Honorable John F. Keenan, of the United States District Court for the Southern… v. IRS UNITED STATES COURT OF APPEALS 1 FOR THE SECOND CIRCUIT 2 - - - - - - 3 August…

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

-- 1 of 21 --

-2-
SEAN P. McNAMEE, Wallingford, Connecticut, 1
Plaintiff-Appellant pro se. 2
BRIDGET M. ROWAN, Attorney, Tax Division, 3
Department of Justice, Washington, D.C. 4
(Eileen J. O'Connor, Assistant Attorney 5
General, David I. Pincus, Attorney, Tax 6
Division, Washington, D.C., Kevin J. 7
O'Connor, United States Attorney for the 8
District of Connecticut, on the brief), 9
for Defendant-Appellee. 10
KEARSE, Circuit Judge: 11
Plaintiff pro se Sean P. McNamee, the single-member owner 12
of a now-defunct limited liability company (or "LLC") formed under 13
Connecticut law, appeals from a judgment of the United States 14
District Court for the District of Connecticut, Christopher F. 15
Droney, Judge, rejecting his challenge to a determination by the 16
Internal Revenue Service ("IRS") under Treasury Regulations 17
§§ 301.7701-2 and 301.7701-3, 26 C.F.R. §§ 301.7701-2 and 301.7701- 18
3, that, because of his failure to exercise his option to have his 19
LLC treated as a corporation, McNamee was personally liable for the 20
LLC's employment tax liabilities. McNamee alleged principally that 21
the Treasury Regulations, and hence the IRS determination, were 22
contrary (a) to state law treating an LLC and its members as 23
separate entities, and (b) to provisions of the Internal Revenue 24
Code (or "Code"). The district court, concluding that the Treasury 25
Regulations were both consistent with the Code and reasonable, ruled 26
in favor of the government. On appeal, McNamee pursues his 27
contentions that the regulations are invalid because they contravene 28
state law and the federal statutory scheme. For the reasons that 29

-- 2 of 21 --

-3-
follow, we affirm. 1
I. BACKGROUND 2
The material facts appear to be undisputed. McNamee was 3
the sole proprietor of an unincorporated accounting firm, W.F. 4
McNamee & Company LLC ("WFM-LLC"), a Connecticut limited liability 5
company that ceased operation in March 2002. WFM-LLC employed an 6
average of six persons. 7
The Internal Revenue Code imposes two forms of employment 8
tax obligations on an employer (hereinafter "payroll taxes"). 9
First, the employer is required to pay unemployment taxes, see 10
26 U.S.C. § 3301, and to make contributions to its employees' 11
social-security and Medicare benefits pursuant to the Federal 12
Insurance Contributions Act ("FICA"), see id. § 3111. Second, the 13
employer is required to withhold from employee compensation and 14
remit to the government (a) employee income taxes, see id. § 3402, 15
and (b) the employees' own mandated FICA contributions, see id. 16
§§ 3101, 3102(b). With respect to the third and fourth quarters of 17
2000 and all four quarters of 2001, WFM-LLC made no payment of any 18
of the required payroll taxes. 19
The Code recognizes a variety of business entities-- 20
including corporations, companies, associations, partnerships, sole 21
proprietorships, and groups--and, based on the classifications, 22
treats the entities in various ways for income tax purposes. For 23
example, the income of a corporate entity is generally subject to a 24

-- 3 of 21 --

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

-- 4 of 21 --

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

-- 5 of 21 --

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

-- 6 of 21 --

-7-
Judgment was entered in favor of the government, and this 1
appeal followed. 2
II. DISCUSSION 3
On appeal, McNamee argues principally that the check-the- 4
box regulations "directly contradict the relevant statutory 5
provisions of the Internal Revenue Code" (McNamee brief on appeal 6
at 2), violate federal policy, and "ignore the limited liability 7
laws created by local legislation," (id. at 6). He also argues that 8
an IRS proposal in October 2005 to amend the check-the-box 9
regulations--and relieve the owner of a single-member LLC from any 10
possibility of personal liability for the LLC's payroll tax 11
liability--shows that the current check-the-box regulation is 12
"wrong" (id. at 7). Finding no merit in any of McNamee's 13
contentions, we affirm. 14
A. The Validity of the Treasury Regulations 15
1. The Standard of Review 16
In reviewing a challenge to an agency regulation 17
interpreting a federal statute that the agency is charged with 18
administering, the first duty of the courts is to determine "whether 19
the statute's plain terms 'directly addres[s] the precise question 20
at issue.'" National Cable & Telecommunications Ass'n v. Brand X 21

