Petition for Writ of Certiorari — Littriello v. United States (No. 07-851)

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ais

reme Court, U.S.

oni (LE

07-85 1 DEC 2 6 2007

No. OFFICE OF THE CLERK

In The

Supreme Court of the United States

FRANK A. LITTRIELLO,

Petitioner,

Vv.

UNITED STATES OF AMERICA, and UNITED

STATES DEPARTMENT OF TREASURY,

Respondents.

On Petition for Writ of Certiorari to the United

States Court of Appeals for the Sixth Circuit

PETITION FOR WRIT OF CERTIORARI

IRWIN G. WATERMAN*

MICHAEL T. HYMSON

SEILLER WATERMAN LLC

462 S. FouRTH STREET

MEIDINGER TOWER, 22ND FLOOR

LOUISVILLE, KY 40202-3445

(502) 584-7400

waterman@derbycitylaw.com

hymson@derbycitylaw.com

*Counsel of Record

December 26, 2007

Becker Gallagher + Cincinnau, OH - Washington, D.C. - 800.890.5001

QUESTIONS PRESENTED

Does 26 USC § 7805(a) (Internal Revenue

Code § 7805(a)), which gives the Secretary of the

Treasury the authority to prescribe “all needful rules

and regulations for the enforcement” of the entire

Internal Revenue Code, grant the Secretary the

authority to issue legislative regulations with respect

to the numerous sections of the Internal Revenue Code

of 1986 (“Code” or “IRC”), or does that section limit the

Secretary's authority to prescribe rules and

regulations that arc interpretive of the various Code

sections?

TABLE OF CONTENTS

QUESTIONS PRESENTED .................

TABLE OF AUTHORITIES ...............

OPINIONS AND ORDERS BELOW ..........

yg 0!

STATUTORY AND REGULATORY PROVISIONS

As °s 6 ee aaa a a ee ane

pane eeuys OF THE CASE ...............

REASONS FOR GRANTING THIS PETITION

The Chevron Deference to Regulations That Fill

Gaps in Statutory Enactments Applies Only to

Regulations Adopted Pursuant to Specific

Congressional Acts or Code _ Sections

Empowering the Agency to Administer and

Enforce Specific Regulatory Acts ...........

Regulations Issued under IRC § 7805(a) Are

Limited to Explaining a Statute and How the

Internal Revenue Service Will Administer the

re “A Are a ee

The Secretary Does Not Ilave the Power to

Disregard Entities Defined by IRC § 7701(a) as

Created by State Statute .................

The Check-the-Box Regulations Did Not Amend

IRC § 3402 and IRC § 3403 or IRC § 6672 or

Replace the Pattern of These Code Sections.. 12

CARO AIIGIEE 5 on 8 ee a ee eee 13

APPENDIX

Appendix A: 4/13/07 Circuit Court Opinion .. la

Appendix B: 5/18/05 _ District Court

Memorandum Opinion .................. 16a

Appendix C: 5/18/05 District Court Order .. 27a

Appendix D: 9/25/07 Circuit Court Order

denying rehearingen banc .............. 29a

Appendix E: 8/3/05 District Court Memorandum

GCG. Coe eee eee gla

Appendix F: 10/30/07 Mandate ........... 34a

Appendix G: Statutes and Regulations..... 35a

Supreme Court Rule 13.1 ............. 35a

SB Uo. & 12081)... ww we ces On

Oe ta; tes oe oe ee ees 36a

Se Fa OB co 5 ae ae mae wee 37a

ae Aso Oe oe os ee eee ee Ala

Internal Revenue Code of 1986 § 3402; 26

C700. ss ee ee ee 42a

Internal Revenue Code of 1986 § 3403; 26

U.S.C. § 3403 ae .. baa

Internal Revenue Code of 1986 § 6672: 26

.ckn 6 OO Seo ae eee ee i2a

Internal Revenue Code of 1986 § 7501; 26

ee 5 no en Glee bee ca T7la

Internal Revenue Code of 1986 § 7701; 26

SG MS ss pacer he Xf we ee Ae 78a

Internal Revenue Code of 1986 § 7704; 26

ye I Pk yw we a hs be eee ee 133a

Internal Revenue Code of 1986 § 7805(a); 26

Ey rs kn cok ne oo ee ae ee 140a

Kentucky Revised Statutes § 275.150(1); KRS

UNE oe arg reo a an he ne wea 141a

Treas. Reg. § 301.7701-1;

yee Oe Ee gs 142a

Treas. Reg. § 301.7701-2;

26 C.F BM. SOL TOTS . ww ww ee 145a

Treas. Reg. § 301.7701-3;

T6C 2 R. S201. fret. oe ee ee 160a

TABLE OF AUTHORITIFS

CASES

Chevron, U.S.A., Inc. v. Natural Resource Defense

Counsel, Inc.,

467 U.S. 837, 104 S.Ct. 2778 (1984) ..... passim

Gerson Estate v. CIR,

507 F.3d 435 (6th Cir; November 9, 2007) .... 6

Gonzales v. Oregon,

546 U.S. 243, 126 S.Ct. 904 (2006) ...... 9,11

McNamee_v. Department of Treasury, Internal

Revenue Service,

4852.30 100 (2nd Cir. 2007) . 2... we neues 5

National Cable & Telecommunications Association v.

Brand X Internet Services,

545 U.S. 967, 125 S.Ct. 2688 (2005) ......... 7

O’Neill v. United States,

410 F.2d 888 (6th Cir. 1969) .............. 10

People Place Auto Hand Carwash LLC v.

Commissioner,

ae Bt a as ee eee 12

Rapanos v. United States.

176 344. S206 (7006)... .. . oc -.. 7,10

Slodov v. United States,

436 U.S. 238, 96 S.Ct. 1778 (1978) ......... 12

Swallows Holding, Ltd. v. C.LR.,

126 T.C. 96, 129 (2006)

LInited States v. Galletti,

541 U.S. 114, 124 S.Ct. 1548 (2004)

United States v. Vogel Fertilizer Company

155 U.S. 16, 102 S.Ct. 821 (1982)

STATUTES

Internal Revenue Code «

26 U.S.C § 3402

Internal Revenue

26 U.S.C § 3403

Internal Revenue

26 U.S.C § 6672

Internal Revenue

26 U.S.C $7501

Internal Revenue

26 U.S.C § 7701

Internal Revenue

26 U.S.C § 7704

Internal Revenue

26 U.S.C § 7805

28 U.S.C. § 1i

28 U.S.C. § 2101(

(

bs de

' 1986

1986

f 1986

1986

t LYSb

if 1GR6

“

3402.

3403:

6672.

passim

DUSSLUiTii

Vil

Clean Water Act of 1972, 33 U.S.C. 8 1251 .... 2,

Federal Communications Commission Act of 1934.

if t).2.4&. @ EDR .... Pas eae ER ee ea > i

Da Bee? yas oe eee 3

RULES

pupreme Court Rule 13.1 . 2... cc eee. a

REGULATIONS

Treasury Regulations, 26 C.F.R. §§ 301.7701-1 through

301.7701-3 ae )

]

PETITION FOR WRIT OF CERTIORARI

Frank A. Littriello (“Littriello”) respectfully

petitions the Court for a writ of certiorari to review the

opinion and judgment of the United States Court of

Appeals for the Sixth Circuit.

OPINIONS AND ORDERS BELOW

The opinion of the U.S. Court of Appeals for the

Sixth Circuit was decided and filed April 13, 2007.

The Court of Appeals denied Littriello’s petition for

rehearing and rehearing en banc on September 25,

2007. The opinion is officially reported at 484 F.3d

372, and is reproduced at App. A, la through 15a. The

order denying Littriello’s petition for rehearing and

rehearing en banc is reproduced at App. D, 29a.

The Order of the United States District Court for

the Western District of Kentucky, dated May 18, 2005,

is reproduced at App. C, 27a. The accompanying

Memorandum Opinion, dated May 18, 2005, is

unofficially reported at 2005 WL 1173277 and is

reproduced at App. B, 16a through 26a. The District

Court’s Memorandum and Order dated August 3, 2005,

denying Littriello’s motion to reconsider the District

Court’s Order and Memorandum Opinion, is

unofficially reported at 2005 WL 1862156 and is

reproduced at App. E, 3la.

JURISDICTION

The judgment of the United States Court of

Appeals for the Sixth Circuit sought to be reviewed

was entered on April 13, 2007. The Court of Appeals

denied Littriello’s petition for rehearing and rehearing

en banc on September 25, 2007. This petition is timely

under 28 U.S.C. § 2101(c) and Supreme Court

Rule 13.1 because it is being filed within ninety days

(as extended) of the entry of the Court of Appeals’

denial of Littriello’s petition for rehearing and

rehearing en banc. The United States Supreme Court

has jurisdiction to review the judgment of the Court of

Appeals for the Sixth Circuit pursuant to 28 U.S.C

§ 1254(1).

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

The relevant statutory and regulatory provisions

involved are:

Ss Supreme Court Rule 13.1

2. 28 U.S.C. § 1254(1)

3. 28 U.S.C. § 2101(c)

4. 33 U.S.C. § 1251 et seq

2. 47 U.S.C. § 151

—-

6. Internal Revenue Code of 1986

U.S.C. § 3402

i. Internal Revenue Code of 1986 § 3403: 26

U.S.C. § 3403

8. Internal Revenue Code of 1986 § 6672: 26

U.S.C. 8 6672

9. Internal Revenue Code of 1986 § 7501; 26

U.S.C. § 7501

10. Internal Revenue Code of 1986 § 7701; 26

U.S.C. § 7701

11. Internal Revenue Code of 1986 § 7704: 26

U.S.C. § 7704

12. Internal Revenue Code of 1986 § 7805(a):

26 U.S.C. § 7805(a)

13 Kentucky Revised Statutes § 275.150(1):;

KRS 275.150(1)

14. Treas. Reg. §§ 301.7701-1 through

301.7701-3; 26 C.F.R. §§ 301.7701-1

through 301.7701-3

STATEMENT OF THE CASE

This case originated as an appeal to U.S. District

Court for the Western District of Kentucky from a final

determination ona collection due process hearing. The

basic issue is: Does the Internal Revenue Service,

acting under a regulation adopted pursuant to

IRC § 7805(a), have authority to collect withholding,

FICA, and FUTA taxes (employment taxes) owed by a

Kentucky limited liability company (Kentuckiana

Healthcare, L.L.C.) from its sole member? The

Treasury Regulations at 26 C.F.R. §§ 301-7701-1 to

301.7701-3 (“check-the-box regulations”) give the

Commissioner of Internal Revenue the authority to

disregard the separate existence of a limited liability

company for all tax purposes when the sole member

has not affirmatively elected to have the limited

liability company taxed as a corporation.

The District Court by Order dated May 18, 2005

overruled Plaintiffs (Petitioner’s) Motion for Summary

Judgment based on a sworn complaint and Littriello’s

separate affidavit, and granted the Defendant’s

(Respondent’s) Motion for Partial Summary Judgment.

The Order and Opinion held the regulation enforceable

as meeting the Chevron test.

The Sixth Circuit Court of Appeals in an Opinion

dated April 13, 2007 (App. 1a) affirmed the Order of

the District Court.

REASONS FOR GRANTING THIS PETITION

The District Court’s Order and Memorandum

Opinion and the Opinion of the Court of Appeals,

relying on the two step test set out in Chevron

U.S.A., Inc. v. Natural Resource Defense Counsel, Inc.,

467 U.S. 837, 104 S.Ct. 2778 (1984), held the check-

the-box regulations enforceable. The Chevron

standard provides that courts must first determine

whether Congress has directly spoken on the precise

question at issue. If congressional intent is clear, then

that is the end of the matter as effect must be given to

the unambiguously expressed intent of Congress. If

the statute is silent or ambiguous with respect to the

specific issues, the question for the court is whether

the agency's answer is based on a_ permissible

construction of the statute. When the statute is silent

or ambiguous, the court must defer to a reasonable

construction by the agency.

The Chevron decision specifically applies to

“legislative regulations”, regulations promulgated

pursuant to specific congressional authority granted

regulatory administrative commissions to enforce

specific regulatory acts. Legislative regulations can fill

gaps in legislation if there is an express delegation of

authority to elucidate a specific statute by regulations.

The decisions of the Sixth Circuit herein and of the

Second Circuit in McNamee _v. Department of

Treasury, Internal Revenue Service, 488 F.3d 100 (2""

Cir. 2007), a hke case, are contrary to this Court’s

decision in United States v. Vogel Fertilizer Company,

455 U.S. 16, 102 S.Ct. 821 (1982). Vogel holds

Treasury regulations adopted under IRC § 7805(a) are

interpretive. Interpretive is defined as explanatory.

IRC § 7508(a) applies to the entire Internal

Revenue Code and does not contain an express

delegation of authority to elucidate IRC § 7701(a), the

statute upon which the check-the-box regulations are

based.

IRC § 7701(a) provides the definition of persons,

partnerships, corporations, and associations. Treas.

Reg. §§ 301.7701-1 through 301.7701-3 (“check-the-box

regulations”), adopted December 18, 1996, are the

result of a litigation and administration history of

categorizing associations as partnerships” or

corporations according to their business attributes and

of the advent. of the limited liability company.

The check-the-box regulations are legislation giving

the Commissioner of Internal Revenue the power to

disregard for tax purposes business entities existing

under state law and giving private business entities

the power by checking a box on Form 8832, Entity

Classification Election, to elect to be taxed as

corporations, partnerships, or sole proprietorships

although the Code provides separate specific taxing

provisions for partnerships, corporations, and sole

proprietorships.

The Sixth Circuit, relying on its decision in

Littniello, has applied the Chevron standard to

validate a Treasury Regulation adopted under

IRC § 7805(a) after notice and comment, Gerson

Estate v. CIR, 507 F.3d 435 (6 Cir; November 9,

2007). Reliance on notice and comment as a condition

for use of the Chevron standard ts not a substitute for

specific congressional authority.

The Secretary, whose authority is from the

executive branch, does not and should not have the

legislative power without specific congressional

authority to create new penalties, new taxing regimes,

repeal existing statutes, or amend any provision of the

Code, whether reasonable or advisable for any reason

not authorized by Congress.

The Sixth Circuit states that the Littriello

challenge to the enforceability of the check-the-box

regulations is a case of first impression. The Sixth

Circuit Opinion will permit the Secretary to, in effect,

amend Internal Revenue Code sections subject only to

the reasonableness of his regulations. The Sixth

Circuit Opinion, if not reversed, will open many

unknown doors.

The Chevron Deference to Regulations That

Fill Gaps in Statutory Enactments Applies

Only to Regulations Adopted Pursuant to

Specific Congressional Acts or Code Sections

Empowering the Agency to Administer and

Enforce Specific Regulatory Acts

The Chevron test was produced by Chevron,

USA, Inc. v. Natural Resources Defense Council, Inc.,

467 U.S. 837, 104 S.Ct. 2778 (1984), which upheld

regulations under the Clean Air Act. In stating the

test, the Opinion specifically uses the term “legislative

regulations” with respect to authority granted by

Congress under the 1970 amendment to the Clean Air

Act to the Environmental Protection Agency to

promulgate National Ambient Air Standards.

Likewise, the Federal Communications Commission

was specifically granted the power to prescribe

regulations to be necessary in the public interest to

carry out the provisions of the Federal

Communications Commission Act of 1934, 47 U.S.C.

§ 151. See 47 U.S.C. § 151 and National Cable &

Telecommunications Association v. Brand X Internet

Services, 545 U.S. 967, 125 S.Ct. 2688 (2005) and also

Rapanos v. United States, 126 S.Ct. 2208 (2006),

involving authority of the Corps of Engineers to

interpret the Clean Water Act of 1972, 33 U.S.C.

§ 1251 et seq.

The Chevron standard applicable to regulation

issued pursuant to specific statutory authorization

does not translate into a standard of review for

regulations issued pursuant to the general grant of

authority contained in IRC § 7805(a).

Regulations Issued under IRC § 7805(a) Are

Limited to Explaining a Statute and

How the Internal Revenue Service

Will Administer the Law

IRC § 7805(a) gives the Secretary of the Treasury

authority to issue needful regulations with respect to

the entire Internal Revenue Code (“IRC” or “Code”).

