McNamee v. IRS

Opinion

05-6151 McNamee v. IRS

1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 - - - - - - 4 August Term, 2006 5 (Argued: December 8, 2006 Decided: May 23, 2007) 6 7 Docket No. 05-6151-cv 8 _________________________________________________________ 9 SEAN P. McNAMEE, 10 Plaintiff-Appellant, 11 - v. - 12 DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE, 13 Defendant-Appellee. 14 _________________________________________________________ 15 Before: KEARSE and STRAUB, Circuit Judges, and KEENAN, District 16 Judge*. 17 Appeal from a judgment of the United States District Court 18 for the District of Connecticut, Christopher F. Droney, Judge, 19 upholding Internal Revenue Service determination that plaintiff is 20 personally liable for the employment tax liabilities of his wholly- 21 owned limited-liability company, which he had chosen not to have 22 treated as a corporation. 23 Affirmed.

*Honorable John F. Keenan, of the United States District Court for the Southern District of New York, sitting by designation.

1 SEAN P. McNAMEE, Wallingford, Connecticut, 2 Plaintiff-Appellant pro se.

3 BRIDGET M. ROWAN, Attorney, Tax Division, 4 Department of Justice, Washington, D.C. 5 (Eileen J. O'Connor, Assistant Attorney 6 General, David I. Pincus, Attorney, Tax 7 Division, Washington, D.C., Kevin J. 8 O'Connor, United States Attorney for the 9 District of Connecticut, on the brief), 10 for Defendant-Appellee.

11 KEARSE, Circuit Judge: 12 Plaintiff pro se Sean P. McNamee, the single-member owner 13 of a now-defunct limited liability company (or "LLC") formed under 14 Connecticut law, appeals from a judgment of the United States 15 District Court for the District of Connecticut, Christopher F. 16 Droney, Judge, rejecting his challenge to a determination by the 17 Internal Revenue Service ("IRS") under Treasury Regulations 18 §§ 301.7701-2 and 301.7701-3, 26 C.F.R. §§ 301.7701-2 and 301.7701- 19 3, that, because of his failure to exercise his option to have his 20 LLC treated as a corporation, McNamee was personally liable for the 21 LLC's employment tax liabilities. McNamee alleged principally that 22 the Treasury Regulations, and hence the IRS determination, were 23 contrary (a) to state law treating an LLC and its members as 24 separate entities, and (b) to provisions of the Internal Revenue 25 Code (or "Code"). The district court, concluding that the Treasury 26 Regulations were both consistent with the Code and reasonable, ruled 27 in favor of the government. On appeal, McNamee pursues his 28 contentions that the regulations are invalid because they contravene 29 state law and the federal statutory scheme. For the reasons that

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1 follow, we affirm.

2 I. BACKGROUND

3 The material facts appear to be undisputed. McNamee was 4 the sole proprietor of an unincorporated accounting firm, W.F. 5 McNamee & Company LLC ("WFM-LLC"), a Connecticut limited liability 6 company that ceased operation in March 2002. WFM-LLC employed an 7 average of six persons. 8 The Internal Revenue Code imposes two forms of employment 9 tax obligations on an employer (hereinafter "payroll taxes"). 10 First, the employer is required to pay unemployment taxes, see 11 26 U.S.C. § 3301, and to make contributions to its employees' 12 social-security and Medicare benefits pursuant to the Federal 13 Insurance Contributions Act ("FICA"), see id. § 3111. Second, the 14 employer is required to withhold from employee compensation and 15 remit to the government (a) employee income taxes, see id. § 3402, 16 and (b) the employees' own mandated FICA contributions, see id. 17 §§ 3101, 3102(b). With respect to the third and fourth quarters of 18 2000 and all four quarters of 2001, WFM-LLC made no payment of any 19 of the required payroll taxes. 20 The Code recognizes a variety of business entities-- 21 including corporations, companies, associations, partnerships, sole 22 proprietorships, and groups--and, based on the classifications, 23 treats the entities in various ways for income tax purposes. For 24 example, the income of a corporate entity is generally subject to a

