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.
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.
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.
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).
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