Tuesday, May 31, 2005
In a case of first impression, the U.S. District Court has upheld the validity of the check-the-box regulations (Reg. § 301.7701-1 through 3) in Littriello v. United States, No. 3:04CV-143-H (W.D. KY, May 18, 2005).
The court in Littriello noted that it could find "no appellate or district court opinions considering the validity of the check-the-box regulations. One Tax Court opinion, Dover Corp. v. Commissioner, 122 T.C. 324, 330-31 n.7 (2004), discusses the regulations and notes that 'some commentators' had questioned whether they constitute a valid exercise of regulatory authority." In Dover Corp., the Tax Court stated:
Some commentators have questioned whether the regulations constitute a valid exercise of the Treasury Secretary's authority under § 7805(a) to issue interpretive regulations. See, e.g., Staff of Joint Committee on Taxation, Review of Selected Entity Classification and Partnership Tax Issues, at 13-17 (J. Comm. Print Apr. 18, 1997); McKee et al., Federal Taxation of Partnerships and Partners, par. 3.08 at 3-102 (3d ed.1997); Dougan et al., "Check The Box"--Looking Under The Lid, 75 Tax Notes 1141, 1143-1144 (May 26, 1997); Mundstock, A Unified Approach To Subchapters K & S, 11 n. 35 (2002). Neither party has challenged the validity of all or any portion of the regulations. Therefore, for purposes of this case, we accept (without deciding) that the regulations are valid.
The district court in Littriello held that the check-the-box regulations satisfied the two-prong test of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1989):
Under step one of the Chevron analysis the Court looks to whether the intent of Congress is clear on the precise issue of business classification for federal tax purposes. The IRC defines "partnership" and "corporation" as being mutually exclusive. A business entity for tax purposes is defined either as a partnership or as a corporation. Littriello contends that the check-the-box regulations violate this manifest intent because two identical business entities may elect different classifications. The Commissioner responds that the term "association" in the statutory definition of a corporation is ambiguous.
Read together § 7701(a)(2) and § 7701(a)(3) do not seem to make a clear distinction between an "association" which is treated for tax purposes as a corporation and a "group pool or joint venture" which is treated for tax purposes as a partnership....[T]he Court concludes that the Commissioner's argument that the statute is ambiguous on this point is more persuasive than Littriello who seeks to impose clarity where the Court finds none....
Step two of the Chevron analysis requires the Court to decide "whether the agency's answer is based on a permissible construction of the statute." The Treasury promulgated the check-the-box regulations pursuant to its general authority to issue "needful rules and regulations for the enforcement of [the IRC]." § 7701(a)....
[T]he check-the-box regulations seem to be a reasonable response to the changes in the state law industry of business formation. The rise of the limited liability corporation presents a malleable corporate form incompatible with the definitions of the IRC. The newer regulations allow similar flexibility to the Kintner regulations, with more certainty of results and consequences. Considering the difficulty in defining for federal tax purposes the precise character of various state sanctioned business entities, the regulations also seem to provide a flexible permissible construction of the statute.