[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
 ________________________________________________________________________
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 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.
 
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 

  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 http://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