(A) Paragraph (4) and (5)(A) of section 
1361(c) (relating to special rules for applying 
subsection (b)) are each amended by striking 
‘‘subsection (b)(1)(D)’’ and inserting ‘‘sub-
section (b)(1)(C)’’. 
(B) Clause (i) of section 280G(b)(5)(A) 
(relating to general rule for exemption for small 
business corporations, etc.) is amended by strik-
ing ‘‘but without regard to paragraph (1)(C) 
thereof’’. 
(b) NONRESIDENT ALIEN SHAREHOLDER TREATED 
AS ENGAGED IN TRADE OR BUSINESS WITHIN UNITED 
STATES.— 
(1) IN GENERAL.—Section 875 is amended— 
(A) by striking ‘‘and’’ at the end of para-
graph (1), 
(B) by striking the period at the end of 
paragraph (2) and inserting ‘‘, and’’, and 
(C) by adding at the end the following new 
paragraph: 
‘‘(3) a nonresident alien individual shall be con-
sidered as being engaged in a trade or business 
within the United States if the S corporation of 
which such individual is a shareholder is so en-
gaged.’’.
(2) PRO RATA SHARE OF S CORPORATION IN-
COME.—The last sentence of section 1441(b) (relat-
ing to income items) is amended to read as follows: 
‘‘In the case of a nonresident alien individual who is 
a member of a domestic partnership or a share-
holder of an S corporation, the items of income re-
ferred to in subsection (a) shall be treated as refer-
ring to items specified in this subsection included in 
his distributive share of the income of such partner-
ship or in his pro rata share of the income of such 
S corporation.’’. 
(3) APPLICATION
OF
WITHHOLDING
TAX
ON 
NONRESIDENT
ALIEN
SHAREHOLDERS.—Section 
1446 (relating to withholding tax on foreign part-
ners’ share of effectively connected income) is 
amended by redesignating subsection (f) as sub-
section (g) and by inserting after subsection (e) the 
following new subsection: 
‘‘(f) S CORPORATION TREATED AS PARTNERSHIP, 
ETC.—For purposes of this section— 
‘‘(1) an S corporation shall be treated as a 
partnership, 
‘‘(2) the shareholders of such corporation shall 
be treated as partners of such partnership,
‘‘(3) any reference to section 704 shall be treat-
ed as a reference to section 1366, and 
‘‘(4) no withholding tax under subsection (a) 
shall be required in the case of any income realized 
by such corporation and allocable to a shareholder 
which is an electing small business trust (as defined 
in section 1361(e)).’’. 
(4) CONFORMING AMENDMENTS.— 
(A) The heading of section 875 is amended 
to read as follows: 
‘‘SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES 
AND TRUSTS; S CORPORATIONS.’’. 
(B) The heading of section 1446 is amend-
ed to read as follows: 
‘‘SEC. 1446. WITHHOLDING TAX ON FOREIGN PARTNERS’ 
AND 
S 
CORPORATION 
SHAREHOLDERS’ 
SHARE OF EFFECTIVELY CONNECTED IN-
COME.’’. 
(5) CLERICAL AMENDMENTS.— 
(A) The item relating to section 875 in the 
table of sections for subpart A of part II of 
subchapter N of chapter 1 is amended to read 
as follows: 
‘‘Sec. 875. Partnerships; beneficiaries of estates and trusts; S corporations.’’.
(B) The item relating to section 1446 in 
the table of sections for subchapter A of chap-
ter 3 is amended to read as follows: 
‘‘Sec. 1446. Withholding tax on foreign partners’ and S corporation share-
holders’ share of effectively connected income.’’. 
(C) 
PERMANENT
ESTABLISHMENT
OF 
PARTNERS
AND
S
CORPORATION
SHARE-
HOLDERS.—Section 894 (relating to income af-
fected by treaty) is amended by redesignating 
subsection (c) as subsection (d) and by insert-
ing after subsection (b) the following new sub-
section: 
‘‘(c) PERMANENT ESTABLISHMENT
OF PARTNERS 
AND S CORPORATION SHAREHOLDERS.—If a partnership 
or S corporation has a permanent establishment in the 
United States (within the meaning of a treaty to which 
the United States is a party) at any time during a taxable 
year of such entity, a nonresident alien individual or for-
eign corporation which is a partner in such partnership, 
or a nonresident alien individual who is a shareholder in 
such S corporation, shall be treated as having a permanent 
establishment in the United States for purposes of such 
treaty.’’. 