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1 double wave of taxation, in that the corporation is taxed directly, 2 see 26 U.S.C. § 11(a), and its individual shareholders are further 3 taxed on dividends paid to them out of the corporation's income, see 4 id. § 61(a)(7). In contrast, an unincorporated sole proprietorship 5 that is treated as such is taxed only once: the owner simply lists 6 his business income on Schedule C of his individual tax return; the 7 proprietorship entity is not directly taxed, see generally id. 8 § 61(a)(2); 26 C.F.R. § 301.7701-3(b). 9 As discussed in greater detail in Part II below, the 10 Code's definitions of various types of business entities are broad, 11 and to some extent they overlap one another. See 26 U.S.C. 12 § 7701(a). In an attempt to eliminate ambiguity, the Treasury 13 Regulations instruct that certain entities must be classified as 14 corporations, see 26 C.F.R. § 301.7701-2(b), while other entities 15 are permitted to decide for themselves whether or not to be treated 16 as corporations, see id. § 301.7701-3. Thus, an entity whose 17 classification as a corporation is not required (referred to in the 18 Regulations as an "eligible entity"), and which has only one owner, 19 has the option of being classified either as an "association"--which 20 is defined in § 301.7701-2(b)(2) as a corporation--or as a "sole 21 proprietorship" that is to be "disregarded as an entity separate 22 from its owner," id. § 301.7701-2(a). 23 An eligible entity exercises that option simply by filing 24 IRS Form 8832, entitled "Entity Classification Election," having 25 checked the appropriate box on the Form. See id. § 301.7701-3(c) 26 (the "check-the-box" regulation). In the absence of such an

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1 election, an eligible entity that has only one owner is disregarded 2 as a separate entity. See id. § 301.7701-3(b). 3 WFM-LLC, McNamee's LLC, was not required to be classified 4 as a corporation, and McNamee elected not to have it treated as one. 5 Thus, under the Treasury Regulations, WFM-LLC was disregarded as a 6 separate entity and was treated as a sole proprietorship. WFM-LLC's 7 unpaid payroll taxes for 2000 and 2001 totaled $64,736.18. The IRS, 8 having disregarded WFM-LLC as a separate entity, assessed those 9 taxes against McNamee personally and placed a lien on his property. 10 McNamee filed a timely administrative appeal. He did not 11 dispute WFM-LLC's liability for the unpaid $64,736.18. However, 12 pointing to sections of Connecticut law providing that members of an 13 LLC are not personally liable for the debts of the LLC, see, e.g., 14 Conn. Gen. Stat. Ann. § 34-133 (West 2005), he argued that the IRS 15 did not have the authority to "unilaterally pierce the corporate 16 veil of an LLC simple [sic] by looking at how it reports it's [sic] 17 income," and that the IRS's application of the check-the-box 18 regulation was therefore "in direct conflict with the right of an 19 LLC member." (McNamee Request for a Collection Due Process 20 Hearing.) 21 In a Notice of Determination Concerning Collection 22 Action(s) Under Section 6320 and/or 6330, dated October 23, 2003 23 ("IRS Determination"), the IRS Appeals Office rejected McNamee's 24 appeal. The unpaginated explanatory Attachment ("IRS Determination 25 Attachment") stated that the IRS's review confirmed that "[WFM-LLC] 26 was set up as a single member LLC, and that you, as the single

