Paul L. Caron

Friday, April 13, 2007

6th Circuit Upholds Check-the-Box Regs

In a "case of first impression," the Sixth Circuit today affirmed the district court's grant of summary judgment and upheld the validity of the check-the-box regulations (Regs. §§ 301.7701-1 to -3) in Littriello v. United States, No. 05-6494 (6th Cir. 4/13/07):

The plaintiff, Frank Littriello, was the sole owner of several Kentucky limited liability companies (LLCs), the operation of which resulted in unpaid federal employment taxes totaling $1,077,000. Because Littriello was the sole member of the LLCs and had not elected to have the businesses treated as “associations” (i.e., corporations) under Treasury Regulations §§ 301.7701-3(a) and (c), the LLCs were “disregarded” as separate taxable entities and, instead, were treated for federal tax purposes as sole proprietorships under Treasury Regulation § 301.7701-3(b)(1)(ii). When Littriello, as sole proprietor, failed to pay the outstanding employment taxes, the IRS filed notices of determination and, eventually, notified him of its intent to levy on his property to enforce previously filed tax liens. Littriello responded by initiating complaints for judicial review in district court, contending that the regulations in question (1) exceed the authority of the Treasury to issue regulatory interpretations of the Internal Revenue Code; (2) conflict with the principles enunciated by the Supreme Court in Morrissey v. Commissioner, 296 U.S. 344 (1935); and (3) disregard the separate existence of an LLC under Kentucky state law. He also argued in his motion for summary judgment that the regulations are not applicable to employment taxes. After the cases were consolidated for disposition, the district court held that the “check-the-box regulations” are “a reasonable response to the changes in the state law industry of business formation,” upheld them under Chevron1 analysis, and held that the plaintiff was individually liable for the employment taxes at issue. We conclude that the district court’s analysis was correct and affirm.

For prior TaxProf Blog coverage, see U.S. District Court Upholds Check-the-Box Regs (5/31/05)

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