Compare the one paragraph of IRC § 7805(a) to the

EPA, CWA, and FCC broad Congressional grants of

authority to issue regulations with respect to those

statutes. The authority under IRC § 7805(a) is to issue

interpretive regulations. United States v. Vogel

Fertilizer, 455 U.S. 16, 24, 102 S.Ct. 821, 827 (1982);

Swallows Holding, Ltd. v. C.LR., 126 T.C. 96, 129

(2006). It follows that the check-the-box regulations

issued pursuant to IRC § 7805(a) comprising numerous

complex sections on taxpayer identity and applicable

taxation follow no statutory mandate and _ being

legislative exceed the Secretary's authority.

Interpretive regulations under IRC § 7805(a)

explain the law as itis. “The Secretary’s authority to

issue regulations Junder IRC § 7805(a)] is not the

power to make law; it is the power to carry into effect

the will of Congress as expressed in the statute under

which the regulations are prescribed.” Swallows

Holdings, Ltd., 126 T.C. at 129. According to the

Opinion of the Sixth Circuit herein, the check-the-box

regulations issued pursuant to IRC § 7805(a) seek to

fill a legislative gap occasioned by new forms of

business entities. Administrative regulations cannot

fill gaps in legislation unless authorized by specific

Congressional acts.

In summary, interpretive regulations issued

pursuant to the general authority of IRC § 7805(a) are

the Secretary’s understanding of Congressional acts.

As issued by an agency charged with administration of

the Code they are accorded persuasive value.

Legislative regulations are issued pursuant to

authority set out in particular acts of Congress and if

consistent with specific statutory authority contained

in the Act have the force of law. Legislative

regulations can fill a gap in the enabling legislation if

specifically authorized and may resolve statutory

ambiguities. When challenged, legislative regulations

are accorded “Chevron deference”. That deference does

not apply to interpretive regulations issued which may

not perform the legislative function to fill gaps in

legislative acts or resolve ambiguous terms. Gonzales

v. Oregon, 546 U.S. 243, 126 S.Ct. 904 (2006), states:

Just as the Interpretive Rule receives no

deference under Auer, neither does it receive

deference under Chevron. If a statute is

ambiguous, judicial review of administrative

rulemaking often demands Chevron deference:

and the rule is judged accordingly. All would

agree, we should think, that the statutory

phrase “legitimate medical purpose” is a

generality, susceptible to more precise

definition and open to varying constructions.

and thus ambiguous in the relevant sense.

Chevron deference, however, is not accorded

merely because the statute is ambiguous and an

administrative official is involved. To begin

with, the rule must be promulgated pursuant to

authority Congress has delegated to the official.

Mead, 533 U.S., at 226-227, 121 S.Ct. 2164.

546 U.S. at 258, 126 S.Ct. at 916.

Filling a gap in a legislative act is legislation.

Thus, the issue goes beyond the degree of deference to

the regulation in question to an issue of presence or

absence of specific legislative authority.

The Secretary Does Not Have the Power to

Disregard Entitics Defined by IRC § 7701 (a)

as Created by State Statute

The first sentence of the check-the-box regulations

assumes on behalf of the Secretary the power to

disregard business entities. The pattern of the

Internal Revenue Code is based on taxpayers defined

by or existing by means of state law. A power to

disregard any such taxpayer identity is contrary to the

statute. Likewise, the authority to self-elect a

taxpayer identity is contrary to the Code.

In Rapanos v. United States, 126 S.Ct. 2208 (2006),

a Corps of Engincers Regulation, although interpreting

an ambiguous statutory term “waters of the United

States”, was held unenforceable as an impingement of

the states’ traditional and primary power over land

and water use. The regulatory disregard of a state

statute providing limited liability for a limited liability

company is an impermissible impingement on the

state’s power to provide for and define business

entities. O'Neill v. United States, 410 F.2d 888 (6"

Cir. 1969). The power of taxation does not trump the

state’s regulation of business entities. The substantive

tax sections of the Code on taxation of individuals,

partnerships, corporations, and associations are

interrelated with the taxpayer identities listed in

IRC § 7701(a) which, except for persons, only exist by

virtue of state law. There is no statutory authority to

disregard these entities or statutory authority to

create new taxable entities or identities in the absence

of the disregarded entities.

In Gonzales v. Oregon, supra, the Supreme Court

enjoined the enforcement of an interpretive rule

promulgated under the Controlled Substances Act that

permitted the Attorney General to deny an Oregon

physician a license to dispense controlled substances

and consequently to practice medicine if his practice

included participation in assisted suicides permissible

under the Oregon Assisted Suicide Act.

The Controlled Substances Act gave the Attorney

General authority to promulgate rules and regulations

he may deem appropriate for “efficient execution of his

functions” under the Act directing him to promulgate

rules and regulations relating to the registration and

control of the manufacture and distribution of

controlled substances. That authority is parallel to

IRC § 7805(a). The Attorney General’s rule issued

under a general grant to issue regulations in effect

impermissibly regulated the practice of medicine in

Oregon, exclusively a state matter.

The Secretary may determine on the evidence that

a business entity is not what it appears to be. He may

not disregard its identity as such under the

IRC § 7701(a) definitions or under state law.

The Check-the-Box Regulations Did Not

Amend IRC § 3402 and IRC § 3403 or IRC § 6672

or Replace the Pattern of These Code Sections

IRC § 3403 and IRC § 3402 impose a duty on an

employer, here a limited liability company, to collect

and remit to the Treasury the income taxes owed by its

employees. The collected income taxes create a

debtor/creditor relationship between the employer and

the Internal Revenue Service. IRC § 7501 and Slodov

v. United States, 436 U.S. 238, 98 S.Ct. 1778 (1978).

‘he single member of a limited liability company is not

liable as the employer for the employer’s failure to

collect and remit the uncollected employee income

taxes.

United States v. Galletti, 541 U.S. 114, 124 S.Ct.

1548 (2004), holds that a partnership existing under

California law was the employer for IRC § 3402

purposes. People Place Auto Hand Carwash LLC v.

Commissioner, 126 T.C. 359 (2006), holds a limited

liability company that elected to be taxed as a

partnership was the employer for employment tax

purposes. The fact that Kentuckiana Health-

care, L.L.C. did not elect to be taxed as a corporation

does not decide the issue of whether the disputed

regulations for substantive reasons exceed the

Secretary's authority under § 7805(a).

The check-the-box regulations cannot amend or

bypass IRC § 3402 and IRC § 3403 or change the

statutory pattern that provides the 100% penalty of

IRC § 6672 as the Commissioner’s remedy where a

responsible person failed to comply with IRC § 3402

and IRC § 3403.

Additionally, the collected employee income taxes

are a trust fund titled in the employer for the benefit

of the Treasury. IRC § 7501. The check-the-box

regulations cannot cenvert trust funds into taxes owed

by the limited liability company employer for pass

through to its member(s) nor otherwise amend the

Code or otherwise disregard IRC §§ 3402 and 3403.

CONCLUSION

The check-the-box regulations have proved

workable although not in harmony with IRC § 770 1(a)

With proper congressional authorization, the

regulations would pass the Chevron test.

Here reasonableness is not the issue. The degree of

deference to the Secretary’s regulations is secondary.

There was no authority for the adoption of the check-

the-box regulations. The Sixth Circuit Opinion, if not

reversed, will open many unknown doors.

Respectfully Submitted,

Irwin G. Waterman

Counsel of Record

Seiller Waterman LLC

462 S. Fourth Avenue

Meidinger Tower, 22" Floor

Louisville, KY 40202-3445

(502) 584-7400

Michael T. Hymson

Seiller Waterman LLC

462 S. Fourth Avenue

Meidinger Tower, 22”° Floor

Louisville, KY 40202-3445

(502) 584-7400

Counsei for Petitioner

APPENDIX

APPENDIX A

‘

FOR THE SIXTH CIRCUIT

No. 05-6494

[Filed April 13, 2007]

FRANK A. LITTRIELLO

Plaintiff-Appellant,

UNITED STATES OF AMERICA a1

UNITED STATES

DEPARTMENT OF TREASURY,

Defendants-Appellees

Appeal from the United States District Court

for the Western District of Kentucky at Louisvill

No. 04-00143—John G. Heyburn I]

Chief District Judge

Before: KENNEDY and DAUGHTREY. Circuit

Judges: ADAMS, District Judge

“The Honorable John R. Adams, United Stats iste mira

the Northern District of Oh tting by onat

OPINION

MARTHA CRAIG DAUGHTREY, Circuit Judge. In

this appeal from a grant of summary judgment to the

government, we are presented with a case of first

impression regarding the validity of the Treasury

Department’s so-called “check-the-box” regulations, 26

C.F.R. §§ 301.7701-1 to 301.7701-3, promulgated in

1996 to simplify the classification of business entities

for tax purposes.

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 Kegulation

§ 301.7701-3(b)(1)Gi). 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 Chevron’ analysis, and

held that the plaintiff was individually hable for the

employment taxes at issue. We conclude that the

district court’s analysis was correct and affirm.

PROCEDURAL AND FACTUAL BACKGROUND

Frank Littriello was the owner of several business

entities, including Kentuckiana Healthcare, LLC;

Pyramid Healthcare Wisc. I, LLC; and Pyramid

Healthcare Wisc. II, LLC. Wach of these businesses

was organized as a limited liability company under

Kentucky law, with Littriello as the sole member. He

did not elect to have them treated as corporations for

federal tax purposes and, as a result, none of the LLCs

was subject to corporate income taxation. For the tax

years in question, Littriello reported his income from

the three businesses on Schedule C of his individual

income tax return - the schedule on which the profits

and losses of a sole proprietorship are reported.

Because the LLCs were “disregarded entities” under

the pertinent tax regulations, and not corporate

entities, the IRS assessed Littriello for the full amount

of the unpaid employment taxes for 2000-2002

‘Chevron USA., Inc. v. Natural Res Def. Council, Inc.,

467 U.S. 837 (1984).

In January 2003, the Internal Revenue Service

informed Littriello that it intended to enforce the liens

that had been filed against his property as security for

the unpaid taxes. In response, Littriello requested a

hearing, which produced a determination by the IRS

Appeals Office that Littriello was individually hable as

a sole proprietor under Treasury Regulation

§ 301.7701-3(b)(1)(i1), as a result of his failure to elect

to be treated as a corporation.

Littriello filed suit in district court contesting the

finding of liability and contending, among other things,

that Treasury Regulations §§ 301.7701-1—301.7701-3

(the “check-the-box regulations”) were invalid. Relying

on Chevron, the district court rejected Littriello’s

challenge to the regulations. The district court upheld

the assessment against Littriello, ruling that the

governing provisions of the Internal Revenue Code,

found in 26 I.R.C. § 7701, were ambiguous and that

the IRS’s regulatory interpretation, including the

check-the-box provisions, was “a reasonable response

to the changes in the state law industry of business

formation.” This appeal followed.

DISCUSSION

The Treasury Regulations at the heart of this

litigation, 26 C.F.R. §§ 301.7701-1---801.7701-3, were

issued in 1996 to clarify the rules for determining the

classification of certain business entities for federal tax

purposes, replacing the so-called “Kintner

regulations.”” The earlier regulations had been

* See United States v. Kintner, 216 F.2d 418 (9th Cir. 1954).

developed to aid in classifying business associations

that were not incorporated under state incorporation

statutes but that had certain characteristics common

to corporations and were thus subject to taxation as

corporations under the federal tax code. Corporate

income is, of course, subject to “double taxation” —

once at the corporate level under I.R.C. § 11(a) and

again at the individual-shareholder level, pursuant to

I.R.C. § 61(a)(7). In contrast, partnership income

benefits from “pass-through” treatment — it is taxed

once, not at the business level but only after it passes

through to the individual partners and is taxed as

income to them, pursuant to I.R.C. §§ 701-777. A sole

proprietorship — in which a single individual owns all

the assets, is liable for all debts, and operates in an

individual capacity — is also taxed only once.

The Kintner regulations built on an even earlier

standard, set out by the Supreme Court in Morrissey,

in which the Court addressed the tax code provision

that included an “association” within the definition of

a corporation, in order to determine whether a

“business trust” qualified as an “association” for

federal tax purposes. 296 U.S. at 346. Morrissey

identified certain characteristics as those typical of a

corporation, including the existence of associates,

continuity of the entity, centralized management,

limited personal liability, transferahility of ownership

interests, and title to property. Jd. at 359-61.

Ilowever, the Court did not hold that a specific number

of those characteristics had to be present in order to

establish the business entity as a corporation, nor did

it address the consequence of a partnership having

some of those characteristics, leaving the distinctions

between and among the various defined entities less

than clear.

Meant to clarify some of the confusion created in

the wake of Morrissey, the Kintner regulations

developed four essential characteristics of a corporate

entity and provided that an unincorporated business

would be treated as an “association” — and, therefore,

as a corporation rather than a partnership — if it had

three of those four identifying characteristics. See

former Treas. Reg. §§ 301.7701-2(a)(1) and (3). The

Kintner regulations, adequate to provide a measure of

predictability at the time of their promulgation in 1960

and for several decades afterward, proved less than

adequate to deal with the new hybrid business entities

— limited liability companies, limited liability

partnerships, and the like — developed in the last

years of the last century under various state laws.

These unincorporated business entities had the

characteristics of both corporations and partnerships,

combining ease of management with limited liability,

and were increasingly structured with the Kintner

regulations in mind, in order to take advantage of

whatever classification was thought to be the most

advantageous. The “Kintner exercise” required skillful

lawyering by business entities and case-by-case review

by the IRS; it quickly came to be seen as squandering

of resources on both sides of the equation.

As a result, the IRS undertook to replace the

Kintner regulations with a more practical scheme,

consistent with existing tax statutes and with a new

provision in I.R.C. § 7704 treating publicly-traded

entities as corporations, regardless of their structure

or status under state law. As to the unincorporated

business associations not covered by § 7704, including

the newly emerging hybrid entities, the IRS proposed

to allow an election by the taxpayer to be treated as a

corporation or, in the absence of such an election, to be

“disregarded,” t.e., deemed a partnership (for entities

with multiple members) or a sole proprietorship (for

those with a single member). After a period for notice

and comment, the new regulations were issued and

became effective on January 1,1997, implementing the

definitional provisions of §§ 7701(a)(2) and (3). The

regulations were particularly helpful with regard to

the tax status of the new hybrids, because the hybrid

entities were not, and still are not, explicitly covered

by the definitions set out in § 7701. What was avoided

by the resulting “check-the-box” provisions was the

necessity of forcing those hybrids to jump through the

Kantner regulation “hoops” in order to achieve a

desired — and perfectly legal — classification for

federal tax purposes.

The district court noted that Littriello’s

unincorporated businesses had not elected to be

treated as corporations under the new regulations and

were, therefore, deemed by the IRS to be sole

proprietorships. This result provided Littriello with a

major tax advantage: his income from the healthcare

facilities would be taxed to him only once. But, of

course, it also meant that he would be responsible not

only for taxes on business income but also for those

federal employment taxes that were required by

statute and that had not been paid for the years in

question.

The district court found that the regulations were

a reasonable interpretation by the IRS of a tax statute

(I.R.C. § 7701) that was otherwise ambiguous, upheld

them under Chevron analysis, after noting that it was

apparently the first court asked to review those

regulations, and held Littriello individually liable for

the amounts assessed by the IRS. In doing so, the

district court rejected Littriello’s arguments that the

Secretary of the Treasury had exceeded his authority

in promulgating the entity-classification regulations,

that the regulations are invalid under Morrissey, and

that they impermissibly altered the legal status of his

state-law-created LLC. Before this court, Littriello

also contends that the regulations do not apply to

employment taxes, an argument that depends, at least

in part, on proposed amendments to the

entity-classification regulations that were not

circulated until after the appeal in this case was filed.

A. Chevron Analysis

The first two arguments raised by Littriello are

intertwined. He contends that the statute underlying

the “check-the-box” regulations is unambiguous and

that the district court’s invocation of Chevron was,

therefore, erroneous. Under Chevron, a _ court

reviewing an agency’s interpretation of a statute that

it administers must first determine “whether Congress

has directly spoken to the precise question at issue.”

467 U.S. at 842. If congressional intent is clear, then

“that is the end of the matter; for the court, as well as

the agency, must give effect to the unambiguously

expressed intent of Congress.” /d. at 842-43.