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1 member, did not elect association status . . . ." (IRS 2 Determination Attachment, first page.) After discussing the 3 pertinent Treasury Regulations, the IRS concluded that, 4 "[t]herefore, the LLC has been disregarded as an entity separate 5 from you. You, as the single member owner, are personally liable 6 for the employment tax debt of the LLC" (id. third page). The IRS 7 also noted that, while the administrative appeal was pending, 8 McNamee had terminated the existence of WFM-LLC (see id. first 9 page), and that he offered no alternative means of collecting the 10 amount due (see id. third page). 11 McNamee brought the present action in the district court 12 pursuant to, inter alia, 26 U.S.C. §§ 6320 and 6330, seeking review 13 of the IRS's administrative determination. He principally 14 reiterated his contentions that the IRS had no authority to 15 disregard the protection from liability afforded to members of an 16 LLC by Connecticut law and thereby hold him responsible for 17 WFM-LLC's tax liabilities. He also contended that the regulations 18 relied on by the IRS conflicted with provisions of the Internal 19 Revenue Code. 20 McNamee moved for summary judgment in his favor. The 21 government moved for affirmance of its determination that McNamee is 22 liable for WFM-LLC's unpaid payroll taxes. The district court 23 summarily denied McNamee's motion and granted the IRS's motion, 24 "find[ing] that the regulations at issue here were both reasonable 25 and consistent with the purposes of the revenue statutes." Ruling 26 on Pending Motions, dated September 26, 2005, at 1.

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1 Judgment was entered in favor of the government, and this 2 appeal followed.

3 II. DISCUSSION

4 On appeal, McNamee argues principally that the check-the- 5 box regulations "directly contradict the relevant statutory 6 provisions of the Internal Revenue Code" (McNamee brief on appeal 7 at 2), violate federal policy, and "ignore the limited liability 8 laws created by local legislation," (id. at 6). He also argues that 9 an IRS proposal in October 2005 to amend the check-the-box 10 regulations--and relieve the owner of a single-member LLC from any 11 possibility of personal liability for the LLC's payroll tax 12 liability--shows that the current check-the-box regulation is 13 "wrong" (id. at 7). Finding no merit in any of McNamee's 14 contentions, we affirm.

15 A. The Validity of the Treasury Regulations 16 1. The Standard of Review 17 In reviewing a challenge to an agency regulation 18 interpreting a federal statute that the agency is charged with 19 administering, the first duty of the courts is to determine "whether 20 the statute's plain terms 'directly addres[s] the precise question 21 at issue.'" National Cable & Telecommunications Ass'n v. Brand X

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1 Internet Services, 545 U.S. 967, 986 (2005) ("National Cable") 2 (quoting Chevron U.S.A. Inc. v. Natural Resources Defense Council, 3 Inc., 467 U.S. 837, 843 (1984)). "If the statute is ambiguous on 4 the point, we defer . . . to the agency's interpretation so long as 5 the construction is 'a reasonable policy choice for the agency to 6 make.'" National Cable, 545 U.S. at 986 (quoting Chevron, 467 U.S. 7 at 845). As stated in Chevron itself,

8 [f]irst, always, is the question whether Congress 9 has directly spoken to the precise question at 10 issue. If the intent of Congress is clear, that is 11 the end of the matter; for the court, as well as the 12 agency, must give effect to the unambiguously 13 expressed intent of Congress. If, however, the 14 court determines Congress has not directly addressed 15 the precise question at issue, the court does not 16 simply impose its own construction on the statute, 17 as would be necessary in the absence of an 18 administrative interpretation. Rather, if the 19 statute is silent or ambiguous with respect to the 20 specific issue, the question for the court is 21 whether the agency's answer is based on a 22 permissible construction of the statute.

23 467 U.S. at 842-43 (footnotes omitted) (emphases added). 24 "If Congress has explicitly left a gap for the agency to 25 fill, there is an express delegation of authority to the agency to 26 elucidate a specific provision of the statute by regulation[, and 27 s]uch legislative regulations are given controlling weight unless 28 they are arbitrary, capricious, or manifestly contrary to the 29 statute." Id. at 843-44. See also United States v. Mead Corp., 533 30 U.S. 218, 226-27 (2001) ("administrative implementation of a 31 particular statutory provision qualifies for Chevron deference when 32 it appears that Congress delegated authority to the agency generally 33 to make rules carrying the force of law, and that the agency

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1 interpretation claiming deference was promulgated in the exercise of 2 that authority"). 3 In the Internal Revenue Code, Congress expressly delegated 4 authority to the Secretary of the Treasury to adopt regulations to 5 fill in gaps in the Code: 6 § 7805. Rules and regulations

7 (a) Authorization 8 Except where such authority is expressly given 9 by this title to any person other than an officer or 10 employee of the Treasury Department, the Secretary 11 shall prescribe all needful rules and regulations 12 for the enforcement of this title, including all 13 rules and regulations as may be necessary by reason 14 of any alteration of law in relation to internal 15 revenue.

