# Petition for Writ of Certiorari — Littriello v. United States (No. 07-851) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0440%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 2007 ## Text 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 1 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? il 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 ................. 1 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 1V 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 V 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 V1 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( ( C bs de ' 1986 1986 1986 f 1986 1986 t LYSb if 1GR6 “ A 4S LS 3402. 3403: 6672. to 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 AT —- - ~ 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 4 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. oO 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 6 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. 7 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). 8 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. 9 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 10 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 1] 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. ov 12 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. Ls 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. 14 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 4 ‘ 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 2a 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 3a 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). 4a 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). 5a 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 6a 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 7a 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 8a (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 Ya 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). A. 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. C. 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 W. 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 I 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 te 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 (c) Any other appeal or any writ of certiorari intended 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. (c) Congressional policy toward Presidential activities 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. (c) Wage bracket withholding (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; (C) an exemption for each individual with respect 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 (C) Change of status which affects next calendar 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 (C) to deduct and withhold upon any payment of 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 (C) dividing the amount of tax determined under 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, (C) compute the total amount of tax that would 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 (c) toa payment of wages, the employer shall treat the 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 (C) any payment to an individual of sick pay which 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. (C) Sick pay For purposes of this subsection, the 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 (C) shall take effect (} 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. (C) Specified 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. (C) Sweepstakes, wagering pools, certain 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. (c) Extension of period of collection where bond 1s 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 o [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_0440%3A1. Public record. Not legal advice.