McNamee v. IRS, No. 05-6151 (2d Cir. 2007)

Annotate this Case

Download PDF

05-6151 McNamee v. IRS 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 - - - - - - 4 August Term, 2006 5 (Argued: December 8, 2006 Decided: May 23, 2007) 6 7 Docket No. 05-6151-cv 8 _________________________________________________________ 9 SEAN P. McNAMEE, 10 Plaintiff-Appellant, 11 - v. - 12 DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE, 13 Defendant-Appellee. 14 _________________________________________________________ 15 Before: 16 KEARSE and STRAUB, Circuit Judges, and KEENAN, District Judge*. 17 Appeal from a judgment of the United States District Court 18 for the District of Connecticut, Christopher F. Droney, Judge, 19 upholding Internal Revenue Service determination that plaintiff is 20 personally liable for the employment tax liabilities of his wholly- 21 owned limited-liability company, which he had chosen not to have 22 treated as a corporation. 23 Affirmed. *Honorable John F. Keenan, of the United States District Court for the Southern District of New York, sitting by designation. 1 2 SEAN P. McNAMEE, Wallingford, Connecticut, Plaintiff-Appellant pro se. 3 4 5 6 7 8 9 10 BRIDGET M. ROWAN, Attorney, Tax Division, Department of Justice, Washington, D.C. (Eileen J. O'Connor, Assistant Attorney General, David I. Pincus, Attorney, Tax Division, Washington, D.C., Kevin J. O'Connor, United States Attorney for the District of Connecticut, on the brief), for Defendant-Appellee. 11 KEARSE, Circuit Judge: 12 Plaintiff pro se Sean P. McNamee, the single-member owner 13 of a now-defunct limited liability company (or "LLC") formed under 14 Connecticut law, appeals from a judgment of the United States 15 District Court for the District of Connecticut, Christopher F. 16 Droney, Judge, rejecting his challenge to a determination by the 17 Internal 18 §§ 301.7701-2 and 301.7701-3, 26 C.F.R. §§ 301.7701-2 and 301.7701- 19 3, that, because of his failure to exercise his option to have his 20 LLC treated as a corporation, McNamee was personally liable for the 21 LLC's employment tax liabilities. 22 the Treasury Regulations, and hence the IRS determination, were 23 contrary (a) to state law treating an LLC and its members as 24 separate entities, and (b) to provisions of the Internal Revenue 25 Code (or "Code"). 26 Regulations were both consistent with the Code and reasonable, ruled 27 in 28 contentions that the regulations are invalid because they contravene 29 state law and the federal statutory scheme. favor Revenue of the Service ("IRS") under Treasury Regulations McNamee alleged principally that The district court, concluding that the Treasury government. On -2- appeal, McNamee pursues his For the reasons that 1 follow, we affirm. 2 I. 3 BACKGROUND The material facts appear to be undisputed. McNamee was 4 the sole proprietor of an unincorporated accounting firm, W.F. 5 McNamee & Company LLC ("WFM-LLC"), a Connecticut limited liability 6 company that ceased operation in March 2002. 7 average of six persons. 8 9 WFM-LLC employed an The Internal Revenue Code imposes two forms of employment tax obligations on an employer (hereinafter "payroll taxes"). 10 First, the employer is required to pay unemployment taxes, see 11 26 U.S.C. § 3301, and to make contributions to its employees' 12 social-security 13 Insurance Contributions Act ("FICA"), see id. § 3111. 14 employer is required to withhold from employee compensation and 15 remit to the government (a) employee income taxes, see id. § 3402, 16 and (b) the employees' own mandated FICA contributions, see id. 17 §§ 3101, 3102(b). 18 2000 and all four quarters of 2001, WFM-LLC made no payment of any 19 of the required payroll taxes. and Medicare benefits pursuant to the Federal Second, the With respect to the third and fourth quarters of 20 The Code recognizes a variety of business entities-- 21 including corporations, companies, associations, partnerships, sole 22 proprietorships, and groups--and, based on the classifications, 23 treats the entities in various ways for income tax purposes. 24 example, the income of a corporate entity is generally subject to a -3- For 1 double wave of taxation, in that the corporation is taxed directly, 2 see 26 U.S.C. § 11(a), and its individual shareholders are further 3 taxed on dividends paid to them out of the corporation's income, see 4 id. § 61(a)(7). 5 that is treated as such is taxed only once: 6 his business income on Schedule C of his individual tax return; the 7 proprietorship entity is not directly taxed, see generally id. 8 § 61(a)(2); 26 C.F.R. § 301.7701-3(b). In contrast, an unincorporated sole proprietorship the owner simply lists 9 As discussed in greater detail in Part II below, the 10 Code's definitions of various types of business entities are broad, 11 and to some extent they overlap one another. 