However, “if the statute is silent or ambiguous with

respect to the specific issuc, the question for the court

is whether the agency’s answer is based on a

permissible construction of the statute.” /d. at 843; see

also Barnhart v. Thomas, 540 U.S. 20, 26 (2003) (when

a statute is silent or ambiguous, the court must “defer

to a reasonable construction by the agency charged

with its implementation”).

Littriello argues, first, that Chevron has been

modified by the Supreme Court’s recent decision in

National Cable & Telecommunications Ass’n v. Brand

X Internet Services, 545 U.S. 967 (2005), which “seems

to revise the Chevron formula by substituting as the

second agency requirement ‘reasonableness’ for

‘permissible construction of the statute.” But this

argument overlooks the fact that the Chevron opinion

uses the terms “reasonable” and “permissible”

interchangeably in reference to statutory construction.

See, e.g., 467 U.S. at 8438, 845. Second, and more

substantially, he posits that the regulations run afoul

of Morrissey, “the seminal case on § 7701 ,” which he

reads to hold that the IRS is legally required to

determine the classification of a taxpayer-business

within the definitions set out in the statute and may

not “abdicate the responsibility of making that

determination to the taxpayer itself” by permitting an

election of classification such as a “check-the-box”

option.

Although the plaintiffs Morrissey argument is not

a model of clarity, it seems to depend on the

proposition that the terms defined in § 7701

(“corporation,” “association,” “partnership,” etc.) are

not ambiguous but “[have been] in common usage in

Anglo American law for centuries” and, as a corollary,

that “Morrissey provides a test of identification [that is

itself] unambiguous.” Hence, the argument goes, it is

the “check-the-box” regulations that “render whole

10a

portions of the Internal Revenue Code ambiguous” and

are therefore “in direct conflict with the decision of the

Supreme Court in Morrissey” in the absence of

Congressional amendment to § 7701.

It is unnecessary, in our judgment, to engage in an

exegesis of Chevron here. The perimeters of that

opinion and its directive to courts to give deference to

an agency’s interpretation of statutes that the agency

is entrusted to administer and to the rules that govern

implementation, as long as they are reasonable, are

clear, and are clearly applicable in this case.

Moreover, the argument that Morrissey has somehow

cemented the interpretation of § 7701 in the absence of

subsequent Congressional action or Supreme Court

modification is refuled by Chevron, in which the Court

suggested that an agency’s interpretation of a statute,

as reflected in the regulations it promulgates, can and

must be revised to meet changing circumstances. See

Chevron, 467 U.S. at 863-64. Even more to the point,

the Court in Morrissey observed that the Code’s

definition of a corporation was less than adequate and

that, as a result, the IRS had the authority to supply

rules of implementation that could Jater be changed to

meet new situations. See 296 U.S. at 354-55. Finally,

we note that our interpretation is buttressed by the

opinion in National Cable, on which the plaintiff relies

to support the proposition that the “check-the-box”

regulations are impermissible in light of Morrissey. In

that case, the Supreme Court noted that “[a] court’s

prior judicial construction of a statute trumps an

agency construction otherwise entitled to Chevron

deference only if the prior court decision holds that its

construction follows from the unambiguous terms of

the statute and thus leaves no room for agency

lla

discretion.” Natl Cable, 545 U.S. at 982 (emphasis

added).

In short, we agree with the district court’s

conclusions: that § 7701 is ambiguous when applied to

recently emerging hybrid business entities such as the

LLCs involved in this case; that the Treasury

regulations developed to fill in the statutory gaps when

dealing with such entities are eminently reasonable;

that the “check-the-box” regulations are a_ valid

exercise of the agency’s authority in that respect; that

the plaintiffs failure to make an election under the

“check-the-box” provision dictates that his companies

be treated as disregarded entities under those

regulations, thereby preventing them from being taxed

as corporations under the Internal Revenue Code; and

that he is, therefore, liable individually for the

employment taxes due and owing from those

businesses because they constitute sole proprietorships

under § 7701, and he is the proprietor.

B. Status Under State Law

Citing United States v. Galletti, 541 U.S. 114

(2004), Littriello argues that the IRS must recognize

the separate existence of his LLCs as a matter of state

law. Weconclude that the opinion is inapplicable here.

Galletti involved a partnership, not a disregarded

entity, that was assessed as an employer for unpaid

employment taxes. See id. at 117. The partners, who

were liable for partnership debts under state law,

contended that they should therefore also be assessed

as “employers,” but the Court held as a matter of

federal law that “nothing in the Code requires the IRS

to duplicate its efforts by separately assessing the

12a

same tax against individuals or entities who are not

the actual taxpayers but are, by reason of state law,

liable for payment of the taxpayer’s debt.” Jd. at 123.

Hence, the Court in Galletti was concerned with a

business actually organized as a partnership and not

a disregarded entity deemed a sole proprictorship for

federal tax purposes. Of course, partnerships are

recognized entities under federal! tax law and explicitly

included in § 7701's definitions, while single-member

LLCs are not. See I.R.C. § 7701(a)(2).

The same flaw prevents application of the ruling in

People Place Auto Hand Carwash, LLC ov.

Commissioner, 126 T.C., 359 (2006), to the facts here.

In this recent opinion, submitted as supplemental

authority by Littriello, the Tax Court held that

imposition of an employment tax on the LLC could not

be viewed as equivalent to the imposition of an

employment tax on its members. Again, however, the

LLC in People Place had more than a single member

and, because it had not opted to be treated as a

corporation, it was perforce a—thsreyarded—entity

treated as a partnership. But under no circumstances

could Littriello’s single-member LLCs be treated as

partnerships for federal tax purposes — his choice was

to elect treatment of each of them as a corporation or,

in the absence of an election, have them treated as sole

proprietorships.

The federal) government has historically

disregarded state classifications of businesses for some

federal tax purposes. In Hecht v. Malley, 265 U.S. 144

(1924), for example, the United States Supreme Court

held that Massachusetts trusts were “associations”

within the meaning of the Internal Revenue Code

l3a

despite the fact they were not so considered under

state law. As courts have repeatedly observed, state

laws of incorporation control various aspects of

business relations; they may affect, but do not

necessarily control, federal tax provisions. See, e.g.,

Morrissey, 296 U.S. at 357-58 (explaining that common

law definitions of certain corporate forms do not

control interpretation of federal tax code). Asa result,

Littriello’s single-member LLCs are entitled to

whatever advantages state law may extend, but state

law cannot abrogate his federal tax liability.

C. Proposed Amendments to the Regulations

In October 2005, after the notice of appeal in this

case had been filed, the IRS circulated a notice of

proposed rule-making that set out possible

amendments to the entity-classification regulations

that would shelter individuals similarly situated to

Littriello for unpaid employment taxes. The proposed

amendments would treat “single-owner eligible

entities that currently are disregarded as entities

separate from their owners for federal tax purposes. .. .

as separate entities for employment tax and related

reporting requirements.” Disregarded Entities;

Employment and Excise Taxes, 70 Fed. Reg. 60475

(proposed Oct. 18, 2005) (to be codified at 26 C.F.R.

pts. 1.301). Thus, if the amendments had been in

place when the tax deficiencies in this case arose,

single-member LLCs such as Littriello’s would be

treated as separate entities for employment tax

purposes, although not for other federal tax purposes.

Littriello argues that the proposed amendments

should be taken as reflecting current Treasury

l4a

Department policy and applied to his case. But, it

appears that the changes contemplated by the

amendments are intended to simplify employment tax

collection procedures and do not represent an

endorsement of the position that Littriello has

advocated in this litigation. As the Supreme Court

noted in Commodity Futures Trading Commission v.

Schor, 478 U.S. 833 (1986):

It goes without saying that a proposed

regulation does not represent an agency’s

considered interpretation of its statute and that

an agency is entitled to consider alternative

interpretations before settling on the view it

considers most sound. Indeed, it would be

antithetical to the purposes of the notice and

comment provisions of the Administrative

Procedure Act, 5 U.S.C. § 553, to tax an agency

with “inconsistency” whenever it circulates a

proposal that it has not firmly decided to put

into effect and that it subsequently reconsiders

in response to public comment.

Id. at 845. As the IRS urges, we conclude that

“{blecause the further development of permissible

alternatives is part of the administering agency’s

function under Chevron, the proposed regulations do

not in any way undermine the District Court’s

determination that the current regulations are

reasonable and valid.” Plainly, an agency does not lose

its entitlement to Chevron deference merely because it

subsequently proposes a different approach in its

regulations.”

CONCLUSION

For the reasons set out above, we reject the

plaintiffs challenge to the “check-the-box” regulations

and AFFIRM the district court's grant of summary

judgment to the defendant

4 ~ .

As of the date of this opinion, the proposed regulations have not

been adopted.

l6a

APPENDIX B

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF KENTUCKY

AT LOUISVILLE

CIVIL ACTION NO. 3:04CV-143-H

[Filed May 18, 2005]

FRANK A. LITTRIELLO. .

PLAINTIFF |

)

UNITED STATES, et al

DEFENDANT

MEMORANDUM OPINION

Kentuckiana Healthcare, LLC (the “Company’), a

limited liability company formed under the laws of

Kentucky, operated a nursing home in Scottsburg,

Indiana, under the trade name Scott County

Healthcare Center. It failed to pay withholding and

FICA taxes for some of the tax periods ending between

12/2000 and 3/2002. Frank Littriello (“Littriello”), the

plaintiff in this case, was the sole member of the

Company during the tax periods in question. The IRS

notified Littriello of its intent to levy his property to

enforce previously filed notices of federal tax licens for

17a

the Company’s unpaid withholding and FICA taxes.’

Littriello requested a due process hearing with the IRS

Appeals office in Louisville, Kentucky.

The Appeals Office determined that Littriello was

individually lhable for the Company’s’ unpaid

withholding and FICA taxes. It held that under Treas.

Reg. § 301.7701-3(b)(1)Gii), a single member limited

lability company that did not elect to be treated as a

corporation is considered as a disregarded entity for

federal tax purposes. As such, its activities are treated

in the same manner as a sole proprietorship, division

or branch of the owner under Treas. Reg.

§ 301.7701-3(a). Through this federal action Littriello

seeks judicial review and redetermination of that

decision.

The real dispute here concerns the validity of the

so-called “check-the-box” regulations for corporations

and partnerships. Treas. Reg. § 301.7701-1 through 3.

Littriello contends that the check-the-box regulations

constitute an invalid exercise of the Treasury’s

authority to issue interpretive regulations under

Internal Revenue Code (“IRC”) § 7805(a) and are, thus,

unenforceable. If the regulations are invalid, then the

Company alone is liable for the taxes at issue. The

Commissioner argues that the regulations are valid

and that as applied here Littriello is individually liable

for the Company’s tax obligation. Both sides have

moved for summary judgment.

' Defendant seeks to have the Commissioner of Internal Revenue

(the “Commissioner”) substituted as the proper defendant.

Littniello makes no objection to this suggestion

18a

The IRS and the Treasury Department proposed

the check-the-box regulations in 1996 to simplify

entity classification for tax purposes, believing that the

prior regulations had become’ unnecessarily

cumbersome, complex and risky for affected entities.

The current regulations function in a relatively

straightforward fashion. The Internal Revenue Vode

treats business entities differently depending ugen

whether the business entity is classified as a

corporation ora partnership. IRC § 7701(a)(3) defines

the term “corporation” to include associations,

joint-stock companies, and insurance companies. IRC

§ 7701(a)(2) defines the term “partnership” to include

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

unincorporated organization, through or by means of

which any business, financial operation, or venture is

carried on, and which is not, within the meaning of

this title, a trust or estate or a corporation. The

regulations provide that for the purposes of IRC

§ 7701(a)(3) any unincorporated business entity that is

not a publically traded partnership covered by IRC

§ 7704 may elect whether or not to be classified as an

association. Thus, an unincorporated business entity

like the Company can generally elect whether or not to

be subject to the corporate tax. A default treatment

applies under a variety of circumstances where a

business entity chooses not to be considered a

corporation. Ifan unincorporated business entity with

more than one member elects not to be treated as an

association, it will be treated for federal tax purposes

as a partnership. If an unincorporated business entity

with only one member elects not to be treated as an

association, it will be treated for federal tax purposes

19a

as a disregarded entity and taxed as a sole

proprietorship. Treas. Reg. § 301.7701-3(a).

II.

The Court now considers the validity of the

check-the-box regulations.” Chevron, U.S.A., Inc. v.

Natural Resources Defense Council, Inc., 467 U.S. 837

(1989), governs the analysis for reviewing agency

regulations. The Supreme Court established a

two-part analysis:

When a court reviews an agency’s construction

of the statute which it administers, it is

confronted with two questions. First, always, is

the question whether Congress has directly

spoken to the precise question at issue. If the

intent of Congress is clear, that is the end of the

matter; for the court, as well as the agency,

must give effect to the unambiguously

expressed intent of Congress. If, however, the

court determines Congress has not directly

addressed the precise question at issue, the

court does not simply impose its own

construction on the statute, as would be

necessary in the absence of an administrative

* The Court can find no appellate or district court opinions

considering the validity of the check-the-box regulations. One Tax

Court opinion, Dover Corporation v. Commissioner of Internal

Revenue, 122 T.C. 324 (2004), discusses the regulations and notes

that “some commentators” had questioned whether they

constitute a valid exercise of regulatory authority. /d at 330-31

(n.7). Neither party challenged the validity of the regulations in

that case

20a

interpretation. Rather, if the statute is silent or

ambiguous with respect to the specific issue, the

question for the court is whether the agency’s

answer is based on a permissible construction of

the statute.

Id. at 842-43 (footnotes omitted). The Sixth Circuit

has employed Chevron when assessing the validity of

interpretive ‘Treasury regulations. Hospital

Corporation of America & Subsidiaries v.

Commissioner, 348 F.3d 136, 140 (6th Cir. 2003); Ohio

Pertodical Distributors, Inc. v. Commissioner, 105 F.3d

322, 324-326 (6th Cir. 1997).

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. Laittriello 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 IRC § 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. The

definition of the “corporation” in the IRC dates from

21a

the Revenue Act of 1918 and the definition of the term

“partnership” was added in 1932. Since then,

Kentucky has endorsed the limited liability company

as a popular business form. Business entities formed

under state law most often seek to combine the limited

hability of a corporation with the tax benefits of a

partnership exacerbating the ambiguity in the

definitions section of the statute. A business entity

registered in Kentucky as a limited liability company

does not fall squarely in either the partnership or

corporation category as defined in the IRC. This is

undoubtedly true in most other states as well. Indeed,

the ambiguity is part of the reason for providing

unincorporated business entities with a choice of

treatment. Therefore, the Court concludes that the

Commissioner's argument that the statute is

ambiguous on this point is more persuasive than

Littriello who secks to impose clarity where the Court

finds none.

Bb.

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.” Jd. at 843.

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].” IRC § 7701(a). The regulations at issue

interpret the definitions sections of the IRC. The

classification of a business entity affects how the IRS

assesses tax hability.

Littriello argues that the plain meaning of the

Internal Revenue Code forecloses the possibility of an

22a

elective regime because “taxation as intended by

Congress is based on the realistic nature of the

business entity.” Pls.’ Mot. for Summ. J. p 8.

Littriellos primary evidence in support of this

contention appears to be the previous ‘Treasury

regulations, effective prior to January 1, 1997. Former

Treas. Reg. § 301.7701-2(1960). These regulations,

commonly referred to as the Kintner regulations,

looked to six corporate characteristics to determine the

tax status of a business entity. The Kintner

regulations enumerated the factors used by the

Supreme Court in Morrissey v. Commissioner, 296 U.S.

344 (1935) to define the characteristics of a pure

corporation: (1) associates; (2) an objective to carry on

a business and divide the gains there from; (3)

continuity of life; (4) centralization of management; (5)

liability for corporate debts limited to property; and (6)

free transferability of interests. Most every business

entity has associates and an objective to carry out a

business and _ profit. Before the check-the-box

regulations, any business entity the IRS found to meet

three of the remaining four corporate characteristics

was classified as a association and taxed as a

corporation. Business entities that contained only two

of the remaining four where classified and taxed as a

partnership. Former Treas. Reg. § 301.7701-2(a)(1).

