Monday, September 17, 2012

Use of NOL's After Changing Status From Resident Alien to Nonresident Alien



In PLR 201228013, the IRS considered whether an individual who incurred net operating losses (NOLs) while a resident alien could use the NOLs after he became a nonresident alien. The IRS ruled that he could to the extent the NOLs were allocable and/or apportionable to gross income effectively connected with a U.S. trade or business (gross ECI).

Taxpayer, a citizen of Country A, was a resident of the United States solely by reason of §7701(b)(3) “substantial presence test". LLC, a limited liability company formed under the law of a state of the United States, was wholly owned by Taxpayer and was a“disregarded entity” (within the meaning of Regs. §301.7701-3(a)). LLC was engaged in Business X within and without the United States. Taxpayer had NOLs as a result of the activities of LLC.

Taxpayer planned to relocate to Country A and remain there for a number of years, after which he would return to live in the United States.

For U.S. income tax purposes, he would be a nonresident alien while living in Country A and, after returning to the United States, would again become a resident alien under the substantial presence test.

Taxpayer would continue to carry on Business X (LLC) while living in Country A, and during that time Business X would continue to have a fixed place of business in the United States. The taxable income of Business X attributable to that fixed place of business would be taxable as business profits attributable to a permanent establishment under Article 7 of the U.S.-Country A Income Tax Treaty.

Taxpayer represented that a portion of the NOLs generated while he was a resident would have been allocated and/or apportioned to gross ECI had he been taxed as a nonresident alien during that time.

Taxpayer requested a ruling that, during the period he is taxed as a nonresident alien, properly apportioned NOLs may be offset against his gross ECI.

Similarly, Taxpayer requested a ruling that he may carry over properly apportioned NOLs generated while a nonresident alien to taxable years during which he is a resident again. In addition, Taxpayer requested a ruling that NOLs generated when he was first a resident may be carried over to taxable years during which he is a resident again.

The IRS ruled that:

1. Properly apportioned NOLs generated while Taxpayer was a resident may be offset against gross ECI realized while Taxpayer is a nonresident alien.

2. Properly apportioned NOLs generated while Taxpayer is a nonresident alien may be offset against gross income from Business X realized by Taxpayer after he reacquires resident status.

3. NOLs generated while Taxpayer was first a resident may be offset against gross income from Business X realized by Taxpayer after he reacquires resident status. The years in which Taxpayer is a nonresident alien will be taken into account in determining whether any such NOLs are still available under §172(b)(1).

If you Are Leaving the US, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).


1 comment:

  1. Brian Dooley likes this

    Brian Dooley • Great post.

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