U n it e d St a t e s Go v e r n m e n t

M e m o r a n d u m

FORM G-11M (1-92)

Ra il r o a d R e t ir e m e n t Bo a r d

August 20,2002

L-2002-10

TO : Suzanne Haynes

Chief of Records Analysis and Systems 

Through: Ronald Russo

Director Policy and Systems 

Office of Programs

FROM : Steven A.

General

SUBJECT : Umiied Liability Company

Last Person Employment/Current Connection

This is in reply to your inquiry of June 21,2002, requesting my opinion as to 

whether a sole proprietor who converts his business to a limited liability company 

under the law of Missouri would be considered an employee of the new entity 

for purposes of determining whether he worked in non-railroad employment 

pursuant to sections 1 (o) and 2(f)(6)(A) of the Railroad Retirement Act. For the 

reasons set forth below, in my opinion the limited liability company would not be 

his last non-railroad employment, and would not be regular employment which 

would break his current connection with the railroad industry.

Your background memorandum states that the subject individual, who is a 

former railroad employee (hereinafter the “employee"), is sole owner and 

manager of a restaurant in Missouri. He states that he has been advised that if 

he converts his sole proprietorship to a limited liability company ("LLC"), and 

then obtains in the name of the company a local license to serve alcoholic 

beverages, he can qualify for a less costly liability insurance premium than he 

would if he sold alcohol as a sole proprietor. He states that he would remain 

sole owner of the business, and that he would pass through all income from the 

business to himself for Federal income tax purposes.

Bartholo’
Characterization of income from a LLC has previously been addressed by this 

office only in the context of the work restrictions incorporated into the Railroad 

Retirement Act from the Social Security Act. See Legal Opinion L-2000-8. These 

sections', by incorporating the deduction for excess earnings of section 203(b) 

of the Social Security Act, also thereby include the additional requirement that a 

self-employed individual must perform substantial services in the business before 

he or she is subject to reduction of benefits for that month, if earnings occur in 

the individual's "grace year". See section 203(f)(1) of the Social Security Act; 

regulations of the Social Security Administration at 20 CFR 404.435(d); and 

proposed Board regulation 230.15, (60 Fed. Rea. 42482,42486) (August 16,

1995) .2 Beyond the grace year, earnings as an employee and from selfemployment are charged against monthly benefits in the same manner. Legal 

Opinion L-2000-8 advised that for purposes of the foregoing excess earnings 

provisions characterization of income from a LLC to an annuitant should follow 

treatment of that income to that taxpayer under the Federal Internal Revenue 

Code. Where the LLC is treated as a partnership for Federal tax purposes, the 

income paid to the claimant is considered earned in self-employment. Where 

the LLC is treated as a corporation, payments are either salary or investment 

income, depending on the circumstances of a particular case.

Legal Opinion L-2000-8 did not address the effect of LLC income under the 

current connection and last person employment provisions. Current connection 

is defined by section 1 (o) of the Railroad Retirement Act, which provides insofar 

as relevant here that an employee may break his or her current connection by 

engaging in "regular employment other than employment for an employer [in 

the railroad industry]" outside a specified time interval. The Board's regulations

1 The Social Security Act deduction for excess earnings applies to employee age and service

annuities (section 2(f)(1) of the Act); spouse and divorced spouse annuities (section 2(f)(2) of the

Act); survivor annuitants (section 2(g)(2) of Act); and employee and spouse annuity increases

paid under the social security over-all minimum guaranty (section 3(f)(2) of the Act).

2 The distinction between self-employment and work as an employee also arises under the

sequential evaluation process used to determine total and permanent disability under the

Board's regulations, which parallel those of the Social Security Administration. Where the

disability applicant works as an employee, SSA regulations establish a presumption of gainful

activity based on the amount of annual earnings. Where the disability applicant is selfemployed, his or her ability to work is measured by a substantial services test. See regulations of

the Social Security Administration at 20 CFR 404.1574 (employees), and 404.1575 (self-employed);

and regulations of the Board at 20 CFR 220.143 and 220.144. Analysis of work in the disability

context is beyond the scope of this memorandum.
define regular employment to include full or part time employment, but to 

exclude self-employment. See 20 CFR 261.16. Certain benefit entitlement 

provisions under the Railroad Retirement Act require that the railroad employee 

must have a “current connection with the railroad industry". See regulations of 

the Board at 20 CFR 216.12. The deduction for work for last non-railroad 

employer is imposed on employee and spouse annuitants by section 2(f)(6)(A). 

Pursuant to section 2(f)(6)(A), the tier II annuity component and supplemental 

annuity of the railroad employee, and the tier II annuity com ponent of his or her 

spouse, are subject to a reduction (limited to no more than half of the total 

component otherwise payable) for $1 of every $2 of:

* * * compensation received by such individual from compensated 

service rendered in such month to the last person, or persons, by whom 

such individual was employed before the date on which the annuity of 

such individual * * * began to accrue * * *.

