LLC members and employment taxes.

• Author: Laffie, Leslie S.
• Position: From The IRS

Rev. Rul. 2004-41 provides that the IRS may not collect a limited liability company's (LLC's) unpaid employment taxes from its members, because they are not liable for the LLC's debts under state law, even though the LLC is classified as a partnership for Federal tax purposes and the partners are liable for partnership obligations under state Law. However, the LLC members may be liable for the unpaid employment taxes under Sec. 6672's trust fund penalty tax rules.

Overview: A multi-member domestic LLC is classified as a partnership for Federal tax purposes by default under Regs. Sec. 301.7701-1, unless an election is made to tax it as a corporation. Generally, state law provides that general partners are jointly and severally liable for the partnership's obligations. The IRS may seek to collect Federal tax liabilities incurred by the partnership (i.e., employment taxes) from its general partners; see, e.g., Papandon, 331 F3d 52 (2d Cir. 2003). However, LLC multi-members are generally not liable under state law for the entity's debts, subject to certain limited exceptions.

Facts: In the ruling, A, B and C are members of a domestic LLC formed m state D. The LLC is an employer for Federal tax purposes and has unpaid Federal employment taxes for the years in question. A, B and C each had assets that would be enough to satisfy all or a part of the unpaid employment taxes. Under D's laws, LLC members generally are not liable for the LLC's debts.

Issue: At issue was whether the IRS could collect the LLC's unpaid employment taxes from A, B and C as if they were general members of a partnership, and place a levy on their assets...