16 . . . .

17 (d) Manner of making elections prescribed by 18 Secretary 19 Except to the extent otherwise provided by this 20 title, any election under this title shall be made 21 at such time and in such manner as the Secretary 22 shall prescribe.

23 26 U.S.C. §§ 7805(a) and (d) (emphasis added); see also 26 U.S.C. 24 § 7701(a)(11)(B) ("The term 'Secretary' means the Secretary of the 25 Treasury or his delegate."). With respect to the promulgation of 26 regulations interpreting the Code, the Secretary of the Treasury has 27 delegated authority to the Commissioner of Internal Revenue 28 ("Commissioner"). See 26 C.F.R. § 301.7805-1. "Because Congress 29 has delegated to the Commissioner the power to promulgate 'all 30 needful rules and regulations for the enforcement of [the Internal 31 Revenue Code],' 26 U.S.C. § 7805(a), we must defer to his regulatory 32 interpretations of the Code so long as they are reasonable, see 33 National Muffler Dealers Assn., Inc. v. United States, 440 U.S. 472,

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1 476-477 (1979)." Cottage Savings Ass'n v. Commissioner of Internal 2 Revenue, 499 U.S. 554, 560-61 (1991).

3 2. The Relevant Provisions of the Code 4 The Internal Revenue Code sets out "[d]efinitions" of 5 various types of business entities in the first three subsections of 6 § 7701(a), under the headings "Person[s]," "Partnership[s]," and 7 "Corporation[s]." As an examination of these provisions reveals, 8 the categories are overlapping and somewhat ambiguous:

9 (a) When used in this title, where not 10 otherwise distinctly expressed or manifestly 11 incompatible with the intent thereof--

12 (1) Person 13 The term "person" shall be construed to 14 mean and include an individual, a trust, 15 estate, partnership, association, company or 16 corporation.

17 (2) Partnership . . . 18 The term "partnership" includes a 19 syndicate, group, pool, joint venture, or other 20 unincorporated organization, through or by 21 means of which any business, financial 22 operation, or venture is carried on, and which 23 is not, within the meaning of this title, a 24 trust or estate or a corporation . . . .

25 (3) Corporation 26 The term "corporation" includes 27 associations . . . .

28 26 U.S.C. §§ 7701(a)(1), (2), and (3) (emphases added). Thus, each 29 subsection tends to be illustrative, rather than definitive, and 30 none of them specifies the characteristics of the entity that it 31 "defin[es]." 32 Potential overlap among definitions is evident from the

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1 lack of even illustrative definitional entries of such terms as 2 "company" and "association." For example, a "company" could be 3 deemed a "partnership" within the meaning of subsection (a)(2) if it 4 is an "unincorporated organization"; but it is a "corporation" 5 within the meaning of subsection (a)(3) if it is an "association." 6 However, the Code contains no definition of the term "association." 7 It does, however, define the term "shareholder" to "include[] a 8 member in an association." Id. § 7701(a)(8). Sole proprietorships 9 are nowhere defined in the Code, although the existence of such a 10 business form is recognized, see, e.g., 26 U.S.C. 11 § 172(b)(1)(F)(iii) (relating to net operating loss carryovers and 12 carrybacks). 13 Limited liability companies are not expressly mentioned, 14 much less defined, in the Code. Although an LLC might be considered 15 a company or an association, its proper characterization is not 16 clear from the terms of the Code itself. Limited liability 17 companies are "a relatively new business structure allowed by state 18 statute," having some features of corporations and some features of 19 partnerships. IRS Publication 3402, Tax Issues for Limited 20 Liability Companies 1 (2000), available at 21 http://www.irs.gov/businesses/small/article/0,,id-=98277,00.html 22 ("IRS Pub. 3402"). For example, "similar to a corporation, owners 23 have limited personal liability for the debts and actions of the 24 LLC." Id.; see, e.g., Conn. Gen. Stat. Ann. § 34-133. "Other 25 features of LLCs are more like a partnership, providing management 26 flexibility," IRS Pub. 3402; see, e.g., Conn. Gen. Stat. Ann.