Regulations of the Board state that for purposes of determining last non-railroad 

employment under section 2(f)(6) of the Act, an officer of a corporation will be 

considered to be an employee of that corporation. See 20 CFR 216.22(c). 

Section 216.23(c) of the regulations further provides with respect to selfemployment that:

(c) Self-employment. Self-employment is work performed in an 

individual's own business, trade or profession as an independent 

contractor, rather than as an employee. An individual [who works in his or 

her own business] is not self-employed if the business is incorporated. * * *

Unlike the excess earnings provisions of the Social Security Act, where the 

distinction between employment and self-employment is not significant beyond 

the grace year, a determination that a work activity is self-employment for 

purposes of the current connection or last non-railroad employer provisions thus 

has a continuing effect on entitlement. In this context, Board regulation 

216.23(c) incorporates consistent advice by this office3 that an individual who 

has incorporated his or her business, and becomes an officer of the corporation.

3 The 1988 amendment to the Railroad Retirement Act of 1974 which added section 2(f)(6) also

removed the former requirement of section 2(e)(3) that prevented payment of an annuity for

any month in which the annuitant was in compensated service to his or her last non-railroad

employer. See R.L. 100-647, section 7302(e) (102 Stat. 3757,3777). Legal Opinion L-93-21

reviewed the legislative history of the 1988 amendment, and concluded that Congress intended

the 2(f)(6) deduction to apply to the same individuals and in the same fashion as the nonpayment provision of former section 2(e) which it superseded. Accordingly, the analysis applied
is no longer engaged in self-employment. Section 216.23(c) is thus based on (1) 

the legal doctrine that a corporation is a legal person, distinct from its 

shareholders and officers, and (2) the specific inclusion of corporate officers 

within the definition of employee by section 1 (k) of the Act. See, e.g. L-86-53 (the 

definition of employee for last non-railroad employer determinations is broader 

than the definition of employee of a railroad employer). The rule had been 

applied where the shares of the corporation are privately held by a small 

number of people (L-70-172, L-72-56), by two people (L-67-192), or even by one 

individual (L-67-243, L-65-176); where the corporation is formed under a 

professional corporation statute (L-82-93) (finding that former section 415-4 of the 

Illinois Professional Service Corporation Act, now SHA 805 ILCS 10/4, provides that 

professional services corporations are subject to the Illinois Business Corporation 

Act and hence are corporations); where the annuitant remains an officer 

although ownership of the shares is transferred (L-69-179) or where the owners of 

the corporation have elected to have its existence disregarded for Federal 

income tax purposes under Subchapter S of the Internal Revenue Code (L-68-70, 

L-86-111).

Whether the subject individual would be in the employ of the proposed LLC 

therefore depends upon whether the LLC may be considered to be a 

"corporation". As a general matter, a corporation has four essential legal 

characteristics: continuity of life, transferability of interest, liability for debts 

limited to corporate property, and power to sue, own property and act in its 

own name. See 18 AM JUR 2d Corporations section 2. For purposes of liability 

for Federal taxes, the Supreme Court has added the requirements that the entity 

be a joint enterprise among associates, organized for the conduct of a business. 

See: Morrissey v. Commissioner. 296 U.S. 344 (1935). These factors were applied 

in the leading case of United States v. Kintner, 216 F. 2d 418 (9th Cir., 1954) to 

determine that an entity with more corporate than non-corporate 

characteristics would be taxed as a corporation regardless of its status under 

state law. The IRS later adopted these factors, as applied by the Kintner 

decision, as the basis for determining whether an organization was a 

corporation. 26 CFR 301.7701-1 to 301.7701-16 (1996)(the "Kintner regulations").

Footnote 3 (cont'd)

to determine the last non-railroad employer under former section 2(e) (and the predecessor

section 2(d) of the Railroad Retirement Act of 1937, as amended) may also be applied to

determine whether to apply the deduction now imposed by section 2(f)(6).
The nation's first LLC statute was enacted by Wyoming specifically to obtain 

non-corporate partnership classification under the Kintner regulations. See: 

Rebecca J. Huss, Revamping Veil Piercing for All Limited Liability Entities: Forcing

the Common Law Doctrine into the Statutory Age, 70 U. Cin. L. Rev. 95 (Fall 

2001), at 97(n. 8). In 1988, the IRS agreed that an entity formed as a Wyoming 

LLC was not a corporation for Federal tax purposes. The IRS found under the 

Kintner regulations that the LLC lacked continuity of life because the LLC 

terminated with the death of a member, and lacked free transferability of 

interests because a LLC membership transferred to an outsider could not be 

granted full rights unless the transfer was approved unanimously by the 

remaining members. See Revenue Ruling 88-76,1988-2 Cum. Bui. 360.