Littriello is correct that under the former

regulations the Company might have been classified

differently. Of course, under the current regulations,

the Company could have elected to be classified

differently. Moreover, Congressional intent does not

attach to the previous regulations. Indeed, Congress

appears only to have spoken on this issue through the

existing statutes. The check-the-box regulations are

23a

only a more forma! version of the informally elective

regime under the Kintner regulations. A business

entity could pick at will which two corporate

characteristics to avoid in order to qualify as a

partnership under the Kintner regulations. ‘The

importance of the change is that under the current

regulations a business entity may elect to be taxed as

a corporation without specific reference to its corporate

characteristics.

While some _ reasonable arguments’ support

Littriello’s position, the Court ultimately finds them

unpersuasive. Under the circumstances, the

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.

Littriello advances a number of arguments that the

Court finds not sufficiently persuasive to change its

basic analysis. Littriello says that the check-the-box

regulations violate the basic principle of treating like

entities alike under the IRC. It is fundamentally

wrong, according to Littriello, that two business

entities identical in every relevant respect would be

24a

classified and thereby taxed differently solely because

of a box checked on a form. A single member LLC with

all six of the pure corporation characteristics could

elect not to be treated as a corporation for federal tax

purposes. Conversely a single member LLC with no

traditionally corporate characteristics could

nevertheless elect to be classified and taxed as a

corporation perhaps with the goal of limiting the

assets available to that organization’s tax liability.

This elective function is of course the very point of the

check-the-box regulations. In today’s business

environment, not all corporations are alike and not all

partnerships share the same characteristics. In

response to an ambiguous statutory definition coupled

with a variety of legally created business forms, the

Treasury decided that entities may choose their form

for tax purposes within the limits of the IRC. Business

entities get the good and the bad with their choice.

This new criterion added with the check-the-box

regulations appears eminently reasonable.

In a somewhat related argument, Littriello argues

that the check-the-box regulations impermissibly alter

the legal status of his state law created LLC. This

construction of the statute, the argument goes, is

impermissible because it disregards the separate

existence of the LLC and its sole member created

under state law.’ The Court finds this argument

* Littriello relies heavily on U.S. v. Galletti, 541 U.S. 114 (2004)

contending that Galletti isin conflict with disregarding a state law

entity. In Galletti, the Supreme Court held that the assessment

of a general partnership as the relevant taxpayer under IRC

§ 6203 extended the time for collecting from that employer's

25a

unpersuasive because the check-the-box regulations

apply only for federal tax liability purposes. Littriello

will not be held liable for other debts of his LLC, he is

only being held liable for the relevant tax liability

under the IRC. The Court concludes that the

reasonableness of this approach considered with the

Treasury’s general authority to interpret what is on its

face an ambiguous statutory provision supports a

finding that the check-the-box regulations are valid. °

Littriello also argues that, at least with regard to

taxes withheld from employees of the Company, his

obligation is a debt owed the IRS as its agent not a tax

liability. As a member of an LLC, Littriello would not

be liable for that LLC’s debts under Kentucky law.

While Littriello’s is a novel argument, the Court agrees

with the IRS that taxes withheld from employees of

the Company are the responsibility of the employer,

here Littriello, not as an agent but as a taxpayer. IRC

§ 3402.

Finally, Littriello argues that IRC § 6672 is the

IRS’s sole statutory recourse. To impose tax liability

against him under this section, the IRS must prove

that Littriello was the responsible person for the

lapses in turning over withheld wages which it has not

done. This argument lacks merit because the IRS has

imposed tax liability upon Littriello as the owner of a

sole proprietorship. The Commissioner’s assertion

general partners who were liable for payment. of partnership's

debts. To the extent that it is relevant at all, this case supports

the Commissioner’s contention that the definition of a taxpayer is

not made with reference to a person’s legal status under state law.

26a

that the IRS has not pursued a claim against Littriello

under IRC § 6672 is well taken and supported by the

evidence. Moreover, that the IRS might have more

than one possible avenue for enforcement does not

imply an impermissible construction of the statute.

The Court will grant Defendant’s motion for

summary judgment on the issue of the validity of the

check-the-box regulations. The Court will enter an

order consistent with this Memorandum Opinion.

/s/ patie a eel

John G. Heyburn II

Chief Judge, U.S. District Court

May 18, 2005

ec: Counsel of Record

27la

APPENDIX C

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF KENTUCKY

AT LOUISVILLE

CIVIL ACTION NO. 3:04CV-143-H

[Filed May 18, 2005]

FRANK A. LITTRIELLO,

PLAINTIFF

UNITED STATES, et al

DEFENDANTS

{

ORDER

Plaintiff has moved for summary judgment on all

claims in this case. Defendant has moved for partial

summary judgment on the validity of the

check-the-box regulations. The Court has carefully

considered the issues in an accompanying

Memorandum Opinion. Being otherwise sufficiently

advised,

IT IS HEREBY ORDERED that Plaintiffs motion

for summary judgment is DENIED.

28a

IT IS FURTHER ORDERED that Defendant’s

motion for partial summary judgment is SUSTAINED

and the check-the-box regulations promulgated by the

Treasury and at issue in this action are valid as a

matter of law.

This is not a final order. The Court will schedule a

telephone conference to determine whether any further

action is necessary.

/s/

John G. Hayburn, I]

Chief Judge, U.S. District Court

May 18, 2005

ce: Counsel of Record

905

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No. 05-6494

[Filed September 25, 2007}

FRANK A. LITTRIELLO,

Plaintiff-Appellant,

UNITED STATES OF AMERICA AND

UNITED STATES

DEPARTMENT OF TREASURY

Defendants-Appellees

BEFORE: KENNEDY and DAUGHTREY.

Circuit Judges: and ADAMS, District

Judge

The court having received a petition lor rehearing

en banc, and the petition having been circulated not

y Hon. -John R Adam lLinited State Distnct Jud re jor t

Northern District of Ohio, sitting by designation

30a

only to the original panel members but also to all other

active judges of this court, and no judge of this court

having requested a vote on the suggestion for

rehearing en banc, the petition for rehearing has been

referred to the original panel

The panel has further reviewed the petition for

rehearing and concludes that the issues raised in the

petition were fully considered upon the original

submission and decision of the case. Accordingly, the

petition is denied.

ENTERED BY ORDER OF THE COURT

Leonard Green, Clerk

3la

APPENDIX E

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF KENTUCKY

AT LOUISVILLE

CIVIL ACTION NO. 3:04CV-143-H

[Filed August 3, 2005]

FRANK A. LITTRIELLO.

PLAINTIFF

UNITED STATES, et al

DEFENDANTS

A a

MEMORANDUM AND ORDER

Plaintiff has moved to reconsider the Court’s

Memorandum Opinion and its Order dated May 18,

2005, on the grounds that the _ check-the-box

regulations are invalid under Morrissey v.

Commissioner, 296 U.S. 344 (1935) as argued ina Law

Review article by Professor Gregg D. Polsky of the

University of Minnesota Law School. Polsky, “Can

Treasury Overrule the Supreme Court?”’, 84 BU.L.Rev.

185 (2004). Thus, this motion states new grounds for

Plaintiff's relief. The Court will consider the argument

32a

even though it amounts to a renewed motion rather

than a true reconsideration.

When confronted with the question posed by

Professor Polsky’s title, one would naturally answer,

“No.” However, that is not precisely the question

before this Court nor can it be fairly said that

Treasury’s check-the-box regulations have such an

effect. The Court has reviewed Morrissey in its proper

context and does not find that it requires invalidating

the check-the-box regulations.

Certainly, the check-the-box regulations are the

subject of academic and theoretical questioning.

Professor Polsky has proposed that the Treasury has

gone too far in adopting regulations concerning

corporations and other associations. However, it is a

theory only that the check-the-box regulations violate

the Internal Revenue Code definitions because those

definitions were made in effect permanent by

Morrissey. ‘The Court does not believe that Morrissey

forever incorporated in all future Treasury regulations

a particular definition of an “association.” In support

of this conclusion, the Court would adopt the

discussion contained in the response of the United

States.

Being otherwise sufficiently advised,

IT IS HEREBY ORDERED that Plaintiffs motion

to reconsider is DENIED.

This is a final and appealable order.

33a

John G. Hayburn, Il

Chief Judge, U.S. District Court

August 3, 2005

ce: Counsel of Record

APPENDIX F

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

No. 05-6494

[Filed October 30, 2007]

FRANK A. LITTRIELLO

Plaintiff-Appellant

¥.

UNITED STATES OF AMERICA;

UNITED STATES

DEPARTMENT OF TREASURY

Defendants-Appellees

MANDATE

Pursuant to the court’s disposition that was filed on

04/13/2007 the mandate for this case hereby issues

today.

COSTS: NONE

Filing Fee..................... $

PLIES os ccsiesccincom

Jc.) | ee $

)

35a

APPENDIX G

RULES, STATUTES AND REGULATIONS

RULES OF THE SUPREME COURT

OF THE UNITED STATES

Rule 13. Review on Certiorari: Time for

Petitioning

1. Unless otherwise provided by law, a petition for a

writ of certiorari to review a judgment in any case,

civil or criminal, entered by a state court of last resort

or a United States court of appeals (including the

United States Court of Appeals for the Armed Forces)

is timely when it is filed with the Clerk of this Court

within 90 days after entry of the judgment. A petition

for a writ of certiorari seeking review of a judgment of

a lower state court that is subject to discretionary

review by the state court of last resort is timely when

it is filed with the Clerk within 90 days after entry of

the order denying discretionary review.

. a ae

28 U.S.C. $1254

TITLE 28- JUDICIARY AND JUDICIAL

PROCEDURE

PARTIV- JURISDICTION AND VENUE

CHAPTER 81 - SUPREME COURT

36a

Sec. 1254. Courts of appeals; certiorari; certified

questions

Cases in the courts of appeals may be reviewed by the

Supreme Court by the following methods:

(1) By writ of certiorari granted upon the petition of

any party to any civil or criminal case, before or after

rendition of judgment or decree;

* KOK

28 U.S.C. § 2101

TITLE 28- JUDICIARY AND JUDICIAL

PROCEDURE

PART V- PROCEDURE

CHAPTER 133- REVIEW - MISCELLANEOUS

PROVISIONS

Sec. 2101. Supreme Court; time for appeal or

certiorari; docketing; stay

to bring any judgment or decree in a civil action, suit

or proceeding before the Supreme Court for review

shall be taken or applied for within ninety days after

the entry of such judgment or decree. A justice of the

Supreme Court, for good cause shown, may extend the

time for applying for a writ of certiorari for a period

not exceeding sixty days.

37a

33 U.S.C. § 1251

TITLE 33- NAVIGATION AND NAVIGABLE

WATERS

CHAPTER 26- WATER POLLUTION PREVENTION

AND CONTROL

SUBCHAPTER 1- RESEARCH AND RELATED

PROGRAMS

Sec. 1251. Congressional declaration of goals and

policy

(a) Restoration and maintenance of chemical, physical

and biological integrity of Nation’s waters; national

goals for achievement of objective

The objective of this chapter is to restore and

maintain the chemical, physical, and_ biological

integrity of the Nation’s waters. In order to achieve

this objective it is hereby declared that, consistent

with the provisions of this chapter -

(1) it is the national goal that the discharge of

pollutants into the navigable waters be eliminated by

1985;

(2) it is the national goal that wherever attainable,

an interim goal of water quality which provides for the

protection and propagation of fish, shellfish, and

wildlife and provides for recreation in and on the water

be achieved by July 1, 1983;

(3) it is the national policy that the discharge of

toxic pollutants in toxic amounts be prohibited;

38a

(4) it is the national policy that Federal financial

assistance be provided to construct publicly owned

waste treatment works;

(5) it is the national policy that areawide waste

treatment management planning’ processes’ be

developed and implemented to assure adequate control

of sources of pollutants in each State;

(6) it is the national policy that a major research

and demonstration effort be made to develop

technology necessary to eliminate the discharge of

pollutants into the navigable waters, waters of the

contiguous zone, and the oceans; and

(7) it is the national policy that programs for the

contro] of nonpoint sources of pollution be developed

and implemented in an expeditious manner so as to

enable the goals of this chapter to be met through the

control of both point and nonpoint sources of pollution.

(b) Congressional recognition, preservation, and

protection of primary responsibilities and rights of

States

It is the policy of the Congress to recognize,

preserve, and protect the primary responsibilities and

rights of States to prevent, reduce, and eliminate

pollution, to plan the development and use (including

restoration, preservation, and enhancement) of land

and water resources, and to consult with the

Administrator in the exercise of his authority under

this chapter. It is the policy of Congress that the

States manage the construction grant program under

this chapter and implement the permit programs

39a

under sections 1342 and 1344 of this title. It is further

the policy of the Congress to support and aid research

relating to the prevention, reduction, and elimination

of pollution and to provide Federal technical services

and financial aid to State and interstate agencies and

municipalities in connection with the prevention,

reduction, and elimination of pollution.

with foreign countries It is further the policy of

Congress that the President, acting through the

Secretary of State and such national and international

organizations as he determines appropriate, shall take

such action as may be necessary to insure that to the

fullest extent possible all foreign countries shall take

meaningful action for the prevention, reduction, and

elimination of pollution in their waters and in

international waters and for the achievement of goals

regarding the elimination of discharge of pollutants

and the improvement of water quality to at least the

same extent as the United States does under its laws.

(d) Administrator of Environmental Protection Agency

to administer chapter

Except as otherwise expressly provided in this

chapter, the Administrator of the Environmental

Protection Agency (hereinafter in this chapter called

“Administrator”) shall administer this chapter.

(e) Public participation in development, revision, and

enforcement of any regulation, etc.

Public participation in the development, revision,

and enforcement of any regulation, standard, effluent

40a

limitation, plan, or program established by the

Administrator or any State under this chapter shall be

provided for, encouraged, and assisted by the

Administrator and the States. The Administrator, in

cooperation with the States, shall develop and publish

regulations specifying minimum guidelines for public

participation in such processes.

(f) Procedures utilized for implementing chapter

It is the national policy that to the maximum

extent possible the procedures utilized for

implementing this chapter shall encourage the drastic

minimization of paperwork and interagency decision

procedures, and the best use of available manpower

and funds, so as to prevent needless duplication and

unnecessary delays at all levels of government.

(g) Authority of States over water

It is the policy of Congress that the authority of each

State to allocate quantities of water within its

jurisdiction shall not be superseded, abrogated or

otherwise impaired by this chapter. It is the further

policy of Congress that nothing in this chapter shall be

construed to supersede or abrogate rights to quantities

of water which have been established by any State.

Federal agencies shall co-operate with State and local

agencies to develop comprehensive solutions to

prevent, reduce and eliminate pollution in concert with

programs for managing water resources.

xk kK *

4la

47 U.S.C. § 151

TITLE 47- TELEGRAPHS, TELEPHONES, AND

RADIOTELEGRAPHS

CHAPTER5- WIR E OR KADIO

COMMUNICATION

SUBCHAPTER I - GENERAL PROVISIONS

Sec. 151. Purposes of chapter; Federal

Communications Commission created

lor the purpose of regulating interstate and foreign

commerce in communication by wire and radio so as to

make available, so far as possible, to all the people of

the United States, without discrimination on the basis

of race, color, religion, national origin, or sex, a rapid,

efficient, Nation-wide, and world-wide wire and radio

communication service with adequate facilities at

reasonable charges, for the purpose of the national

defense, for the purpose of promoting safety of life and

property through the use of wire and_ radio

communications, and for the purpose of securing a

more effective execution of this policy by centralizing

authority heretofore granted by law to several agencies

and by granting additional authority with respect to

interstate and foreign commerce in wire and radio

communication, there is created a commission to be

known as the “Federal Communications Commission”,

which shall be constituted as hereinafter provided, and

which shall execute and enforce the provisions of this

chapter.

42a

26 U.S.C. § 3402

TITLE 26- INTERNAL REVENUE CODE

Subtitle C - Employment Taxes

CHAPTER 24 - COLLECTION OF INCOME TAX AT

SOURCE ON WAGES

Sec. 3402. Income tax collected at source

(a) Requirement of withholding

(1) In general

Except as otherwise provided in this section, every

employer making payment of wages shall deduct and

withhold upon such wages a tax determined in

accordance with tables or computational procedures

prescribed by the Secretary. Any tables or procedures

prescribed under this paragraph shall -

(A) apply with respect to the amount of wages paid

during such periods as the Secretary may prescribe,

and

(B) be in such form, and provide for such amounts

to be deducted and withheld, as the Secretary

determines to be most appropriate to carry out the

purposes of this chapter and to reflect the provisions of

chapter 1 applicable to such periods.

