Monday, October 3, 2016

A Blast From The Past: LLC’s Sole Member Held Liable For Employee Employment Taxes

A Blast From The Past: LLC’s Sole Member Held Liable For Employee Employment Taxes


When single-member LLCs were first recognized as “disregarded entities,there existed a significant number of questions with respect to the effect of that tax treatment. Over time, many of those questions have been resolved. Under current law, the LLC itself is treated as the employer for purposes of the withholding and remission of Social Security and similar taxes imposed upon wages. Originally, however, the opposite rule applied. Under that construct, the sole member of the LLC was treated as the employer with liability for those employment taxes. In the decision rendered last week by the U.S. Tax Court, it had opportunity to apply those old rules. Heber E. Costello LLC v. Commissioner, T. C. Memo 2016-184 (Sept. 29, 2016).

While this case dealt with liability for the remission of employment tax liabilities for the 2006 through 2008 calendar years, most of the opinion is focused upon addressing (and rejecting) arguments made by Costello as to why he should not be treated as the employer. Essentially, Costello argued that the LLC at issue should be classified not as a disregarded entity, but rather as a corporation. This argument was based upon the fact that the predecessor to the LLC had been a corporation, and it was intended that the LLC surviving the 368(a)(1)(f) reorganization should have been classified as a corporation. He also noted that in for several years the LLC had filed corporate tax returns, and on that basis the IRS should be estopped from arguing that it is other than taxable as a corporation.

These arguments were easily dismissed by the court. It was repeatedly noted that a single member LLC has a default tax classification as a disregarded entity. In order to change that default classification, is necessary to file a Form 8832 with the Internal Revenue Service. As no Form 8832 electing to treat the LLC as, for tax purposes, a corporation had ever been filed, the default classification would apply.


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