     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:   KEARSE and STRAUB, Circuit Judges, and KEENAN, District

16                    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                            SEAN P. McNAMEE, Wallingford, Connecticut,
 2                            Plaintiff-Appellant pro se.

 3                            BRIDGET M. ROWAN, Attorney, Tax Division,
 4                            Department of Justice, Washington, D.C.
 5                            (Eileen J. O'Connor, Assistant Attorney
 6                            General, David I. Pincus, Attorney, Tax
 7                            Division, Washington, D.C., Kevin J.
 8                            O'Connor, United States Attorney for the
 9                            District of Connecticut, on the brief),
10                            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     Revenue    Service   ("IRS")      under    Treasury   Regulations

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.           McNamee alleged principally that

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").       The district court, concluding that the Treasury

26   Regulations were both consistent with the Code and reasonable, ruled

27   in   favor   of   the   government.    On     appeal,   McNamee    pursues   his

28   contentions that the regulations are invalid because they contravene

29   state law and the federal statutory scheme.             For the reasons that


                                           -2-
 1   follow, we affirm.



 2                                   I.   BACKGROUND



 3              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.                WFM-LLC employed an

 7   average of six persons.

 8              The Internal Revenue Code imposes two forms of employment

 9   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     and   Medicare    benefits     pursuant    to   the   Federal

13   Insurance Contributions Act ("FICA"), see id. § 3111.               Second, the

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).    With respect to the third and fourth quarters of

18   2000 and all four quarters of 2001, WFM-LLC made no payment of any

19   of the required payroll taxes.

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.                  For

24   example, the income of a corporate entity is generally subject to a



                                            -3-
 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).   In contrast, an unincorporated sole proprietorship

 5   that is treated as such is taxed only once:    the owner simply lists

 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).

 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.            See 26 U.S.C.

12   § 7701(a).   In an attempt to eliminate ambiguity, the Treasury

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.         Thus, an entity whose

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).

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.      See id. § 301.7701-3(c)

26   (the "check-the-box"   regulation).     In   the   absence   of   such   an



                                      -4-
 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.                       However,

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,"    and   that   the     IRS's   application       of   the   check-the-box

18   regulation was therefore "in direct conflict with the right of an

19   LLC   member."        (McNamee    Request      for   a   Collection    Due    Process

20   Hearing.)

21               In    a   Notice     of   Determination       Concerning    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.    The unpaginated explanatory Attachment ("IRS Determination

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



                                              -5-
 1   member,     did   not    elect     association         status      .   .     .    ."     (IRS

 2   Determination        Attachment,    first        page.)       After        discussing     the

 3   pertinent      Treasury     Regulations,           the       IRS       concluded        that,

 4   "[t]herefore, the LLC has been disregarded as an entity separate

 5   from you.     You, as the single member owner, are personally liable

 6   for the employment tax debt of the LLC" (id. third page).                              The IRS

 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   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    the   IRS's     administrative        determination.              He       principally

14   reiterated     his    contentions        that    the   IRS    had      no    authority     to

15   disregard the protection from liability afforded to members of an

16   LLC   by    Connecticut    law     and    thereby      hold     him     responsible        for

17   WFM-LLC's tax liabilities.          He also contended that the regulations

18   relied on by the IRS conflicted with provisions of the Internal

19   Revenue Code.

20                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.                         The district court

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."                             Ruling

26   on Pending Motions, dated September 26, 2005, at 1.



                                                -6-
 1                Judgment was entered in favor of the government, and this

 2   appeal followed.



 3                                       II.    DISCUSSION



 4                On appeal, McNamee argues principally that the check-the-

 5   box    regulations        "directly       contradict          the    relevant     statutory

 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).                      He also argues that

 9   an    IRS   proposal      in     October    2005    to    amend       the    check-the-box

10   regulations--and relieve the owner of a single-member LLC from any

11   possibility        of    personal       liability   for       the    LLC's     payroll   tax

12   liability--shows          that    the    current    check-the-box           regulation   is

13   "wrong"     (id.    at    7).       Finding    no    merit      in    any    of   McNamee's

14   contentions, we affirm.




15   A.    The Validity of the Treasury Regulations

16          1.   The Standard of Review

17                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)).             "If the statute is ambiguous on

 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.'"    National Cable, 545 U.S. at 986 (quoting Chevron, 467 U.S.

