* 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-A ppellant , 10

- v. - 11 DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE, 12 Defendant- Appell ee . 13

_________________________________________________________ 14 Before: KEARSE and STRAUB, Circuit Judges , and KEENAN, District 15 Judge * . 16 Appeal from a judgment of the UnitedStates District Court 17 forthe District of Connecticut, Christopher F. Droney, Judge , 18 upholding Internal Revenue Service determination that plaintiff is 19 personallyliable for the employment tax liabilities of his wholly20 ownedlimited-liabili ty company, which he had chosen not to have 21 treated as a corporation. 22 Affirmed. 23-2- SEANP. 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 froma judgment of the United States 14 District Court for the District of Connecticut, Christopher F. 15 Droney, Judge , rejecting his challen ge 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 taxliabilities. McNamee allegedprincipally that 21 the Treasury Regulations, and hence the IRS determinatio n, w ere 22 contrary(a) to state law trea ting an LLC and its members as 23 separate entities, a nd (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 sta tutor y scheme. For the reasons that 29-3-

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 companythat ceased operation in March 2002. WFM-LLC employed an 6 average of six persons. 7 The Internal Revenue Code imposes two forms ofemployment 8 taxobligations on an employer (hereinafter "payro ll taxes"). 9 First, the employeris re quired to pay unemployment taxes, see 10 26 U.S.C. § 3301, and to make contributions to its employees' 11 social-securityand M edicare benefits pursuant to the Federal 12 Insurance Contributions Act ("FICA"), see id . § 3111. Second, the 13 empl oyeris 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 recogn iz es a variety of business entities-- 20 includingcorporations, companies, associations, partnerships, sole 21 proprietorships, and groups--and, based on the classifications, 22 treats the entities in various wa ys fo r income tax purposes. For 23 example, the income of a corporate entity is generallysubject to a 24-4-

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 taxedon dividends paidto them out of the corporation's income, see 3 id . § 61(a)(7). In contrast, an unincorporated sole proprietorship 4 that is treated as suchis taxed only once: the owner simplylists 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 andto some extent they overlap on e 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 2 6 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 eitheras 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 "disregarde d a s 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 Classificat i on Election," having 24 checkedthe appropriate box on th e For m. See id . § 301.7701-3(c) 25 (the "check-the-box" regulation). In the absence of such an 26-5-

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 requiredto 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 unpaidpayroll taxes for 2000 and 2001 totaled $64,736.18. The IRS, 7 havingdisregarded WFM-LLC as a separate entity, ass esse d those 8 taxes against McNamee personally and placed a lien on his property. 9 McNamee filed a timelyadministrative appeal. He did not 10 dispute WFM-LLC's liability for the unpaid $64,736.18. However, 11 pointingto 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 didnot have the authority to "unilat era lly 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 fo r a Co llection Due Process 19 Hearing.) 20 In a Notice of Determination Concerning Collection 21 Ac tion(s) Under Section 6320 and/or 6330, dated October 23, 200 3 22 ("IRS Determination") , the IRS Appeals Office rejected McNamee's 23 appeal. The unpaginated explanatoryAttachment ("IRS Determination 24 Attachment") statedthat the IRS's reviewconfirmed that "[WFM-LLC] 25

was set up as a single member LLC, and that y ou, as the single 26-6-

member, did not elect association status . . . ." (IRS 1 Determination Attachment, first pa ge.) After discussing the 2 pertinent Treasury Regulations, the IRS concluded that, 3 "[t]herefore, the LLC has been disregarded as an en tit y separate 4 fromyou. 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 appe al was pending, 7 McNamee had terminated the exis tence 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 prin cipa lly 13 reiteratedhis contention s that the IRS had no authority to 14 disregardthe protection from liabilit y affo rded to members of an 15 LLC by Connecticut law and thereby hold him re sponsible for 16 WFM-LLC's tax liabilities. He also contended that the regulations 17 reliedon 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 foraffirmance of its determination that McNamee is 21 liable for WFM-LLC's unpaid payroll taxes. The dis trict court 22 summarilydenied 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. 26-7- 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-the4 boxregulations "directly contradict the relevant statutory 5 provisions of the Internal Revenue Code" (McNamee brief on appeal 6 at 2), violate federal policy, an d " ignore the limited liability 7 laws created by local legislation," ( id . at 6). He also argues that 8

an IRS proposal in October 20 05 to amend the check-the-box 9 regulations--and relieve the owner of a single-member LLC from any 10 possibilityof personal liability for the LLC's pay roll tax 11 liability--shows that the current check-the-box regulation is 12 "wrong" ( id . at 7). Finding n o 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 chal lenge to an agency regulation 17 interpretinga fe deral 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 21-8-

