More Support for Check-the-Box

Following the U.S. Supreme Court’s refusal to hear an appeal attacking the validity of “check-the-box” provisions, a district court has similarly denied a legal challenge to the default business entity classification. The plaintiff in the more recent decision, L&L Holding Co. LLC v. U.S. (101 AFTR2d 2008-2081), contested an employment tax collection action, just as in the earlier case, Littriello v. U.S. (99 AFTR2d 2007-2210; “Tax Matters: Check-the-Box Regulations Are Valid,” JofA, July 08, page 86). The Supreme Court in February allowed the Sixth Circuit’s decision against the taxpayer in Littriello to stand.

Subsequently, the District Court for the Western District of Louisiana likewise ruled that the check-the-box regulations are valid when applied to an LLC as an employer for purposes of employment taxes. L&L was the sole owner of Gonzales Home Health Care LLC, which had not made an election to be taxed as a corporation under the check-the- box rules and so by default was a disregarded entity.

Because of Gonzales’ unpaid employment taxes, the IRS filed a lien against L&L. L&L argued that because it did not meet the statutory definition of “employer” under IRC § 3401, the check-the-box regulations’ requirement that it be treated as the employer conflicted with the Code’s plain language.

Citing Littriello, as well as McNamee v. Department of the Treasury (99 AFTR2d 2007-2871), decided a year earlier by the Second Circuit, the district court denied there was any conflict, since the regulations do not define “employer” but prescribe treatment for all tax purposes, including employment taxes. Neither does the Code define LLCs, so their tax treatment is covered only by the regulations, the court said.