12 § 7701(a). 13 Regulations instruct that certain entities must be classified as 14 corporations, see 26 C.F.R. § 301.7701-2(b), while other entities 15 are permitted to decide for themselves whether or not to be treated 16 as corporations, see id. § 301.7701-3. 17 classification as a corporation is not required (referred to in the 18 Regulations as an "eligible entity"), and which has only one owner, 19 has the option of being classified either as an "association"--which 20 is defined in § 301.7701-2(b)(2) as a corporation--or as a "sole 21 proprietorship" that is to be "disregarded as an entity separate 22 from its owner," id. § 301.7701-2(a). See 26 U.S.C. In an attempt to eliminate ambiguity, the Treasury Thus, an entity whose 23 An eligible entity exercises that option simply by filing 24 IRS Form 8832, entitled "Entity Classification Election," having 25 checked the appropriate box on the Form. 26 (the "check-the-box" regulation). -4- In See id. § 301.7701-3(c) the absence of such an 1 election, an eligible entity that has only one owner is disregarded 2 as a separate entity. See id. § 301.7701-3(b). 3 WFM-LLC, McNamee's LLC, was not required to be classified 4 as a corporation, and McNamee elected not to have it treated as one. 5 Thus, under the Treasury Regulations, WFM-LLC was disregarded as a 6 separate entity and was treated as a sole proprietorship. WFM-LLC's 7 unpaid payroll taxes for 2000 and 2001 totaled $64,736.18. The IRS, 8 having disregarded WFM-LLC as a separate entity, assessed those 9 taxes against McNamee personally and placed a lien on his property. 10 McNamee filed a timely administrative appeal. He did not 11 dispute WFM-LLC's liability for the unpaid $64,736.18. 12 pointing to sections of Connecticut law providing that members of an 13 LLC are not personally liable for the debts of the LLC, see, e.g., 14 Conn. Gen. Stat. Ann. § 34-133 (West 2005), he argued that the IRS 15 did not have the authority to "unilaterally pierce the corporate 16 veil of an LLC simple [sic] by looking at how it reports it's [sic] 17 income," 18 regulation was therefore "in direct conflict with the right of an 19 LLC 20 Hearing.) and that member." 21 In the (McNamee a Notice IRS's application Request of for a Determination of the However, check-the-box Collection Concerning Due Process Collection 22 Action(s) Under Section 6320 and/or 6330, dated October 23, 2003 23 ("IRS Determination"), the IRS Appeals Office rejected McNamee's 24 appeal. 25 Attachment") stated that the IRS's review confirmed that "[WFM-LLC] 26 was set up as a single member LLC, and that you, as the single The unpaginated explanatory Attachment ("IRS Determination -5- 1 member, 2 Determination 3 pertinent 4 "[t]herefore, the LLC has been disregarded as an entity separate 5 from you. 6 for the employment tax debt of the LLC" (id. third page). 7 also noted that, while the administrative appeal was pending, 8 McNamee had terminated the existence of WFM-LLC (see id. first 9 page), and that he offered no alternative means of collecting the 10 did not elect association Attachment, Treasury first status page.) Regulations, the . . After IRS . ." (IRS discussing concluded the that, You, as the single member owner, are personally liable The IRS amount due (see id. third page). 11 McNamee brought the present action in the district court 12 pursuant to, inter alia, 26 U.S.C. §§ 6320 and 6330, seeking review 13 of 14 reiterated 15 disregard the protection from liability afforded to members of an 16 LLC 17 WFM-LLC's tax liabilities. 18 relied on by the IRS conflicted with provisions of the Internal 19 Revenue Code. 20 the by IRS's his administrative contentions Connecticut law determination. that and the thereby IRS hold He had him no principally authority responsible to for He also contended that the regulations McNamee moved for summary judgment in his favor. The 21 government moved for affirmance of its determination that McNamee is 22 liable for WFM-LLC's unpaid payroll taxes. 23 summarily denied McNamee's motion and granted the IRS's motion, 24 "find[ing] that the regulations at issue here were both reasonable 25 and consistent with the purposes of the revenue statutes." 26 on Pending Motions, dated September 26, 2005, at 1. -6- The district court Ruling 1 2 Judgment was entered in favor of the government, and this appeal followed. 