Employment Taxes Assessed in SMLLC's Name and EIN Were Valid Assessments Against Company's Sole Owner

X , a single member limited liability company (SMLLC), is a limited liability (LLC) company formed under state law. It is a disregarded entity for all Federal tax purposes and its activities are treated in the same manner as a sole proprietorship, branch or division of its sole owner T; see Regs. Sec. 301.7701-2(a). X filed delinquent employment tax returns showing liabilities for 1998, 1999 and March 31, 2000.

Each of the returns was filed with T's address as the business address for X. In addition, the certificate of X's formation shows T's address as X's business address.

All of the delinquent employment tax liabilities associated with the Forms 940 and 941 were assessed under X's employer identification number (EIN) and under the name X, as evidenced by the Certificates of Assessments and Payments for each of the periods at issue. Further, the address to which each notice was sent is the business address of X, which also happens to be T's home address. The Service filed a Notice of Federal Tax Lien against X for the delinquent amounts.

Analysis

Regs. Sec. 301.7701-2(a) provides that a business entity with a single owner is classified as either a corporation or disregarded as an entity separate from its owner. For purposes of these regulations, an SMLLC is treated as a business entity. Certain business entities are always classified as corporations; those business entities not automatically classified as corporations (eligible entities) are permitted to choose their classification for Federal tax purposes. An SMLLC is considered an eligible entity and may choose its tax classification. If an SMLLC does not choose its tax classification, the default classification for all Federal tax purposes is that of an entity disregarded as an entity separate from its owner. If an SMLLC is disregarded, its activities are treated in the same manner as a sole proprietorship, branch or division of the owner.

Notice 99-6 permits an SMLLC to separately calculate, report and pay its employment tax obligations for its employees under its own name and EIN. The notice makes clear that the owner of an SMLLC treated as a disregarded entity for Federal tax purposes is the employer for employment tax liability purposes. Consequently, the owner retains ultimate responsibility for the employment tax obligations incurred for employees of the disregarded entity. Thus, as a disregarded entity, X cannot be the employer for employment tax purposes, regardless of the fact that X filed the employment tax returns for the periods at issue in this case.

Sec. 6201 provides the authority for assessment. Until an assessment of tax has been made, the IRS is not entitled to collect a tax administratively. The lien provisions of the Code depend on the making of a demand for payment, and there cannot be a demand for payment if there is no assessment. Although T is ultimately liable for the employment taxes incurred by X, the Service is precluded from administratively collecting the liability from T without a valid assessment.

Generally speaking, an assessment is the formal recording of a taxpayer's tax liability. Sec. 6203 provides that "[t]he assessment shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary." Regs. Sec. 301.6203-1 further provides:

[t]he assessment shall be made by an assessment officer signing the summary record of assessment. The summary record, through supporting records, shall provide the identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment... The date of the assessment is the date the summary record is signed by an assessment officer. (Emphasis added.)

Thus, to make a valid assessment, the IRS must record the assessment on a signed summary record of assessment and create a supporting record that includes those four elements.

Although the Sec. 6203 regulations include requirements for a valid assessment, court cases interpreting Sec. 6203 indicate that certain mistakes are permissible when making an assessment without the assessment being considered invalid.

The Service is not required to identify a taxpayer by a Social Security number (SSN) when making an assessment. Similarly, there is no requirement that an EIN be used in making an assessment.

In a case with facts somewhat similar to the present situation, the Tenth Circuit held that an assessment made in the taxpayers' trade name (rather than their individual names) was valid. In Marvel, 719 F2d 1507 (1983), the IRS made employment tax assessments in the trade name of an unincorporated business (rather than in the names of its two individual owners). The notices issued by the Service were sent to the taxpayers' business address rather than the owners' address, and the notices listed the taxpayer identification number for the business. The taxpayer identification number for the business was shown on the taxpayers' schedule C attached to their income tax returns for the years in question. The court stated that "taxpayers cannot seriously contend that the notices to the business did not operate to give actual notice to each of the taxpayers. We conclude that the assessments were valid and effective as to the individual plaintiffs, being issued in the trade name which they themselves adopted."

In the present situation, several arguments can be made in support of a conclusion that T was adequately identified by the assessments and was not prejudiced or misled by the fact that X's name and EIN were used. First, given X's status as a disregarded entity for all Federal tax purposes and X's close relationship to T, the reference in the assessments to X as the taxpayer is tantamount to an identification of T as the taxpayer. In substance, X is a trade name by which T conducts business. This conclusion is supported by the fact that T indicated that X was an "LLC to be taxed as sole proprietor" on its application for an EIN.

Second, although T's SSN was not included on the assessment, an assessment is not required to identify the taxpayer by an SSN or an EIN. Moreover, the EIN used in making the assessments in this case identified T as the taxpayer, in that T must use this EIN in preparing his schedule C (which is attached to his Federal income tax return).

Further, in reference to the requirement that the taxpayer must not be prejudiced or misled by the assessment, the notices at issue were addressed to X rather than to T. However, T was doing business as X, and, as the only owner of the business, T cannot reasonably assert lack of knowledge of the notices. In addition, T's home address and X's business address were one and the same. Moreover, T has not disputed actual receipt of those notices. Consequently, T cannot contend that the notices to X failed to give notice to T of his tax liability. Thus, even if the assessments may have been erroneous in a technical sense, T was not misled or prejudiced by the errors, and the employment tax assessments under X's name and EIN are valid against T.

IRS Letter Ruling (FSA) 200114006 (12/18/00)