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 pre cise q uestion 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 in tent of Congress. If, however, the 13 court determines Congress has not directly addressed 14 the precise question at issue, the court does not 15 simplyimpose its own construction on the sta tute , 16 as would be necessary in the absence of a n 17 administrative interpretation. Rather, if the 18 statute is s ilen t or ambiguous with respect to the 19 specific issue, the qu estion for the court is 20 whether the agency's answer is bas ed 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 regula tion[, and 26 s]u ch l egislative regulations are given controlling weight unless 27 theyare arbitrary, capricious, or manifestly con trar y 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 particularstatutoryprovision qualifies for Chevron deference when 31 it appears that Congress delegated authority to the agency generally 32 to make rules c arrying the force of law, and that the agency 33-9-

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 bythis 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 th is ti tle, including all 12 rules and regulations as may be necessary by reason 13 of any alteration of law in relation to interna l 14 revenue . 15

. . . . 16 (d) Manner of making elections prescribed by 17 Secretary 18 Except to the extent otherwise provided bythis 19 title, any elec tion 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 interpretingthe Code, the Secretary of the Treasury has 26 delegatedauthority to the Commissioner of Internal Revenue 27 ("Commissioner"). See 26 C.F.R. § 301.7 805-1. "Because Congress 28 has del egatedto 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 deferto 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, 33-10-

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 o ut "[ d]efinitions" of 4 various types of business entities in the first three subsections of 5 § 7701(a), under the headings "Person[s]," "Partnersh i p[s]," and 6 "Corporation[s]." As an examinatio n of these provisions reveals, 7 the categories are overlapping and somewhat ambiguous: 8 (a) When used in this t itle , 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 unincorporatedorganization , through or by 20 means of which any business, financial 21 operation, or venture is carried on, and which 22 is not, withi n th e 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 overl ap a mong definitions is evident from the 32-11-

lackof even illustrative definitional entries of such terms as 1 "company" and "association." For example, a "company" could be 2 deemeda "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 memberin an association." Id . § 7701(a)(8). Sole proprietorships 8

are nowhere defined in the Code, although the existenc e of such a 9 business form is recogniz ed, s ee , 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 muchless 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 newbusiness structure allowedby state 17 statute," having some features of corporations and some features of 18 partnerships. IRS Publication 34 02, Tax Issues for Limited 19 Lia bility Companies 1 (2000), availab le a t 20 http://www.irs.gov/businesses/small /artic le/0,,id-=98277,00.htm l 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 . 3 402; see , e.g. , Conn. Gen. Stat. Ann. 26-12-

§§ 34-109 (execution of documents), 34-130 (agency), 34-140 1 (management), and in some cases affording "the benefit of pass2 throughtaxation," IRS Pub. 3402; but see Conn. Gen. Stat. Ann. 3 § 34-113 (" A limitedliability companyformedunder 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 fed eral t ax purposes ." 7 (emphases added)). 8 UnderConnecticut law, a limited liabilit ycompany 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 companyfalls 11 within subsection (a)(2) or (a)(3) of § 7701. It hardlyseems to be 12

a subsection (a)(3) "association," as one person does not associate 13 withhimself. 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 . . . ."). Th e closest fit for a single-owner LLC would 20

seemto 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 25-13-

howvarious types of entities, i nclu ding single-owner businesses, 1

a re to be classified for tax purposes. Treasury Regu latio n 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 classificat io n of business 18 entities: 19 (a) Business entities . For purposes of t h is 20 section and § 301.7701-3, a business ent ity is any 21 entityrecognized for federal tax purposes 22 ( includingan entitywith a single owner that may be 23 disregardedas an entity separ ate from its owner 24 under § 301.7701-3 ) that is not properly classified 25 as a trust under § 301.77 01-4 or otherwise subject 26 to special treatment under the Internal Revenue 27 Code. A business entity with two or more members is 28 classifie d for federal tax purposes as either a 29 c orporation or a partnership. A business e ntit y 30 withonly one owner is classified as a corporation 31 oris disregarded; if the entityis 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 entitythat is incorporated under federal or state law, see id . 37 § 301.7701-2(b)(1), an " association (as determined under 38-14-

§ 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) ofTreasury 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 entitythat is not a corporation under paragraph (b) 8 of this section and that has at least two members. 9 (2) Wholly own ed e ntities --(i) In general . A 10 business entity that has a single owner and is not a 11 corporation u nder 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 entitythat is not classified as a 16

cor poration under § 301.7701-2(b)(1), (3), (4), (5), (6), (7) , o r 17 (8)"--is given an option whethe r o r not to be classified as a 18 corporation. Thus, 19 [a]n eligible enti ty w ith at least two members can 20 elect to be classifiedas either an association (and 21 thus a corporation under § 301.7701-2(b)(2) ) or a 22 par t nership, and an eligible entity with a single 23 o wner can elect to be classified as an associa tio n 24 or to be disregarded as an entity separate from its 25 owner . Pa ragraph (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 providedin 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 35-15- (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 "Form8832, Entity Classificati on E lection" and filing that Form. 10 Id . § 301.7701-3(c). 11 These regulations became effective o n January 1, 1997, 12 replacingregulations, known as the "Kintner regulations," that had 13 been in place since 1960. The Kintner regulations had been adequate 14 duringthe first several decades after their adoption. But, as 15 explainedin the 1996 proposal for their amendment, the Kintner 16 regulations were complicated to ap ply, e specially 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 traditionallyhave 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 flexi bil ity" in local laws authorizing an entity that "in all 28 meaningful respects, is virtually indistinguishable from a 29 corporation" was that the Kin tner regulations required "taxpayers 30-16-