(2) Amount of wages For purposes of applying

tables or procedures prescribed under paragraph (1),

the term “the amount of wages” means the amount by

which the wages exceed the number of withholding

exemptions claimed multiplied by the amount of one

43a

such exemption. The amount of each withholding

exemption shall be equal to the amount of one personal

exemption provided in section 151(b), prorated to the

payroll period. The maximum number of withholding

exemptions permitted shall be calculated in accordance

with regulations prescribed by the Secretary under

this section, taking into account any reduction in

withholding to which an employee is entitled under

this section.

(b) Percentage method of withholding

(1) If wages are paid with respect to a period which

is not a payroll period, the withholding exemption

allowable with respect to each payment of such wages

shall be the exemption allowed for a miscellaneous

payroll period containing a number of days (including

Sundays and holidays) equal to the number of days in

the period with respect to which such wages are paid.

(2) In any case in which wages are paid by an

employer without regard to any payroll period or other

period, the withholding exemption allowable with

respect to each payment of such wages shall be the

exemption allowed for a miscellaneous payroll period

containing a number of days cqual to the number of

days (including Sundays and holidays) which have

elapsed since the date of the last payment of such

wages by such employer during the calendar year, or

the date of commencement of employment with such

employer during such year, or January 1 of such year,

whichever is the later.

(3) In any case in which the period, or the time

described in paragraph (2), in respect of any wages is

44a

less than one week, the Secretary, under regulations

prescribed by him, may authorize an employer to

compute the tax to be deducted and withheld as if the

aggregate of the wages paid tu the employee during the

calendar week were paid for a weekly payrol! period.

(4) In determining the amount to be deducted and

withheld under this subsection, the wages may, at the

election of the employer, be computed to the nearest

dollar.

(1) At the election of the employer with respect to

any employee, the employer shall deduct and withhold

upon the wages paid to such employee a tax (in lieu of

the tax required to be deducted and withheld under

subsection (a)) determined in accordance with tables

prescribed by the Secretary in accordance with

paragraph (6).

(2) If wages are paid with respect to a period which

is not a payroll period, the amount to be deducted and

withheld shall be that applicable in the case of a

miscellaneous payroll period containing a number of

days (including Sundays and holidays) equal to the

number of days in the period with respect to which

such wages are paid.

(3) In any case in which wages are paid by an

employer without regard to any payrol! period or other

period, the amount to be deducted and withheld shall

be that applicable in the case of a miscellaneous

payroll period containing a number of days equal to

the number of days (including Sundays and holidays)

45a

which have elapsed since the date of the last payment

of such wages by such employer during the calendar

year, or the date of commencement of employment

with such employer during such year, or January 1 of

such year, whichever is the later.

(4) In any case in which the period, or the time

described in paragraph (3), in respect of any wages is

less than one week, the Secretary, under regulations

prescribed by him, may authorize an employer to

determine the amount to be deducted and withheld

under the tables applicable in the Case of a weekly

payroll period, in which case the aggregate of the

wages paid to the employee during the calendar week

shall be considered the weekly wages.

(5) If the wages exceed the highest wage bracket, in

determining the amount to be deducted and withheld

under this subsection, the wages may, at the election

of the employer, be computed to the nearest dollar.

(6) In the case of wages paid after December 31,

1969, the amount deducted and withheld under

paragraph (1) shall be determined in accordance with

tables prescribed by the Secretary. In the tables so

prescribed, the amounts set forth as amounts of wages

and amounts of income tax to be deducted and

withheld shall be computed on the basis of the table

for an annual payroll period prescribed pursuant to

subsection (a).

(d) Tax paid by recipient

If the employer, in violation of the provisions of this

chapter, fails to deduct and withhold the tax under

46a

this chapter, and thereafter the tax against which such

tax may be credited is paid, the tax so required to be

deducted and withheld shall not be collected from the

employer; but this subsection shall in no case relieve

the employer from liability for any penalties or

additions to the tax otherwise applicable in respect of

such failure to deduct and withhold.

(e) Included and excluded wages

If the remuneration paid by an employer to an

employee for services performed during one-half or

more of any payroll period of not more than 31

consecutive days constitutes wages, all the

remuneration paid by such employer to such employee

for such period shall be deemed to be wages; but if the

remuneration paid by an employer to an emplovee for

services performed during more than one- half of any

such payroll period does not constitute wages, then

none of the remuneration paid by such employer to

such employee for such period shall be deemed to be

wages.

(f) Withholding exemptions

(1) In general An employee receiving wages shall on

any day be entitled to the following withholding

exemptions:

(A) an exemption for himself unless he is an

individual described in section 151(d)(2):

(B) if the employee is married, any exemption to

which his spouse is entitled, or would be entitled if

such spouse were an employee receiving wages, under

47a

subparagraph (A) or (D), but only if such spouse does

not have in effect a witiiholding exemption certificate

claiming such exemption;

to whom, on the basis of facts existing at the beginning

of such day, there may reasonably be expected to be

allowable an exemption under section 151(c) for the

taxable year under subtitle A in respect of which

amounts deducted and withheld under this chapter in

the calendar year in which such day falls are allowed

as a credit;

(D) any allowance to which he is entitled under

subsection (m), but only if his spouse does not have in

effect a withholding exemption certificate claiming

such allowance; and

(E) a standard deduction allowance which shall be

an amount equal to one exemption (or more than one

exemption if so prescribed by the Secretary) unless (1)

he is married (as determined under section 7703) and

his spouse is an employee receiving wages subject to

withholding or (11) he has withho!lding exemption

certificates in effect with respect to more than one

employer.

For purposes of this title, any standard deduction

allowance under subparagraph (E) shall be treated as

if it were denominated a withholding exemption.

48a

(2) Exemption certificates

(A) On commencement of employment

On or before the date of the commencement of

employment with an employer, the employee shall

furnish the employer with a signed withholding

exemption certificate relating to the number of

withholding exemptions which he claims, which shal!

in no event exceed the number to which he is entitled.

(B) Change of status

If, on any day during the calendar year, the number

of withholding exemptions to which the employee is

entitled is less than the number of withholding

exemptions claimed by the employee on_ the

withholding exemption certificate then in effect with

respect to him, the employee shall within 10 days

thereafter furnish the employer with a new

withholding exemption certificate relating to the

number of withholding exemptions which the employee

then claims, which shall in no event exceed the

number to which he is entitled on such day. If, on any

day during the calendar year, the number of

withholding exemptions to which the employee is

entitled is greater than the number of withholding

exemptions claimed, the employee may furnish the

employer with a new withholding exemption certificate

relating to the number of withholding exemptions

which the employee then claims, which shall in no

event exceed the number to which he is entitled on

such day.

49a

year

If on any day during the calendar year the number

of withholding exemptions to which the employee will

be, or may reasonably be expected to be, entitled at the

beginning of his next taxable year under subtitle A is

different from the number to which the employee is

entitled on such day, the employee shall, in such cases

and at such times as the Secretary may by regulations

prescribe, furnish the employer with a withholding

exemption certificate relating to the number of

withholding exemptions which he claims with respect

to such next taxable year, which shall in no event

exceed the number to which he will be, or may

reasonably be expected to be, so entitled.

(3) When certificate takes effect

(A) First certificate furnished

A withholding exemption certificate furnished the

employer in cases in which no previous such certificate

is in effect shall take effect as of the beginning of the

first payroll period ending, or the first payment of

wages made without regard to a payroll period, on or

after the date on which such certificate is so furnished.

(B) Furnished to take place of existing certificate

(i) In general Except as provided in clauses (11)

and (iii), a withholding exemption certificate furnished

to the employer in cases in which a previous such

certificate is in effect shall take effect as of the

beginning of the lst payroll period ending (or the Ist

50a

payment of wages made without regard to a payroll

period) on or after the 30th day after the day on which

such certificate is so furnished.

(ii) Employer may elect earlier effective date At

the election of the employer, a certificate described in

clause (i) may be made effective beginning with any

payment of wages made on or after the day on which

the certificate is so furnished and before the 30th day

referred to in clause (1).

Giii) Change of status which affects next year

Any certificate furnished pursuant to paragraph (2)(C)

shall not take effect, and may not be made effective,

with respect to any payment of wages made in the

calendar year in which the certificate is furnished.

(4) Period during which certificate remains in effect

A withholding exemption certificate which takes

effect under this subsection, or which on December 31,

1954, was in effect under the corresponding subsection

of prior law, shall continue in effect with respect to the

employer until another such certificate takes effect

under this subsection.

(5) Form and contents of certificate

Withholding exemption certificates shall be in such

form and contain such information as the Secretary

may by regulations prescribe.

5la

(6) Exemption of certain nonresident aliens

Notwithstanding the provisions of paragraph (1), a

nonresident alien individual (other than an individual

described in section 3401(a)(6)(A) or (B)) shall be

entitled to only one withholding exemption.

(7) Exemption where certificate with another

employer is in effect

If a withholding exemption certificate is in effect

with respect to one employer, an employee shall not be

entitled under a certificate in effect with any other

employer to any withholding exemption which he has

claimed under such first certificate.

(g) Overlapping pay periods, and payment by agent

or fiduciary If a payment of wages is made to an

employee by an employer -

(1) with respect to a payroll period or other period,

any part of which is included in a payroll period or

other period with respect to which wages are also paid

to such employee by such employer, or

(2) without regard to any payroll period or other

period, but on or prior to the expiration of a payroll

period or other period with respect to which wages are

also paid to such employee by such employer, or

(3) with respect to a period beginning in one and

ending in another calendar year, or

(4) through an agent, fiduciary, or other person who

also has the control, receipt, custody, or disposal of, or

52a

pays, the wages payable by another employer to such

employee, the manner of withholding and the amount

to be deducted and withheld under this chapter shall

be determined in accordance with regulations

prescribed by the Secretary under which _ the

withholding exemption allowed to the employee in any

calendar year shall approximate the withholding

exemption allowable with respect to an annual payroll

period.

(h) Alternative methods of computing amount to be

withheld

The Secretary may, under regulations prescribed by

him, authorize -

(1) Withholding on basis of average wages An

employer -

(A) to estimate the wages which will be paid to any

employee in any quarter of the calendar year,

(B) to determine the amount to be deducted and

withheld upon each payment of wages to such

employee during such quarter as if the appropriate

average of the wages so estimated constituted the

actual wages paid, and

wages to such employee during such quarter (and, in

the case of tips referred to in subsection (k), within 30

days thereafter) such amount as may be necessary to

adjust the amount actually deducted and withheld

upon the wages of such employee during such quarter

53a

to the amount required to be deducted and withheld

during such quarter without regard to this subsection.

(2) Withholding on basis of annualized wages An

employer to determine the amount of tax to be

deducted and withheld upon a payment of wages to an

employee for a payroll period by -

(A) multiplying the amount of an employee’s wages

for a payroll period by the number of such payroll

periods in the calendar year,

(B) determining the amount of tax which would be

required to be deducted and withheld upon the amount

determined under subparagraph (A) if such amount

constituted the actual wages for the calendar year and

the payroll period of the employee were an annual

payroll period, and

subparagraph (B) by the number of payroll periods

(described in subparagraph (A)) in the calendar year.

(3) Withholding on basis of cumulative wages

An employer, in the case of any employee who

requests to have the amount of tax to be withheld from

his wages computed on the basis of his cumulative

wages, to -

(A) add the amount of the wages to be paid to the

employee for the payroll period to the total amount of

wages paid by the employer to the employee during the

calendar year,

54a

(B) divide the aggregate amount of wages computed

under subparagraph (A) by the number of payroll

periods to which such aggregate amount of wages

relates,

have been required to be deducted and withheld under

subsection (a) if the average amount of wages (as

computed under subparagraph (B)) had been paid to

the employee for the number of payroll periods to

which the aggregate amount of wages (computed under

subparagraph (A)) relates,

(D) determine the excess, if any, of the amount of

tax computed under subparagraph (C) over the total

amount of tax deducted and withheld by the employer

from wages paid to the employee during the calendar

year, and

(—) deduct and withhold upon the payment of

wages (referred to in subparagraph (A)) to the

employee an amount equal to the excess (if any)

computed under subparagraph (D).

(4) Other methods

An employer to determine the amount of tax to be

deducted and withheld upon the wages paid to an

employee by any other method which will require the

employer to deduct and withhold upon such wages

substantially the same amount as would be required to

be deducted and withheld by applying subsection (a) or

(c), either with respect to a payroll period or with

respect to the entire taxable year.

ova

(i) Changes in withholding

(1) In general The Secretary may by regulations

provide for increases in the amount of withholding

otherwise required under this section in cases where

the employee requests such changes.

(2) Treatment as tax

Any increased withholding under paragraph (1)

shall for all purposes be considered tax required to be

deducted and withheld under this chapter.

(j) Noncash remuneration to retail commission

salesman

In the case of remuneration paid in any medium

other than cash for services performed by an

individual as a retail salesman for a person, where the

service performed by such individual for such person

is ordinarily performed for remuneration solely by way

of cash commission an employer shall not be required

to deduct or withhold any tax under this subchapter

with respect to such remuneration, provided that such

employer files with the Secretary such information

with respect to such remuneration as the Secretary

may by regulation prescribe.

(k) Tips

In the case of tips which constitute wages,

subsection (a) shall be applicable only to such tips as

are included in a written statement furnished to the

employer pursuant to section 6053(a), and only to the

extent that the tax can be deducted and withheld by

56a

the employer, at or after the time such statement is so

furnished and before the close of the calendar year in

which such statement is furnished, from such wages of

the employee (excluding tips, but including funds

turned over by the employee to the employer for the

purpose of such deduction and withholding) as are

under the control of the employer; and an employer

who is furnished by an employee a written statement

of tips (received in a calendar month) pursuant to

section 6053(a) to which paragraph (16)(B) of section

3401(a) is applicable may deduct and withhold the tax

with respect to such tips from any wages of the

employee (excluding tips) under his control, even

though at the time such statement is furnished the

total amount of the tips included in statements

furnished to the employer as having been received by

the employee in such calendar month in the course of

his employment by such employer is less than $20.

Such tax shall not at any time be deducted and

withheld in an amount which exceeds the aggregate of

such wages and funds (including funds turned over

under section 3102(c)(2) or section 3202(c)(2)) minus

any tax required by section 3102(a) or section 3202(a)

to be collected from such wages and funds.

(1) Determination and disclosure of marital status

(1) Determination of status by employer For

purposes of applying the tables in subsections (a) and

employee as a single person unless there ts in effect

with respect to such payment of wages a withholding

exemption certificate furnished to the employer by the

employee after the date of the enactment of this

subsection indicating that the employee is married.

57a

(2) Disclosure of status by employee An employee

shall be entitled to furnish the employer with a

withholding exemption certificate indicating he is

married only if, on the day of such furnishing, he is

married (determined with the application of the rules

in paragraph (3)). An employee whose marital status

changes from married to single shall, at such time as

the Secretary may by regulations prescribe, furnish

the employer with a new withholding exemption

certificate.

(3) Determination of marital status For purposes of

paragraph (2), an employee shall on any day be

considered

(A) as not married, if

(i) he is legally separated from his spouse under

a decree of divorce or separate maintenance, or

(ii) either he or his spouse is, or on any

preceding day within the calendar year was, a

nonresident alien; or

(B) as married, if

(i) his spouse (other than a spouse referred to in

subparagraph (A)) died within the portion of his

taxable year which precedes such day, or

(11) his spouse died during one of the two taxable

years immediately preceding the current taxable year

and, on the basis of facts existing at the beginning of

such day, the employee reasonably expects, at the close

58a

of his taxable year, to be a surviving spouse (as defined

in section 2(a)).

(m) Withholding allowances

Under regulations prescribed by the Secretary, an

employee shall be entitled to additional withholding

allowances or additional reductions in withholding

under this subsection. In determining the number of

additional withholding allowances or the amount of

additional reductions in withholding under this

subsection, the employee may take into account (to the

extent and in the manner provided by such

regulations) -

(1) estimated itemized deductions allowable under

chapter 1 (other than the deductions referred to in

section 151 and other than the deductions required to

be taken into account in determining adjusted gross

income under section 62(a) (other than paragraph (10)

thereof)),

(2) estimated tax credits allowable under chapter 1,

and (3) such additional deductions (including the

additional standard deduction under section 63(c)(3)

for the aged and blind) and other items as may be

specified by the Secretary in regulations.