3 II. 4 DISCUSSION On appeal, McNamee argues principally that the check-the- 5 box 6 provisions of the Internal Revenue Code" (McNamee brief on appeal 7 at 2), violate federal policy, and "ignore the limited liability 8 laws created by local legislation," (id. at 6). 9 an regulations IRS "directly proposal in contradict October 2005 the to amend relevant statutory He also argues that the check-the-box 10 regulations--and relieve the owner of a single-member LLC from any 11 possibility 12 liability--shows 13 "wrong" 14 contentions, we affirm. 15 A. 16 17 (id. of at personal that 7). liability the current Finding for the LLC's check-the-box no merit in any payroll tax regulation is of McNamee's The Validity of the Treasury Regulations 1. The Standard of Review In reviewing a challenge to an agency regulation 18 interpreting a federal statute that the agency is charged with 19 administering, the first duty of the courts is to determine "whether 20 the statute's plain terms 'directly addres[s] the precise question 21 at issue.'" National Cable & Telecommunications Ass'n v. Brand X -7- 1 Internet Services, 545 U.S. 967, 986 (2005) ("National Cable") 2 (quoting Chevron U.S.A. Inc. v. Natural Resources Defense Council, 3 Inc., 467 U.S. 837, 843 (1984)). 4 the point, we defer . . . to the agency's interpretation so long as 5 the construction is 'a reasonable policy choice for the agency to 6 make.'" 7 at 845). National Cable, 545 U.S. at 986 (quoting Chevron, 467 U.S. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 "If the statute is ambiguous on As stated in Chevron itself, [f]irst, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. 467 U.S. at 842-43 (footnotes omitted) (emphases added). 24 "If Congress has explicitly left a gap for the agency to 25 fill, there is an express delegation of authority to the agency to 26 elucidate a specific provision of the statute by regulation[, and 27 s]uch legislative regulations are given controlling weight unless 28 they are arbitrary, capricious, or manifestly contrary to the 29 statute." 30 U.S. 31 particular statutory provision qualifies for Chevron deference when 32 it appears that Congress delegated authority to the agency generally 33 to make rules carrying the force of law, and that the agency 218, Id. at 843-44. 226-27 (2001) See also United States v. Mead Corp., 533 ("administrative -8- implementation of a 1 interpretation claiming deference was promulgated in the exercise of 2 that authority"). 3 In the Internal Revenue Code, Congress expressly delegated 4 authority to the Secretary of the Treasury to adopt regulations to 5 fill in gaps in the Code: 6 § 7805. Rules and regulations 7 8 9 10 11 12 13 14 15 (a) Authorization Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue. 16 . . . . 17 18 19 20 21 22 (d) Manner of making elections prescribed by Secretary Except to the extent otherwise provided by this title, any election under this title shall be made at such time and in such manner as the Secretary shall prescribe. 23 26 U.S.C. §§ 7805(a) and (d) (emphasis added); see also 26 U.S.C. 24 § 7701(a)(11)(B) ("The term 'Secretary' means the Secretary of the 25 Treasury or his delegate."). 26 regulations interpreting the Code, the Secretary of the Treasury has 27 delegated 28 ("Commissioner"). 29 has delegated to the Commissioner the power to promulgate 'all 30 needful rules and regulations for the enforcement of [the Internal 31 Revenue Code],' 26 U.S.C. § 7805(a), we must defer to his regulatory 32 interpretations of the Code so long as they are reasonable, see 33 National Muffler Dealers Assn., Inc. v. United States, 440 U.S. 472, authority to the With respect to the promulgation of Commissioner of See 26 C.F.R. § 301.7805-1. -9- Internal Revenue "Because Congress 1 476-477 (1979)." 2 Revenue, 499 U.S. 554, 560-61 (1991). 3 2. Cottage Savings Ass'n v. Commissioner of Internal The Relevant Provisions of the Code 4 The Internal Revenue Code sets out "[d]efinitions" of 5 various types of business entities in the first three subsections of 6 § 7701(a), under the headings "Person[s]," "Partnership[s]," and 7 "Corporation[s]." 8 the categories are overlapping and somewhat ambiguous: 9 10 11 As an examination of these provisions reveals, (a) When used in this title, otherwise distinctly expressed or incompatible with the intent thereof-- where not manifestly 12 13 14 15 16 (1) Person The term "person" shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation. 17 18 19 20 21 22 23 24 (2) Partnership . . . The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation . . . . 25 26 27 (3) Corporation The term "corporation" associations . . . . includes 28 26 U.S.C. §§ 7701(a)(1), (2), and (3) (emphases added). 