-- 7 of 21 --

-8-
Internet Services, 545 U.S. 967, 986 (2005) ("National Cable") 1
(quoting Chevron U.S.A. Inc. v. Natural Resources Defense Council, 2
Inc., 467 U.S. 837, 843 (1984)). "If the statute is ambiguous on 3
the point, we defer . . . to the agency's interpretation so long as 4
the construction is 'a reasonable policy choice for the agency to 5
make.'" National Cable, 545 U.S. at 986 (quoting Chevron, 467 U.S. 6
at 845). As stated in Chevron itself, 7
[f]irst, always, is the question whether Congress 8
has directly spoken to the precise question at 9
issue. If the intent of Congress is clear, that is 10
the end of the matter; for the court, as well as the 11
agency, must give effect to the unambiguously 12
expressed intent of Congress. If, however, the 13
court determines Congress has not directly addressed 14
the precise question at issue, the court does not 15
simply impose its own construction on the statute, 16
as would be necessary in the absence of an 17
administrative interpretation. Rather, if the 18
statute is silent or ambiguous with respect to the 19
specific issue, the question for the court is 20
whether the agency's answer is based on a 21
permissible construction of the statute. 22
467 U.S. at 842-43 (footnotes omitted) (emphases added). 23
"If Congress has explicitly left a gap for the agency to 24
fill, there is an express delegation of authority to the agency to 25
elucidate a specific provision of the statute by regulation[, and 26
s]uch legislative regulations are given controlling weight unless 27
they are arbitrary, capricious, or manifestly contrary to the 28
statute." Id. at 843-44. See also United States v. Mead Corp., 533 29
U.S. 218, 226-27 (2001) ("administrative implementation of a 30
particular statutory provision qualifies for Chevron deference when 31
it appears that Congress delegated authority to the agency generally 32
to make rules carrying the force of law, and that the agency 33

-- 8 of 21 --

-9-
interpretation claiming deference was promulgated in the exercise of 1
that authority"). 2
In the Internal Revenue Code, Congress expressly delegated 3
authority to the Secretary of the Treasury to adopt regulations to 4
fill in gaps in the Code: 5
§ 7805. Rules and regulations 6
(a) Authorization 7
Except where such authority is expressly given 8
by this title to any person other than an officer or 9
employee of the Treasury Department, the Secretary 10
shall prescribe all needful rules and regulations 11
for the enforcement of this title, including all 12
rules and regulations as may be necessary by reason 13
of any alteration of law in relation to internal 14
revenue. 15
. . . . 16
(d) Manner of making elections prescribed by 17
Secretary 18
Except to the extent otherwise provided by this 19
title, any election under this title shall be made 20
at such time and in such manner as the Secretary 21
shall prescribe. 22
26 U.S.C. §§ 7805(a) and (d) (emphasis added); see also 26 U.S.C. 23
§ 7701(a)(11)(B) ("The term 'Secretary' means the Secretary of the 24
Treasury or his delegate."). With respect to the promulgation of 25
regulations interpreting the Code, the Secretary of the Treasury has 26
delegated authority to the Commissioner of Internal Revenue 27
("Commissioner"). See 26 C.F.R. § 301.7805-1. "Because Congress 28
has delegated to the Commissioner the power to promulgate 'all 29
needful rules and regulations for the enforcement of [the Internal 30
Revenue Code],' 26 U.S.C. § 7805(a), we must defer to his regulatory 31
interpretations of the Code so long as they are reasonable, see 32
National Muffler Dealers Assn., Inc. v. United States, 440 U.S. 472, 33

-- 9 of 21 --

-10-
476-477 (1979)." Cottage Savings Ass'n v. Commissioner of Internal 1
Revenue, 499 U.S. 554, 560-61 (1991). 2
2. The Relevant Provisions of the Code 3
The Internal Revenue Code sets out "[d]efinitions" of 4
various types of business entities in the first three subsections of 5
§ 7701(a), under the headings "Person[s]," "Partnership[s]," and 6
"Corporation[s]." As an examination of these provisions reveals, 7
the categories are overlapping and somewhat ambiguous: 8
(a) When used in this title, where not 9
otherwise distinctly expressed or manifestly 10
incompatible with the intent thereof-- 11
(1) Person 12
The term "person" shall be construed to 13
mean and include an individual, a trust, 14
estate, partnership, association, company or 15
corporation. 16
(2) Partnership . . . 17
The term "partnership" includes a 18
syndicate, group, pool, joint venture, or other 19
unincorporated organization, through or by 20
means of which any business, financial 21
operation, or venture is carried on, and which 22
is not, within the meaning of this title, a 23
trust or estate or a corporation . . . . 24
(3) Corporation 25
The term "corporation" includes 26
associations . . . . 27
26 U.S.C. §§ 7701(a)(1), (2), and (3) (emphases added). Thus, each 28
subsection tends to be illustrative, rather than definitive, and 29
none of them specifies the characteristics of the entity that it 30
"defin[es]." 31
Potential overlap among definitions is evident from the 32