(n) Employees incurring no income tax liability

Notwithstanding any other provision of this section,

an employer shall not be required to deduct and

withhold any tax under this chapter upon a payment

of wages to an employee if there is in effect with

respect to such payment a withholding exemption

59a

certificate (in such form and containing such other

information as the Secretary may prescribe) furnished

to the employer by the employee certifying that the

employee -

(1) incurred no liability for income tax imposed

under subtitle A for his preceding taxable year, and

(2) anticipates that he will incur no hability for

income tax imposed under subtitle A for his current

taxable year.

The Seeretary shall by regulations provide for the

coordination of the provisions of this subsection with

the provisions of subsection (f).

(o) Extension of withholding to certain payments

other than wages

(1) General rule

For purposes of this chapter (and so much of

subtitle F as relates to this chapter) -

(A) any supplemental unemployment compensation

benefit paid to an individual,

(B) any payment of an annuity to an individual, if

at the time the payment is made a request that such

annuity be subject to withholding under this chapter

is in effect, and

does not constitute wages (determined without regard

to this subsection), if at the time the payment is made

60a

a request that such sick pay be subject to withholding

under this chapter is in effect, shall be treated as if it

were a payment of wages by an employer to an

employee for a payroll period.

(2) Definitions

(A) Supplemental unemployment compensation

benefits

For purposes of paragraph (1), the term

“supplemental unemployment compensation benefits”

means amounts which are paid to an employee,

pursuant to a plan to which the employer is a party,

because of an employee’s involuntary separation from

employment (whether or not such separation is

temporary), resulting directly from a reduction in

force, the discontinuance of a plant or operation, or

other similar conditions, but only to the extent such

benefits are includible in the employee’s gross income.

(B) Annuity

For purposes of this subsection, the term “annuity”

means any amount paid to an individual as a pension

or annuity.

term “sick pay” means any amount which -

(i) is paid to an employee pursuant to a plan to

which the employer is a party, and

(ii) constitutes remuneration or a payment in

licu of remuneration for any period during which the

6la

employee is temporarily absent from work on account

of sickness or personal injuries.

(3) Amount withheld from annuity payments or

sick pay

If a payee makes a request that an annuity or any

sick pay be subject to withholding under this chapter,

the amount to be deducted and withheld under this

chapter from any payment to which such request

applies shall be an amount (not less than a minimum

amount determined under regulations prescribed by

the Secretary) specified by the payee in such request.

The amount deducted and withheld with respect to a

payment which is greater or less than a full payment

shall bear the same relation to the specified amount as

such payment bears to a full payment.

(4) Request. for withholding

A request that an annuity or any sick pay be

subject to withholding under this chapter -

(A) shall be made by the payee in writing to the

person making the payments and shall contain the

social security number of the payee,

(B) shall specify the amount to be deducted and

withheld from each full payment, and

(} in the case of wk pay with respect to

ivments made more than 7¢ day after the date on

whic uch requ¢

tis furnished to the payor, or

62a

(ii) in the case of an annuity, at suc!» time (after

the date on which such request is furnished to the

payor) as the Secretary shall by regulations prescribe.

Such a request may be changed or terminated by

furnishing to the person making the payments a

written statement of change or termination which

shal] take effect in the same manner as provided in

subparagraph (C). At the election of the payor, any

such request (or statement of change or revocation)

may take effect earlier than as_ provided in

subparagraph (C).

(5) Special rule for sick pay paid pursuant to

certain collective-bargaining agreements

In the case of any sick pay paid pursuant to a

collective-bargaining agreement between employee

representatives and one or more employers which

contains a provision specifying that this paragraph is

to apply to sick pay paid pursuant to such agreement

and contains a provision for determining the amount

to be deducted and withheld from each payment of

such sick pay -

(A) the requirement of paragraph (1)(C) that a

request for withholding be in effect shall not apply,

and

(3) except as provided in subsection (n), the

amounts to be deducted and withheld under this

chapter shall be determined in accordance with such

avpreementl

63a

The preceding sentence shall not apply with respect to

sick pay paid pursuant to any agreement to any

individual unless the social security number of such

individual is furnished to the payor and the payor is

furnished with such information as is necessary to

determine whether the payment is pursuant to the

agreement and to determine the amount to be

deducted and withheld.

(6) Coordination with withholding on designated

distributions under section 3405

This subsection shall not apply to any amount

which is a designated distribution (within the meaning

of section 3405(e)(1)).

(p) Voluntary withholding agreements

(1) Certain Federal payments

(A) In general

If, at the time a specified Federal payment is made

to any person, a request by such person 1s in effect that

such payment be subject to withholding under this

chapter, then for purposes of this chapter and so much

of subtitle F as relates to this chapter, such payment

shall be treated as if it were a payment of wages by an

}

employer LO an employee

(}3) Amount withhe ld

64a

the percentage of such payment specified in such

request. Such a request shall apply to any payment

only if the percentage specified is 7 percent, any

percentage applicable to any of the 3 lowest income

brackets in the table under section l(c), or such other

percentage as is permitted under regulations

prescribed by the Secretary.

Federal payments For purposes of this paragraph,

the term “specified Federal payment” means -

(i) any payment of a social security benefit (as

defined in section 86(d)),

(ii) any payment referred to in the second

sentence of section 451(d) which is treated as

insurance proceeds,

(ii) any amount which is includible in gross

income under section 77(a), and

(iv) any other payment made pursuant to

Federal law which is specified by the Secretary for

purposes of this paragraph

(DD) Requests for withholding

Rules similar to the rules that apply to annuities

under subsection (0)(4) shall apply to requests under

this paragraph and paragraph (2)

65a

(2) Voluntary withholding on unemployment

benefits

If, at the time a payment of unemployment

compensation (as defined in section 85(b)) is made to

any person, a request by such person is in effect that

such payment be subject to withholding under this

chapter, then for purposes of this chapter and so much

of subtitle F as relates to this chapter, such payment

shall be treated as if it were a payment of wages by an

employer to an employee. The amount to be deducted

and withheld under this chapter from any payment to

which any request under this paragraph applies shall

be an amount equal to 10 percent of such payment.

(3) Authority for other voluntary withholding

The Secretary is authorized by regulations to

provide for withholding -

(A) from remuneration for services performed by an

employee for the employee’s employer which (without

regard to this paragraph) does not constitute wages,

and

(B) from any other type of payment with respect to

which the Secretary finds that withholding would be

appropriate under the provisions of this chapter,

if the employer and employee, or the person making

and the person receiving such other type of payment,

agree to such withholding. Such agreement shal! be in

such form and manner as the Secretary may by

regulations prescribe. For purposes of this chapter

(and SO MU! h ot subtitle KF ais re} ites to this chapter ‘

66a

remuneration or other payments with respect to which

such agreement is made shall be treated as if they

were wages paid by an employer to an employee to the

extent that such remuneration is paid or other

payments are made during the period for which the

agreement is in effect.

(q) Extension of withholding to certain gambling

winnings

(1) General rule

Every person, including the Government of the

United States, a State, or a political subdivision

thereof, or any instrumentalities of the foregoing,

making any payment of winnings which are subject to

withholding shall deduct and withhold from such

payment a tax in an amount equal to the product of

the third lowest rate of tax applicable under section

l(c) and such payment.

(2) Exemption where tax otherwise withheld

In the case of any payment of winnings which are

subject to withholding made to a nonresident alien

individual or a foreign corporation, the tax imposed

under paragraph (1) shall not apply to any such

payment subject to tax under section 1441(a) (relating

to withholding on nonresident aliens) or tax under

section 1442(a) (relating to withholding on foreign

corporations)

67a

(3) Winnings which are subject to withholding

For purposes of this subsection, the term “winnings

which are subject to withholding” means proceeds from

a wager determined in accordance with the following:

(A) In general

Except as provided in subparagraphs (B) and (C),

proceeds of more than $5,000 from a wagering

transaction, if the amount of such proceeds is at least

300 times as large as the amount wagered.

(B) State-conducted lotteries

Proceeds of more than $5,000 from a wager placed

in a lottery conducted by an agency of a State acting

under authority of State law, but only if such wager is

placed with the State agency conducting such lottery,

or with its authorized employees or agents.

parimutuel pools, jai alai, and lotteries

Proceeds of more than $5,000 from -

(i) a wager placed in a sweepstakes, wagering

pool, or lottery (other than a wager described in

subparagraph (B)), or

(it) a Wagering transaction in a parimutuel pool

with respect to horse races, dog races, or jai alarif the

amount of such proceeds ts at least 300 times as large

as the amount wayered

68a

(4) Rules for determining proceeds from a wager

For purposes of this subsection -

(A) proceeds from a wager shall be determined by

reducing the amount received by the amount of the

wager, and

(B) proceeds which are not money shall be taken

into account at their fair market value.

(5) Exception for bingo, keno, and slot machines

The tax imposed under paragraph (1) shall not apply

to winnings from a slot machine, keno, and bingo.

(6) Statement by recipient

Every person who is to receive a payment. of

winnings which are subject to withholding shall

furnish the person making such paymenta statement,

made under the penalties of perjury, containing the

name, address, and taxpayer identification number of

the person receiving the payment and of each person

entitled to any portion of such payment.

(7) Coordination with other sections

For purposes of sections 3403 and 3404 and tor

purposes of so much of subtitle F (except section 7205)

as relates to this chapter, payments to any person of

winnings which are subject to withholding shall be

treated as if they were wages paid by an employer to

an employee

69a

(r) Extension of withholding to certain taxable

payments of Indian casino profits

(1) In general

Every person, including an Indian tribe, making a

payment to a member of an Indian tribe from the net

revenues of any class II or class III gaming activity

conducted or licensed by such tribe shall deduct and

withhold from such payment a tax in an amount equal

to such payment’s proportionate share of the

annualized tax.

(2) Exception

The tax imposed by paragraph (1) shall not apply to

any payment to the extent that the payment, when

annualized, does not exceed an amount equal to the

sum of -

(A) the basic standard deduction (as defined in

section 63(c)) for an individual to whom section

63(c)(2)(C)(1) applies, and

(B) the exemption amount (as defined in section

151(d)).

(3) Annualized tax

Kor purposes of paragraph (1), the’ term

“annualized tax” means, with respect to any payment,

the amount of tax which would be imposed by section

l(c) (determined without regard to any rate of tax in

excess of the fourth lowest rate of tax applicable under

70a

section l(c)) on an amount of taxable income equal to

the excess of -

(A) the annualized amount of such payment, over

(B) the amount determined under paragraph (2).

(4) Classes of gaming activities, etc.

For purposes of this subsection, terms used in

paragraph (1) which are defined in section 4 of the

Indian Gaming Regulatory Act (25 U.S.C. 2701 et

seq.), as in effect on the date of the enactment of this

subsection, shall have the respective meanings given

such terms by such section.

(5) Annualization

Payments shall be placed on an annualized basis

under regulations prescribed by the Secretary.

(6) Alternate withholding procedures

At the election of an Indian tribe, the tax imposed

by this subsection on any payment made by such tribe

shall be determined in accordance with such tables or

computational procedures as may be specified in

reyulations prescribed by the Secretary (in heu of in

accordance with paragraphs (2) and (3))

(7) Coordination with other sections

For purposes of this chapter and so much of subtitle

kas relates to this chapter, payments to any person

which are subject to withholding under this subsection

T7la

shall be treated as if they were wages paid by an

employer to an employee.

(s) Exemption from withholding for any vehicle

fringe benefit

(1) Employer election not to withhold

The employer may elect not to deduct and withhold

any tax under this chapter with respect to any vehicle

fringe benefit provided to any employee if such

employee is notified by the employer of such election

(at such time and in such manner as the Secretary

shall by regulations prescribe). ‘The preceding sentence

shall not apply to any vehicle fringe benefit unless the

amount of such benefit is included by the employer on

a statement timely furnished under section 6051.

(2) Employer must furnish W-2

Any vehicle fringe benefit shall be treated as wages

from which amounts are required to be deducted and

withheld under this chapter for purposes of section

6051.

(3) Vehicle fringe benefit

kor purposes of this subsection, the term “vehrele

}

fringe benefit” means any fringe benefit

(A) which constitutes wayes (as defined in section

$401). and

(18) which consists of providing a highway motor

vehicle or the iyne af thy employes

72a

26 U.S.C. § 3403

TITLE 26 - INTERNAL REVENUE CODE

Subtitle C - Employment Taxes

CHAPTER 24 - COLLECTION OF INCOME TAX AT

SOURCE ON WAGES

Sec. 3403. Liability for tax

The employer shall be liable for the payment of the

tax required to be deducted and withheld under this

chapter, and shall not be liable to any person for the

amount of any such payment.

x *

26 U.S.C. § 6672

TITLE 26- INTERNAL REVENUE CODE

Subtitle I - Procedure and Administration

CHAPTER 68- ADDITIONS TO THE TAX,

ADDITIONAL AMOUNTS, AND

ASSESSABLE PENALTIES

Subchapter B- Assessable Penalties

PART 1- GENERAL PROVISIONS

Sec. 6672 Failure to collect and pay over tax, or

attempt to evade or defeat tax

(a) General rule

Any person required to collect truthfully account

for, and pay over any tax imposed by this tithe who

willfully fails to collect such tax. or truthfully account

for and pay over such tax, or willfully attempts in any

73a

manner to evade or defeat any such tax or the

payment thereof, shall, in addition to other penalties

provided by law, be liable to a penalty equal to the

total amount of the tax evaded, or not collected, or not

accounted for and paid over. No penalty shall be

imposed under section 6653 or part II of subchapter A

of chapter 68 for any offense to which this section is

applicable.

(b) Preliminary notice requirement

(1) In general

No penalty shall be imposed under subsection (a)

unless the Secretary notifies the taxpayer in writing

by nail to an address as determined under section

6212(b) or in person that the taxpayer shall be subject

lo an assessment of such penalty

(2) Timing of notice

The mailing of the notice deseribed in parayraph (1)

(or, in the case of such a notice delivered in person

such delivery) shall precede any notice and demand of

any penalty under subsection (a) by at least 60 da

6 statute of limitation

Ifa notice desenwbed Mr) poring ppt 1) with res joe f

hoany penalty 1 rmiaied of delivered iy pe Oli tyelore

Tyae expiration of thy jo riod para ile) tT) ection % »f

‘ j , |

ifoT thye } ‘ myer c] tie ti [ptr] | Cieetareyy med

74a

(A) the date 90 days after the date on which such

notice was mailed or delivered in person, or

(B) if there is a timely protest of the proposed

assessment, the date 30 days after the Secretary

makes a final administrative determination with

respect to such protest.

(4) Exception for jeopardy

This subsection shall not apply if the Secretary

finds that the collection of the penaity is in jeopardy.

filed

(1) In general

If, within 40 days after the day on which notice and

demand of any penalty under subsection (4) 1s made

against any person, such person

(A) pays an amount which is mot less than the

moron aroun required to commence a proceeding

i Courl with ve pect lo bias, divsboalaty for suseh pen itt

(FA) tale a Claim for refund of the onmount O paid

mid

(Cy tiarraaadye byonie) Paice ty trieeaet Phiee peeeguiire

75a

begun as provided in paragraph (2). Notwithstanding

the provisions of section 7421(a), the beginning of such

proceeding or levy during the time such prohibition is

in force may be enjoined by a proceeding in the proper

court. Nothing in this paragraph shall be construed to

prohibit any counterclaim for the remainder of such

penalty in a proceeding begun as_ provided in

paragraph (2).

(2) Suit must be brought to determine lability for

penalty

If, within 30 days after the day on which his claim

for refund with respect to any penalty under

subsection (a) is denied, the person described in

paragraph (1) fails to begin a proceeding in the

appropriate United States district court (or in the

Yourt of Claims) (1) for the determination of his

liability for such penalty, paragraph (1) shall cease to

apply with respect to such penalty, effective on the day

following the close of the 30-day period referred to in

this paragraph.

(3) Bond

The bond referred to in paragraph (1) shall be in

such form and with such sureties as the Secretary may

by regulations prescribe and shall be in an amount

equal to 1 1/2 times the amount of excess of the

penalty assessed over the payment described in

paragraph (1).

(4) Suspension of running of period of limitations

on collection

76a

The running of the period of limitations provided in

section 6502 on the collection by levy or by a

proceeding in court in respect of any penalty described

in paragraph (1) shall be suspended for the period

during which the Secretary is prohibited from

collecting by levy or a proceeding in court.