29 subsection tends to be illustrative, rather than definitive, and 30 none of them specifies the characteristics of the entity that it 31 "defin[es]." 32 Thus, each Potential overlap among definitions is evident from the -10- 1 lack of even illustrative definitional entries of such terms as 2 "company" and "association." 3 deemed a "partnership" within the meaning of subsection (a)(2) if it 4 is an "unincorporated organization"; but it is a "corporation" 5 within the meaning of subsection (a)(3) if it is an "association." 6 However, the Code contains no definition of the term "association." 7 It does, however, define the term "shareholder" to "include[] a 8 member in an association." 9 are nowhere defined in the Code, although the existence of such a For example, a "company" could be Id. § 7701(a)(8). Sole proprietorships 10 business 11 § 172(b)(1)(F)(iii) (relating to net operating loss carryovers and 12 carrybacks). 13 form is recognized, see, e.g., 26 U.S.C. Limited liability companies are not expressly mentioned, 14 much less defined, in the Code. 15 a company or an association, its proper characterization is not 16 clear 17 companies are "a relatively new business structure allowed by state 18 statute," having some features of corporations and some features of 19 partnerships. 20 Liability 21 http://www.irs.gov/businesses/small/article/0,,id-=98277,00.html 22 ("IRS Pub. 3402"). 23 have limited personal liability for the debts and actions of the 24 LLC." 25 features of LLCs are more like a partnership, providing management 26 flexibility," IRS Pub. 3402; see, e.g., Conn. Gen. Stat. Ann. from the terms IRS of Although an LLC might be considered the Code Publication Companies 1 itself. 3402, Tax (2000), Limited Issues liability for Limited available at For example, "similar to a corporation, owners Id.; see, e.g., Conn. Gen. Stat. Ann. § 34-133. -11- "Other 1 §§ 2 (management), and in some cases affording "the benefit of pass- 3 through taxation," IRS Pub. 3402; but see Conn. Gen. Stat. Ann. 4 § 34-113 ("A limited liability company formed under sections 34-100 5 to 34-242 . . . shall be treated, for purposes of taxes imposed by 6 the laws of the state or any political subdivision thereof, in 7 accordance 8 (emphases added)). 34-109 9 (execution with the of documents), classification for 34-130 (agency), federal tax 34-140 purposes." Under Connecticut law, a limited liability company may 10 have a single member. 11 Internal Revenue Code is unclear as to whether such a company falls 12 within subsection (a)(2) or (a)(3) of § 7701. 13 a subsection (a)(3) "association," as one person does not associate 14 with himself. 15 the specific subsection (a)(2) entities that are included within the 16 term "partnership"--i.e., "syndicate, group, pool, joint venture"-- 17 all of which, like the term partnership itself, denote combinations 18 of persons rather than a single person, see, e.g., Conn. Gen. Stat. 19 Ann. § 34-301(9) ("'Partnership' means an association of two or more 20 persons . . . ."). 21 seem to be "other unincorporated organization"--an organization that 22 might or might not be an entity separate from its owner. 23 3. See, e.g., id. §§ 34-101(10), 34-140(c). The It hardly seems to be Nor is a one-person operation in the same genre as The closest fit for a single-owner LLC would The Gap-Filling Treasury Regulations 24 Against this ambiguous statutory background, the Treasury 25 Regulations were intended to provide straightforward guidance as to -12- 1 how various types of entities, including single-owner businesses, 2 are 3 § 301.7701-1 states "[i]n general" that to be 4 5 6 7 8 9 10 classified for tax purposes. Treasury Regulation [t]he Internal Revenue Code prescribes the classification of various organizations for federal tax purposes. Whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law. 11 . . . . 12 13 14 15 16 (4) Single owner organizations. Under §§ 301.7701-2 and 301.7701-3, certain organizations that have a single owner can choose to be recognized or disregarded as entities separate from their owners. 17 26 C.F.R. 18 Regulations proceed to describe the classification of business 19 entities: 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 §§ 301.7701-1(a)(1) and (4) (emphases added). The (a) Business entities. For purposes of this section and § 301.7701-3, a business entity is any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under § 301.7701-3) that is not properly classified as a trust under § 301.7701-4 or otherwise subject to special treatment under the Internal Revenue Code. A business entity with two or more members is classified for federal tax purposes as either a corporation or a partnership. A business entity with only one owner is classified as a corporation or is disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner. 35 26 C.F.R. § 301.7701-2(a) (emphases added). 