*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

1 UNITED STATES COURT OF APPEALS

2 FOR THE SECOND CIRCUIT

3 - - - - - -

4 August Term, 2006

5 (Argued: December 8, 2006 Decided: May 23, 2007) 

6 

7 Docket No. 05-6151-cv

8 _________________________________________________________

9 SEAN P. McNAMEE,

10 Plaintiff-Appellant,

11 - v. -

12 DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE,

13 Defendant-Appellee.

14 _________________________________________________________

15 Before: KEARSE and STRAUB, Circuit Judges, and KEENAN, District

Judge* 16 .

17 Appeal from a judgment of the United States District Court

18 for the District of Connecticut, Christopher F. Droney, Judge,

19 upholding Internal Revenue Service determination that plaintiff is

20 personally liable for the employment tax liabilities of his wholly21 owned limited-liability company, which he had chosen not to have

22 treated as a corporation.

23 Affirmed.
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1 SEAN P. McNAMEE, Wallingford, Connecticut,

2 Plaintiff-Appellant pro se.

3 BRIDGET M. ROWAN, Attorney, Tax Division,

4 Department of Justice, Washington, D.C.

5 (Eileen J. O'Connor, Assistant Attorney

6 General, David I. Pincus, Attorney, Tax

7 Division, Washington, D.C., Kevin J.

8 O'Connor, United States Attorney for the

9 District of Connecticut, on the brief),

10 for Defendant-Appellee.

11 KEARSE, Circuit Judge:

12 Plaintiff pro se Sean P. McNamee, the single-member owner

13 of a now-defunct limited liability company (or "LLC") formed under

14 Connecticut law, appeals from a judgment of the United States

15 District Court for the District of Connecticut, Christopher F.

16 Droney, Judge, rejecting his challenge to a determination by the

17 Internal Revenue Service ("IRS") under Treasury Regulations

18 §§ 301.7701-2 and 301.7701-3, 26 C.F.R. §§ 301.7701-2 and 301.7701-

19 3, that, because of his failure to exercise his option to have his

20 LLC treated as a corporation, McNamee was personally liable for the

21 LLC's employment tax liabilities. McNamee alleged principally that

22 the Treasury Regulations, and hence the IRS determination, were

23 contrary (a) to state law treating an LLC and its members as

24 separate entities, and (b) to provisions of the Internal Revenue

25 Code (or "Code"). The district court, concluding that the Treasury

26 Regulations were both consistent with the Code and reasonable, ruled

27 in favor of the government. On appeal, McNamee pursues his

28 contentions that the regulations are invalid because they contravene

29 state law and the federal statutory scheme. For the reasons that
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1 follow, we affirm.

2 I. BACKGROUND

3 The material facts appear to be undisputed. McNamee was

4 the sole proprietor of an unincorporated accounting firm, W.F.

5 McNamee & Company LLC ("WFM-LLC"), a Connecticut limited liability

6 company that ceased operation in March 2002. WFM-LLC employed an

7 average of six persons.

8 The Internal Revenue Code imposes two forms of employment

9 tax obligations on an employer (hereinafter "payroll taxes").

10 First, the employer is required to pay unemployment taxes, see

11 26 U.S.C. § 3301, and to make contributions to its employees'

12 social-security and Medicare benefits pursuant to the Federal

13 Insurance Contributions Act ("FICA"), see id. § 3111. Second, the

14 employer is required to withhold from employee compensation and

15 remit to the government (a) employee income taxes, see id. § 3402,

16 and (b) the employees' own mandated FICA contributions, see id.

17 §§ 3101, 3102(b). With respect to the third and fourth quarters of

18 2000 and all four quarters of 2001, WFM-LLC made no payment of any

19 of the required payroll taxes.

