that
elected ESBT status could not have had
a deemed owner who was an NRA.
Without these proposed regulations, the
TCJA’s expansion of an ESBT’s
permissible PCBs to include an NRA
would allow S corporation income
attributed to the grantor portion of an
ESBT that is received by a NRA deemed
owner of that portion, to escape Federal
income taxation, contrary to
Congressional intent. For example, if an
NRA were to be a deemed owner of a
grantor trust that elected to be an ESBT,
and thus were to be allocated foreign
source income of the S corporation or
income not effectively connected with
the conduct of a U.S. trade or business
under section 864(c)(4)(B), that NRA
would not be required to include such
S corporation items in income under
section 671 because the NRA would not
be liable for Federal income tax on such
income under section 871(a) or (b).
Additionally, if that NRA is a resident
of a country with which the United
States has an income tax treaty, U.S.
source income of the S corporation also
might be exempt from tax or subject to
a lower rate of Federal income tax in the
hands of that NRA.
Under section 672(f)(2)(A)(ii), trust
income, deductions, and credits are
taxed to NRA grantors if the only
amounts distributable from such portion
(whether income or corpus) during the
lifetime of the grantor are amounts
distributable to the grantor or the spouse
of the grantor. Such a trust would not
be a foreign trust solely because the
grantor retained this right, provided that
(1) a U.S. court had primary jurisdiction
over the trust, as required by section
7701(a)(30)(E)(i), and (2) U.S. persons
controlled substantial trust decisions, as
required by section 7701(a)(30)(E)(ii).
Accordingly, a domestic trust described
in section 672(f)(2)(A)(ii) that elects
ESBT status would be a grantor trust,
and the income from the trust would be
taxed to the NRA grantor-owner(s) (that
is, the grantor and the grantor’s spouse)
during the grantor’s lifetime. These NRA
deemed owners would not be subject to
U.S. Federal income tax on the S
corporation income unless this income
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was U.S. source fixed or determinable
income or income effectively connected
with a U.S. trade or business.
C. Income From S Portion of ESBT
Should Not Escape U.S. Federal Income
Taxation
In discussing the amendment to
section 1361(c)(2)(B)(v) allowing an
NRA to be a PCB of an ESBT, the
Conference Report made the following
two observations regarding present S
corporation law: First, the portion of an
ESBT that consists of S corporation
stock ‘‘is treated as a separate trust’’ and
generally (that is, not taking into
account capital gains) is ‘‘taxed on its
share of the S corporation’s income at
the highest rate of tax imposed on
individual taxpayers.’’ H. Rept. 115–
466, at 517 (2017). See also § 1.641(c)–
1(e)(1) (articulating the capital gains
exception regarding Congress’ use of the
word ‘‘generally’’). Second, Congress
noted that an ‘‘[ESBT’s share of S
corporation] income (whether or not
distributed by the ESBT) is not taxed to
the beneficiaries of the ESBT.’’ Id. These
observations reflect the general rule of
ESBT taxation that (i) subjects the ESBT
to tax on its S corporation income at the
trust level, rather than the beneficiary
level, and accordingly (ii) is indifferent
to the citizenship or residence status of
the ESBT’s beneficiaries because the
ESBT must be domestic. The
observations do not take into account
the interaction between the ESBT and
grantor trust tax regimes, which allows
a trust to be an ESBT for S corporation
qualification purposes while permitting
all or a portion of the trust subject to the
grantor trust provisions to be taxed as a
grantor trust, rather than as an ESBT. As
described earlier, § 1.641(c)–1(c)
provides that the taxable income of a
grantor trust that elects to be an ESBT
is treated as the taxable income of the
deemed owner of the trust (including a
deemed owner who is an NRA),
regardless of whether the ESBT
distributes the income.
The report accompanying the Senate
bill (Senate Report) similarly indicates
that Congress assumed that the taxation
of income at the ESBT level would
protect against potential tax avoidance
that might otherwise result from
permitting an NRA to be a PCB of an
ESBT: ‘‘An ESBT that is an S
corporation shareholder is taxed on its
share of the S corporation’s income at
the highest rate of tax imposed on
individual taxpayers. For that reason,
the Committee believes that allowing a
nonresident alien individual to be a
potential current beneficiary of an ESBT
presents little risk of tax avoidance.’’ S.
Comm. on the Budget, Reconciliation
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Recommendations Pursuant to H. Con.
Res. 71, S. Print No. 115–20, at 235–236
(2017).
Based on this legislative history of
section 1361(c)(2)(B)(v), the Treasury
Department and the IRS have
determined that the expansion of that
clause to allow an NRA to be an ESBT
PCB was not intended to override
longstanding statutory provisions that
have operated to ensure that all of the
S corporation income remains subject to
Federal income tax. In the absence of
regulations, the post-TCJA ability of an
NRA to be a PCB of an ESBT, in
combination with the potential for a
grantor trust portion of an ESBT to be
owned by an NRA under section
672(f)(2)(A)(1)(ii), could result in S
corporation income passing without tax
from the domestic ESBT to the NRA and
escaping Federal income taxation.
Explanation of Provisions
These proposed regulations would
ensure that, with respect to situations in
which an NRA 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. Specifically,
the proposed regulations would modify
the allocation rules under § 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 an NRA
deemed owner under the grantor trust
rules. Accordingly, such income would
be taxed to the domestic ESBT by
providing that, if the deemed owner is
an NRA, 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 Congress’ amendment to
section 1361(c)(2)(B)(v) by making
conforming revisions to § 1.1361–1(m).
