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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