-- 10 of 21 --

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

-- 11 of 21 --

-12-
§§ 34-109 (execution of documents), 34-130 (agency), 34-140 1
(management), and in some cases affording "the benefit of pass- 2
through taxation," IRS Pub. 3402; but see Conn. Gen. Stat. Ann. 3
§ 34-113 ("A limited liability company formed under sections 34-100 4
to 34-242 . . . shall be treated, for purposes of taxes imposed by 5
the laws of the state or any political subdivision thereof, in 6
accordance with the classification for federal tax purposes." 7
(emphases added)). 8
Under Connecticut law, a limited liability company may 9
have a single member. See, e.g., id. §§ 34-101(10), 34-140(c). The 10
Internal Revenue Code is unclear as to whether such a company falls 11
within subsection (a)(2) or (a)(3) of § 7701. It hardly seems to be 12
a subsection (a)(3) "association," as one person does not associate 13
with himself. Nor is a one-person operation in the same genre as 14
the specific subsection (a)(2) entities that are included within the 15
term "partnership"--i.e., "syndicate, group, pool, joint venture"-- 16
all of which, like the term partnership itself, denote combinations 17
of persons rather than a single person, see, e.g., Conn. Gen. Stat. 18
Ann. § 34-301(9) ("'Partnership' means an association of two or more 19
persons . . . ."). The closest fit for a single-owner LLC would 20
seem to be "other unincorporated organization"--an organization that 21
might or might not be an entity separate from its owner. 22
3. The Gap-Filling Treasury Regulations 23
Against this ambiguous statutory background, the Treasury 24
Regulations were intended to provide straightforward guidance as to 25

-- 12 of 21 --

-13-
how various types of entities, including single-owner businesses, 1
are to be classified for tax purposes. Treasury Regulation 2
§ 301.7701-1 states "[i]n general" that 3
[t]he Internal Revenue Code prescribes the 4
classification of various organizations for federal 5
tax purposes. Whether an organization is an entity 6
separate from its owners for federal tax purposes is 7
a matter of federal tax law and does not depend on 8
whether the organization is recognized as an entity 9
under local law. 10
. . . . 11
(4) Single owner organizations. Under 12
§§ 301.7701-2 and 301.7701-3, certain organizations 13
that have a single owner can choose to be recognized 14
or disregarded as entities separate from their 15
owners. 16
26 C.F.R. §§ 301.7701-1(a)(1) and (4) (emphases added). The 17
Regulations proceed to describe the classification of business 18
entities: 19
(a) Business entities. For purposes of this 20
section and § 301.7701-3, a business entity is any 21
entity recognized for federal tax purposes 22
(including an entity with a single owner that may be 23
disregarded as an entity separate from its owner 24
under § 301.7701-3) that is not properly classified 25
as a trust under § 301.7701-4 or otherwise subject 26
to special treatment under the Internal Revenue 27
Code. A business entity with two or more members is 28
classified for federal tax purposes as either a 29
corporation or a partnership. A business entity 30
with only one owner is classified as a corporation 31
or is disregarded; if the entity is disregarded, its 32
activities are treated in the same manner as a sole 33
proprietorship, branch, or division of the owner. 34
26 C.F.R. § 301.7701-2(a) (emphases added). Subsection (b) of this 35
Regulation defines the term "corporation" to include a business 36
entity that is incorporated under federal or state law, see id. 37
§ 301.7701-2(b)(1), an "association (as determined under 38