36 Regulation defines the term "corporation" to include a business 37 entity that is incorporated under federal or state law, see id. 38 § 301.7701-2(b)(1), an "association -13- Subsection (b) of this (as determined under 1 § 301.7701-3)," id. § 301.7701-2(b)(2) (emphasis added), and various 2 other business entities, see id. §§ 301.7701-2(b)(3), (4), (5), (6), 3 (7), and (8). 4 Subsection (c) of Treasury Regulation 301.7701-2 states in 5 pertinent part, with regard to "[o]ther business entities," that 6 "[f]or federal tax purposes," 7 8 9 (1) The term partnership means a business entity that is not a corporation under paragraph (b) of this section and that has at least two members. 10 11 12 13 (2) Wholly owned entities--(i) In general. A business entity that has a single owner and is not a corporation under paragraph (b) of this section is disregarded as an entity separate from its owner. 14 26 15 Regulation 301.7701-3(a) provides that "an eligible entity"--which 16 it defines as a "business entity that is not classified as a 17 corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or 18 (8)"--is given an option whether or not to be classified as a 19 corporation. C.F.R. §§ 301.7701-2(c)(1) and (2)(i). Finally, Treasury Thus, 20 21 22 23 24 25 26 27 28 [a]n eligible entity with at least two members can elect to be classified as either an association (and thus a corporation under § 301.7701-2(b)(2)) or a partnership, and an eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner. Paragraph (b) of this section provides a default classification for an eligible entity that does not make an election. . . . 29 30 31 32 33 (b) Classification of eligible entities that do not file an election--(1) Domestic eligible entities. Except as provided in paragraph (b)(3) of this section, unless the entity elects otherwise, a domestic eligible entity is-- 34 35 (i) A partnership if it has two or more members; or -14- 1 2 (ii) Disregarded as an entity separate from its owner if it has a single owner. 3 26 C.F.R. §§ 301.7701-3(a) and (b)(1) (emphases added). 4 id. § 301.7701-3(b)(3) (a single-owner entity that was in existence 5 prior to the effective date of this regulation and that claimed to 6 be a partnership under the prior regulations will be disregarded as 7 an entity separate from its owner). 8 An entity files its election to be See also treated as an 9 association simply by checking the appropriate box or boxes on IRS 10 "Form 8832, Entity Classification Election" and filing that Form. 11 Id. § 301.7701-3(c). 12 These regulations became effective on January 1, 1997, 13 replacing regulations, known as the "Kintner regulations," that had 14 been in place since 1960. The Kintner regulations had been adequate 15 during the first several decades after their adoption. 16 explained in the 1996 proposal for their amendment, the Kintner 17 regulations were complicated to apply, especially in light of the 18 fact that 19 20 21 22 23 24 25 But, as many states ha[d] revised their statutes to provide that partnerships and other unincorporated organizations may possess characteristics that traditionally have been associated with corporations, thereby narrowing considerably the traditional distinctions between corporations and partnerships under local law. 26 Simplification of Entity Classification Rules, 61 Fed. Reg. 21989, 27 21989-90 (proposed May 13, 1996). "One consequence of the increased 28 flexibility" in local laws authorizing an entity that "in all 29 meaningful 30 corporation" was that the Kintner regulations required "taxpayers respects, is virtually -15- indistinguishable from a 1 and the IRS [to] expend considerable resources on classification 2 issues." Id. at 21990; see, e.g., Littriello v. United States, No. 3 05-6494, 2007 4 ("Littriello") (the Kintner regulations "proved less than adequate 5 to deal with the new hybrid business entities--limited liability 6 companies, limited liability partnerships, and the like--developed 7 in the last years of the last century under various state laws"). WL 1093723, at *3 (6th Cir. Apr. 13, 2007) 8 In light of the emergence of limited liability companies 9 and their hybrid nature, and the continuing silence of the Code on 10 the proper tax treatment of such companies in the decade since the 11 present regulations became effective, we cannot conclude that the 12 above Treasury Regulations, providing a flexible response to a novel 13 business form, are arbitrary, capricious, or unreasonable. 