Discussion:Non resident alien shareholders - S- Corp

According to the Article of Incorporation the Corporation is owned 100% by one individual. Examing the returns I came accross that the Income was allocated between 3 separate shareholders of which ( 59% to the original shareholder and the rest among two others which happened to be father and brother of his).(No election of stock was done) Now the original shareholder seems to have a valid SS# as well as the father. The other brother is here illegally but according to them he will get the SSN soon since his wife is an american citizen. I know, and correct if I'm wrong, that the S-Corp election form 2553 specifically states among all other requirements that "NO NONRESIDENT ALIEN SHAREHOLDERS" can do business under and S- Corp status and if formed by an nonresident alien the S- Corp Status can simple be dissallowed. What about this current year 2006 filings?

Can the other two still remain schareholder or because the 3rd one is illegal the S- election is automatically revoked?

The firm that prepared the return and advised this particular client is a mid side firm in the area where I am and the worst thing is they heavily charged for all the tax workt. Thanks for your imput JR1.

You have only blown the S election if you have a nonresident alien as a shareholder -- not if you have an illegal resident alien shareholder.

Its very strange that an illegal alien only because he's resident in the country can have the same benefits of a legal alien or a citizen. I always knew that if you not a legal alien you couldn't be a shareholder of an S-corp. Tell me if you can where can I look up what you just wrote above. Thanks.

Reg. 1.1361-1(g)(1) refers to the 7701(b) definition of nonresident alien. The tax rules are generally applied independently of immigration law.

The fact that the K-1 was allocated between schedule "E" and part to Schedule " C" is because no payroll was paid out to the shareholders , however the accountant double dipped on the deductions. Thanks JR1 and Intltax.

I agree with the resident test that is met.(He entered the country 15 years ago - ILLEGALLY)

He is clearly a Resident Alien, he was at the time the S-Corp was set up, and he has continued to be a Resident Alien the entire time the S-Corp has been in existence. Thus, the S-Corp remains an S-Corp the entire time and he can be a shareholder in the S-Corp. If he leaves the US and breaks the physical presence test, then the S-Corp will revert to regular corp status.

Reg. 1.1361-1(g)(1)(i) provides that "A corporation having a shareholder who is a nonresident alien as defined in section 7701(b)(1)(B) does not qualify" as an S corporation. Generally, an alien (legal or illegal) is treated as a resident alien if he/she meets the substantial presence test of section 7701(b)(3).

The problem is giving information to the government on their physical presence in the US and being a S/H of an S-corp assumes that they meet that test or are US citizens by birth.

Your client needs to provide documentation to the IRS in order to get the ITIN and thereby will be giving that information to the INS.

An S-election will be blown if any of the S/H's do not have valid SS #'s or ITIN #'s. In order to issue the K-1 this is required....

The following is a quote from the IRS website: "Under these rules, even an undocumented (illegal) alien under the immigration laws who passes the Substantial Presence Test will be treated for tax purposes as a RESIDENT ALIEN." [[1]]

You can indeed file a corporation with no SSN or ITN, but not electronically. You may have to withhold 30% if no W9 or W8BEN is provided. You are asking to be audited in such a case. The illegal alien should apply for an ITIN. Doing so does not result in notification to the INS, so there's no problem with getting the illegal alien in trouble.

Yes, you can FILE the corporate return but you have to apply for the ITIN. But give me some insight please?

When you file Form W-7 for the ITIN, you are required to submit documents with this form including birth certificate, visa, drivers license, etc. I understand that IRS does not coordinate with other agencies but this will soon come to a stop if you are a S/H in a business that pays wages. Now the S/H of the corporation by law has to fill out an I-9; is this not then checking on the status of the employee (self?). You can't use the ITIN for employment purposes for identification since it is inherently IRS for taxation only.

Maybe I am missing something here, but if you are a S/H and you are being paid, but are here illegally and don't provide I-9 documentation, then this DOES get reported to INS....

First, what Sandysea is saying is not necessary untrue even though I also agree with IntlTax. And if you remember, I have mentioned above that "I believe you will need a vaild SS# not an ITIN in order to satisfy the non resident status". Well if you think about it, since one of the S corp. shareholder requirement is resident alien. Yes, you are considered a resident alien if you meet the presence test. But remember S corp. also has a law (forgot which section) stating that your wages must be reasonable, meaning you must pay wages to shareholder if the distribution is too large. If that's the case, then you will need to have tax id # to report your wages. Now this is where I agree with sandysea, because if you are not legal to work, you can not get a SS# or even an ITIN (you are not authorize to work with an ITIN). So how can you use an ITIN to report your income if you can not work legally to begin with. It will be a catch-22. I don't know if it is wise to file a K-1 or W-2 using a ITIN, because even the IRS doesn't care about your alien status, would you want to risk the INS of finding it out?

Now, having said that, what IntlTax said was totally true. If you pass the presence test, yes, you are considered a resident alien for tax purposes and therefore you can be a shareholder for S corp. But I just think that it would be safer to have a valid ss# in order to have no problem in the future when you need to get wages from the S corp.

Second, with regard to what IntlTax said: "Clearly an illegal alien is present in the U.S. or else they wouldn't be illegal". I have one problem with this. If you are an illegal alien enter into this country, you wouldn't have paper work showing when you enter into this country. You are basically non existence in U.S. So how can you prove the presence test? If you can not prove the presence test, you are not considered a resident alien for tax purpose. This will ultimately blow the s corp. status.

Please let me know what are your thoughts?

It seems simple in the statutes:

1. Only citizens and resident aliens can hold S-shares.

2. Any alien that is present in the US for more than 183 days is a resident alien under the IRC.

There have been many well written post outlining the real world problems of reporting flow through items to illegal aliens. But I have yet to see cite to a statute that would disallow a corporations S election.

William Price, EA | Portland, OR - Talk to me

I agree that a resident alien can be a s/h of an S corporation and that the presence test will indicate if they are a resident or non resident. However, I still stand firm on the premise that this person (if here illegally) is jeopardizing their status by being a s/h. Sure the IRS doesn't care if they are legal, illegal, etc. IRS taxes on illegal acts all the time...briberies, kickbacks, illegal gambling, drugs, etc.

Sounds like we all agree on one thing...the S election will not be blown by having a resident (illegal) alien as a S/H. It may be a moot issue anyway because Mauro is indicating this person will be applying for and receiving a SS number shortly.

The undocumented entry into the US I believe is a larger hurdle for the S/H than taxes by the IRS...just my opinion but if the S/H wants to remain in this country illegally then I would be careful about making my presence known as openly...