20 The Code recognizes a variety of business entities--

21 including corporations, companies, associations, partnerships, sole

22 proprietorships, and groups--and, based on the classifications,

23 treats the entities in various ways for income tax purposes. For

24 example, the income of a corporate entity is generally subject to a
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1 double wave of taxation, in that the corporation is taxed directly,

2 see 26 U.S.C. § 11(a), and its individual shareholders are further

3 taxed on dividends paid to them out of the corporation's income, see

4 id. § 61(a)(7). In contrast, an unincorporated sole proprietorship

5 that is treated as such is taxed only once: the owner simply lists

6 his business income on Schedule C of his individual tax return; the

7 proprietorship entity is not directly taxed, see generally id.

8 § 61(a)(2); 26 C.F.R. § 301.7701-3(b).

9 As discussed in greater detail in Part II below, the

10 Code's definitions of various types of business entities are broad,

11 and to some extent they overlap one another. See 26 U.S.C.

12 § 7701(a). In an attempt to eliminate ambiguity, the Treasury

13 Regulations instruct that certain entities must be classified as

14 corporations, see 26 C.F.R. § 301.7701-2(b), while other entities

15 are permitted to decide for themselves whether or not to be treated

16 as corporations, see id. § 301.7701-3. Thus, an entity whose

17 classification as a corporation is not required (referred to in the

18 Regulations as an "eligible entity"), and which has only one owner,

19 has the option of being classified either as an "association"--which

20 is defined in § 301.7701-2(b)(2) as a corporation--or as a "sole

21 proprietorship" that is to be "disregarded as an entity separate

22 from its owner," id. § 301.7701-2(a).

23 An eligible entity exercises that option simply by filing

24 IRS Form 8832, entitled "Entity Classification Election," having

25 checked the appropriate box on the Form. See id. § 301.7701-3(c)

26 (the "check-the-box" regulation). In the absence of such an
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1 election, an eligible entity that has only one owner is disregarded

2 as a separate entity. See id. § 301.7701-3(b).

3 WFM-LLC, McNamee's LLC, was not required to be classified

4 as a corporation, and McNamee elected not to have it treated as one.

5 Thus, under the Treasury Regulations, WFM-LLC was disregarded as a

6 separate entity and was treated as a sole proprietorship. WFM-LLC's

7 unpaid payroll taxes for 2000 and 2001 totaled $64,736.18. The IRS,

8 having disregarded WFM-LLC as a separate entity, assessed those

9 taxes against McNamee personally and placed a lien on his property.

10 McNamee filed a timely administrative appeal. He did not

11 dispute WFM-LLC's liability for the unpaid $64,736.18. However,

12 pointing to sections of Connecticut law providing that members of an

13 LLC are not personally liable for the debts of the LLC, see, e.g.,

14 Conn. Gen. Stat. Ann. § 34-133 (West 2005), he argued that the IRS

15 did not have the authority to "unilaterally pierce the corporate

16 veil of an LLC simple [sic] by looking at how it reports it's [sic]

17 income," and that the IRS's application of the check-the-box

18 regulation was therefore "in direct conflict with the right of an

19 LLC member." (McNamee Request for a Collection Due Process

20 Hearing.)

21 In a Notice of Determination Concerning Collection

22 Action(s) Under Section 6320 and/or 6330, dated October 23, 2003

23 ("IRS Determination"), the IRS Appeals Office rejected McNamee's

24 appeal. The unpaginated explanatory Attachment ("IRS Determination

25 Attachment") stated that the IRS's review confirmed that "[WFM-LLC]

26 was set up as a single member LLC, and that you, as the single
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1 member, did not elect association status . . . ." (IRS

2 Determination Attachment, first page.) After discussing the

3 pertinent Treasury Regulations, the IRS concluded that,

4 "[t]herefore, the LLC has been disregarded as an entity separate

5 from you. You, as the single member owner, are personally liable

6 for the employment tax debt of the LLC" (id. third page). The IRS

7 also noted that, while the administrative appeal was pending,

8 McNamee had terminated the existence of WFM-LLC (see id. first

9 page), and that he offered no alternative means of collecting the

10 amount due (see id. third page).