14 current regulations allow the single-owner limited liability company 15 to choose 16 corporation--or to be disregarded as a separate entity. 17 LLC elects to be treated as a corporation, its owner avoids the 18 liabilities that would fall upon him if the LLC were disregarded; 19 but he is subject to double taxation--once at the corporate level 20 and once at the individual shareholder level. 21 not to be treated as a corporation, either by affirmative election 22 or by default, its owner will be liable for debts incurred by the 23 LLC, but there will be no double taxation. 24 regulations, allowing the single-owner LLC to make the choice, are 25 therefore eminently reasonable. Accord Littriello, 2007 WL 1093723, 26 at *4-*6. whether to be treated -16- as an The "association"--i.e., a If such an If the LLC chooses The IRS check-the-box 1 4. The Proposed New Regulations 2 McNamee's contention that the fact that the IRS has 3 proposed new regulations that would definitively make an LLC's 4 single owner not liable for the LLC's unpaid payroll taxes means 5 that the current regulations are "wrong" (McNamee brief on appeal at 6 7) is wide of the mark. 7 that a proposed regulation does not represent an agency's considered 8 interpretation of its statute and that an agency is entitled to 9 consider alternative interpretations before settling on the view it 10 considers most sound.'" Littriello, 2007 WL 1093723, at *7 (quoting 11 Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 845 12 (1986)) (emphasis ours). To begin with, "'[i]t goes without saying 13 Further, "if the agency adequately explains the reasons 14 for a reversal of policy, change is not invalidating, since the 15 whole point of Chevron is to leave the discretion provided by the 16 ambiguities of a statute with the implementing agency," and to allow 17 the agency to "consider varying interpretations and the wisdom of 18 its policy on a continuing basis, . . . for example, in response to 19 changed factual circumstances." 20 (internal quotation marks omitted). 21 22 23 24 25 26 27 28 29 30 National Cable, 545 U.S. at 981 Here, the IRS explained that its October 2005 proposal to change the regulations was a response to [a]dministrative difficulties [that] have arisen from the interaction of the disregarded entity rules and the federal employment tax provisions. Problems have arisen for both taxpayers and the IRS with respect to reporting, payment and collection of employment taxes, particularly where state employment tax law also sets requirements for reporting, payment and collection that may be in -17- 1 2 3 4 5 6 conflict with the federal disregarded entity rules. The Treasury Department and the IRS believe that treating the disregarded entity as the employer for purposes of federal employment taxes will improve the administration of the tax laws and simplify compliance. 7 Disregarded Entities; Employment and Excise Taxes, 70 Fed. Reg. 8 60475, 60476 (proposed Oct. 18, 2005). 9 have not been adopted as of the filing of this opinion, provide no The proposed changes, which 10 basis for finding the existing regulations unreasonable. 11 B. McNamee's Reliance on State Law 12 McNamee also contends that the Treasury Regulations are 13 invalid 14 provisions that accord an LLC member limited liability. 15 that "the treasury has consistently held that the owner of a single 16 member LLC is the employer for Federal tax purposes," and argues 17 that United States v. Galletti, 541 U.S. 114 (2004), shows that the 18 IRS exceeded its authority "in attempt[ing] to ignore the limited 19 liability laws created by local legislation." 20 appeal at 6.) on the theory that they ignore the Connecticut law He states (McNamee brief on We are unpersuaded. 21 First, as discussed in Part II.A.3. above, the IRS has not 22 dictated that the owner of a single-member LLC always be considered 23 the employer for federal tax purposes; rather, it has given the LLC 24 the option to elect association status. 25 treated as an association, the LLC is regarded as the employer. 26 Second, Galletti did not If the LLC elects to be involve either Treasury 27 Regulations 28 liability company. Galletti involved nonpayment of payroll taxes by interpreting the Code -18- or a single-member limited 1 a partnership and the government's assertion of claims for the 2 unpaid taxes in individual bankruptcy proceedings filed by the 3 partnership's general partners. 