For example, the proposed regulations
would update the description of PCBs in
§ 1.1361–1(m)(4)(i) to reflect the ability
of NRAs to be PCBs of ESBTs. The
proposed regulations similarly would
update other provisions in § 1.1361–
1(m) to reflect that ability.
Proposed Effective/Applicability Date
Section 7805(b)(1)(A) and (B) of the
Code generally provide that no
temporary, proposed, or final regulation
relating to the internal revenue laws
may apply to any taxable period ending
before the earliest of (A) the date on
which such regulation is filed with the
Federal Register, or (B) in the case of a
final regulation, the date on which a
proposed or temporary regulation to
which the final regulation relates was
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filed with the Federal Register.
However, section 7805(b)(2) provides
that 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 taxable periods prior to those
described in section 7805(b)(1).
Furthermore, section 7805(b)(3)
provides that the Secretary may provide
that any regulation may take effect or
apply retroactively to prevent abuse.
Accordingly, to prevent abuse of
sections 641 and 1361 and the
regulations thereunder, these proposed
regulations are proposed to apply to all
ESBTs after December 31, 2017.
Special Analyses
This regulation is not subject to
review under section 6(b) of Executive
Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Department of the
Treasury and the Office of Management
and Budget regarding review of tax
regulations.
This notice of proposed rulemaking
does not impose a collection of
information on any small entities.
Accordingly, a regulatory flexibility
analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is
not required. Notwithstanding this
certification, the Treasury Department
and the IRS invite comments from
interested members of the public on
both the number of entities affected and
the economic impact on small entities.
Pursuant to section 7805(f) of the
Code, this notice of proposed
rulemaking has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
comments that are submitted timely to
the IRS as prescribed in this preamble
under the ADDRESSES heading.
All comments will be available at
https://www.regulations.gov or upon
request. A public hearing may be
scheduled if requested in writing by any
person that timely submits written
comments. If a public hearing is
scheduled, notice of the date, time, and
place for the public hearing will be
published in the Federal Register.
Drafting Information
The principal author of these
proposed regulations is Cynthia Morton
of the Office of Associate Chief Counsel
(Passthroughs and Special Industries).
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However, other personnel from the IRS
and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.641(c)–1 is amended
by:
■ 1. Revising paragraphs (b)(1) and (2).
■ 2. Adding a sentence to the end of
paragraph (k).
■ 3. In paragraph (l), designating
Examples 1 through 5 as paragraphs
(l)(1) through (5).
■ 4. In newly designated paragraph
(l)(3)(i), removing the language
‘‘Example 2’’ and adding ‘‘Example 2 in
paragraph (l)(2) of this section’’ in its
place.
■ 5. Adding paragraph (l)(6).
The revisions and additions read as
follows:
■
§ 1.641(c)–1
Electing small business trust.
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*
*
*
*
*
(b) * * *
(1) Grantor portion—(i) In general.
Subject to paragraph (b)(1)(ii) of this
section, the grantor portion of an ESBT
is the portion of the trust that is treated
as owned by the grantor or another
person under subpart E of the Code.
(ii) Nonresident alien deemed owner.
If, pursuant to section 672(f)(2)(A)(ii),
the deemed owner of a grantor portion
of the ESBT is a nonresident alien, as
defined in section 7701(b)(1)(B) (NRA),
the items of income, deduction, and
credit from that grantor portion must be
reallocated from the grantor portion to
the S portion, as defined in paragraph
(b)(2) of this section, of the ESBT.
(2) S portion—(i) In general. Subject
to paragraph (b)(2)(ii) of this section, the
S portion of an ESBT is the portion of
the trust that consists of S corporation
stock and that is not treated as owned
by the grantor or another person under
subpart E of the Code.
(ii) NRA deemed owner of grantor
portion. The S portion of an ESBT also
includes the grantor portion of the items
of income, deduction, and credit
reallocated under paragraph (b)(1)(ii) of
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this section from the grantor portion of
the ESBT to the S portion of the ESBT.
*
*
*
*
*
(k) * * * Paragraphs (b)(1) and (2) of
this section, and Example 6 in
paragraph (l)(6) of this section, apply to
all ESBTs after December 31, 2017.
(l) * * *
(6) Example 6: NRA as potential current
beneficiary. Domestic Trust (DT) has a valid
ESBT election in effect. DT owns S
corporation stock. The S corporation owns
U.S. and foreign assets. The foreign assets
produce foreign source income. B, an NRA,
is the grantor and the only trust beneficiary
and potential current beneficiary of DT. B is
not a resident of a country with which the
United States has an income tax treaty.
Under section 677(a), B is treated as the
owner of DT because, under the trust
documents, income and corpus may be
distributed only to B during B’s lifetime.
Paragraph (b)(2)(ii) of this section requires
that the S corporation income of the ESBT
that otherwise would have been allocated to
B under the grantor trust rules must be
reallocated from B’s grantor portion to the S
portion of DT. In this example, the S portion
of DT is treated as including the grantor
portion of the ESBT, and thus all of DT’s
income from the S corporation is taxable to
DT.
Par. 3. Section 1.1361–1 is amended
by:
■ 1. Revising paragraph (m)(1)(ii)(D).
■ 2. Revising paragraph (m)(2)(ii)(E)(2).
■ 3. Adding two sentences to the end of
paragraph (m)(4)(i).
■ 4. Revising the second sentence of
paragraph (m)(5)(iii).
■ 5. In paragraph (m)(8), designating
Examples 1 through 9 as paragraphs
(m)(8)(i) through (ix).