 7   at 845).      As stated in Chevron itself,

 8                 [f]irst, always, is the question whether Congress
 9                 has directly spoken to the precise question at
10                 issue. If the intent of Congress is clear, that is
11                 the end of the matter; for the court, as well as the
12                 agency, must give effect to the unambiguously
13                 expressed intent of Congress.      If, however, the
14                 court determines Congress has not directly addressed
15                 the precise question at issue, the court does not
16                 simply impose its own construction on the statute,
17                 as would be necessary in the absence of an
18                 administrative interpretation.      Rather, if the
19                 statute is silent or ambiguous with respect to the
20                 specific issue, the question for the court is
21                 whether the agency's answer is based on a
22                 permissible construction of the statute.

23   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."     Id. at 843-44.     See also United States v. Mead Corp., 533

30   U.S.   218,    226-27   (2001)    ("administrative     implementation   of   a

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



                                            -8-
 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                    (a) Authorization
 8                    Except where such authority is expressly given
 9               by this title to any person other than an officer or
10               employee of the Treasury Department, the Secretary
11               shall prescribe all needful rules and regulations
12               for the enforcement of this title, including all
13               rules and regulations as may be necessary by reason
14               of any alteration of law in relation to internal
15               revenue.

16                    . . . .

17                    (d) Manner of making elections prescribed by
18               Secretary
19                    Except to the extent otherwise provided by this
20               title, any election under this title shall be made
21               at such time and in such manner as the Secretary
22               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.").        With respect to the promulgation of

26   regulations interpreting the Code, the Secretary of the Treasury has

27   delegated    authority   to   the   Commissioner   of   Internal   Revenue

28   ("Commissioner").    See 26 C.F.R. § 301.7805-1.        "Because Congress

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,

                                          -9-
 1   476-477 (1979)."    Cottage Savings Ass'n v. Commissioner of Internal

 2   Revenue, 499 U.S. 554, 560-61 (1991).



 3        2.   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]."    As an examination of these provisions reveals,

 8   the categories are overlapping and somewhat ambiguous:

 9                   (a) When used in this title,         where not
10              otherwise   distinctly   expressed  or    manifestly
11              incompatible with the intent thereof--

12                   (1) Person
13                        The term "person" shall be construed to
14                   mean and include an individual, a trust,
15                   estate, partnership, association, company or
16                   corporation.

17                   (2) Partnership . . .
18                         The   term   "partnership"   includes   a
19                   syndicate, group, pool, joint venture, or other
20                   unincorporated organization, through or by
21                   means    of  which   any  business,   financial
22                   operation, or venture is carried on, and which
23                   is not, within the meaning of this title, a
24                   trust or estate or a corporation . . . .



25                   (3) Corporation
26                        The    term     "corporation"     includes
27                   associations . . . .

28   26 U.S.C. §§ 7701(a)(1), (2), and (3) (emphases added).   Thus, each

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              Potential overlap among definitions is evident from the

                                       -10-
 1   lack of even illustrative definitional entries of such terms as

 2   "company" and "association."              For example, a "company" could be

 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."          Id. § 7701(a)(8).          Sole proprietorships

 9   are nowhere defined in the Code, although the existence of such a

10   business       form     is      recognized,          see,      e.g.,    26      U.S.C.

11   § 172(b)(1)(F)(iii) (relating to net operating loss carryovers and

12   carrybacks).

13              Limited liability companies are not expressly mentioned,

14   much less defined, in the Code.           Although an LLC might be considered

15   a company or an association, its proper characterization is not

16   clear   from   the    terms    of   the   Code      itself.      Limited     liability

17   companies are "a relatively new business structure allowed by state

18   statute," having some features of corporations and some features of

19   partnerships.         IRS    Publication         3402,   Tax   Issues   for    Limited

20   Liability         Companies           1           (2000),        available         at

21   http://www.irs.gov/businesses/small/article/0,,id-=98277,00.html

22   ("IRS Pub. 3402").          For example, "similar to a corporation, owners

23   have limited personal liability for the debts and actions of the

24   LLC."   Id.; see, e.g., Conn. Gen. Stat. Ann. § 34-133.                         "Other

25   features of LLCs are more like a partnership, providing management

26   flexibility," IRS Pub. 3402; see, e.g., Conn. Gen. Stat. Ann.