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1 §§ 34-109 (execution of documents), 34-130 (agency), 34-140 2 (management), and in some cases affording "the benefit of pass- 3 through taxation," IRS Pub. 3402; but see Conn. Gen. Stat. Ann. 4 § 34-113 ("A limited liability company formed under sections 34-100 5 to 34-242 . . . shall be treated, for purposes of taxes imposed by 6 the laws of the state or any political subdivision thereof, in 7 accordance with the classification for federal tax purposes." 8 (emphases added)). 9 Under Connecticut law, a limited liability company may 10 have a single member. See, e.g., id. §§ 34-101(10), 34-140(c). The 11 Internal Revenue Code is unclear as to whether such a company falls 12 within subsection (a)(2) or (a)(3) of § 7701. It hardly seems to be 13 a subsection (a)(3) "association," as one person does not associate 14 with himself. Nor is a one-person operation in the same genre as 15 the specific subsection (a)(2) entities that are included within the 16 term "partnership"--i.e., "syndicate, group, pool, joint venture"-- 17 all of which, like the term partnership itself, denote combinations 18 of persons rather than a single person, see, e.g., Conn. Gen. Stat. 19 Ann. § 34-301(9) ("'Partnership' means an association of two or more 20 persons . . . ."). The closest fit for a single-owner LLC would 21 seem to be "other unincorporated organization"--an organization that 22 might or might not be an entity separate from its owner.

23 3. The Gap-Filling Treasury Regulations 24 Against this ambiguous statutory background, the Treasury 25 Regulations were intended to provide straightforward guidance as to

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1 how various types of entities, including single-owner businesses, 2 are to be classified for tax purposes. Treasury Regulation 3 § 301.7701-1 states "[i]n general" that

4 [t]he Internal Revenue Code prescribes the 5 classification of various organizations for federal 6 tax purposes. Whether an organization is an entity 7 separate from its owners for federal tax purposes is 8 a matter of federal tax law and does not depend on 9 whether the organization is recognized as an entity 10 under local law.

11 . . . .

12 (4) Single owner organizations. Under 13 §§ 301.7701-2 and 301.7701-3, certain organizations 14 that have a single owner can choose to be recognized 15 or disregarded as entities separate from their 16 owners.

17 26 C.F.R. §§ 301.7701-1(a)(1) and (4) (emphases added). The 18 Regulations proceed to describe the classification of business 19 entities:

20 (a) Business entities. For purposes of this 21 section and § 301.7701-3, a business entity is any 22 entity recognized for federal tax purposes 23 (including an entity with a single owner that may be 24 disregarded as an entity separate from its owner 25 under § 301.7701-3) that is not properly classified 26 as a trust under § 301.7701-4 or otherwise subject 27 to special treatment under the Internal Revenue 28 Code. A business entity with two or more members is 29 classified for federal tax purposes as either a 30 corporation or a partnership. A business entity 31 with only one owner is classified as a corporation 32 or is disregarded; if the entity is disregarded, its 33 activities are treated in the same manner as a sole 34 proprietorship, branch, or division of the owner.

35 26 C.F.R. § 301.7701-2(a) (emphases added). Subsection (b) of this 36 Regulation defines the term "corporation" to include a business 37 entity that is incorporated under federal or state law, see id. 38 § 301.7701-2(b)(1), an "association (as determined under

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1 § 301.7701-3)," id. § 301.7701-2(b)(2) (emphasis added), and various 2 other business entities, see id. §§ 301.7701-2(b)(3), (4), (5), (6), 3 (7), and (8). 4 Subsection (c) of Treasury Regulation 301.7701-2 states in 5 pertinent part, with regard to "[o]ther business entities," that 6 "[f]or federal tax purposes,"

7 (1) The term partnership means a business 8 entity that is not a corporation under paragraph (b) 9 of this section and that has at least two members.