■ 6. Redesignating paragraphs
(m)(8)(i)(i) through (iii) as paragraphs
(m)(8)(i)(A) through (C).
■ 7. Redesignating paragraphs
(m)(8)(ii)(i) and (ii) as paragraphs
(m)(8)(ii)(A) and (B) and revising the
second sentence of newly redesignated
paragraph (m)(8)(ii)(A).
■ 8. In newly redesignated paragraph
(m)(8)(ii)(B), removing the language
‘‘Example 2(i)’’ and adding ‘‘Example 2
in paragraph (m)(8)(ii)(A) of this
section’’ in its place.
■ 9. Redesignating paragraphs
(m)(8)(vi)(i) through (iii) as paragraphs
(m)(8)(vi)(A) through (C) and revising
the first sentence of newly redesignated
paragraph (m)(8)(vi)(B).
■ 10. In newly redesignated paragraph
(m)(8)(vi)(C), removing the language
‘‘paragraph (i) of this Example 6’’ and
adding ‘‘Example 6 in paragraph
(m)(8)(vi)(A) of this section’’ in its place.
■ 11. In paragraph (m)(9):
■ i. Removing the language ‘‘Paragraphs
(m)(2)(ii)(A), (m)(4)(iii) and (vi), and
(m)(8), Example 2, Example 5, Example
■
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7, Example 8, and Example 9’’ and
adding ‘‘Paragraphs (m)(2)(ii)(A) and
(m)(4)(iii) and (vi) of this section and
Examples 2, 5, and 7 through 9 in
paragraphs (m)(8)(ii), (v), and (vii)
through (ix)’’ in its place.
■ ii. Adding a sentence at the end of the
paragraph.
The revisions and additions read as
follows:
§ 1.1361–1
S corporation defined.
*
*
*
*
*
(m) * * *
(1) * * *
(ii) * * *
(D) Nonresident aliens. A nonresident
alien (NRA), as defined in section
7701(b)(1)(B), is an eligible beneficiary
of an ESBT and an eligible potential
current beneficiary.
*
*
*
*
*
(2) * * *
(ii) * * *
(E) * * *
(2) All potential current beneficiaries
of the trust meet the shareholder
requirements of section 1361(b)(1); for
this purpose, an NRA potential current
beneficiary does not violate the
requirement under section 1361(b)(1)(C)
that an S corporation cannot have an
NRA as a shareholder.
*
*
*
*
*
(4) * * *
(i) * * * An NRA potential current
beneficiary of an ESBT is treated as a
shareholder for purposes of the 100shareholder limit under section
1361(b)(1)(A). However, an NRA
potential current beneficiary of an ESBT
is not treated as a shareholder in
determining whether a corporation is a
small business corporation for purposes
of the NRA-shareholder prohibition
under section 1361(b)(1)(C).
*
*
*
*
*
(5) * * *
(iii) * * * For example, the S
corporation election will terminate if a
charitable remainder trust becomes a
potential current beneficiary of an
ESBT. * * *
*
*
*
*
*
(8) * * *
(ii) * * *
(A) * * * On January 1, 2006, A, a
partnership, becomes a potential current
beneficiary of Trust. * * *
*
*
*
*
*
(vi) * * *
(B) * * * Assume the same facts as
Example 6 in paragraph (m)(8)(vi)(A) of
this section except that D is a charitable
remainder trust. * * *
*
*
*
*
*
(9) * * * Paragraphs (m)(1)(ii)(D),
(m)(2)(ii)(E)(2), (m)(4)(i), (m)(5)(iii), and
E:\FR\FM\19APP1.SGM
19APP1
Federal Register / Vol. 84, No. 76 / Friday, April 19, 2019 / Proposed Rules
(m)(8) of this section apply to all ESBTs
after December 31, 2017.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2019–07919 Filed 4–17–19; 4:15 pm]
BILLING CODE 4830–01–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[Docket Number USCG–2019–0243]
RIN 1625–AA00
Safety Zone; Lower Mississippi River;
New Orleans, LA
Coast Guard, DHS.
Notice of proposed rulemaking.
AGENCY:
ACTION:
The Coast Guard is proposing
to establish a temporary safety zone
between mile marker (MM) 99.5 and
MM 100.5 Above Head of Passes, Lower
Mississippi River, New Orleans, LA.
This action is necessary to provide for
the safety of life on these navigable
waters near New Orleans, LA, during a
fireworks display on June 20, 2019. This
proposed rulemaking would prohibit
persons and vessels from being in the
safety zone unless authorized by the
Captain of the Port New Orleans or a
designated representative. We invite
your comments on this proposed
rulemaking.
DATES: Comments and related material
must be received by the Coast Guard on
or before May 20, 2019.
ADDRESSES: You may submit comments
identified by docket number USCG–
2019–0243 using the Federal
eRulemaking Portal at https://
www.regulations.gov. See the ‘‘Public
Participation and Request for
Comments’’ portion of the
SUPPLEMENTARY INFORMATION section for
further instructions on submitting
comments.
SUMMARY:
If
you have questions about this proposed
rulemaking, call or email Lieutenant
Commander Benjamin Morgan, Sector
New Orleans, U.S. Coast Guard;
telephone 504–365–2281, email
Benjamin.P.Morgan@uscg.mil.
