Check-the-Box Regulations Are Valid

By Kreissl, Laura Jean; Pulliam, Darlene | Journal of Accountancy, July 2008 | Go to article overview

Check-the-Box Regulations Are Valid


Kreissl, Laura Jean, Pulliam, Darlene, Journal of Accountancy


The U.S. Supreme Court declined to review a case in which a business owner argued that "check-the-box" entity classification rules represent an invalid exercise of the IRS'S authority to issue interpretive regulations under IRC [section] 7805(a). In so doing, the court let stand a ruling by the Sixth Circuit Court of Appeals, which had upheld a district court decision against the taxpayer.

Frank Littriello, the sole owner of several Kentucky limited liability companies providing health care services, failed to "check the box" as prescribed by Treas. Reg. [section] 301.7701-3, thereby electing that the LLCs be treated as sole proprietorships rather than corporations for federal tax purposes. While this election protected Littriello from double taxation, it also meant that as a sole proprietor he would be held individually liable not only for taxes on business income but also for federal employment taxes. The latter, however, were not paid for 2000 through 2002. The IRS assessed Littriello more than $1 million and in 2003 informed him it would enforce liens against his property Littriello filed suit in district court challenging the validity of the regulations. He contended they conflicted with the principles enunciated by the Supreme Court in Morrissey v Commissioner (16 AFTR 1274 (1935)) and disregarded the separate existence under Kentucky state law of an LLC from its owner. The district court ruled against him, and Littriello appealed.

The Sixth Circuit, like the district court, cited Chevron USA Inc. v. Natural Resources Defense Council Inc. (467 U.S. 837 (1984)), ruling that the regulations were a reasonable interpretation by the IRS of a tax statute (IRC [section] 7701) that was otherwise ambiguous. Under Chevron, a court must first determine "whether Congress has directly spoken to the precise question at issue." If congressional intent 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." However, "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. …

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