(c) APPLICATION
OF OTHER WITHHOLDING TAX 
RULES ON NONRESIDENT ALIEN SHAREHOLDERS.—
(1) SECTION 1441.—Section 1441 (relating to 
withholding of tax on nonresident aliens) is amended 
by redesignating subsection (g) as subsection (h) 
and by inserting after subsection (f) the following 
new subsection: 
‘‘(g) S CORPORATION TREATED AS PARTNERSHIP, 
ETC.—For purposes of this section— 
‘‘(1) an S corporation shall be treated as a 
partnership, 
‘‘(2) the shareholders of such corporation shall 
be treated as partners of such partnership, and 
‘‘(3) no deduction or withholding under sub-
section (a) shall be required in the case of any item 
of income realized by such corporation and allocable 
to a shareholder which is an electing small business 
trust (as defined in section 1361(e)).’’. 
(2) SECTION 1445.—Section 1445(e) (relating to 
special rules relating to distributions, etc., by cor-
porations, partnerships, trusts, or estates) is amend-
ed by redesignating paragraph (6) as paragraph (7) 
and by inserting after paragraph (5) the following 
new paragraph: 
‘‘(6) S CORPORATION TREATED AS PARTNER-
SHIP, ETC.—For purposes of this section—
‘‘(A) an S corporation shall be treated as 
a partnership, and 
‘‘(B) the shareholders of such corporation 
shall be treated as partners of such partnership, 
and 
‘‘(C) no deduction or withholding under 
subsection (a) shall be required in the case of 
any gain realized by such corporation and allo-
cable to a shareholder which is an electing small 
business trust (as defined in section 1361(e)).’’. 
(d) ADDITIONAL CONFORMING AMENDMENTS.— 
(1) Section 1361(c)(2)(A)(i) is amended by 
striking ‘‘who is a citizen or resident of the United 
States’’. 
(2) Section 1361(d)(3)(B) is amended by strik-
ing ‘‘who is a citizen or resident of the United 
States’’. 
(3) Section 1361(e)(2) is amended by inserting 
‘‘(including a nonresident alien)’’ after ‘‘person’’ the 
first place it appears. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2005.
SEC. 10. INADVERTENT INVALID ELECTIONS OR TERMI-
NATIONS. 
(a) IN GENERAL.—Subsection (f) of section 1362 (re-
lating to inadvertent invalid elections or terminations) is 
amended to read as follows: 
‘‘(f) INADVERTENT INVALID ELECTIONS OR TERMI-
NATIONS.— 
‘‘(1) IN GENERAL.—If— 
‘‘(A) an election under subsection (a), sec-
tion 
1361(b)(3)(B)(ii), 
or 
section 
1361(c)(1)(A)(ii) by any corporation— 
‘‘(i) was not effective for the taxable 
year for which made (determined without 
regard to subsection (b)(2)) by reason of a 
failure to meet the requirements of section 
1361(b) or to obtain shareholder consents, 
or 
‘‘(ii) was terminated under paragraph 
(2) or (3) of subsection (d), section 
1361(b)(3)(C), 
or 
section 
1361(c)(1)(D)(iii), 
‘‘(B)(i) the Secretary determines that the 
circumstances resulting in such ineffectiveness 
or termination were inadvertent, and 
‘‘(ii) such circumstances occurred in a tax-
able year for which a claim for credit or refund
under section 6511 has expired as of the date 
of discovery referred to in subparagraph (C), 
‘‘(C) no later than a reasonable period of 
time after discovery of the circumstances result-
ing in such ineffectiveness or termination, steps 
were taken— 
‘‘(i) so that the corporation for which 
the election was made or the termination 
occurred is a small business corporation or 
a qualified subchapter S subsidiary, as the 
case may be, or 
‘‘(ii) to acquire the required share-
holder consents, and 
‘‘(D) the corporation for which the election 
was made or the termination occurred, and 
each person who was a shareholder in such cor-
poration at any time during the period specified 
pursuant to this subsection, makes all adjust-
ments (necessary and consistent with the treat-
ment of such corporation as an S corporation or 
a qualified subchapter S subsidiary, as the case 
may be)— 
‘‘(i) for purposes of subpara-
graph (B)(i), as may be required by
the Secretary with respect to such pe-
riod, or 
‘‘(ii) for purposes of subpara-
graph (B)(ii), as if the corporation 
was a S corporation or a qualified 
subchapter S subsidiary for each tax-
able year for which a claim for credit 
or refund pursuant to section 6511 
has not expired at the time of the dis-
covery in paragraph (3) of this sub-
section, 
then, notwithstanding the circumstances result-
ing in such ineffectiveness or termination, para-
graph (2) shall apply. 
‘‘(2) PERIOD FOR WHICH TREATED AS S COR-
PORATION.—If this paragraph applies to a corpora-
tion by reason of paragraph (1), such corporation 
shall be treated as an S corporation or a qualified 
subchapter S subsidiary, as the case may be— 
‘‘(A) for purposes of paragraph (1)(B)(i), 
during the period specified by the Secretary, 
and 
‘‘(B) for purposes of paragraph (1)(B)(ii), 
for each taxable year for which a claim for 
credit or return pursuant to section 6511 has
not expired at the time of the discovery referred 
to in paragraph (1)(C).’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2005. 
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