SUPPLEMENTARY INFORMATION:
khammond on DSKBBV9HB2PROD with PROPOSALS
FOR FURTHER INFORMATION CONTACT:
I. Table of Abbreviations
AHP Above Head of Passes
COTP Captain of the Port New Orleans
CFR Code of Federal Regulations
DHS Department of Homeland Security
VerDate Sep<11>2014
15:55 Apr 18, 2019
Jkt 247001
FR Federal Register
MM Mile marker
NPRM Notice of proposed rulemaking
§ Section
U.S.C. United States Code
II. Background, Purpose, and Legal
Basis
On April 11, 2019, MIP Inc. notified
the Coast Guard that they will be
conducting a fireworks display at 9:45
on June 20, 2019. The fireworks are to
be launched from a barge at
approximately MM 100 Above Head of
Passes, Lower Mississippi River, New
Orleans, LA. Hazards from firework
displays include accidental discharge of
fireworks, dangerous projectiles, and
falling hot embers or other debris. The
Captain of the Port New Orleans (COTP)
has determined that potential hazards
associated with the fireworks to be used
in this display would be a safety
concern for anyone within a half mile
upbound and downbound of the barge.
The purpose of this rulemaking is to
ensure the safety of vessels and the
navigable waters within a mile span of
the river before, during, and after the
scheduled event. The Coast Guard is
proposing this rulemaking under
authority in 46 U.S.C. 70034 (previously
33 U.S.C. 1231).]
III. Discussion of Proposed Rule
The COTP is proposing to establish a
safety zone from 9:30 to 10:30 p.m. on
June 20, 2019. The safety zone would
cover all navigable waters between mile
marker (MM) 99.5 and 100.5 Above
Head of Passes, Lower Mississippi
River, New Orleans, LA. The duration of
the zone is intended to ensure the safety
of vessels and these navigable waters
before, during, and after the scheduled
9:45 p.m. fireworks display. No vessel
or person would be permitted to enter
the safety zone without obtaining
permission from the COTP or a
designated representative. The
regulatory text we are proposing appears
at the end of this document.
IV. Regulatory Analyses
We developed this proposed rule after
considering numerous statutes and
Executive orders related to rulemaking.
Below we summarize our analyses
based on a number of these statutes and
Executive orders and we discuss First
Amendment rights of protestors.
A. Regulatory Planning and Review
Executive Orders 12866 and 13563
direct agencies to assess the costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits.
Executive Order 13771 directs agencies
PO 00000
Frm 00005
Fmt 4702
Sfmt 4702
16419
to control regulatory costs through a
budgeting process. This NPRM has not
been designated a ‘‘significant
regulatory action,’’ under Executive
Order 12866. Accordingly, the NPRM
has not been reviewed by the Office of
Management and Budget (OMB), and
pursuant to OMB guidance it is exempt
from the requirements of Executive
Order 13771.
This regulatory action determination
is based on the location, time, and
duration of the safety zone. The safety
zone will be enforced for one hour on
one day on a one mile span of the Lower
Mississippi River.
B. Impact on Small Entities
The Regulatory Flexibility Act of
1980, 5 U.S.C. 601–612, as amended,
requires Federal agencies to consider
the potential impact of regulations on
small entities during rulemaking. The
term ‘‘small entities’’ comprises small
businesses, not-for-profit organizations
that are independently owned and
operated and are not dominant in their
fields, and governmental jurisdictions
with populations of less than 50,000.
The Coast Guard certifies under 5 U.S.C.
605(b) that this proposed rule would not
have a significant economic impact on
a substantial number of small entities.
While some owners or operators of
vessels intending to transit the safety
zone may be small entities, for the
reasons stated in section IV.A above,
this proposed rule would not have a
significant economic impact on any
vessel owner or operator.
If you think that your business,
organization, or governmental
jurisdiction qualifies as a small entity
and that this rule would have a
significant economic impact on it,
please submit a comment (see
ADDRESSES) explaining why you think it
qualifies and how and to what degree
this rule would economically affect it.
Under section 213(a) of the Small
Business Regulatory Enforcement
Fairness Act of 1996 (Pub. L. 104–121),
we want to assist small entities in
understanding this proposed rule. If the
rule would affect your small business,
organization, or governmental
jurisdiction and you have questions
concerning its provisions or options for
compliance, please contact the person
listed in the FOR FURTHER INFORMATION
CONTACT section. The Coast Guard will
not retaliate against small entities that
question or complain about this
proposed rule or any policy or action of
the Coast Guard.
C. Collection of Information
This proposed rule would not call for
a new collection of information under
E:\FR\FM\19APP1.SGM
19APP1
Agencies
[Federal Register Volume 84, Number 76 (Friday, April 19, 2019)]
[Proposed Rules]
[Pages 16415-16419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-07919]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 84, No. 76 / Friday, April 19, 2019 /
Proposed Rules
[[Page 16415]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-117062-18]
RIN 1545-BO93
Electing Small Business Trusts With Nonresident Aliens as
Potential Current Beneficiaries
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This notice of proposed rulemaking provides rules regarding
the recent statutory expansion of the class of permissible potential
current beneficiaries (PCBs) of an electing small business trust (ESBT)
to include nonresident aliens (NRAs). In particular, these proposed
regulations would ensure that the income of an S corporation will
continue to be subject to U.S. Federal income tax when an NRA is a
deemed owner of a grantor trust that elects to be an ESBT.
DATES: Comments and requests for a public hearing must be received by
June 3, 2019.
ADDRESSES: Submit electronic submissions via the Federal Rulemaking
Portal at www.regulations.gov (indicate IRS and REG-117062-18) by
following the online instructions for submitting comments. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comment received to its public
docket, whether submitted electronically or in hard copy. Send hard
copy submissions to: CC:PA:LPD:PR (REG-117062-18), Room 5203, Internal
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC
20044. Submissions may be hand-delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-117062-18),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW,
Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Cynthia Morton, (202) 317-5279; concerning submissions and the hearing,
Regina Johnson, (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
1. Overview
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under sections 641 and 1361 of the Internal
Revenue Code (Code).