11 McNamee brought the present action in the district court

12 pursuant to, inter alia, 26 U.S.C. §§ 6320 and 6330, seeking review

13 of the IRS's administrative determination. He principally

14 reiterated his contentions that the IRS had no authority to

15 disregard the protection from liability afforded to members of an

16 LLC by Connecticut law and thereby hold him responsible for

17 WFM-LLC's tax liabilities. He also contended that the regulations

18 relied on by the IRS conflicted with provisions of the Internal

19 Revenue Code.

20 McNamee moved for summary judgment in his favor. The

21 government moved for affirmance of its determination that McNamee is

22 liable for WFM-LLC's unpaid payroll taxes. The district court

23 summarily denied McNamee's motion and granted the IRS's motion,

24 "find[ing] that the regulations at issue here were both reasonable

25 and consistent with the purposes of the revenue statutes." Ruling

26 on Pending Motions, dated September 26, 2005, at 1.
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1 Judgment was entered in favor of the government, and this

2 appeal followed.

3 II. DISCUSSION

4 On appeal, McNamee argues principally that the check-the5 box regulations "directly contradict the relevant statutory

6 provisions of the Internal Revenue Code" (McNamee brief on appeal

7 at 2), violate federal policy, and "ignore the limited liability

8 laws created by local legislation," (id. at 6). He also argues that

9 an IRS proposal in October 2005 to amend the check-the-box

10 regulations--and relieve the owner of a single-member LLC from any

11 possibility of personal liability for the LLC's payroll tax

12 liability--shows that the current check-the-box regulation is

13 "wrong" (id. at 7). Finding no merit in any of McNamee's

14 contentions, we affirm.

15 A. The Validity of the Treasury Regulations

16 1. The Standard of Review

17 In reviewing a challenge to an agency regulation

18 interpreting a federal statute that the agency is charged with

19 administering, the first duty of the courts is to determine "whether

20 the statute's plain terms 'directly addres[s] the precise question

21 at issue.'" National Cable & Telecommunications Ass'n v. Brand X
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1 Internet Services, 545 U.S. 967, 986 (2005) ("National Cable")

2 (quoting Chevron U.S.A. Inc. v. Natural Resources Defense Council,

3 Inc., 467 U.S. 837, 843 (1984)). "If the statute is ambiguous on

4 the point, we defer . . . to the agency's interpretation so long as

5 the construction is 'a reasonable policy choice for the agency to

6 make.'" National Cable, 545 U.S. at 986 (quoting Chevron, 467 U.S.

7 at 845). As stated in Chevron itself,

8 [f]irst, always, is the question whether Congress

9 has directly spoken to the precise question at

10 issue. If the intent of Congress is clear, that is

11 the end of the matter; for the court, as well as the

12 agency, must give effect to the unambiguously

13 expressed intent of Congress. If, however, the

14 court determines Congress has not directly addressed

15 the precise question at issue, the court does not

16 simply impose its own construction on the statute,

17 as would be necessary in the absence of an

18 administrative interpretation. Rather, if the

19 statute is silent or ambiguous with respect to the

20 specific issue, the question for the court is

21 whether the agency's answer is based on a

22 permissible construction of the statute.

23 467 U.S. at 842-43 (footnotes omitted) (emphases added).

24 "If Congress has explicitly left a gap for the agency to

25 fill, there is an express delegation of authority to the agency to

26 elucidate a specific provision of the statute by regulation[, and

27 s]uch legislative regulations are given controlling weight unless

28 they are arbitrary, capricious, or manifestly contrary to the

29 statute." Id. at 843-44. See also United States v. Mead Corp., 533

30 U.S. 218, 226-27 (2001) ("administrative implementation of a

31 particular statutory provision qualifies for Chevron deference when

32 it appears that Congress delegated authority to the agency generally

33 to make rules carrying the force of law, and that the agency
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1 interpretation claiming deference was promulgated in the exercise of

2 that authority").

