Treatment of disregarded entities as corporations for employment tax purposes.

On April 28, 2008, TEl President Robert J. McDonough recommended that the Treasury Department permit owners of disregarded to elect to assume joint and several liability of employment tax obligations with the entities in order to permit the owners to file and report the employment tax obligations at the owner level. The comments were prepared under the aegis of TEI's Federal Income Tax Committee, whose chair is Carita Twinem of the Briggs & Stratton Corporation. Also contributing to the development of the comments were Robert J. Birch of Wellmark Inc., Chair of the Federal Tax Subcommittee on Employee Benefits and Payroll Taxes, William H. Brennan of McKesson Corporation, John K. Deshong of Bechtel Corporation, Becky Harshberger of Entertainment Partners, Inc., and Michael J. Nesbitt of Paychex, Inc.

During the February 20 liaison meeting between Tax Executives Institute and the Treasury Department's Office of Tax Policy, we discussed the amendment of Treas. Reg. [section] 301.7701-2-(c)(iv)(B), which provides that a disregarded entity will, instead of being disregarded, be treated as a corporation with respect to employment tax obligations. During the meeting, TEI noted that the amended regulation will impose significant burdens for large corporate groups with wholly owned LLCs for business operations and have, since the issuance of Notice 99-6, (1) aggregated the disregarded entities' employment tax obligations at the owner level. Even though disregarded entities in large corporate groups pose little risk for nonpayment and nonreporting of their employment tax obligations, they must comply with the regulations and withhold, deposit, and report employment tax liabilities for each such entity with employees. The Treasury Department invited proposals to address the IRS collection concerns that prompted amendment of the regulation.

Discussion

On October 18, 2005, a notice of proposed rulemaking (REG-114371-05) was published proposing to treat qualified subchapter S subsidiaries (QSubs) and certain other single-owner eligible entities under [section][section] 301.7701-1 through 301.7701-3 (disregarded entities) as separate entities for purposes of employment tax deposits and related reporting requirements. (2) T.D. 9356 implements this proposal by stating in Treas. Reg. [section] 301.7701-2(c) (iv)(B) that an entity that is otherwise disregarded as an entity separate from its owner will be treated as a corporation with respect to taxes under...