As other states adopted LLC statutes, the IRS provided specific guidelines under 

which it would find that a LLC lacked corporate characteristics under the Kintner 

regulations. See: Revenue Ruling 95-10,1995-1 Cum. Bui. 501, 504. Also in 1995, 

the Commissioners on Uniform State Laws published the Uniform Limited Liability 

Act, which was based in part on the Wyoming statute, and which was intended 

to serve as a model for states in drafting LLC legislation. By July 1996, all 50 states 

and the District of Columbia had LLC statutes in place, and by 1997, the IRS had 

ruled LLCs formed in 18 states were not taxable as corporations. See: Allan 

Karnes, Roger Lirely, and Lori Cundiff, The Limited Liability Company: A State by

State Look a t the New Pass-Through Entity, 1 Detroit College of Law at Michigan 

State University Law Review 1, 5 (at n. 29) (1997).

In this process, the limited liability company evolved certain identifiable 

characteristics. Huss, supra, at 21-24, 29-33. At formation, a short document 

registering the company is filed with the relevant state official. Persons forming 

the company also enter into an “operating agreement" which specifies the 

relationship between themselves as "members" of the company, including 

allocation of membership interests, taxes, and profits. The operating agreement 

also provides whether the company will be run by the members, or by a 

manager selected by the members; the manager may be, but need not be, a 

member. As a general rule, all members and managers are not personally 

responsible for the debts and liabilities of the company solely because they are 

a member or manager.
*

- 6-

Reacting to the increased number of LLCs, the IRS replaced the Kintner 

regulations effective January 1997. The preamble to the new final regulation 

stated:

The existing regulations for classifying business organizations as * * * 

corporations * * * or as partnerships * * * are based on the historical 

differences under local law between partnerships and corporations. 

Treasury and the IRS believe that those rules have becom e increasingly 

formalistic. This document replaces those rules with a much simpler 

approach that generally is elective. 61 Fed. Rea. 66584, December 18, 

1996.

Under the new regulations and with certain specified exceptions, an entity 

organized under a Federal or State statute which is not described by that statute 

as incorporated or as a corporation, may elect to be treated as either a 

partnership, corporation, or sole proprietorship. 26 CFR 301.7701 -3(a): 301.7701- 

2(a) and 2(b) (1). The regulations further provide that a LLC with two or more 

members which does not file any election is treated as a partnership by default; 

and the existence of a LLC with a single member is disregarded. 26 CFR 

301.7701-3(b). In sum, the question of whether a LLC is a corporation or a 

partnership for purposes of Federal taxation no longer concerns whether the LLC 

meets traditional corporate characteristics. The absence or presence of these 

characteristics has becom e irrelevant, and the treatment as a corporation or 

partnership is determined by wishes of the members. See: Carol Miller, Douglas 

March, Jack Karns, Limited Liability Companies Before and After the January

1997 IRS "Check the Box" Regulations: Choice of Entity and Taxation

Considerations, 25 N. Ky. L. Rev. 585 (1998), at 603.

The foregoing analysis shows that the various state LLC statutes developed 

specifically to create an entity which would not meet the test applied under 

Federal tax law to determine an entity to be a corporation. The default 

classification of a LLC under the new IRS regulations shows that after an 

extensive period of review, the Internal Revenue Service has determined that a 

company formed under the state LLC statutes (as opposed to a company 

formally incorporated under the various state business corporation acts) per se 

lacks the characteristics of a corporation. The principles applied under the 

Internal Revenue Code themselves derived from the general characteristics of a 

corporation. These same principles have been used by the Board to determine

♦
that an entity is a “ person" which would be an applicant’s last non-railroad 

employer, or which would constitute regular non-railroad employment for 

purposes of the current connection test. In view of the determination of the IRS, 

it is my opinion that formation of a company under a LLC statute does not result 

in creation of a legal "person" which becomes the employer of a member of 

that LLC for purposes of sections 1 (o) and 2(f)(6) of the Railroad Retirement Act.4 

This would be the case regardless of whether the LLC elects to classify itself as a 

corporation under the Code. See L-68-70, L-86-111 (corporation electing to 

report income under Subchapter S of the Code does not affect its status under 

the Railroad Retirement Act).

In the case you submitted, I assume that the former railroad employee intends 

to create a LLC with himself as the sole member, a form that is permitted under 

Missouri law. See Mo. Ann. Stat. 347.017. Consistent with the foregoing 

discussion, his continued work activity in his business would be self-employment 

which would not affect his current connection and would not trigger the 

deduction for last non-railroad employment.

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41 should note that an individual working for the company, who is not a member and therefore

has no equity in the company, would be an employee just as he or she would be if working a

concern run by partners or by a sole proprietor.