(5) Jeopardy collection

If the Secretary makes a finding that the collection

of the penalty is in jeopardy, nothing in this subsection

shall prevent the immediate collection of such penalty.

(d) Right of contribution where more than 1 person

hable for penalty

If more than 1 person is liable for the penalty under

subsection (a) with respect to any tax, each person who

paid such penalty shall be entitled to recover from

other persons who are lable for such penalty an

amount equal to the excess of the amount paid by such

person over such person’s proportionate share of the

penalty. Any claim for such a recovery may be made

only in a proceeding which is separate from, and is not

joined or consolidated with -

(1) an action for collection of such penalty brought

by the United States, or

(2) a proceeding in which the United States files a

counterclaim or third-party complaint for the collection

of such penalty.

(e) Exception for voluntary board members of tax-

exempt organizations

77a

No penalty shall be imposed by subsection (a) on

any unpaid, volunteer member of any board of trustees

or directors of an organization exempt from tax under

subtitle A if such member -

(1) 1s solely serving in an honorary capacity,

(2) does not participate in the day-to-day or

financial operations of the organization, and

(3) does not have actual knowledge of the failure on

which such penalty is imposed.

The preceding sentence shall not apply if it results in

no person being liable for the penalty imposed by

subsection (a).

2 Ie

26 U.S.C. § 7501

TITLE 26- INTERNAL REVENUE CODE

Subtitle F - Procedure and Administration

CHAPTER 77 - MISCELLANEOUS PROVISIONS

Sec. 7501. Liability for taxes withheld or collected

(a) General rule

Whenever any person is required to collect or

withhold any internal revenue tax from any other

person and to pay over such tax to the United States,

the amount of tax so collected or withheld shall be held

to be a special fund in trust for the United States. The

amount of such fund shall! be assessed, collected, and

paid in the same manner and subject to the same

78a

provisions and limitations (including penalties) as are

applicable with respect to the taxes from which such

fund arose.

(b) Penalties

For penalties applicable to violations of this section,

see sections 6672 and 7202.

* * OK

26 U.S.C. § 7701

TITLE 26 - INTERNAL REVENUF CODE

Subtitle F - Procedure and Administration

CHAPTER 79 - DEFINITIONS

26 U.S.C. § 7701 Definitions

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

distinctly expressed or manifestly incompatible

with the intent thereof -

(1) Person

The term “person” shall be construed to

mean and include an individual, a trust,

estate, partnership, association, company or

corporation.

(2) Partnership and partner

The term “partnership” includes a syndicate,

group, pool, joint venture, or other

unincorporated organization, through or by

means of which any business, financial

operation, or venture is carried on, and

which is not, within the meaning of this

(4)

79a

title, a trust or estate or a corporation; and

the term “partner” includes a member in

such a syndicate, group, pool, joint venture,

or organization.

Corporation

The term “corporation” includes associations,

joint-stock companies, and _ insurance

companies.

Domestic

The term “domestic” when applied to a

corporation or partnership means created or

organized in the United States or under the

law of the United States or of any State

unless, in the case of a partnership, the

Secretary provides otherwise by regulations.

Foreign

The term “foreign” when applied to a

corporation or partnership means a

corporation or partnership which is not

domestic.

Fiduciary

The term “fiduciary” means a guardian,

trustee, executor, administrator, receiver,

conservator, or any person acting in any

fiduciary capacity for any person.

Stock

The term “stock” includes shares in an

association, joint-stock company, or

insurance company.

(8)

(9)

(10)

(11)

(12)

80a

Shareholder

The term “shareholder” includes a member

in an association, joint-stock company, or

insurance company.

United States

The term “United States” when used in a

geographical sense includes only the States

and the District of Columbia.

State

The term “State” shall be construed to

include the District of Columbia, where such

construction is necessary to carry out

provisions of this title.

Secretary of the Treasury and Secretary

(A) Secretary of the Treasury

The term “Secretary of the Treasury”

means the Secretary of the Treasury,

personally, and shall not include any

delegate of his.

(B) Secretary

The term “Secretary” means the

Secretary of the Treasury or his

delegate.

Delegate

(A) In general

The term “or his delegate” -

(i) when used with reference to

the Secretary of the Treasury,

means any officer, employee, or

agency of the ‘Treasury

Department duly authorized by

(13)

(14)

8la

the Secretary of the Treasury

directly, or indirectly by one or

more redelegations of

authority, to perform’ the

function mentioned or

described in the context; and

(i) when used with reference to

any other official of the United

States, shall be similarly

construed.

(B) Performance of certain functions in

Guam or American Samoa

The term “delegate,” in relation to the

performance of functions in Guam or

American Samoa with respect to the

taxes imposed by chapters 1, 2, and

21, also includes any officer or

employee of any other department or

agency of the United States, or of any

possession thereof, duly authorized by

the Secretary (directly, or indirectly

by one or more redelegations of

authority) to perform such functions.

Commissioner

The term “Commissioner” means the

Commissioner of Internal Revenue.

Taxpayer

The term “taxpayer” means any person

subject to any internal revenue tax.

Military or naval forces and armed forces of

the United States

(16)

82a

The term “military or naval forces of the

United States” and the term “Armed Forces

of the United States” each includes all

regular and reserve components of the

uniformed services which are subject to the

jurisdiction of the Secretary of Defense, the

Secretary of the Army, the Secretary of the

Navy, or the Secretary of the Air Force, and

each term also includes the Coast Guard.

The members of such forces include

commissioned officers and personnel below

the grade of commissioned officers in such

forces.

Withholding agent

The term “withholding agent” means any

person required to deduct and withhold any

tax under the provisions of section 1441,

1442, 1443, or 1461.

Husband and wife

As used in sections 682 and 2516, if the

husband and wife therein referred to are

divorced, wherever appropriate to the

meaning of such sections, the term “wife”

shall be read “former wife” and the term

“husband” shall be read “former husband”;

and, if the payments described in such

sections are made by or on behalf of the wife

or former wife to the husband or former

husband instead of vice versa, wherever

appropriate to the meaning of such sections,

the term “husband” shall be read “wife” and

the term “wife” shall be read “husband.”

(18)

(19)

83a

International organization

The term “international organization” means

a public international organization entitled

to enjoy privileges, exemptions, and

immunities as an international organization

under the International Organizations

Immunities Act (22 U.S.C. 288- 288f).

Domestic building and loan association

The term “domestic building and loan

association” means a domestic building and

loan association, a domestic savings and

loan association, and a Federal savings and

loan association -

(A) which either (i) is an_ insured

institution within the meaning of

section 401(a) (!1) of the National

Housing Act (12 U.S.C., sec. 1724(a)),

or (ii) is subject by law to supervision

and examination by State or Federal

authority having supervision over

such associations;

(B) the business of which consists

principally of acquiring the savings of

the public and investing in loans; and

the total assets of which (at the close

of the taxable year) consists of -

(i) cash,

Gi) obligations of the United States

or of a State or political

subdivision thereof, and stock

or obligations of a corporation

which is an instrumentality of

the United States or of a State

(i211)

(iv)

(v)

84a

or political subdivision thereof,

but not including obligations

the interest on which is

excludable from gross income

under section 103,

certificates of deposit in, or

obligations of, a corporation

organized under a State law

which specifically authorizes

such corporation to insure the

deposits or share accounts of

member associations,

loans secured by a deposit or

share of a member,

loans (including redeemable

ground rents, as defined in

section 1055) secured by an

interest in real property which

is (or, from the proceeds of the

loan, will become) residential

real property or real property

used primarily for church

purposes, loans made for the

improvement of residential real

property or real property used

primarily for church purposes,

provided that for purposes of

this clause, residential real

property shall include single or

multifamily dwellings,

facilities in residential

developments dedicated to

public use or property used on

a nonprofit basis for residents,

(vi)

(Vil?

Sha

and mobile homes not used on

a transient basis,

loans secured by an interest in

real property located within an

urban renewal area to be

deveioped for predominantly

residential use under an urban

renewal plan approved by the

Secretary of Housing and

Urban Development under part

A or part B of title | of the

Housing Act of 1949, as

amended, or located within any

area covered by a program

eligible for assistance under

section 103 of the

Demonstration Cities and

Metropolitan Development Act

of 1966, as amended, and loans

made for the improvement of

any such real property,

louns secured by an interest in

educational, health, or welfare

institutions or facilities,

including structures designed

or used primarily for

residential purposes _ for

students. residents and

;

persons under Care empioyees

Sha

(ix) loans made for the payment of

expenses of college or

university education or

vocational training, in

accordance with such

regulations as may be

prescribed by the Secretary,

x) property used by the

association in the conduct of

the business described in

subparagraph (B), and

x1 any regular or residual interest

in a REMIC, but only in the

proportion which the assets of

such REMIC consist of

property described in any of

the preceding clauses of this

subparagraph; except that if 95

percent or more of the assets of

such REMIC are assets

described in clauses (1) through

(x), the entire interest in the

KEMIC shall qualify

At the election of the taxpayer, the

percentage specified in this subparagraph

shall be applied on the basis of the average

issets outstanding during the taxable year,

: lieu of the close of the taxable year,

mputed under regulations prescribed t

the Secretary. For purposes of claus fa

nuitsa@my! tructure securing a mis use

rt for r agentiz our ix tre

‘ tir Per tre cd ; (erg ; re :

7 r <t ‘ c

87a

exceeds 80 percent of the property’s planned

use (determined as of the time the loan is

made). For purposes of clause (v), loans

made to finance the acquisition or

development of land shall be deemed to be

loans secured by an interest in residential

real property if, under regulations

prescribed by the Secretary, there is

reasonable assurance that the property will

become residential real property within a

period of 3 years from the date of acquisition

of such land; but this sentence shall not

apply for any taxable year unless, within

such 3-year period, such land becomes

residential real property. For purposes of

determining whether any interest in a

REMIC qualifies under clause (xi), any

regular interest in another REMIC held by

such REMIC shall be treated as a loan

described in a _ preceding clause under

principles similar to the principles of clause

(xt); except that, ifsuch REMIC’s are part of

a tiered structure, they shall be treated as |

REMIC for purposes of clause (x1)

(20) Employee

For the purpose of applying the provisions of

section 79 with respect to group-term life

insurance purchased for employees, for the

- 4 ——— 4] _ . - <

Iirpose Of applying re provision i

ions 104. 105. and 106 with respect to

; at » .

-_ 4 aT ; roc r : Tr 5 r ¥ cl aeTy

Ont and nea:itM imsurance or acciceti

7 | ‘ “ are and far ‘ —~, *

a neaitrn pians aqyi 107 nme purpos j

«| fri¢g vrs cor cy , fiz J ‘

88a

bonus, pension, profit-sharing, or annuity

plan, and with respect to distributions under

such a plan, or by a trust forming part of

such a plan, and for purposes of applying

section 125 with respect to cafeteria plans,

the term “employee” shall include a full-time

life insurance salesman whois considered an

employee for the purpose of chapter 21, or in

the case of services performed before

January 1, 1951, who would be considered

an employee if his services were performed

during 1951.

(21) Levy

The term “levy” includes the power of

distraint and seizure by any means.

(22) Attorney General

The term “Attorney General” means the

Attorney General of the United States

(23) Taxable year

The term “taxable year” means the calendar

year, or the fiscal year ending during such

calendar year, upon the basis of which the

taxable income is computed under subtitle

A. “Taxable year” means, in the case of a

return made for a fractional part of a year

under the provisions of subtitle A or under

regulations prescribed by the Secretary, the

‘ eaceat fe , } vt ay ‘ , 5

period for which such return is made

(26)

(27)

(28)

(29)

89a

Fiscal year

The term “fiscal year” means an accounting

period of 12 months ending on the last day of

any month other than December.

Paid or incurred, paid or accrued

The terms “paid or incurred” and “paid or

accrued” shall be construed according to the

method of accounting upon the basis of

which the taxable income is computed under

subtitle A.

Trade or business

The term “trade or business” includes the

performance of the functions of a public

office.

Tax Court

The term “Tax Court” means the United

States Tax Court.

Other terms

Any term used in this subtitle with respect

to the application of, or in connection with,

the provisions of any other subtitle of this

title shall have the same meaning as 1n such

provisions.

Internal Revenue Code

The term “Internal Revenue Code of 1986"

means this title, and the term “Internal

Revenue Code of 1939” means the Internal

Revenue Code enacted February 10, 1939, as

amended.

(30)

90a

United States person

The term “United States person” means -

(A)

(B)

(C)

(D)

a citizen or resident of the United

States,

a domestic partnership,

a domestic corporation,

any estate (other than a foreign

estate, within the meaning of

paragraph (31)), and (E) any trust if -

(1) acourt within the United States is

able to exercise primary

Supervision over the

administration of the trust, and

Gi) one or more United States

persons have the authority to

control all substantia! decisions

of the trust.

Foreign estate or trust

(A)

(B)

Foreign estate The term “foreign

estate” means an estate the income of

which, from sources without the

United States which is not effectively

connected with the conduct of a trade

or business within the United States,

is not includible in gross income

under subtitle A.

Foreign trust The term “foreign trust”

means any trust other than a trust

described in subparagraph (FE) of

paragraph (30).

Cooperative bank

The term “cooperative bank” means an

institution without capital stock organized

(33)

9la

and operated for mutual purposes and

without profit, which - (A) either -

G) is an insured institution within the

meaning of section 401(a) (!2) of the

National Housing Act (12 U.S.C., sec.

1724(a)), or

(ii) 1s subject by law to supervision and

examination by State or Federal

authority having supervision over

such institutions, and (B) meets the

requirements of subparagraphs (B)

and (C) of paragraph (19) of this

subsection (relating to definition of

domestic building and _ loan

association).

In determining whether an institution meets

the requirements” referred to in

subparagraph (B) of this paragraph, any

reference to an association or to a domestic

building and loan association contained in

paragraph (19) shall be deemed to be a

reference to such institution.

Regulated public utility

The term “regulated public utility” means -

(A) A corporation engaged in the

furnishing or sale of -

(1) electric energy, gas, water, or

sewerage disposal services, or

(11) transportation (not included in

subparagraph (C)) on = an

intrastate, suburban,

municipal, or interurban

electric railroad, on an

92a

intrastate, municipal, or

suburban trackless trolley

system, or on a municipal or

suburban bus system, or

(iii) transportation (not included in

clause (ii)) by motor vehicle -

if the rates for such furnishing or

sale, as the case may be, have been

established or approved by a State or

political subdivision thereof, by an

agency or instrumentality of the

United States, by a public service or

public utility commission or other

similar body of the District of

Columbia or of any State or political

subdivision thereof, or by a foreign

country or an agency or

instrumentality or _ political

subdivision thereof

A corporation engaged as a common

carrier in the furnishing or sale of

transportation of gas by pipe line, if

subject to the jurisdiction of the

Federal Energy Kegulatory

Commission.

A corporation engaged as a common

carrier (i) in the furnishing or sale of

transportation by railroad, if subject

to the jurisdiction of the Surface

Transportation Board, or (ii) in the

furnishing or sale of transportation of

oil or other petroleum products

(including shale oil) by pipe line, if

to the jurisdiction of the

subject

(D)

((;)

93a

Federal Energy Regulatory

Commission or if the rates for such

furnishing or sale are subject to the

jurisdiction of a public service or

public utility commission or other

similar body of the District of

Columbia or of any State.

A corporation engaged in_ the

furnishing or sale of telephone or

telegraph service, if the rates for such

furnishing or sale meet the

requirements of subparagraph (A).

A corporation engaged in_ the

furnishing or sale of transportation as

a common carrier by air, subject to

the jurisdiction of the Secretary of

Transportation.

A corporation engaged in_ the

furnishing or sale of transportation by

a water carrier subject to jurisdiction

under subchapter II of chapter 135 of

title 49.

A rail carrier subject to part A of

subtitle IV of title 49, if (i)

substantially all of its” railroad

properties have been leased to

another such railroad corporation or

corporations by an agreement or

agreements entered into before

January 1, 1954, (11) each lease is for

a term of more than 20 years, and (ili)

at least 80 percent or more of its gross

income (computed without regard to

dividends and capital gains and

losses) for the taxable year is derived

(H)

94a

from such leases and from sources

described in subparagraphs (A)

through (F), inclusive. For purposes of

the preceding sentence, an agreement

for lease of railroad _ properties

entered into before January 1, 1954,

shall be considered to be a lease

including such term as the total

number of years of such agreement

may, unless sooner terminated, be

renewed or continued under the terms

of the agreement, and any such

renewal or continuance under such

agreement shall be considered part of

the lease entered into before January

1, 1954.