10 (2) Wholly owned entities--(i) In general. A 11 business entity that has a single owner and is not a 12 corporation under paragraph (b) of this section is 13 disregarded as an entity separate from its owner.

14 26 C.F.R. §§ 301.7701-2(c)(1) and (2)(i). Finally, Treasury 15 Regulation 301.7701-3(a) provides that "an eligible entity"--which 16 it defines as a "business entity that is not classified as a 17 corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or 18 (8)"--is given an option whether or not to be classified as a 19 corporation. Thus,

20 [a]n eligible entity with at least two members can 21 elect to be classified as either an association (and 22 thus a corporation under § 301.7701-2(b)(2)) or a 23 partnership, and an eligible entity with a single 24 owner can elect to be classified as an association 25 or to be disregarded as an entity separate from its 26 owner. Paragraph (b) of this section provides a 27 default classification for an eligible entity that 28 does not make an election. . . .

29 (b) Classification of eligible entities that do 30 not file an election--(1) Domestic eligible 31 entities. Except as provided in paragraph (b)(3) of 32 this section, unless the entity elects otherwise, a 33 domestic eligible entity is--

34 (i) A partnership if it has two or more 35 members; or

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1 (ii) Disregarded as an entity separate 2 from its owner if it has a single owner.

3 26 C.F.R. §§ 301.7701-3(a) and (b)(1) (emphases added). See also 4 id. § 301.7701-3(b)(3) (a single-owner entity that was in existence 5 prior to the effective date of this regulation and that claimed to 6 be a partnership under the prior regulations will be disregarded as 7 an entity separate from its owner). 8 An entity files its election to be treated as an 9 association simply by checking the appropriate box or boxes on IRS 10 "Form 8832, Entity Classification Election" and filing that Form. 11 Id. § 301.7701-3(c). 12 These regulations became effective on January 1, 1997, 13 replacing regulations, known as the "Kintner regulations," that had 14 been in place since 1960. The Kintner regulations had been adequate 15 during the first several decades after their adoption. But, as 16 explained in the 1996 proposal for their amendment, the Kintner 17 regulations were complicated to apply, especially in light of the 18 fact that

19 many states ha[d] revised their statutes to provide 20 that partnerships and other unincorporated 21 organizations may possess characteristics that 22 traditionally have been associated with 23 corporations, thereby narrowing considerably the 24 traditional distinctions between corporations and 25 partnerships under local law.

26 Simplification of Entity Classification Rules, 61 Fed. Reg. 21989, 27 21989-90 (proposed May 13, 1996). "One consequence of the increased 28 flexibility" in local laws authorizing an entity that "in all 29 meaningful respects, is virtually indistinguishable from a 30 corporation" was that the Kintner regulations required "taxpayers

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1 and the IRS [to] expend considerable resources on classification 2 issues." Id. at 21990; see, e.g., Littriello v. United States, No. 3 05-6494, 2007 WL 1093723, at *3 (6th Cir. Apr. 13, 2007) 4 ("Littriello") (the Kintner regulations "proved less than adequate 5 to deal with the new hybrid business entities--limited liability 6 companies, limited liability partnerships, and the like--developed 7 in the last years of the last century under various state laws"). 8 In light of the emergence of limited liability companies 9 and their hybrid nature, and the continuing silence of the Code on 10 the proper tax treatment of such companies in the decade since the 11 present regulations became effective, we cannot conclude that the 12 above Treasury Regulations, providing a flexible response to a novel 13 business form, are arbitrary, capricious, or unreasonable. The 14 current regulations allow the single-owner limited liability company 15 to choose whether to be treated as an "association"--i.e., a 16 corporation--or to be disregarded as a separate entity. If such an 17 LLC elects to be treated as a corporation, its owner avoids the 18 liabilities that would fall upon him if the LLC were disregarded; 19 but he is subject to double taxation--once at the corporate level 20 and once at the individual shareholder level. If the LLC chooses 21 not to be treated as a corporation, either by affirmative election 22 or by default, its owner will be liable for debts incurred by the 23 LLC, but there will be no double taxation. The IRS check-the-box 24 regulations, allowing the single-owner LLC to make the choice, are 25 therefore eminently reasonable. Accord Littriello, 2007 WL 1093723, 26 at *4-*6.