3 In the Internal Revenue Code, Congress expressly delegated

4 authority to the Secretary of the Treasury to adopt regulations to

5 fill in gaps in the Code:

6 § 7805. Rules and regulations

7 (a) Authorization

8 Except where such authority is expressly given

9 by this title to any person other than an officer or

10 employee of the Treasury Department, the Secretary

11 shall prescribe all needful rules and regulations

12 for the enforcement of this title, including all

13 rules and regulations as may be necessary by reason

14 of any alteration of law in relation to internal

15 revenue.

16 . . . .

17 (d) Manner of making elections prescribed by

18 Secretary

19 Except to the extent otherwise provided by this

20 title, any election under this title shall be made

21 at such time and in such manner as the Secretary

22 shall prescribe.

23 26 U.S.C. §§ 7805(a) and (d) (emphasis added); see also 26 U.S.C.

24 § 7701(a)(11)(B) ("The term 'Secretary' means the Secretary of the

25 Treasury or his delegate."). With respect to the promulgation of

26 regulations interpreting the Code, the Secretary of the Treasury has

27 delegated authority to the Commissioner of Internal Revenue

28 ("Commissioner"). See 26 C.F.R. § 301.7805-1. "Because Congress

29 has delegated to the Commissioner the power to promulgate 'all

30 needful rules and regulations for the enforcement of [the Internal

31 Revenue Code],' 26 U.S.C. § 7805(a), we must defer to his regulatory

32 interpretations of the Code so long as they are reasonable, see

33 National Muffler Dealers Assn., Inc. v. United States, 440 U.S. 472,
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1 476-477 (1979)." Cottage Savings Ass'n v. Commissioner of Internal

2 Revenue, 499 U.S. 554, 560-61 (1991).

3 2. The Relevant Provisions of the Code

4 The Internal Revenue Code sets out "[d]efinitions" of

5 various types of business entities in the first three subsections of

6 § 7701(a), under the headings "Person[s]," "Partnership[s]," and

7 "Corporation[s]." As an examination of these provisions reveals,

8 the categories are overlapping and somewhat ambiguous:

9 (a) When used in this title, where not

10 otherwise distinctly expressed or manifestly

11 incompatible with the intent thereof--

12 (1) Person

13 The term "person" shall be construed to

14 mean and include an individual, a trust,

15 estate, partnership, association, company or

16 corporation.

17 (2) Partnership . . .

18 The term "partnership" includes a

19 syndicate, group, pool, joint venture, or other

20 unincorporated organization, through or by

21 means of which any business, financial

22 operation, or venture is carried on, and which

23 is not, within the meaning of this title, a

24 trust or estate or a corporation . . . .

25 (3) Corporation

26 The term "corporation" includes

27 associations . . . .

28 26 U.S.C. §§ 7701(a)(1), (2), and (3) (emphases added). Thus, each

29 subsection tends to be illustrative, rather than definitive, and

30 none of them specifies the characteristics of the entity that it

31 "defin[es]."

32 Potential overlap among definitions is evident from the
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1 lack of even illustrative definitional entries of such terms as

2 "company" and "association." For example, a "company" could be

3 deemed a "partnership" within the meaning of subsection (a)(2) if it

4 is an "unincorporated organization"; but it is a "corporation"

5 within the meaning of subsection (a)(3) if it is an "association."

6 However, the Code contains no definition of the term "association."

7 It does, however, define the term "shareholder" to "include[] a

8 member in an association." Id. § 7701(a)(8). Sole proprietorships

9 are nowhere defined in the Code, although the existence of such a

10 business form is recognized, see, e.g., 26 U.S.C.

11 § 172(b)(1)(F)(iii) (relating to net operating loss carryovers and

12 carrybacks).

