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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