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1 4. The Proposed New Regulations 2 McNamee's contention that the fact that the IRS has 3 proposed new regulations that would definitively make an LLC's 4 single owner not liable for the LLC's unpaid payroll taxes means 5 that the current regulations are "wrong" (McNamee brief on appeal at 6 7) is wide of the mark. To begin with, "'[i]t goes without saying 7 that a proposed regulation does not represent an agency's considered 8 interpretation of its statute and that an agency is entitled to 9 consider alternative interpretations before settling on the view it 10 considers most sound.'" Littriello, 2007 WL 1093723, at *7 (quoting 11 Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 845 12 (1986)) (emphasis ours). 13 Further, "if the agency adequately explains the reasons 14 for a reversal of policy, change is not invalidating, since the 15 whole point of Chevron is to leave the discretion provided by the 16 ambiguities of a statute with the implementing agency," and to allow 17 the agency to "consider varying interpretations and the wisdom of 18 its policy on a continuing basis, . . . for example, in response to 19 changed factual circumstances." National Cable, 545 U.S. at 981 20 (internal quotation marks omitted). 21 Here, the IRS explained that its October 2005 proposal to 22 change the regulations was a response to

23 [a]dministrative difficulties [that] have arisen 24 from the interaction of the disregarded entity rules 25 and the federal employment tax provisions. Problems 26 have arisen for both taxpayers and the IRS with 27 respect to reporting, payment and collection of 28 employment taxes, particularly where state 29 employment tax law also sets requirements for 30 reporting, payment and collection that may be in

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1 conflict with the federal disregarded entity rules. 2 The Treasury Department and the IRS believe that 3 treating the disregarded entity as the employer for 4 purposes of federal employment taxes will improve 5 the administration of the tax laws and simplify 6 compliance.

7 Disregarded Entities; Employment and Excise Taxes, 70 Fed. Reg. 8 60475, 60476 (proposed Oct. 18, 2005). The proposed changes, which 9 have not been adopted as of the filing of this opinion, provide no 10 basis for finding the existing regulations unreasonable.

11 B. McNamee's Reliance on State Law 12 McNamee also contends that the Treasury Regulations are 13 invalid on the theory that they ignore the Connecticut law 14 provisions that accord an LLC member limited liability. He states 15 that "the treasury has consistently held that the owner of a single 16 member LLC is the employer for Federal tax purposes," and argues 17 that United States v. Galletti, 541 U.S. 114 (2004), shows that the 18 IRS exceeded its authority "in attempt[ing] to ignore the limited 19 liability laws created by local legislation." (McNamee brief on 20 appeal at 6.) We are unpersuaded. 21 First, as discussed in Part II.A.3. above, the IRS has not 22 dictated that the owner of a single-member LLC always be considered 23 the employer for federal tax purposes; rather, it has given the LLC 24 the option to elect association status. If the LLC elects to be 25 treated as an association, the LLC is regarded as the employer. 26 Second, Galletti did not involve either Treasury 27 Regulations interpreting the Code or a single-member limited 28 liability company. Galletti involved nonpayment of payroll taxes by