Section 13541(a) of ``An Act to provide for reconciliation pursuant
to titles II and V of the concurrent resolution on the budget for
fiscal year 2018,'' Public Law 115-97,131 Stat. 2054, 2154 (TCJA)
amended section 1361(c)(2)(B)(v) of the Code to allow NRAs to be PCBs
of ESBTs. As amended, section 1361(c)(2)(B)(v) provides that NRA PCBs
will not be taken into account for purposes of the S corporation
shareholder-eligibility requirement that otherwise prohibits NRA
shareholders. See section 1361(b)(1)(C).
A. S Corporations and NRAs
An S corporation is a ``small business corporation'' for which an
election, made under section 1362(a), is in effect. Section 1361(b)(1)
defines the term ``small business corporation'' as a domestic
corporation that (i) is not an ineligible corporation (as defined in
section 1361(b)(2)); (ii) does not have more than 100 shareholders;
(iii) does not have a shareholder who is not an individual, estate, a
certain type of trust, or a certain type of tax-exempt organization;
(iv) does not have more than one class of stock; and (v) as relevant to
these proposed regulations, does not have an NRA as a shareholder.
Section 7701(b)(1)(B) defines an NRA as an individual who is
neither a citizen of the United States nor a resident of the United
States, within the meaning of section 7701(b)(1)(A). Section
7701(b)(1)(A) provides that an alien individual is 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 section 7701(b)(3); or (iii) makes the
first-year election provided in section 7701(b)(4).
B. Categories of Trusts Permitted To Be S Corporation Shareholders
Only certain trusts are permitted to be an S corporation
shareholder. Specifically, sections 1361(c)(2) and (d)(1)(A) provide
that the following trusts may be an S corporation shareholder: (i) A
grantor trust wholly owned by an individual who is a citizen or
resident of the United States; (ii) a voting trust; (iii) certain
grantor trusts that continue to exist for a period generally not longer
than two years after the grantor's death; (iv) certain testamentary
trusts for two years after the S corporation stock is transferred to
it; (v) a qualified subchapter S trust; (vi) certain individual
retirement accounts under section 408(a) that hold certain bank or
company stock; and (vii) as relevant to these proposed regulations, a
domestic trust that qualifies as an ESBT.
C. Overview of ESBTs
To expand the categories of trusts permitted to be S corporation
shareholders under section 1361(c)(2) and thereby, in particular, to
facilitate family financial planning, Congress added ESBTs to the list
of permitted categories of S corporation shareholders over two decades
ago. See H. Rept. 104-586, at 82 (1996); S. Rept. 104-281, at 46
(1996). An ESBT must be a domestic trust based on the flush language
under section 1361(c)(2)(A), which provides that a foreign trust cannot
be an eligible S corporation shareholder. Read together with section
1361(e)(1), an ESBT is any domestic trust that satisfies the following
requirements: (i) The trust does not have as a beneficiary any person
other than an individual, an estate, or an organization described in
section 170(c)(2) through (5), or an organization described in section
170(c)(1) that holds a contingent interest in such trust and is not a
PCB; (ii) no interest in the trust was acquired by purchase; and (iii)
an election has been made under section 1361(e) with respect to the
trust. An ESBT may hold S corporation stock as well as other property,
and may accumulate trust income. In addition, and as relevant to these
proposed regulations, (i) a PCB may be one of multiple beneficiaries of
an ESBT, and (ii) a grantor trust may elect to be an ESBT.
[[Page 16416]]
i. PCB as an ESBT Beneficiary
For purposes of determining whether a corporation is an S
corporation, each PCB of an ESBT is treated as a separate S corporation
shareholder. See section 1361(c)(2)(B)(v). A PCB, with respect to any
period, is any person who at any time during such period is entitled
to, or at the discretion of any person may receive, a distribution from
the principal or income of the ESBT (determined without regard to any
power of appointment to the extent such power remains unexercised). See
section 1361(e)(2). As relevant to these proposed regulations, a PCB
also can be the deemed owner of a grantor trust that elects to be an
ESBT.
ii. ESBTs Divided Into Portions for Tax Liability Determinations
An ESBT that owns stock of an S corporation, as well as other
property, is treated as two separate trusts (S portion and non-S
portion, respectively) for purposes of chapter 1 of subtitle A of the
Code (chapter 1), even though the ESBT is treated as a single trust for
administrative purposes. See Sec. 1.641(c)-1(a). Specifically, section
641(c)(1)(A) provides that the S portion, which consists solely of S
corporation stock, is (i) treated as a separate trust for purposes of
chapter 1, and (ii) taxed in accordance with section 641(c)(2). The
non-S portion of the ESBT remains subject to the normal trust income
taxation rules of subparts A through D of subchapter J of chapter 1
(subchapter J) that govern simple and complex trusts. In addition, the
S portion or non-S portion (or both) can be treated as owned by a
grantor under Sec. 1.641(c)-1(b)(1), referred to as the ``grantor
portion,'' and is subject to the rules under subpart E of subchapter J.
iii. Effect of ESBT Election by a Grantor Trust
A grantor trust generally is a trust over which the grantor or
other deemed owner retains the power to control or direct the trust's
income or assets. If a trust is a grantor trust, then (i) the deemed
owner is treated as the owner of the assets, (ii) the trust is
disregarded as a separate entity for Federal income tax purposes, and
(iii) all items of income, deduction, and credit are taxed to the
deemed owner. Wholly or partially-owned grantor trusts can make an ESBT
election but the grantor trust taxation rules of the Code override the
ESBT provisions. Therefore, an ESBT pays tax directly at the trust
level on its S corporation income and that income is not passed through
to the beneficiaries, except for the amount that is taxed to the owner
of the grantor trust portion.
