Friday, June 10, 2011

Supreme Court won't review decision validating “check-the-box” regs

Medical Practice Solutions LLC, Carolyn Britton, Sole Member, (CA 1 8/24/2010) 106 AFTR 2d ¶2010-5239, cert denied 06/06/2011

The Supreme Court has declined to review a decision of the First Circuit Court of Appeals affirming the Tax Court's rejection of an attempt to remove liens to satisfy unpaid employment taxes by claiming that the “check-the-box” regs were invalid. The taxpayer was the sole member of a limited liability company (LLC), which the “check-the-box” regs treated as a disregarded entity under its default rule. As a result, the taxpayer was responsible for the LLC's employment taxes.

Background. Under the “check-the-box” system of classifying entities for tax purposes, eligible entities, i.e., unincorporated business entities that aren't trusts and that aren't mandatorily classified as corporations, may choose their federal tax classification. Multi-owner eligible entities may elect to be classified as corporations or partnerships, or to retain their default classifications in the absence of an election. Single-owner eligible entities may elect to be classified as corporations, or may choose to have their status as entities separate from their owners ignored. (Reg. §301.7701-3(a))

A single member LLC that doesn't elect to be treated as a corporation under the “check-the-box” regs is considered a disregarded entity for federal tax purposes. As such, its activities are treated in the same manner as a sole proprietorship. (Reg. §301.7701-3(b)(1)(ii)) As a result, the disregarded entity is ignored and its property and activities are treated as those of the owner of the entity.

In 2005, IRS issued proposed regs that would treat single-owner entities that are disregarded as entities as separate entities for employment tax purposes. Final regs provide that for employment taxes related to wages paid on or after Jan. 1, 2009, a disregarded entity is treated as a corporation (i.e., as a separate entity) for purposes of employment tax reporting and liability. (Reg. §301.7701-2(c)(2)(iv))

Facts. Medical Practice Solutions was a single-member LLC with Carolyn Britton as its sole member. She treated the LLC as her sole proprietorship on Schedule C, Profit or Loss From Business, on her return. She did not elect to have the LLC treated as a corporation for federal income tax purposes.

After Medical Practice Solutions failed to pay employment taxes for several periods in 2006, notices of lien and intent to levy were sent to Britton. After a hearing under Code Sec. 6330, a notice of determination sustaining lien and proposed levy were sent to Britton, pursuant to Reg. §301.7701-3(b) of the check-the-box regs.

Taxpayer's argument. Britton contended that only the LLC, Medical Practice Solutions, was liable and that the check-the-box regs (as applicable to employment taxes related to wages paid before Jan. 1, 2009) were invalid. She asserted that the LLC was the employer liable for the taxes. She also argued that the amended regs, which reverse the effect of regs applicable to the periods at issue, showed that the prior regs were unreasonable.

Check the box regs valid. The Tax Court held that collection against Britton could proceed. Relying on Littriello v. U.S., (CA 6 4/13/2007) 99 AFTR 2d 2007-2210, cert denied 2/18/2008, and McNamee v. Dept. of the Treasury (CA 2 5/23/2007) 99 AFTR 2d 2007-2871, the Tax Court rejected the taxpayer's argument that the LLC had to be treated as the employer liable for the employment taxes and that the check-the-box regs were invalid. The Sixth Circuit in Littriello and the Second Circuit in McNamee rejected the argument that a LLC's separate existence under state law had to be recognized and that the proposed regs were evidence of the invalidity of the regs in issue. The Court found that Britton did not provide a valid reason to support a conclusion contrary to these cases and noted that she had not contested the underlying liabilities.

TC affirmed. The First Circuit found that there was no error or abuse of discretion in the Tax Court's decision and affirmed it.

No review in Supreme Court. The Supreme Court has now declined to review the case. Accordingly, the decision of the First Circuit is now final.

References: For the “check-the-box” regs, see FTC 2d/FIN ¶D-1150 et seq.; United States Tax Reporter ¶77,014.15 et seq.; TaxDesk ¶580,500 et seq.; TG ¶4050 et seq. For disregarded entities and employment tax, see FTC 2d/FIN ¶H-4223; TaxDesk ¶534,002.

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