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1 a partnership and the government's assertion of claims for the 2 unpaid taxes in individual bankruptcy proceedings filed by the 3 partnership's general partners. The question raised was "whether, 4 in order for the United States to avail itself of the 10-year 5 increase in the statute of limitations for collection of a tax debt, 6 it must assess the taxes not only against a partnership that is 7 directly liable for the debt, but also against each individual 8 partner who might be jointly and severally liable for the debts of 9 the partnership." 541 U.S. at 116. The Supreme Court noted that 10 under state law, a partnership was regarded as an entity separate 11 from its partners and that the liability of the partners for 12 partnership debt was secondary, i.e., derived from the liability of 13 the partnership. See id. at 116, 122 n.4. The Court held that the 14 government was not required, in order to press its claims in 15 bankruptcy, to assess the payroll taxes against the individual 16 partners because payroll taxes are imposed on the "employer," e.g., 17 26 U.S.C. §§ 3402, 3403, and the employer was the partnership, 18 rather than its partners, see 541 U.S. at 121. The Galletti Court's 19 identification of the partnership as the employer has no bearing on 20 whether the sole owner of an LLC is to be considered the employer. 21 A partnership, as discussed above, has at least two 22 members; and while a partnership may elect to be treated as a 23 corporation, "partnership" and "corporation" are its only options. 24 26 C.F.R. § 301.7701-3(a) ("An eligible entity with at least two 25 members can elect to be classified as either an association (and 26 thus a corporation under § 301.7701-2(b)(2) or a partnership

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1 . . . ." (emphases added)); id. § 301.7701-2(a) ("A business entity 2 with two or more members is classified for federal tax purposes as 3 either a corporation or a partnership." (emphases added)). There is 4 no Code provision or regulation that allows a partnership to be 5 disregarded as an entity in order for its partners to be treated as 6 the taxable entity. Thus, it is hardly remarkable that the Galletti 7 Court concluded that the employer was the partnership rather than 8 its partners. 9 Further, we note that although the payroll tax sections of 10 the Code define "employer"--in various ways--see 26 U.S.C. §§ 3306 11 and 3401, as discussed in Part II.A.2. above the Code does not even 12 mention limited liability companies. Thus, nothing in the Code 13 provides that an LLC is always to be regarded, for purposes of 14 federal taxation, as the employer. Under the pertinent Treasury 15 Regulations, the single-member LLC is the employer if it elects to 16 be treated as a corporation; but if it does not elect that 17 treatment, it is "[d]isregarded" as a "separate" entity, 26 C.F.R. 18 § 301.7701-3(b)(1)(ii) (emphasis added), and hence cannot be 19 regarded as the employer. 20 Finally, we reject McNamee's contention that the IRS's 21 attempt to collect his LLC's unpaid payroll taxes from him is 22 impermissible because it violates the limited-liability rights 23 granted him by state law. As the Court of Appeals for the Sixth 24 Circuit noted in rejecting such a claim in Littriello,

25 [t]he federal government has historically 26 disregarded state classifications of businesses for 27 some federal tax purposes. In Hecht v. Malley, 265 28 U.S. 144 . . . (1924), for example, the United

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1 States Supreme Court held that Massachusetts trusts 2 were "associations" within the meaning of the 3 Internal Revenue Code despite the fact they were not 4 so considered under state law. As courts have 5 repeatedly observed, state laws of incorporation 6 control various aspects of business relations; they 7 may affect, but do not necessarily control, federal 8 tax provisions. See, e.g., Morrissey, 296 U.S. at 9 357-58 . . . (explaining that common law definitions 10 of certain corporate forms do not control 11 interpretation of federal tax code). As a result, 12 . . . single-member LLCs are entitled to whatever 13 advantages state law may extend, but state law 14 cannot abrogate [their owner's] federal tax 15 liability.

16 Littriello, 2007 WL 1093723, at *6. We agree. 17 Moreover, McNamee could have had the benefit of limited 18 personal liability if he had simply elected to have his LLC treated 19 as a corporation; he chose not to do so and thereby avoided having 20 the LLC taxed as a separate entity. We know of no provision, 21 policy, or principle that required the federal government to allow 22 him both to escape personal liability for the taxes owed by his sole 23 proprietorship and to have the proprietorship escape taxation as a 24 separate entity.

25 CONCLUSION

26 We have considered all of McNamee's contentions on this 27 appeal and have found them to be without merit. The judgment of the 28 district court is affirmed.