The Department of the Treasury (Treasury Department) and the IRS
promulgated regulations in 2002 to clarify that the items of income,
deduction, and credit of the portion of an ESBT treated as owned by a
grantor or other person under the grantor trust rules are taken into
account by the deemed owner (rather than the ESBT) under section 671 in
computing the deemed owner's taxable income. See Sec. 1.641(c)-1(c).
Therefore, under those regulations, a wholly-owned grantor trust can be
an ESBT, but with no immediate change to the grantor trust's taxation.
While an ESBT may be divided into a non-S portion, an S portion, and a
grantor trust portion, the statutory definitions of an ESBT and of a
PCB focus on all the persons who are beneficiaries or PCBs of the
entire trust, rather than beneficiaries of only the S portion. As
relevant to these proposed regulations, the deemed owner of the grantor
trust portion is treated as a PCB of the ESBT.
2. TCJA Expansion of Qualifying Beneficiaries of ESBTs
A. Prior Law and TCJA Change
Prior to the enactment of the TCJA, a change in the immigration
status of a PCB of an ESBT that owns S corporation stock from resident
alien to NRA would have terminated an ESBT election, and therefore also
terminated the corporation's election as an S corporation. This result
would have occurred because, prior to the TCJA-enacted exception to the
section 1361(b)(1)(C) eligible-shareholder requirement, section
1361(c)(2)(B)(v) provided, in relevant part, that each PCB of an ESBT
must be treated as a shareholder of the S corporation. As discussed in
part 1(A) of this Background section, if a purported S corporation has
an NRA shareholder, such S corporation would fail the qualification
requirements listed in section 1361(b)(1), resulting in the termination
of its status as an S corporation.
Section 13541(a) of the TCJA amended section 1361(c)(2)(B)(v) to
provide that the rule treating each PCB of an ESBT as a shareholder
does not apply for purposes of the eligible-shareholder requirement of
section 1361(b)(1)(C). As a result of that TCJA amendment, if a
resident alien PCB of an ESBT becomes an NRA, the status of that PCB as
an NRA will not cause the S corporation of which the ESBT is a
shareholder to fail the requirement in section 1361(b)(1)(C), which
otherwise would terminate its S election. While Congress amended
section 1361(c)(2)(B)(v) to expand the scope of qualifying
beneficiaries of ESBTs, Congress left unaltered the rule under section
1361(b)(1)(C) that an S corporation cannot have an NRA as a
shareholder.
B. TCJA Expansion
Prior to the TCJA, only individuals subject to Federal income
taxation could receive an ESBT's share of S corporation income because
a grantor trust that elected ESBT status could not have had a deemed
owner who was an NRA. Without these proposed regulations, the TCJA's
expansion of an ESBT's permissible PCBs to include an NRA would allow S
corporation income attributed to the grantor portion of an ESBT that is
received by a NRA deemed owner of that portion, to escape Federal
income taxation, contrary to Congressional intent. For example, if an
NRA were to be a deemed owner of a grantor trust that elected to be an
ESBT, and thus were to be allocated foreign source income of the S
corporation or income not effectively connected with the conduct of a
U.S. trade or business under section 864(c)(4)(B), that NRA would not
be required to include such S corporation items in income under section
671 because the NRA would not be liable for Federal income tax on such
income under section 871(a) or (b). Additionally, if that NRA is a
resident of a country with which the United States has an income tax
treaty, U.S. source income of the S corporation also might be exempt
from tax or subject to a lower rate of Federal income tax in the hands
of that NRA.
Under section 672(f)(2)(A)(ii), trust income, deductions, and
credits are taxed to NRA grantors if the only amounts distributable
from such portion (whether income or corpus) during the lifetime of the
grantor are amounts distributable to the grantor or the spouse of the
grantor. Such a trust would not be a foreign trust solely because the
grantor retained this right, provided that (1) a U.S. court had primary
jurisdiction over the trust, as required by section 7701(a)(30)(E)(i),
and (2) U.S. persons controlled substantial trust decisions, as
required by section 7701(a)(30)(E)(ii). Accordingly, a domestic trust
described in section 672(f)(2)(A)(ii) that elects ESBT status would be
a grantor trust, and the income from the trust would be taxed to the
NRA grantor-owner(s) (that is, the grantor and the grantor's spouse)
during the grantor's lifetime. These NRA deemed owners would not be
subject to U.S. Federal income tax on the S corporation income unless
this income
[[Page 16417]]
was U.S. source fixed or determinable income or income effectively
connected with a U.S. trade or business.
C. Income From S Portion of ESBT Should Not Escape U.S. Federal Income
Taxation
In discussing the amendment to section 1361(c)(2)(B)(v) allowing an
NRA to be a PCB of an ESBT, the Conference Report made the following
two observations regarding present S corporation law: First, the
portion of an ESBT that consists of S corporation stock ``is treated as
a separate trust'' and generally (that is, not taking into account
capital gains) is ``taxed on its share of the S corporation's income at
the highest rate of tax imposed on individual taxpayers.'' H. Rept.