A common parent corporation which

is a common carrier by railroad

subject to part A of subtitle IV of title

49 if at least 80 percent of its gross

income (computed without regard to

capital gains or losses) is derived

directly or indirectly from sources

described in subparagraphs (A)

through (F), inclusive. For purposes of

the preceding sentence, dividends and

interest, and income from leases

described in subparagraph (G),

received from a_ regulated public

utility shall be considered as derived

from sources’ described in

subparagraphs (A) through (F),

inclusive, if the regulated public

utility is a member of an affiliated

group (as defined in section 1504)

95a

which includes the common parent

corporation.

The term “regulated public utility” does not

(except as provided in subparagraphs (G)

and (H)) include a corporation described in

subparagraphs (A) through (F), inclusive,

unless 80 percent or more of its gross income

(computed without regard to dividends and

capital gains and losses) for the taxable year

is derived from sources described in

subparagraphs (A) through (F), inclusive. If

the taxpayer establishes to the satisfaction

of the Secretary that (i) its revenue from

regulated rates described in subparagraph

(A) or (D) and its revenue derived from

unregulated rates are derived from the

operation of a single interconnected and

coordinated system or from the operation of

more than one such system, and (ii) the

unregulated rates have been and are

substantially as favorable to users and

consumers as are the regulated rates, then

such revenue from such unregulated rates

shall be considered, for purposes of the

preceding sentence, as income derived from

sources described in subparagraph (A) or

(D). [((34) Repealed. Pub. L. 98-369, div. A,

title IV, Sec. 4112(b)(11), July 18, 1984, 98

Stat. 792]

Enrolled actuary

The term “enrolled actuary” means a person

who is enrolled by the Joint Board for the

Enrollment of Actuaries established under

(36)

96a

subtitle C of the title III of the Employee

Retirement Income Security Act of 1974.

Income tax return preparer

(A)

(B)

In general

The term “income tax return

preparer’ means any person who

prepares for compensation, or who

employs one or more persons to

prepare for compensation, any return

of tax imposed by subtitle A or any

claim for refund of tax imposed by

subtitle A. For purposes of the

preceding sentence, the preparation of

a substantial portion of a return or

claim for refund shall be treated as if

it were the preparation of such return

or claim for refund.

Exceptions

A person shall not be an “income tax

return preparer” merely because such

person -

(i) furnishes typing, reproducing,

or other mechanical assistance,

(il) prepares a return or claim for

refund of the employer (or of an

officer or employee of the

employer) by whom he is

regularly and _ continuously

employed,

(il) prepares as a fiduciary a

return or claim for refund for

any person, or

(iv) prepares a claim for refund for

a taxpayer in response to any

(35)

(339)

97a

notice of deficiency issued to

such taxpayer or in response to

any waiver of restriction after

the commencement of an audit

of such taxpayer or another

taxpayer if a determination in

such audit of such other

taxpayer directly or indirectly

affects the tax liability of such

taxpayer.

Individual retirement plan

The term “individual retirement plan”

means -

(A) an individual retirement account

described in section 408(a), and

(B) an individual retirement annuity

described in section 408(b).

Joint return

The term “joint return” means a single

return made jointly under section 6013 by a

husband and wife.

Persons residing outside United States

If any citizen or resident of the United

States does not reside in (and is not found

in) any United States judicial district, such

citizen or resident shall be treated as

residing in the District of Columbia for

purposes of any provision of this title

relating to -

(A) jurisdiction of courts, or

(B) enforcement of summons.

98a

(40) Indian tribal government

(A) In general

The term “Indian tribal government”

means the governing body of any

tribe, band, community, village, or

group of Indians, or (if applicable)

Alaska Natives, which is determined

by the Secretary, after consultation

with the Secretary of the Interior, to

exercise governmental functions.

(B) Special rule for Alaska Natives

No determination under

subparagraph (A) with respect to

Alaska Natives shall grant or defer

any status or powers other than those

enumerated in section 7871. Nothing

in the Indian Tribal Governmental

Tax Status Act of 1982, or in the

amendments made thereby, shall

validate or invalidate any claim by

Alaska Natives of sovereign authority

over lands or people.

(41) TIN

The term “TIN” means the identifying

number assigned to a person unaer section

6109.

(42) Substituted basis property

‘The term “substituted basis property” means

property which is -

(A) transferred basis property, or

(KB) exchanged basis property.

“uu

: } ita isterre i basi prope LY

Che term “transfe rrea Dasis property m ns

property having a basis determined unde!

any provision of subtitle A (or under any

orresponding provision of prior income tax

iw providing that the ba hall b

termined in whole or in part by reference

» the bas n the hands of the donor

tor, or otner transterol

+4 exchanged basi property

lhe term “exchanged basis property means

property having a basis determined unde1

ny provision of subtitle A (or under any

corresponding provision ol prior income tax

law) providing that the basis shall! bs

determined in whole or in part by reference

» other property held at any time by the

erson to! whon the DAaASI | ) be

determined

: Nonrecognition transaction

1 Tie Lerim nonrecognitio!l tran LIOI

neal iny l position I property I i

rai tion 1 hich yain or le not

ecognized in whole or in part lor purpose |

ubtitie \

{ Determinati of whether § there

collective bargaining agreement

In determining whether there is a collective

bargaining agreement between employee

representatives and 1 or more emplovers,

tre rerry “employee representative s” shall

nol include any organization more than ons

1O0Oa

half of the members of which are employees

who are owners, officers, or executives of t

employer. An agreement shall not be treated

is a collective bargaining agreement unless

it is a bona fide agreement between bona

fide employee representatives and 1 or mors

Executor

The term “executor” means the executor o

administrator of the decedent, or, if there is

no executor or administrator appointed,

qualified, and acting within the United

States, then any person in actual or

constructive Possession Of any propert Y Ol

the decedent

Ott-highway vehicles

\ Off-highway transportation vehicles

In ceneral

A vehicle shall not be treated

as a highway vehicle if such

vehicle is specially designed for

the primary function of

transporting a particular type

of load other than over the

blic highway and Dec ause ol

this pecial design uch

vehicle's capability to transport

a load over the public highway

substantially limited of

impaired

1) Determination | vehicle

design

10la

For purposes of clause (i), a

vehicle’s design is determined

solely on the basis of its

physical characteristics.

Determination of substantial

limitation or impairment

For purposes of clause (i), in

determining whether

substantial limitation or

impairment exists, account

may be taken of factors such as

the size of the vehicle, whether

such vehicle is subject to the

licensing, safety, and other

requirements applicable to

highway vehicles, and whether

such vehicle can transport a

load at a sustained speed of at

least 25 miles per hour. It is

immaterial that a vehicle can

transport a greater load off the

public highway than such

vehicle is permitted’ to

transport over the _ public

highway

B) Nontransportation trailers and

semitrailers

A trailer or semitrailer shall not be

treated as a highway vehicle if it is

specially designed to function only as

an enclosed stationary shelter for the

carrying on of an _ off- highway

function at an off-highway site

102a

ib) Definition of resident alien and nonresident

alien

(1) In general For purposes of this title (other

than subtitle B) -

(A)

(B)

Resident alien

An alien individual shall be treated as

a resident of the United States with

respect to any calendar year if (and

only if) such individual meets the

requirements of clause (i), (11), or (iil)

(i) Lawfully admitted for permanent

residence Such individual is a lawful

permanent resident of the United

States at any time during such

calendar year. (ii) Substantial!

presence test Such individual meets

the substantial presence test of

paragraph (3). (111) First year election

Such individual makes the election

provided in paragraph (4).

Nonresident alien

An individual is a nonresident alien if

such individual is neither a citizen of

the United States nor a resident of

the United States (within the

meaning of subparagraph (A)).

(2) Special rules for first and last year of

residency

(A)

I'irst year of residency

(i) In general

If an alien individual is a

resident of the United States

under paragraph (1)(A) with

(1)

(111)

103a

respect to any calendar year,

but was not a resident of the

United States at any time

during the preceding calendar

year, such alien indtvidual

shall be treated as a resident of

the United States only for the

portion of such calendar year

which begins on the residency

starting date.

Residency starting date for

individuals lawfully admitted

for permanent residence

In the case of an individual

who is a lawfully permanent

resident of the United States at

any time during the calendar

year, but does not meet the

substantial presence test of

paragraph (3), the residency

starting date shall be the first

day in such calendar year on

which he was present in the

United States while a lawful

permanent resident of the

United States.

Residency starting date for

individuals meeting

substantial presence test

In the case of an individual

who meets the substantial

presence test of paragraph (3)

with respect to any calendar

year, the residency starting

date shall be the first day

(B)

104a

during such calendar year on

which the individual is present

in the United States.

(iv) Residency starting date for

individuals making first year

election

In the case of an individual

who makes the election

provided by paragraph (4) with

respect to any calendar year,

the residency starting date

shall be the lst day during

such calendar year on which

the individual is treated as a

resident of the United States

under that paragraph.

Last year of residency

An alien individual shall not be

treated as a resident of the United

States during a portion of any

calendar year if -

(i) such portion is after the last

day in such calendar year on

which the individual was

present in the United States

(or, in the case of an individual

described in paragraph

(1)(A)G), the last day on which

he was so described),

(ii) during such_ portion the

individual has a_ closer

connection to a foreign country

than to the United States, and

(ii) the individual is not a resident

of the United States at any

105a

time during the next calendar

year.

(i) In general

For purposes of subparagraphs

(A)Gi) and (B), an individual

shall not be treated as present

in the United States during

any period for which the

individual establishes that he

has a closer connection to a

foreign country than to the

United States.

(i) Not more than 10 days

disregarded

Clause (i) shall not apply to

more than 10 days on which

the individual is present in the

United States.

(3) Substantial presence test

(A) In general

Except as otherwise provided in this

paragraph, an individual meets the

substantial presence test of this

paragraph with respect to any

calendar year (hereinafter in this

subsection referred to as the “current

year’) if -

(i) such individual was present in

the United States on at least

31 days during the calendar

year, and

(11) the sum of the number of days

on which such individual was

yresent in the United States

4 ? ‘ Irrent . >,

aus = L 2S | is ‘ cAit

. YY > se — =

is § = : 2

tue : ‘

- « —_ " = 7

- =

In the case of days it multiplier

Current year

lst preceding veut 1/3

2nd preceding year 1/6

> ACE] 1) \ t wily it > SCI

7 “ST ~ ; cc Ff

Z Z Pt —_

° F smi »

4 =

‘ - —

: i

book + ‘ » £h

s; established hat for the

irrent year such individual

has a tax home (as defined in

section 911(d)\(3) without

regard to the second sentence

L07a

thereof) in a foreign country

and has a closer connection to

=e bP 4. = shlen a — as bE os hed <r S > rr

such foreign country than to

— —-

the | inirtod Stat

EE . ~<a

] -_ecnarere 3 #

~ ryr - “ae re? 4 - rr a

siya aS a iv Je

rt a4 4 ~f><

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~ rerea racw$c?T ror + se ¢ coe 7

Je ; a | eS. ia JiFiy 7

aT rice . . vr . > >

< ’ mivicusi ¥ 4 CSD f any

current CagT ‘7 «=f ny tume di rinig

uJ iL VY@e<c li a2 any i} UT iti¢

uch year

such individual had an

application for adjustment of

status pending, or

(il) such individual took other

steps to apply for status as a

lawful permanent resident of

the United States.

1)) Exception for exempt individuals or

for certain medical conditions

. " "

Teemebelebhtslere & -~Halil mmat ? r >t ory

in inciviacduai SHaili NOt oe treated as

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— -_ > - - - < =

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- _ : -+ : rvrc vr, * r

- . >| aAW-GCLSE ’ 2 Ss b

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re r CG ') 4LES

(4 First-year election

(A) An alien individual shall be deemed

to meet the requirements of this

subparagraph if such individual -

tii]

. 7

+ > : . >

S mL < esident of the I iLed

Cine —_— " £

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calendar year immediately

preceding the election year

is a resident of the United

States under clause (ii) of

paragraph (1)(A) with respect

to the calendar’ year

immediately following the

election year, and

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days in the aggregate

notwithstanding nis

absence from the United

States on such days)

An alien individual who meets the

requirements of subparagraph (A)

shall. if he So elects. be treated as a

resident of the United States with

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paragraph (3) shall apply for purposes

of determining an_ individual's

presence ip the United States unde:

this paragraph.

(F)

110a

An election under subparagraph (B)

shall be made on the individual’s tax

return for the election year, provided

that such election may not be made

before the individual has met the

substantial presence test of

paragraph (3) with respect to the

calendar year immediately following

the election year.

An election once made under

subparagraph (B) remains in effect for

the election year, unless revoked with

the consent of the Secretary.

(5) ¢xempt individual defined

For purposes of this subsection -

{A)

(B)

In general

An individual is an exempt individual

for any day if, for such day, such

individual is -

(i) a foreign government-related

individual,

(ii) a teacher or trainee,

(iii) a student, or

(iv) a professional athlete who is

temporarily in the United

States to compete in a

charitable sports event

described in section

274(1)(1)(B).

Foreign government-related

individual

The term “foreign government-related

individual” means any _ individual

(C)

lila

temporarily present in the United

States by reason of -

(i) diplomatic status, or a visa

which the Secretary (after

consultation with the Secretary

of State) determines represents

full-time diplomatic or consu!ar

status for purposes of this

subsection,

i) being a full-time employee of

an international organization,

Qn) being a member of the

immediate family of an

individual described in clause

(1) or (11).

Teacher or trainee

The term “teacher or trainee” means

any individual -

(i) who is temporarily present in

the United States under

subparagraph (J) or (Q) of

section 101(15) of the

Immigration and Nationality

Act (other than as a student),

and

i) who substantially complies

with the requirements for

being so present.

Student

The term “student” means any

individual -

(i) who is temporarily present in

the United States -

(ii)

112a

(1) under subparagraph (F)

or (M) of section 101(15)

of the Immigration and

Nationality Act, or

(II) as a= student under

subparagraph (J) or (Q)

of such section 101(15),

and

who substantially complies

with the requirements for

being so present.

Special rules for teachers, trainees,

and students

(1)

(11)

Limitation on teachers and

trainees

An individual shall not be

treated as an exempt

individual by reason of clause

(ii) of subparagraph (A) for the

current year if, for any 2

calendar years during the

preceding 6 calendar years,

such person was an exempt

person under clause (11) or (111)

of subparagraph (A). In the

case of an individual all of

whose compensation 1s

described in section 872(b)(3),

the preceding sentence shall be

applied by substituting “4

calendar years” for “2 calendar

years’.

Limitation on students

For any calendar year after the

5th calendar year for which an

| l3a

individual was an exempt

individual under clause (ii) or

ili) of subparagraph (A), such

individual shall not be treated

as an exempt individual by

reason of clause (iil) of

subparagraph (A), unless such

individual establishes to the

satisfaction of the Secretary

that such individual does not

intend to permanently reside

in the United States and that

such individual meets the

requirements of subparagraph

(11)

Lawful permanent resident

For purposes of this subsection, an

individual is a lawful permanent resident of

the United States at any time if

(A) such individual has the status of

having been lawfully accorded the

privilege of residing permanently in

the United States as an immigrant in

accordance with the immigration

laws, and

(B) such status has not been revoked (and

has not been administratively or

judicially determined to have been

abandoned)

Presence in the United States

lor purposes of this subsection

(A) In general

(B)

(D)

}l4a

Except as provided in subparagraph

(B), (C), or (D), an individual shall be

treated as present in the United

States on any day if such individual is

physically present in the United

States at any time during such day.

Commuters from Canada or Mexico

If an individual regularly commutes

to employment (or self- employment)

in the United States from a place of

residence in Canada or Mexico, such

individual shall not be treated as

present in the United States on any

day during which he so commutes.

Transit between 2 foreign points

If an individual, who is in transit

between 2 points outside the United

States, is physically present in the

United States for less than 24 hours,

such individual shall not be treated as

present in the United States on any

day during such transit.

Crew members temporarily present

An individ

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