13 Limited liability companies are not expressly mentioned,

14 much less defined, in the Code. Although an LLC might be considered

15 a company or an association, its proper characterization is not

16 clear from the terms of the Code itself. Limited liability

17 companies are "a relatively new business structure allowed by state

18 statute," having some features of corporations and some features of

19 partnerships. IRS Publication 3402, Tax Issues for Limited

20 Liability Companies 1 (2000), available at

21 http://www.irs.gov/businesses/small/article/0,,id-=98277,00.html

22 ("IRS Pub. 3402"). For example, "similar to a corporation, owners

23 have limited personal liability for the debts and actions of the

24 LLC." Id.; see, e.g., Conn. Gen. Stat. Ann. § 34-133. "Other

25 features of LLCs are more like a partnership, providing management

26 flexibility," IRS Pub. 3402; see, e.g., Conn. Gen. Stat. Ann.
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1 §§ 34-109 (execution of documents), 34-130 (agency), 34-140

2 (management), and in some cases affording "the benefit of pass3 through taxation," IRS Pub. 3402; but see Conn. Gen. Stat. Ann.

4 § 34-113 ("A limited liability company formed under sections 34-100

5 to 34-242 . . . shall be treated, for purposes of taxes imposed by

6 the laws of the state or any political subdivision thereof, in

7 accordance with the classification for federal tax purposes."

8 (emphases added)).

9 Under Connecticut law, a limited liability company may

10 have a single member. See, e.g., id. §§ 34-101(10), 34-140(c). The

11 Internal Revenue Code is unclear as to whether such a company falls

12 within subsection (a)(2) or (a)(3) of § 7701. It hardly seems to be

13 a subsection (a)(3) "association," as one person does not associate

14 with himself. Nor is a one-person operation in the same genre as

15 the specific subsection (a)(2) entities that are included within the

16 term "partnership"--i.e., "syndicate, group, pool, joint venture"--

17 all of which, like the term partnership itself, denote combinations

18 of persons rather than a single person, see, e.g., Conn. Gen. Stat.

19 Ann. § 34-301(9) ("'Partnership' means an association of two or more

20 persons . . . ."). The closest fit for a single-owner LLC would

21 seem to be "other unincorporated organization"--an organization that

22 might or might not be an entity separate from its owner.

23 3. The Gap-Filling Treasury Regulations

24 Against this ambiguous statutory background, the Treasury

25 Regulations were intended to provide straightforward guidance as to
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1 how various types of entities, including single-owner businesses,

2 are to be classified for tax purposes. Treasury Regulation

3 § 301.7701-1 states "[i]n general" that

4 [t]he Internal Revenue Code prescribes the

5 classification of various organizations for federal

6 tax purposes. Whether an organization is an entity

7 separate from its owners for federal tax purposes is

8 a matter of federal tax law and does not depend on

9 whether the organization is recognized as an entity

10 under local law.

11 . . . .

12 (4) Single owner organizations. Under

13 §§ 301.7701-2 and 301.7701-3, certain organizations

14 that have a single owner can choose to be recognized

15 or disregarded as entities separate from their

16 owners.

17 26 C.F.R. §§ 301.7701-1(a)(1) and (4) (emphases added). The

18 Regulations proceed to describe the classification of business

19 entities:

20 (a) Business entities. For purposes of this

21 section and § 301.7701-3, a business entity is any

22 entity recognized for federal tax purposes

23 (including an entity with a single owner that may be

24 disregarded as an entity separate from its owner

25 under § 301.7701-3) that is not properly classified

26 as a trust under § 301.7701-4 or otherwise subject

27 to special treatment under the Internal Revenue

28 Code. A business entity with two or more members is

29 classified for federal tax purposes as either a

30 corporation or a partnership. A business entity

31 with only one owner is classified as a corporation

32 or is disregarded; if the entity is disregarded, its

33 activities are treated in the same manner as a sole

34 proprietorship, branch, or division of the owner.

35 26 C.F.R. § 301.7701-2(a) (emphases added). Subsection (b) of this

36 Regulation defines the term "corporation" to include a business

37 entity that is incorporated under federal or state law, see id.

38 § 301.7701-2(b)(1), an "association (as determined under
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1 § 301.7701-3)," id. § 301.7701-2(b)(2) (emphasis added), and various

2 other business entities, see id. §§ 301.7701-2(b)(3), (4), (5), (6),

3 (7), and (8).