115-466, at 517 (2017). See also Sec. 1.641(c)-1(e)(1) (articulating
the capital gains exception regarding Congress' use of the word
``generally''). Second, Congress noted that an ``[ESBT's share of S
corporation] income (whether or not distributed by the ESBT) is not
taxed to the beneficiaries of the ESBT.'' Id. These observations
reflect the general rule of ESBT taxation that (i) subjects the ESBT to
tax on its S corporation income at the trust level, rather than the
beneficiary level, and accordingly (ii) is indifferent to the
citizenship or residence status of the ESBT's beneficiaries because the
ESBT must be domestic. The observations do not take into account the
interaction between the ESBT and grantor trust tax regimes, which
allows a trust to be an ESBT for S corporation qualification purposes
while permitting all or a portion of the trust subject to the grantor
trust provisions to be taxed as a grantor trust, rather than as an
ESBT. As described earlier, Sec. 1.641(c)-1(c) provides that the
taxable income of a grantor trust that elects to be an ESBT is treated
as the taxable income of the deemed owner of the trust (including a
deemed owner who is an NRA), regardless of whether the ESBT distributes
the income.
The report accompanying the Senate bill (Senate Report) similarly
indicates that Congress assumed that the taxation of income at the ESBT
level would protect against potential tax avoidance that might
otherwise result from permitting an NRA to be a PCB of an ESBT: ``An
ESBT that is an S corporation shareholder is taxed on its share of the
S corporation's income at the highest rate of tax imposed on individual
taxpayers. For that reason, the Committee believes that allowing a
nonresident alien individual to be a potential current beneficiary of
an ESBT presents little risk of tax avoidance.'' S. Comm. on the
Budget, Reconciliation Recommendations Pursuant to H. Con. Res. 71, S.
Print No. 115-20, at 235-236 (2017).
Based on this legislative history of section 1361(c)(2)(B)(v), the
Treasury Department and the IRS have determined that the expansion of
that clause to allow an NRA to be an ESBT PCB was not intended to
override longstanding statutory provisions that have operated to ensure
that all of the S corporation income remains subject to Federal income
tax. In the absence of regulations, the post-TCJA ability of an NRA to
be a PCB of an ESBT, in combination with the potential for a grantor
trust portion of an ESBT to be owned by an NRA under section
672(f)(2)(A)(1)(ii), could result in S corporation income passing
without tax from the domestic ESBT to the NRA and escaping Federal
income taxation.
Explanation of Provisions
These proposed regulations would ensure that, with respect to
situations in which an NRA 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. Specifically, the
proposed regulations would modify the allocation rules under Sec.
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 an NRA deemed owner under the grantor trust
rules. Accordingly, such income would be taxed to the domestic ESBT by
providing that, if the deemed owner is an NRA, 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 Congress' amendment
to section 1361(c)(2)(B)(v) by making conforming revisions to Sec.
1.1361-1(m). For example, the proposed regulations would update the
description of PCBs in Sec. 1.1361-1(m)(4)(i) to reflect the ability
of NRAs to be PCBs of ESBTs. The proposed regulations similarly would
update other provisions in Sec. 1.1361-1(m) to reflect that ability.
Proposed Effective/Applicability Date
Section 7805(b)(1)(A) and (B) of the Code generally provide that no
temporary, proposed, or final regulation relating to the internal
revenue laws may apply to any taxable period ending before the earliest
of (A) the date on which such regulation is filed with the Federal
Register, or (B) in the case of a final regulation, the date on which a
proposed or temporary regulation to which the final regulation relates
was filed with the Federal Register. However, section 7805(b)(2)
provides that 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 taxable periods prior to those
described in section 7805(b)(1). Furthermore, section 7805(b)(3)
provides that the Secretary may provide that any regulation may take
effect or apply retroactively to prevent abuse.
Accordingly, to prevent abuse of sections 641 and 1361 and the
regulations thereunder, these proposed regulations are proposed to
apply to all ESBTs after December 31, 2017.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations.
This notice of proposed rulemaking does not impose a collection of
information on any small entities. Accordingly, a regulatory
flexibility analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Notwithstanding this certification, the
Treasury Department and the IRS invite comments from interested members
of the public on both the number of entities affected and the economic
impact on small entities.
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
All comments will be available at https://www.regulations.gov or
upon request. A public hearing may be scheduled if requested in writing
by any person that timely submits written comments. If a public hearing
is scheduled, notice of the date, time, and place for the public
hearing will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Cynthia
Morton of the Office of Associate Chief Counsel (Passthroughs and
Special Industries).
[[Page 16418]]
However, other personnel from the IRS and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.641(c)-1 is amended by:
0
1. Revising paragraphs (b)(1) and (2).
0
2. Adding a sentence to the end of paragraph (k).
0
3. In paragraph (l), designating Examples 1 through 5 as paragraphs
(l)(1) through (5).
0
4. In newly designated paragraph (l)(3)(i), removing the language
``Example 2'' and adding ``Example 2 in paragraph (l)(2) of this
section'' in its place.
0
5. Adding paragraph (l)(6).
The revisions and additions read as follows:
Sec. 1.641(c)-1 Electing small business trust.
* * * * *
(b) * * *
(1) Grantor portion--(i) In general. Subject to paragraph
(b)(1)(ii) of this section, the grantor portion of an ESBT is the
portion of the trust that is treated as owned by the grantor or another
person under subpart E of the Code.
(ii) Nonresident alien deemed owner. If, pursuant to section
672(f)(2)(A)(ii), the deemed owner of a grantor portion of the ESBT is
a nonresident alien, as defined in section 7701(b)(1)(B) (NRA), the
items of income, deduction, and credit from that grantor portion must
be reallocated from the grantor portion to the S portion, as defined in
paragraph (b)(2) of this section, of the ESBT.
