Sean was the sole owner of an accounting firm that was set up as a LLC.
United States of America (Press Release) February 7, 2008 --
Sean was the sole owner of an accounting firm that was set up as a limited
liability company (LLC) under state law. When the firm went out of business,
it had not paid any payroll taxes for the preceding 18 months. Perhaps
thinking that an accounting business, of all things, should have stayed current
in its payment of payroll taxes, the IRS went after Sean personally for the
$65,000 in unpaid taxes. A federal court upheld a judgment against him.
The authority of the government to look to the business owner in his
personal capacity for satisfaction of the tax liability went back to the
formation of the business. Treasury Regulations allow an individual who is
the only owner of an LLC to elect to have the business classified as either
an “association” or a “sole proprietorship.” In the former situation, the entity
is treated like a corporation. In the latter case, which had been selected by
Sean, the business is not considered an entity separate from the owner.
Sean challenged the tax assessment against him, but to no avail. The court
rejected his argument that the Regulation imposing liability on him as an
individual was invalid because the legislation itself, the Internal Revenue
Code, does not expressly authorize imposing personal liability on the sole
owner of an LLC. The Regulations, like many others issued by the Treasury
Department, are intended as a means to “fill in the gaps” left by the Internal
Revenue Code.
Notwithstanding the ultimately onerous effect on Sean of his earlier
selection under the Regulations, they are not arbitrary, capricious, or unreasonable.
When he checked the box on a form choosing treatment of his
company as a sole proprietorship, he effectively agreed to be liable for the
company’s debts, but he also had benefited by avoiding the double taxation—
once at the corporate level and once as an individual shareholder—that
comes with treatment as a corporation.
liability company (LLC) under state law. When the firm went out of business,
it had not paid any payroll taxes for the preceding 18 months. Perhaps
thinking that an accounting business, of all things, should have stayed current
in its payment of payroll taxes, the IRS went after Sean personally for the
$65,000 in unpaid taxes. A federal court upheld a judgment against him.
The authority of the government to look to the business owner in his
personal capacity for satisfaction of the tax liability went back to the
formation of the business. Treasury Regulations allow an individual who is
the only owner of an LLC to elect to have the business classified as either
an “association” or a “sole proprietorship.” In the former situation, the entity
is treated like a corporation. In the latter case, which had been selected by
Sean, the business is not considered an entity separate from the owner.
Sean challenged the tax assessment against him, but to no avail. The court
rejected his argument that the Regulation imposing liability on him as an
individual was invalid because the legislation itself, the Internal Revenue
Code, does not expressly authorize imposing personal liability on the sole
owner of an LLC. The Regulations, like many others issued by the Treasury
Department, are intended as a means to “fill in the gaps” left by the Internal
Revenue Code.
Notwithstanding the ultimately onerous effect on Sean of his earlier
selection under the Regulations, they are not arbitrary, capricious, or unreasonable.
When he checked the box on a form choosing treatment of his
company as a sole proprietorship, he effectively agreed to be liable for the
company’s debts, but he also had benefited by avoiding the double taxation—
once at the corporate level and once as an individual shareholder—that
comes with treatment as a corporation.
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