4 in order for the United States to avail itself of the 10-year 5 increase in the statute of limitations for collection of a tax debt, 6 it must assess the taxes not only against a partnership that is 7 directly liable for the debt, but also against each individual 8 partner who might be jointly and severally liable for the debts of 9 the partnership." The question raised was "whether, 541 U.S. at 116. The Supreme Court noted that 10 under state law, a partnership was regarded as an entity separate 11 from its partners and that the liability of the partners for 12 partnership debt was secondary, i.e., derived from the liability of 13 the partnership. 14 government was not required, in order to press its claims in 15 bankruptcy, to assess the payroll taxes against the individual 16 partners because payroll taxes are imposed on the "employer," e.g., 17 26 U.S.C. §§ 3402, 3403, and the employer was the partnership, 18 rather than its partners, see 541 U.S. at 121. 19 identification of the partnership as the employer has no bearing on 20 whether the sole owner of an LLC is to be considered the employer. 21 A partnership, as discussed above, has at least two 22 members; and while a partnership may elect to be treated as a 23 corporation, "partnership" and "corporation" are its only options. 24 26 C.F.R. § 301.7701-3(a) ("An eligible entity with at least two 25 members can elect to be classified as either an association (and 26 thus a See id. at 116, 122 n.4. corporation under § The Court held that the The Galletti Court's 301.7701-2(b)(2) -19- or a partnership 1 . . . ." (emphases added)); id. § 301.7701-2(a) ("A business entity 2 with two or more members is classified for federal tax purposes as 3 either a corporation or a partnership." (emphases added)). There is 4 no Code provision or regulation that allows a partnership to be 5 disregarded as an entity in order for its partners to be treated as 6 the taxable entity. Thus, it is hardly remarkable that the Galletti 7 Court concluded that the employer was the partnership rather than 8 its partners. 9 Further, we note that although the payroll tax sections of 10 the Code define "employer"--in various ways--see 26 U.S.C. §§ 3306 11 and 3401, as discussed in Part II.A.2. above the Code does not even 12 mention limited liability companies. 13 provides that an LLC is always to be regarded, for purposes of 14 federal taxation, as the employer. 15 Regulations, the single-member LLC is the employer if it elects to 16 be 17 treatment, it is "[d]isregarded" as a "separate" entity, 26 C.F.R. 18 § 19 regarded as the employer. treated as a corporation; 301.7701-3(b)(1)(ii) Under the pertinent Treasury but (emphasis Thus, nothing in the Code if it added), does and not hence elect that cannot be 20 Finally, we reject McNamee's contention that the IRS's 21 attempt to collect his LLC's unpaid payroll taxes from him is 22 impermissible 23 granted him by state law. 24 Circuit noted in rejecting such a claim in Littriello, 25 26 27 28 because it violates the limited-liability rights As the Court of Appeals for the Sixth [t]he federal government has historically disregarded state classifications of businesses for some federal tax purposes. In Hecht v. Malley, 265 U.S. 144 . . . (1924), for example, the United -20- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 States Supreme Court held that Massachusetts trusts were "associations" within the meaning of the Internal Revenue Code despite the fact they were not so considered under state law. As courts have repeatedly observed, state laws of incorporation control various aspects of business relations; they may affect, but do not necessarily control, federal tax provisions. See, e.g., Morrissey, 296 U.S. at 357-58 . . . (explaining that common law definitions of certain corporate forms do not control interpretation of federal tax code). As a result, . . . single-member LLCs are entitled to whatever advantages state law may extend, but state law cannot abrogate [their owner's] federal tax liability. Littriello, 2007 WL 1093723, at *6. We agree. 17 Moreover, McNamee could have had the benefit of limited 18 personal liability if he had simply elected to have his LLC treated 19 as a corporation; he chose not to do so and thereby avoided having 20 the LLC taxed as a separate entity. 21 policy, or principle that required the federal government to allow 22 him both to escape personal liability for the taxes owed by his sole 23 proprietorship and to have the proprietorship escape taxation as a 24 separate entity. 25 26 We know of no provision, CONCLUSION We have considered all of McNamee's contentions on this 27 appeal and have found them to be without merit. 28 district court is affirmed. -21- The judgment of the

Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.