                                               -11-
 1   §§   34-109     (execution     of   documents),     34-130   (agency),   34-140

 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     with   the    classification   for    federal   tax   purposes."

 8   (emphases added)).

 9                 Under Connecticut law, a limited liability company may

10   have a single member.        See, e.g., id. §§ 34-101(10), 34-140(c).       The

11   Internal Revenue Code is unclear as to whether such a company falls

12   within subsection (a)(2) or (a)(3) of § 7701.           It hardly seems to be

13   a subsection (a)(3) "association," as one person does not associate

14   with himself.      Nor is a one-person operation in the same genre as

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 . . . .").          The closest fit for a single-owner LLC would

21   seem to be "other unincorporated organization"--an organization that

22   might or might not be an entity separate from its owner.



23         3.   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    to   be   classified     for   tax   purposes.         Treasury   Regulation

 3   § 301.7701-1 states "[i]n general" that

 4                [t]he   Internal   Revenue   Code   prescribes   the
 5                classification of various organizations for federal
 6                tax purposes. Whether an organization is an entity
 7                separate from its owners for federal tax purposes is
 8                a matter of federal tax law and does not depend on
 9                whether the organization is recognized as an entity
10                under local law.

11                         . . . .

12                     (4)   Single   owner  organizations.      Under
13                §§ 301.7701-2 and 301.7701-3, certain organizations
14                that have a single owner can choose to be recognized
15                or disregarded as entities separate from their
16                owners.

17   26 C.F.R.        §§   301.7701-1(a)(1)      and   (4)   (emphases   added).     The

18   Regulations proceed to describe the classification of business

19   entities:

20                     (a) Business entities.    For purposes of this
21                section and § 301.7701-3, a business entity is any
22                entity   recognized   for   federal   tax   purposes
23                (including an entity with a single owner that may be
24                disregarded as an entity separate from its owner
25                under § 301.7701-3) that is not properly classified
26                as a trust under § 301.7701-4 or otherwise subject
27                to special treatment under the Internal Revenue
28                Code. A business entity with two or more members is
29                classified for federal tax purposes as either a
30                corporation or a partnership.     A business entity
31                with only one owner is classified as a corporation
32                or is disregarded; if the entity is disregarded, its
33                activities are treated in the same manner as a sole
34                proprietorship, branch, or division of the owner.

35   26 C.F.R. § 301.7701-2(a) (emphases added).               Subsection (b) of this

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      (as     determined    under



                                              -13-
 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                      (1) The term partnership means a business
 8                 entity that is not a corporation under paragraph (b)
 9                 of this section and that has at least two members.

10                      (2) Wholly owned entities--(i) In general. A
11                 business entity that has a single owner and is not a
12                 corporation under paragraph (b) of this section is
13                 disregarded as an entity separate from its owner.

14   26   C.F.R.    §§    301.7701-2(c)(1)    and   (2)(i).   Finally,   Treasury

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.        Thus,

20                 [a]n eligible entity with at least two members can
21                 elect to be classified as either an association (and
22                 thus a corporation under § 301.7701-2(b)(2)) or a
23                 partnership, and an eligible entity with a single
24                 owner can elect to be classified as an association
25                 or to be disregarded as an entity separate from its
26                 owner.   Paragraph (b) of this section provides a
27                 default classification for an eligible entity that
28                 does not make an election. . . .

29                      (b) Classification of eligible entities that do
30                 not   file  an   election--(1)   Domestic   eligible
31                 entities. Except as provided in paragraph (b)(3) of
32                 this section, unless the entity elects otherwise, a
33                 domestic eligible entity is--

34                             (i) A partnership if it has two or more
35                        members; or



                                             -14-
 1                            (ii) Disregarded as an entity separate
 2                       from its owner if it has a single owner.

 3   26 C.F.R. §§ 301.7701-3(a) and (b)(1) (emphases added).                See also

 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   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.                     But, as

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                many states ha[d] revised their statutes to provide
20                that   partnerships    and    other   unincorporated
21                organizations may possess characteristics that
22                traditionally    have     been    associated    with
23                corporations, thereby narrowing considerably the
24                traditional distinctions between corporations and
25                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        respects,    is     virtually   indistinguishable        from   a

30   corporation" was that the Kintner regulations required "taxpayers


                                              -15-
 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   WL   1093723,    at   *3       (6th   Cir.   Apr.   13,   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").

