## Facts

- John Ward, a U.S. citizen living in Mexico, married a Mexican citizen in Mexico and executed a marital property agreement establishing a Mexican community-property regime for property acquired during the marriage.
- Ward formed Wheels West, Inc., a New Mexico corporation, and made a Subchapter S election; Ward was the sole record shareholder and his wife was not listed on corporate records as a shareholder.
- Under Mexican community-property law, Ward’s wife held a present, undivided one-half ownership interest in property acquired during marriage, including Ward’s corporate stock.
- The IRS determined the corporation was ineligible for S-corporation treatment because a nonresident alien spouse’s community-property interest made her a shareholder, and nonresident aliens were statutorily barred from S-corporation share ownership.
- Ward paid tax consistent with C-corporation treatment and sued for refunds, asserting the S election should be respected because his wife was not a shareholder for Subchapter S purposes.

## Issues

1. Whether a nonresident alien spouse’s present community-property interest in S-corporation stock makes the spouse a “shareholder” for purposes of the Subchapter S nonresident-alien shareholder prohibition.
2. If so, whether that ownership interest invalidates or terminates the corporation’s S election, barring pass-through treatment and defeating the taxpayer’s refund claim.

## Decision

- The Court of Claims ruled for the United States and denied Ward’s refund claim.
- The court held that the wife’s community-property interest was a present, vested ownership interest in the stock and therefore constituted shareholder status for Subchapter S eligibility.
- Because a nonresident alien may not be a shareholder of an S corporation, the corporation did not qualify for S-corporation treatment during the relevant period.

## Legal Principles

- For federal tax purposes, local law (including foreign marital property law) determines the taxpayer’s legal interests in property, while federal law determines the tax consequences of those interests.
- Subchapter S shareholder-eligibility rules look to substantive ownership interests, not merely record title on corporate books or stock certificates.
- A nonresident alien’s present ownership interest in S-corporation stock—whether held directly or through community-property rules—renders the corporation ineligible for S-corporation status.
- The presence of an ineligible shareholder invalidates or terminates an S election as of the time the ineligible ownership interest exists, requiring C-corporation treatment.

## Conclusion

The court treated a nonresident alien spouse’s vested community-property interest in corporate stock as shareholder ownership for Subchapter S purposes, thereby disqualifying the S election and eliminating the taxpayer’s claimed refund based on pass-through treatment.


Ward v. United States, 661 F.2d 226 (Ct. Cl. 1981)