4 Subsection (c) of Treasury Regulation 301.7701-2 states in

5 pertinent part, with regard to "[o]ther business entities," that

6 "[f]or federal tax purposes,"

7 (1) The term partnership means a business

8 entity that is not a corporation under paragraph (b)

9 of this section and that has at least two members.

10 (2) Wholly owned entities--(i) In general. A

11 business entity that has a single owner and is not a

12 corporation under paragraph (b) of this section is

13 disregarded as an entity separate from its owner.

14 26 C.F.R. §§ 301.7701-2(c)(1) and (2)(i). Finally, Treasury

15 Regulation 301.7701-3(a) provides that "an eligible entity"--which

16 it defines as a "business entity that is not classified as a

17 corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or

18 (8)"--is given an option whether or not to be classified as a

19 corporation. Thus,

20 [a]n eligible entity with at least two members can

21 elect to be classified as either an association (and

22 thus a corporation under § 301.7701-2(b)(2)) or a

23 partnership, and an eligible entity with a single

24 owner can elect to be classified as an association

25 or to be disregarded as an entity separate from its

26 owner. Paragraph (b) of this section provides a

27 default classification for an eligible entity that

28 does not make an election. . . .

29 (b) Classification of eligible entities that do

30 not file an election--(1) Domestic eligible

31 entities. Except as provided in paragraph (b)(3) of

32 this section, unless the entity elects otherwise, a

33 domestic eligible entity is--

34 (i) A partnership if it has two or more

35 members; or
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1 (ii) Disregarded as an entity separate

2 from its owner if it has a single owner.

3 26 C.F.R. §§ 301.7701-3(a) and (b)(1) (emphases added). See also

4 id. § 301.7701-3(b)(3) (a single-owner entity that was in existence

5 prior to the effective date of this regulation and that claimed to

6 be a partnership under the prior regulations will be disregarded as

7 an entity separate from its owner).

8 An entity files its election to be treated as an

9 association simply by checking the appropriate box or boxes on IRS

10 "Form 8832, Entity Classification Election" and filing that Form.

11 Id. § 301.7701-3(c).

12 These regulations became effective on January 1, 1997,

13 replacing regulations, known as the "Kintner regulations," that had

14 been in place since 1960. The Kintner regulations had been adequate

15 during the first several decades after their adoption. But, as

16 explained in the 1996 proposal for their amendment, the Kintner

17 regulations were complicated to apply, especially in light of the

18 fact that

19 many states ha[d] revised their statutes to provide

20 that partnerships and other unincorporated

21 organizations may possess characteristics that

22 traditionally have been associated with

23 corporations, thereby narrowing considerably the

24 traditional distinctions between corporations and

25 partnerships under local law.

26 Simplification of Entity Classification Rules, 61 Fed. Reg. 21989,

27 21989-90 (proposed May 13, 1996). "One consequence of the increased

28 flexibility" in local laws authorizing an entity that "in all

29 meaningful respects, is virtually indistinguishable from a

30 corporation" was that the Kintner regulations required "taxpayers
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1 and the IRS [to] expend considerable resources on classification

2 issues." Id. at 21990; see, e.g., Littriello v. United States, No.

3 05-6494, 2007 WL 1093723, at *3 (6th Cir. Apr. 13, 2007)

4 ("Littriello") (the Kintner regulations "proved less than adequate

5 to deal with the new hybrid business entities--limited liability

6 companies, limited liability partnerships, and the like--developed

7 in the last years of the last century under various state laws").

8 In light of the emergence of limited liability companies

9 and their hybrid nature, and the continuing silence of the Code on

10 the proper tax treatment of such companies in the decade since the

11 present regulations became effective, we cannot conclude that the

12 above Treasury Regulations, providing a flexible response to a novel

13 business form, are arbitrary, capricious, or unreasonable. The

14 current regulations allow the single-owner limited liability company

15 to choose whether to be treated as an "association"--i.e., a

16 corporation--or to be disregarded as a separate entity. If such an

17 LLC elects to be treated as a corporation, its owner avoids the

18 liabilities that would fall upon him if the LLC were disregarded;