 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.                     The

14   current regulations allow the single-owner limited liability company

15   to choose    whether    to   be   treated    as    an    "association"--i.e.,    a

16   corporation--or to be disregarded as a separate entity.                If such an

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.                If the LLC chooses

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.                The IRS check-the-box

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.



                                           -16-
 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.    To begin with, "'[i]t goes without saying

 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).

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."      National Cable, 545 U.S. at 981

20   (internal quotation marks omitted).

21              Here, the IRS explained that its October 2005 proposal to

22   change the regulations was a response to

23              [a]dministrative difficulties [that] have arisen
24              from the interaction of the disregarded entity rules
25              and the federal employment tax provisions. Problems
26              have arisen for both taxpayers and the IRS with
27              respect to reporting, payment and collection of
28              employment    taxes,   particularly   where    state
29              employment tax law also sets requirements for
30              reporting, payment and collection that may be in


                                       -17-
 1              conflict with the federal disregarded entity rules.
 2              The Treasury Department and the IRS believe that
 3              treating the disregarded entity as the employer for
 4              purposes of federal employment taxes will improve
 5              the administration of the tax laws and simplify
 6              compliance.

 7   Disregarded Entities; Employment and Excise Taxes, 70 Fed. Reg.

 8   60475, 60476 (proposed Oct. 18, 2005).             The proposed changes, which

 9   have not been adopted as of the filing of this opinion, provide no

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   on   the   theory   that    they     ignore     the    Connecticut    law

14   provisions that accord an LLC member limited liability.                   He states

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."                   (McNamee brief on

20   appeal at 6.)    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.              If the LLC elects to be

25   treated as an association, the LLC is regarded as the employer.

26              Second,    Galletti       did     not    involve      either    Treasury

27   Regulations    interpreting    the    Code     or    a   single-member      limited

28   liability company. Galletti involved nonpayment of payroll taxes by


                                           -18-
 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.        The question raised was "whether,

 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."    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.    See id. at 116, 122 n.4.     The Court held that the

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.      The Galletti Court's

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   corporation   under   §   301.7701-2(b)(2)   or   a   partnership



                                          -19-
 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.                 Thus, nothing in the Code

13   provides that an LLC is always to be regarded, for purposes of

14   federal taxation, as the employer.              Under the pertinent Treasury

15   Regulations, the single-member LLC is the employer if it elects to

16   be   treated   as    a   corporation;    but    if    it   does    not    elect   that

17   treatment, it is "[d]isregarded" as a "separate" entity, 26 C.F.R.

18   §    301.7701-3(b)(1)(ii)      (emphasis       added),     and    hence   cannot    be

19   regarded as the employer.

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       because   it   violates     the   limited-liability       rights

23   granted him by state law.          As the Court of Appeals for the Sixth

24   Circuit noted in rejecting such a claim in Littriello,

25                    [t]he federal government has historically
26               disregarded state classifications of businesses for
27               some federal tax purposes. In Hecht v. Malley, 265
28               U.S. 144 . . . (1924), for example, the United


                                             -20-
 1             States Supreme Court held that Massachusetts trusts
 2             were "associations" within the meaning of the
 3             Internal Revenue Code despite the fact they were not
 4             so considered under state law.        As courts have
 5             repeatedly observed, state laws of incorporation
 6             control various aspects of business relations; they
 7             may affect, but do not necessarily control, federal
 8             tax provisions. See, e.g., Morrissey, 296 U.S. at
 9             357-58 . . . (explaining that common law definitions
10             of   certain   corporate   forms   do   not   control
11             interpretation of federal tax code). As a result,
12             . . . single-member LLCs are entitled to whatever
13             advantages state law may extend, but state law
14             cannot   abrogate   [their   owner's]   federal   tax
15             liability.

16   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.        We know of no provision,

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                                 CONCLUSION



26             We have considered all of McNamee's contentions on this

27   appeal and have found them to be without merit.     The judgment of the

28   district court is affirmed.




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