In the decision rendered last week, the Wyoming Supreme Court has pierced the veil of the single-member LLC. That Court’s determination that issues of tax classification and treatment could be utilized as part of a decision to pierce is troubling. Green Hunter Energy, Inc. v. Western Ecosystems Technology, Inc., No. S-14-0036, 2014 WL 5794332 (Wyoming Nov. 7, 2014).
Green Hunter Energy, Inc. was the sole member of Green Hunter Wind Energy, LLC (the “LLC”). The LLC contracted with Western Ecosystems Technology, Inc. (“Western”) for certain consulting services. Western was never paid for those services. After receiving a judgment in its favor against the LLC exceeding $43,000 and finding the LLC without assets to satisfy the judgment, this action was brought against the corporate member, seeking to pierce the veil of the LLC. Initially, it is worthy of note that the opinion describes piercing as the “extraordinary equitable remedy,” providing further support to the notion that piercing is not of itself a cause of action. Further, the Court noted that this determination, as are all determinations on piercing, must be made “under the specific circumstances of [the] case.” ¶¶ 1, 39.
The single-member LLC had, for itself, no employees. Rather, employees of the parent corporation perform services on behalf of the LLC. The most damning factor in support of piercing was the under capitalization of the LLC. Essentially, it had no ongoing capital. Rather, from time to time, the parent corporation would contribute certain amounts to the LLC with the direction that certain invoices be satisfied. Needless to say, no contribution was ever made for the purpose of satisfying the plaintiff’s invoices. This control of what invoices would (and would not) be satisfied also indicated the parents inappropriate domination of the LLC’s activities.
To this point, the opinion appears to be well within the accepted grounds and factors for piercing the veil. That said, there are troubling aspects of this opinion in that the trial courts relied upon, which reliance was permitted by the Wyoming Supreme Court, issues with respect to the tax classification and treatment of the LLC. This single-member LLC had a federal default tax classification as a “disregarded entity,” which classification was not altered by an election to treat the LLC as an association taxable as a corporation. For example, it was noted that the LLC’s tax return was consolidated with that of its corporate parent; consequent thereto the parent was able to deduct $884,092 in expenses and claim an additional loss of $61,047. ¶45. The Court noted as well that:
Appellant has enjoyed significant tax breaks attributable to the LLC’s losses, without bearing any responsibility for the LLC’s debt and obligations that contributed to such losses. Such a disparity of the risk and rewards resulting from this manipulation would lead to injustice.
When the corporate defendant pointed out that “Federal tax law allows the LLC’s losses to be attributed to [the single-member] and a consolidated tax return filed,” the Supreme Court noted that the tax treatment was only one factor utilized in the determination to pierce the veil:
Instead, [the trial court] considered Appellant’s tax filings as only one of many relevant pieces of evidence demonstrating that Appellant directed benefits from the LLC to itself, while at the same time it concentrated wind farm project debts it decided would not be paid in the LLC. ¶48.
It is my view that it is not appropriate to incorporate into piercing analysis the question of tax classification. Initially, to do so draws a line between entities that are for tax purposes treated on a pass-through basis versus those that are taxed on the entity basis, setting the former on a path towards piercing while the latter are not. Simply put, tax classification in no manner impacts upon whether the entity in question has been misused to the detriment of the third-party. In this particular case, had the LLC been taxed as a C Corporation, with all other facts remaining the same, the LLC still would have been without assets with which to satisfy the plaintiff’s claim. In addition, this sort of analysis introduces an unnecessary level of complexity in that numerous jurisdictions impose entity level taxes on what are, for federal tax purposes, disregarded entities. See, e.g., KRS § 141.0401. If piercing analysis is to look at tax classification as a factor, what will be the result when there is a divergence between federal and state treatment?
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