19 but he is subject to double taxation--once at the corporate level

20 and once at the individual shareholder level. If the LLC chooses

21 not to be treated as a corporation, either by affirmative election

22 or by default, its owner will be liable for debts incurred by the

23 LLC, but there will be no double taxation. The IRS check-the-box

24 regulations, allowing the single-owner LLC to make the choice, are

25 therefore eminently reasonable. Accord Littriello, 2007 WL 1093723,

26 at *4-*6.
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1 4. The Proposed New Regulations

2 McNamee's contention that the fact that the IRS has

3 proposed new regulations that would definitively make an LLC's

4 single owner not liable for the LLC's unpaid payroll taxes means

5 that the current regulations are "wrong" (McNamee brief on appeal at

6 7) is wide of the mark. To begin with, "'[i]t goes without saying

7 that a proposed regulation does not represent an agency's considered

8 interpretation of its statute and that an agency is entitled to

9 consider alternative interpretations before settling on the view it

10 considers most sound.'" Littriello, 2007 WL 1093723, at *7 (quoting

11 Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 845

12 (1986)) (emphasis ours).

13 Further, "if the agency adequately explains the reasons

14 for a reversal of policy, change is not invalidating, since the

15 whole point of Chevron is to leave the discretion provided by the

16 ambiguities of a statute with the implementing agency," and to allow

17 the agency to "consider varying interpretations and the wisdom of

18 its policy on a continuing basis, . . . for example, in response to

19 changed factual circumstances." National Cable, 545 U.S. at 981

20 (internal quotation marks omitted).

21 Here, the IRS explained that its October 2005 proposal to

22 change the regulations was a response to

23 [a]dministrative difficulties [that] have arisen

24 from the interaction of the disregarded entity rules

25 and the federal employment tax provisions. Problems

26 have arisen for both taxpayers and the IRS with

27 respect to reporting, payment and collection of

28 employment taxes, particularly where state

29 employment tax law also sets requirements for

30 reporting, payment and collection that may be in
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1 conflict with the federal disregarded entity rules.

2 The Treasury Department and the IRS believe that

3 treating the disregarded entity as the employer for

4 purposes of federal employment taxes will improve

5 the administration of the tax laws and simplify

6 compliance.

7 Disregarded Entities; Employment and Excise Taxes, 70 Fed. Reg.

8 60475, 60476 (proposed Oct. 18, 2005). The proposed changes, which

9 have not been adopted as of the filing of this opinion, provide no

10 basis for finding the existing regulations unreasonable.

11 B. McNamee's Reliance on State Law

12 McNamee also contends that the Treasury Regulations are

13 invalid on the theory that they ignore the Connecticut law

14 provisions that accord an LLC member limited liability. He states

15 that "the treasury has consistently held that the owner of a single

16 member LLC is the employer for Federal tax purposes," and argues

17 that United States v. Galletti, 541 U.S. 114 (2004), shows that the

18 IRS exceeded its authority "in attempt[ing] to ignore the limited

19 liability laws created by local legislation." (McNamee brief on

20 appeal at 6.) We are unpersuaded.

21 First, as discussed in Part II.A.3. above, the IRS has not

22 dictated that the owner of a single-member LLC always be considered

23 the employer for federal tax purposes; rather, it has given the LLC

24 the option to elect association status. If the LLC elects to be

25 treated as an association, the LLC is regarded as the employer.

26 Second, Galletti did not involve either Treasury

27 Regulations interpreting the Code or a single-member limited

28 liability company. Galletti involved nonpayment of payroll taxes by
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1 a partnership and the government's assertion of claims for the