-- 13 of 21 --

-14-
§ 301.7701-3)," id. § 301.7701-2(b)(2) (emphasis added), and various 1
other business entities, see id. §§ 301.7701-2(b)(3), (4), (5), (6), 2
(7), and (8). 3
Subsection (c) of Treasury Regulation 301.7701-2 states in 4
pertinent part, with regard to "[o]ther business entities," that 5
"[f]or federal tax purposes," 6
(1) The term partnership means a business 7
entity that is not a corporation under paragraph (b) 8
of this section and that has at least two members. 9
(2) Wholly owned entities--(i) In general. A 10
business entity that has a single owner and is not a 11
corporation under paragraph (b) of this section is 12
disregarded as an entity separate from its owner. 13
26 C.F.R. §§ 301.7701-2(c)(1) and (2)(i). Finally, Treasury 14
Regulation 301.7701-3(a) provides that "an eligible entity"--which 15
it defines as a "business entity that is not classified as a 16
corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or 17
(8)"--is given an option whether or not to be classified as a 18
corporation. Thus, 19
[a]n eligible entity with at least two members can 20
elect to be classified as either an association (and 21
thus a corporation under § 301.7701-2(b)(2)) or a 22
partnership, and an eligible entity with a single 23
owner can elect to be classified as an association 24
or to be disregarded as an entity separate from its 25
owner. Paragraph (b) of this section provides a 26
default classification for an eligible entity that 27
does not make an election. . . . 28
(b) Classification of eligible entities that do 29
not file an election--(1) Domestic eligible 30
entities. Except as provided in paragraph (b)(3) of 31
this section, unless the entity elects otherwise, a 32
domestic eligible entity is-- 33
(i) A partnership if it has two or more 34
members; or 35

-- 14 of 21 --

-15-
(ii) Disregarded as an entity separate 1
from its owner if it has a single owner. 2
26 C.F.R. §§ 301.7701-3(a) and (b)(1) (emphases added). See also 3
id. § 301.7701-3(b)(3) (a single-owner entity that was in existence 4
prior to the effective date of this regulation and that claimed to 5
be a partnership under the prior regulations will be disregarded as 6
an entity separate from its owner). 7
An entity files its election to be treated as an 8
association simply by checking the appropriate box or boxes on IRS 9
"Form 8832, Entity Classification Election" and filing that Form. 10
Id. § 301.7701-3(c). 11
These regulations became effective on January 1, 1997, 12
replacing regulations, known as the "Kintner regulations," that had 13
been in place since 1960. The Kintner regulations had been adequate 14
during the first several decades after their adoption. But, as 15
explained in the 1996 proposal for their amendment, the Kintner 16
regulations were complicated to apply, especially in light of the 17
fact that 18
many states ha[d] revised their statutes to provide 19
that partnerships and other unincorporated 20
organizations may possess characteristics that 21
traditionally have been associated with 22
corporations, thereby narrowing considerably the 23
traditional distinctions between corporations and 24
partnerships under local law. 25
Simplification of Entity Classification Rules, 61 Fed. Reg. 21989, 26
21989-90 (proposed May 13, 1996). "One consequence of the increased 27
flexibility" in local laws authorizing an entity that "in all 28
meaningful respects, is virtually indistinguishable from a 29
corporation" was that the Kintner regulations required "taxpayers 30

-- 15 of 21 --

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

-- 16 of 21 --

-17-
4. The Proposed New Regulations 1
McNamee's contention that the fact that the IRS has 2
proposed new regulations that would definitively make an LLC's 3
single owner not liable for the LLC's unpaid payroll taxes means 4
that the current regulations are "wrong" (McNamee brief on appeal at 5
7) is wide of the mark. To begin with, "'[i]t goes without saying 6
that a proposed regulation does not represent an agency's considered 7
interpretation of its statute and that an agency is entitled to 8
consider alternative interpretations before settling on the view it 9
considers most sound.'" Littriello, 2007 WL 1093723, at *7 (quoting 10
Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 845 11
(1986)) (emphasis ours). 12
Further, "if the agency adequately explains the reasons 13
for a reversal of policy, change is not invalidating, since the 14
whole point of Chevron is to leave the discretion provided by the 15
ambiguities of a statute with the implementing agency," and to allow 16
the agency to "consider varying interpretations and the wisdom of 17
its policy on a continuing basis, . . . for example, in response to 18
changed factual circumstances." National Cable, 545 U.S. at 981 19
(internal quotation marks omitted). 20
Here, the IRS explained that its October 2005 proposal to 21
change the regulations was a response to 22
[a]dministrative difficulties [that] have arisen 23
from the interaction of the disregarded entity rules 24
and the federal employment tax provisions. Problems 25
have arisen for both taxpayers and the IRS with 26
respect to reporting, payment and collection of 27
employment taxes, particularly where state 28
employment tax law also sets requirements for 29
reporting, payment and collection that may be in 30

