Diversity Jurisdiction and Tax Classification

Diversity Jurisdiction and Tax Classification

      In a recent decision, the court rejected the suggestion that the election by a particular LLC, for purposes of the Federal Internal Revenue Code, to be classified as a corporation should impact upon the mechanism by which the citizenship of the LLC is assessed for diversity purposes.  In effect, the LLC argued that, having elected to be taxed as a corporation, it should be assessed for diversity purposes as a corporation.  This argument was unsuccessful. Fairfield Castings, LLC v Hofmeister, No. 4:15-cv-00059, 2015 WL 4105027 (S.D. Iowa July 2, 2015).

      In rejecting the invitation to treat the LLC as a corporation for purposes of diversity jurisdiction, the District Court wrote:

Similarly, Spara’s elective decision to be treated as a corporation for tax purposes does not somehow transform its LLC status for purposes of evaluating diversity jurisdiction. The motivations behind a business entity’s choice to be taxed in a certain manner have no bearing on the rationale for evaluating the citizenship of each member of an LLC.