2 unpaid taxes in individual bankruptcy proceedings filed by the

3 partnership's general partners. The question raised was "whether,

4 in order for the United States to avail itself of the 10-year

5 increase in the statute of limitations for collection of a tax debt,

6 it must assess the taxes not only against a partnership that is

7 directly liable for the debt, but also against each individual

8 partner who might be jointly and severally liable for the debts of

9 the partnership." 541 U.S. at 116. The Supreme Court noted that

10 under state law, a partnership was regarded as an entity separate

11 from its partners and that the liability of the partners for

12 partnership debt was secondary, i.e., derived from the liability of

13 the partnership. See id. at 116, 122 n.4. The Court held that the

14 government was not required, in order to press its claims in

15 bankruptcy, to assess the payroll taxes against the individual

16 partners because payroll taxes are imposed on the "employer," e.g.,

17 26 U.S.C. §§ 3402, 3403, and the employer was the partnership,

18 rather than its partners, see 541 U.S. at 121. The Galletti Court's

19 identification of the partnership as the employer has no bearing on

20 whether the sole owner of an LLC is to be considered the employer.

21 A partnership, as discussed above, has at least two

22 members; and while a partnership may elect to be treated as a

23 corporation, "partnership" and "corporation" are its only options.

24 26 C.F.R. § 301.7701-3(a) ("An eligible entity with at least two

25 members can elect to be classified as either an association (and

26 thus a corporation under § 301.7701-2(b)(2) or a partnership
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1 . . . ." (emphases added)); id. § 301.7701-2(a) ("A business entity

2 with two or more members is classified for federal tax purposes as

3 either a corporation or a partnership." (emphases added)). There is

4 no Code provision or regulation that allows a partnership to be

5 disregarded as an entity in order for its partners to be treated as

6 the taxable entity. Thus, it is hardly remarkable that the Galletti

7 Court concluded that the employer was the partnership rather than

8 its partners.

9 Further, we note that although the payroll tax sections of

10 the Code define "employer"--in various ways--see 26 U.S.C. §§ 3306

11 and 3401, as discussed in Part II.A.2. above the Code does not even

12 mention limited liability companies. Thus, nothing in the Code

13 provides that an LLC is always to be regarded, for purposes of

14 federal taxation, as the employer. Under the pertinent Treasury

15 Regulations, the single-member LLC is the employer if it elects to

16 be treated as a corporation; but if it does not elect that

17 treatment, it is "[d]isregarded" as a "separate" entity, 26 C.F.R.

18 § 301.7701-3(b)(1)(ii) (emphasis added), and hence cannot be

19 regarded as the employer.

20 Finally, we reject McNamee's contention that the IRS's

21 attempt to collect his LLC's unpaid payroll taxes from him is

22 impermissible because it violates the limited-liability rights

23 granted him by state law. As the Court of Appeals for the Sixth

24 Circuit noted in rejecting such a claim in Littriello,

25 [t]he federal government has historically

26 disregarded state classifications of businesses for

27 some federal tax purposes. In Hecht v. Malley, 265

28 U.S. 144 . . . (1924), for example, the United
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1 States Supreme Court held that Massachusetts trusts

2 were "associations" within the meaning of the

3 Internal Revenue Code despite the fact they were not

4 so considered under state law. As courts have

5 repeatedly observed, state laws of incorporation

6 control various aspects of business relations; they

7 may affect, but do not necessarily control, federal

8 tax provisions. See, e.g., Morrissey, 296 U.S. at

9 357-58 . . . (explaining that common law definitions

10 of certain corporate forms do not control

11 interpretation of federal tax code). As a result,

12 . . . single-member LLCs are entitled to whatever

13 advantages state law may extend, but state law

14 cannot abrogate [their owner's] federal tax

15 liability.

16 Littriello, 2007 WL 1093723, at *6. We agree.

17 Moreover, McNamee could have had the benefit of limited

18 personal liability if he had simply elected to have his LLC treated

19 as a corporation; he chose not to do so and thereby avoided having

20 the LLC taxed as a separate entity. We know of no provision,

21 policy, or principle that required the federal government to allow

22 him both to escape personal liability for the taxes owed by his sole

23 proprietorship and to have the proprietorship escape taxation as a

24 separate entity.

25 CONCLUSION

26 We have considered all of McNamee's contentions on this

27 appeal and have found them to be without merit. The judgment of the

28 district court is affirmed.