-- 17 of 21 --

-18-
conflict with the federal disregarded entity rules. 1
The Treasury Department and the IRS believe that 2
treating the disregarded entity as the employer for 3
purposes of federal employment taxes will improve 4
the administration of the tax laws and simplify 5
compliance. 6
Disregarded Entities; Employment and Excise Taxes, 70 Fed. Reg. 7
60475, 60476 (proposed Oct. 18, 2005). The proposed changes, which 8
have not been adopted as of the filing of this opinion, provide no 9
basis for finding the existing regulations unreasonable. 10
B. McNamee's Reliance on State Law 11
McNamee also contends that the Treasury Regulations are 12
invalid on the theory that they ignore the Connecticut law 13
provisions that accord an LLC member limited liability. He states 14
that "the treasury has consistently held that the owner of a single 15
member LLC is the employer for Federal tax purposes," and argues 16
that United States v. Galletti, 541 U.S. 114 (2004), shows that the 17
IRS exceeded its authority "in attempt[ing] to ignore the limited 18
liability laws created by local legislation." (McNamee brief on 19
appeal at 6.) We are unpersuaded. 20
First, as discussed in Part II.A.3. above, the IRS has not 21
dictated that the owner of a single-member LLC always be considered 22
the employer for federal tax purposes; rather, it has given the LLC 23
the option to elect association status. If the LLC elects to be 24
treated as an association, the LLC is regarded as the employer. 25
Second, Galletti did not involve either Treasury 26
Regulations interpreting the Code or a single-member limited 27
liability company. Galletti involved nonpayment of payroll taxes by 28

-- 18 of 21 --

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

-- 19 of 21 --

-20-
. . . ." (emphases added)); id. § 301.7701-2(a) ("A business entity 1
with two or more members is classified for federal tax purposes as 2
either a corporation or a partnership." (emphases added)). There is 3
no Code provision or regulation that allows a partnership to be 4
disregarded as an entity in order for its partners to be treated as 5
the taxable entity. Thus, it is hardly remarkable that the Galletti 6
Court concluded that the employer was the partnership rather than 7
its partners. 8
Further, we note that although the payroll tax sections of 9
the Code define "employer"--in various ways--see 26 U.S.C. §§ 3306 10
and 3401, as discussed in Part II.A.2. above the Code does not even 11
mention limited liability companies. Thus, nothing in the Code 12
provides that an LLC is always to be regarded, for purposes of 13
federal taxation, as the employer. Under the pertinent Treasury 14
Regulations, the single-member LLC is the employer if it elects to 15
be treated as a corporation; but if it does not elect that 16
treatment, it is "[d]isregarded" as a "separate" entity, 26 C.F.R. 17
§ 301.7701-3(b)(1)(ii) (emphasis added), and hence cannot be 18
regarded as the employer. 19
Finally, we reject McNamee's contention that the IRS's 20
attempt to collect his LLC's unpaid payroll taxes from him is 21
impermissible because it violates the limited-liability rights 22
granted him by state law. As the Court of Appeals for the Sixth 23
Circuit noted in rejecting such a claim in Littriello, 24
[t]he federal government has historically 25
disregarded state classifications of businesses for 26
some federal tax purposes. In Hecht v. Malley, 265 27
U.S. 144 . . . (1924), for example, the United 28

-- 20 of 21 --

-21-
States Supreme Court held that Massachusetts trusts 1
were "associations" within the meaning of the 2
Internal Revenue Code despite the fact they were not 3
so considered under state law. As courts have 4
repeatedly observed, state laws of incorporation 5
control various aspects of business relations; they 6
may affect, but do not necessarily control, federal 7
tax provisions. See, e.g., Morrissey, 296 U.S. at 8
357-58 . . . (explaining that common law definitions 9
of certain corporate forms do not control 10
interpretation of federal tax code). As a result, 11
. . . single-member LLCs are entitled to whatever 12
advantages state law may extend, but state law 13
cannot abrogate [their owner's] federal tax 14
liability. 15
Littriello, 2007 WL 1093723, at *6. We agree. 16
Moreover, McNamee could have had the benefit of limited 17
personal liability if he had simply elected to have his LLC treated 18
as a corporation; he chose not to do so and thereby avoided having 19
the LLC taxed as a separate entity. We know of no provision, 20
policy, or principle that required the federal government to allow 21
him both to escape personal liability for the taxes owed by his sole 22
proprietorship and to have the proprietorship escape taxation as a 23
separate entity. 24
CONCLUSION 25
We have considered all of McNamee's contentions on this 26
appeal and have found them to be without merit. The judgment of the 27
district court is affirmed. 28

-- 21 of 21 --