andthe IRS [to] expend considerable resources on classification 1 issues." Id . at 21990; see , e.g. , Littriello v. UnitedStates , 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 effe ctive, we cannot conclude that the 11 above Treasury Regulations, providing a flexible response to a novel 12 business form, are arbitrary, capricious, or unreas onab le. The 13 current regulations allow the single-owner limited liabilitycompany 14 to choose whether to be treated as an "association"-- i.e. , a 15 corporation--orto 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 andonce 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 L LC, but there will be no double taxation. The IRS check-th e-bo x 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. 26-17- 4. The Proposed New Regulations 1 McNamee's contention that the fact that the IRS has 2 proposednew 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 proposedregulation does not represent an agency's considered 7 interpretation of its statute and that an agency is entitled to 8 consideralternative interpretations before settling on the view it 9 considers most sound.'" Littriello , 2007 WL 1093723, at *7 (quoting 10 CommodityFut ure s Trading Commission v. Schor , 478 U.S. 833, 845 11 (1986)) (emphasis ours). 12 Further, "if the age ncy adequately explains the reasons 13 fora reversal of policy, change is not invalidating, since the 14 whole point of Chevron is to leave the disc retion provided by the 15 ambiguities of a statute with the implementing agency," and to allow 16 the agency to "co nsider varying interpretations and the wisdom of 17 its policy on a continuingbasis, . . . for example, in response to 18

c hangedfactual circumstances." National Cable , 545 U.S. at 98 1 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 fromthe interaction of the disregarded entity rules 24 andthe 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 maybe i n 30-18- conflict with the federal disregarded entity rules. 1 The Treasury Departm ent a nd the IRS believe that 2 treating the disregarded entity as the employer for 3 purposes of federal employment taxes will improve 4 the a dministration of the tax laws and simplify 5 compliance. 6 D isregardedEntities; 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 Trea suryRegulations are 12 invalidon the theor y t hat 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 memberLLC 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 att empt[i ng] to ignore the limited 18 liabilitylaws created by local legislation." (McNamee brie f o n 19 appeal at 6.) We are unpersuaded. 20 First, as discussed in Part II.A.3. above, the IRS has not 21 dictatedthat the owner of a single-member LLC always be considered 22 the employer forfederal 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 interpre tin g the Code or a single-member limited 27 liabilitycompany. Galletti involved nonpayment of payroll taxes by 28-19-

a partnership and the gover nment's assertion of claims for the 1 unpaidtaxes in individual bankruptcy proceedings filed by the 2 partnership's general partners. The question raised was "whether, 3 in order f or 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 mus t assess the taxes not only against a partnership that is 6 dir ectly 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 fromits partners and that the liability of the partners for 11 partnership debt was secondary, i.e. , derivedfrom the liabilityof 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 ratherthan 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 Apartnersh ip, as discussed above, has at least two 21 members; and while a p artnership 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 26-20-

. . . ." (emphases added)); id . § 301.7701-2(a) ("Abusiness entity 1 with two or more members is classifiedfor federal tax purposes as 2 eithera corporation or a partnership ." (emphases added)). There is 3

no Code provision or regulation that allows a partnership to be 4 disregardedas an entity in order for its partners to be treated as 5 the taxable entity. Thus, it is hardlyremarkable that the Galletti 6 Court concluded that t he 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 and3401, 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 purpo ses of 13 federal taxatio n, as the employer. Under the pertinent Treasury 14 Regulations, the single-member LLC is the employer if it elects to 15 be tr eated as a corporation; but if it does not elect t ha t 16 treatment, it is " [d]isregarded " as a "separate" entity, 26 C.F.R. 17 § 301.7701-3(b)(1)(ii) (emphasis ad ded ), and hence cannot be 18 regarded as the employer. 19 Finally, we reject M cNamee'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 grantedhim 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 . . . (19 24) , for example, the United 28-21- 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 cou rts have 4 repeatedlyobserved, state laws of incorporation 5 control various aspects of business relations; they 6 may affect, but do not necessarily control, federal 7 taxprovisions. See , e.g. , Morrisse y , 2 96 U.S. at 8 357-58 . . . (explaining that common law definitions 9 of certain corporate forms do not control 10 interpr etat ion 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 b enef it of limited 17 personal liability if he hadsimply 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 himboth 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 M cNam ee's contentions on this 26 appeal and have found them to be without merit. The judgment of the 27 district court is affirmed. 28