(2) S portion--(i) In general. Subject to paragraph (b)(2)(ii) of
this section, the S portion of an ESBT is the portion of the trust that
consists of S corporation stock and that is not treated as owned by the
grantor or another person under subpart E of the Code.
(ii) NRA deemed owner of grantor portion. The S portion of an ESBT
also includes the grantor portion of the items of income, deduction,
and credit reallocated under paragraph (b)(1)(ii) of this section from
the grantor portion of the ESBT to the S portion of the ESBT.
* * * * *
(k) * * * Paragraphs (b)(1) and (2) of this section, and Example 6
in paragraph (l)(6) of this section, apply to all ESBTs after December
31, 2017.
(l) * * *
(6) Example 6: NRA as potential current beneficiary. Domestic
Trust (DT) has a valid ESBT election in effect. DT owns S
corporation stock. The S corporation owns U.S. and foreign assets.
The foreign assets produce foreign source income. B, an NRA, is the
grantor and the only trust beneficiary and potential current
beneficiary of DT. B is not a resident of a country with which the
United States has an income tax treaty. Under section 677(a), B is
treated as the owner of DT because, under the trust documents,
income and corpus may be distributed only to B during B's lifetime.
Paragraph (b)(2)(ii) of this section requires that the S corporation
income of the ESBT that otherwise would have been allocated to B
under the grantor trust rules must be reallocated from B's grantor
portion to the S portion of DT. In this example, the S portion of DT
is treated as including the grantor portion of the ESBT, and thus
all of DT's income from the S corporation is taxable to DT.
0
Par. 3. Section 1.1361-1 is amended by:
0
1. Revising paragraph (m)(1)(ii)(D).
0
2. Revising paragraph (m)(2)(ii)(E)(2).
0
3. Adding two sentences to the end of paragraph (m)(4)(i).
0
4. Revising the second sentence of paragraph (m)(5)(iii).
0
5. In paragraph (m)(8), designating Examples 1 through 9 as paragraphs
(m)(8)(i) through (ix).
0
6. Redesignating paragraphs (m)(8)(i)(i) through (iii) as paragraphs
(m)(8)(i)(A) through (C).
0
7. Redesignating paragraphs (m)(8)(ii)(i) and (ii) as paragraphs
(m)(8)(ii)(A) and (B) and revising the second sentence of newly
redesignated paragraph (m)(8)(ii)(A).
0
8. In newly redesignated paragraph (m)(8)(ii)(B), removing the language
``Example 2(i)'' and adding ``Example 2 in paragraph (m)(8)(ii)(A) of
this section'' in its place.
0
9. Redesignating paragraphs (m)(8)(vi)(i) through (iii) as paragraphs
(m)(8)(vi)(A) through (C) and revising the first sentence of newly
redesignated paragraph (m)(8)(vi)(B).
0
10. In newly redesignated paragraph (m)(8)(vi)(C), removing the
language ``paragraph (i) of this Example 6'' and adding ``Example 6 in
paragraph (m)(8)(vi)(A) of this section'' in its place.
0
11. In paragraph (m)(9):
0
i. Removing the language ``Paragraphs (m)(2)(ii)(A), (m)(4)(iii) and
(vi), and (m)(8), Example 2, Example 5, Example 7, Example 8, and
Example 9'' and adding ``Paragraphs (m)(2)(ii)(A) and (m)(4)(iii) and
(vi) of this section and Examples 2, 5, and 7 through 9 in paragraphs
(m)(8)(ii), (v), and (vii) through (ix)'' in its place.
0
ii. Adding a sentence at the end of the paragraph.
The revisions and additions read as follows:
Sec. 1.1361-1 S corporation defined.
* * * * *
(m) * * *
(1) * * *
(ii) * * *
(D) Nonresident aliens. A nonresident alien (NRA), as defined in
section 7701(b)(1)(B), is an eligible beneficiary of an ESBT and an
eligible potential current beneficiary.
* * * * *
(2) * * *
(ii) * * *
(E) * * *
(2) All potential current beneficiaries of the trust meet the
shareholder requirements of section 1361(b)(1); for this purpose, an
NRA potential current beneficiary does not violate the requirement
under section 1361(b)(1)(C) that an S corporation cannot have an NRA as
a shareholder.
* * * * *
(4) * * *
(i) * * * An NRA potential current beneficiary of an ESBT is
treated as a shareholder for purposes of the 100-shareholder limit
under section 1361(b)(1)(A). However, an NRA potential current
beneficiary of an ESBT is not treated as a shareholder in determining
whether a corporation is a small business corporation for purposes of
the NRA-shareholder prohibition under section 1361(b)(1)(C).
* * * * *
(5) * * *
(iii) * * * For example, the S corporation election will terminate
if a charitable remainder trust becomes a potential current beneficiary
of an ESBT. * * *
* * * * *
(8) * * *
(ii) * * *
(A) * * * On January 1, 2006, A, a partnership, becomes a potential
current beneficiary of Trust. * * *
* * * * *
(vi) * * *
(B) * * * Assume the same facts as Example 6 in paragraph
(m)(8)(vi)(A) of this section except that D is a charitable remainder
trust. * * *
* * * * *
(9) * * * Paragraphs (m)(1)(ii)(D), (m)(2)(ii)(E)(2), (m)(4)(i),
(m)(5)(iii), and
[[Page 16419]]
(m)(8) of this section apply to all ESBTs after December 31, 2017.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-07919 Filed 4-17-19; 4:15 pm]
BILLING CODE 4830-01-P