NewsNotes

Lesli S. Laffie, J.D., LL.M.

LLC Members and Employment Taxes AICPA ElderCare/PrimePlus Services (Box) Small Business Compliance Tools
UGMAs (Box)

From the IRS

LLC Members and Employment Taxes

Rev. Rul. 2004-41 provides that the IRS may not collect a limited liability companys (LLCs) unpaid employment taxes from its members, because they are not liable for the LLCs debts under state law, even though the LLC is classified as a partnership for Federal tax purposes and the partners are liable for partnership obligations under state law. However, the LLC members may be liable for the unpaid employment taxes under Sec. 6672s trust fund penalty tax rules.

Overview: A multi-member domestic LLC is classified as a partnership for Federal tax purposes by default under Regs. Sec. 301.7701-1, unless an election is made to tax it as a corporation. Generally, state law provides that general partners are jointly and severally liable for the partnerships obligations. The IRS may seek to collect Federal tax liabilities incurred by the partnership (i.e., employment taxes) from its general partners; see, e.g., Papandon, 331 F3d 52 (2d Cir. 2003). However, LLC multi-members are generally not liable under state law for the entitys debts, subject to certain limited exceptions.

Facts: In the ruling, A, B and C are members of a domestic LLC formed in state D. The LLC is an employer for Federal tax purposes and has unpaid Federal employment taxes for the years in question. A, B and C each had assets that would be enough to satisfy all or a part of the unpaid employment taxes. Under Ds laws, LLC members generally are not liable for the LLCs debts.

Issue: At issue was whether the IRS could collect the LLCs unpaid employment taxes from A, B and C as if they were general members of a partnership, and place a levy on their assets and rights to them in their capacity as members.

Holding: The IRS ruled that the members were not liable for the LLCs unpaid employment taxes, because they were not liable under state law for its debts. The Service cannot levy on their property (and their rights to property) to collect the LLCs delinquent employment taxes, absent a fraudulent transfer of assets from the LLC to the members or other special circumstances.

Thus, the IRS cannot collect employment taxes against LLC members, even though the LLC is treated as a partnership for Federal tax purposes, as the members have no derivative state-law employment tax liability. The result would have been different had the LLC been owned by a single member; see Chief Counsel Advice 200235023. A single-member LLC (not treated as a corporation for Federal tax purposes) is disregarded for tax purposes; the taxpayer is its owner. Thus, the Service may recover unpaid employment taxes from the single members own property (but not from the LLCs assets, although the IRS may levy on the owners LLC ownership interest and sell it or foreclose the tax lien on the interest).

However, in the ruling, the IRS stated that an LLCs members may be liable for the Sec. 6672 trust fund recovery penalty (100% penalty) for the LLCs unpaid employment taxes.

Small Business Compliance Tools

Two recent IRS pronouncements describe the small business resources available on the IRSs website.

Compliance: IR-2004-68 explains that the small business section of the IRS website, at www.irs.gov, includes:

• Materials on starting, operating and closing a business;

• Industry-specific advice;

• Guidance for the self-employed and international taxpayers;

• Links to state government websites;

• Access to the IRSs small business classroom; and

• Free products for small businesses and the self-employed.

The website is also the gateway to electronic services for small businesses, including e-filing options, obtaining an employer identification number and accessing the electronic Federal tax payment system.

Retirement plans: According to IR-2004-69, the IRS introduced two tools to help small businesses with employee retirement plan compliance. Retirement plan Check-Ups are compliance checklists for savings incentive match plan for employees (SIMPLE) IRAs, simplified employee pensions (SEPs) or salary reduction simplified employee pensions (SARSEPs) and found on the Retirement Plans page of the IRS website. Each checklist is geared to one of the three IRA-based retirement plans commonly operated by small businesses and concerns the areas in which IRS examiners traditionally find the most problems. A new periodic newsletter, Retirement News for Employers, will address the special concerns of small businesses in relation to the plans they maintain for employees. The debut issue was scheduled for release in mid-May 2004.