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*The Honorable John R. Adams, United States District Judge for the Northern District of Ohio, sitting by designation.

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 07a0136p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

_________________

FRANK A. LITTRIELLO,

Plaintiff-Appellant,

v.

UNITED STATES OF AMERICA and UNITED STATES

DEPARTMENT OF TREASURY,

Defendants-Appellees.

X—-

>,—-N

No. 05-6494

Appeal from the United States District Court

for the Western District of Kentucky at Louisville.

No. 04-00143—John G. Heyburn II, Chief District Judge.

Argued: July 21, 2006

Decided and Filed: April 13, 2007

Before: KENNEDY and DAUGHTREY, Circuit Judges; ADAMS, District Judge.*

_________________

COUNSEL

ARGUED:

Appellant. Bridget M. Rowan, UNITED STATES DEPARTMENT OF JUSTICE, Washington,

D.C., for Appellees. ON BRIEF: Irwin G. Waterman, Michael T. Hymson, SEILLER

WATERMAN LLC, Louisville, Kentucky, for Appellant. Bridget M. Rowan, David I. Pincus,

UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

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OPINION

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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.

1

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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 Regulation § 301.7701-3(b)(1)(ii).

When Littriello, as sole proprietor, failed to pay the outstanding employment taxes, the IRS filed

notices of determination and, eventually, notified him of its intent to levy on his property to enforce

previously filed tax liens. Littriello responded by initiating complaints for judicial review in district

court, contending that the regulations in question (1) exceed the authority of the Treasury to issue

regulatory interpretations of the Internal Revenue Code; (2) conflict with the principles enunciated

by the Supreme Court in Morrissey v. Commissioner, 296 U.S. 344 (1935); and (3) disregard the

separate existence of an LLC under Kentucky state law. He also argued in his motion for summary

judgment that the regulations are not applicable to employment taxes. After the cases were

consolidated for disposition, the district court held that the “check-the-box regulations” are “a

reasonable response to the changes in the state law industry of business formation,” upheld them

under Chevron1 analysis, and held that the plaintiff was individually liable 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. Each

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.

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 liable as a sole proprietor under Treasury Regulation § 301.7701-

3(b)(1)(ii), 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– 301.7701-

3, were issued in 1996 to clarify the rules for determining the classification of certain business

No. 05-6494 Littriello v. United States, et al. Page 3

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entities for federal tax purposes, replacing the so-called “Kintner regulations.”2 The earlier

regulations had been 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

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, transferability of ownership interests, and title

to property. Id. at 359-61. However, the Court did not hold that a specific number of those

characteristics had to be present in order to establish the business entity as a corporation, nor did it

address the consequence of a partnership having some of those characteristics, leaving the

distinctions between and among the various defined entities less than clear.

Meant to clarify some of the confusion created in the wake of Morrissey, the Kintner

regulations developed four essential characteristics of a corporate entity and provided that an

unincorporated business would be treated as an “association” – and, therefore, as a corporation

rather than a partnership – if it had three of those four identifying characteristics. See former Treas.

Reg. §§ 301.7701-2(a)(1) and (3). The Kintner regulations, adequate to provide a measure of

predictability at the time of their promulgation in 1960 and for several decades afterward, proved

less than adequate to deal with the new hybrid business entities – limited liability companies, limited

liability partnerships, and the like – developed in the last years of the last century under various state

laws. These unincorporated business entities had the characteristics of both corporations and

partnerships, combining ease of management with limited liability, and were increasingly structured

with the Kintner regulations in mind, in order to take advantage of whatever classification was

thought to be the most advantageous. The “Kintner exercise” required skillful lawyering by business

entities and case-by-case review by the IRS; it quickly came to be seen as squandering of resources

on both sides of the equation.

As a result, the IRS undertook to replace the Kintner regulations with a more practical

scheme, consistent with existing tax statutes and with a new provision in I.R.C. § 7704 treating

publicly-traded entities as corporations, regardless of their structure or status under state law. As

to the unincorporated business associations not covered by § 7704, including the newly emerging

hybrid entities, the IRS proposed to allow an election by the taxpayer to be treated as a corporation

or, in the absence of such an election, to be “disregarded,” i.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 Kintner

No. 05-6494 Littriello v. United States, et al. Page 4

regulation “hoops” in order to achieve a desired – and perfectly legal – classification for federal tax

purposes.

The district court noted that Littriello’s unincorporated businesses had not elected to be

treated as corporations under the new regulations and were, therefore, deemed by the IRS to be sole

proprietorships. This result provided Littriello with a major tax advantage: his income from the

healthcare facilities would be taxed to him only once. But, of course, it also meant that he would be

responsible not only for taxes on business income but also for those federal employment taxes that

were required by statute and that had not been paid for the years in question.

The district court found that the regulations were a reasonable interpretation by the IRS of

a tax statute (I.R.C. § 7701) that was otherwise ambiguous, upheld them under Chevron analysis,

after noting that it was apparently the first court asked to review those regulations, and held Littriello

individually liable for the amounts assessed by the IRS. In doing so, the district court rejected

Littriello’s arguments that the Secretary of the Treasury had exceeded his authority in promulgating

the entity-classification regulations, that the regulations are invalid under Morrissey, and that they

impermissibly altered the legal status of his state-law-created LLC. Before this court, Littriello also

contends that the regulations do not apply to employment taxes, an argument that depends, at least

in part, on proposed amendments to the entity-classification regulations that were not circulated until

after the appeal in this case was filed.

A. Chevron Analysis

The first two arguments raised by Littriello are intertwined. He contends that the statute

underlying the “check-the-box” regulations is unambiguous and that the district court’s invocation

of Chevron was, therefore, erroneous. Under Chevron, a court reviewing an agency’s interpretation

of a statute that it administers must first determine “whether Congress has directly spoken to the

precise question at issue.” 467 U.S. at 842. If congressional intent is clear, then “that is the end of

the matter; for the court, as well as the agency, must give effect to the unambiguously expressed

intent of Congress.” Id. at 842-43. 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.” Id. at 843; see also Barnhart v. Thomas, 540 U.S. 20, 26 (2003) (when

a statute is silent or ambiguous, the court must “defer to a reasonable construction by the agency

charged with its implementation”).

Littriello argues, first, that Chevron has been modified by the Supreme Court’s recent

decision in National Cable & Telecommunications Ass’n v. Brand X Internet Services, 545 U.S. 967

(2005), which “seems to revise the Chevron formula by substituting as the second agency

requirement ‘reasonableness’ for ‘permissible construction of the statute.’” But this argument

overlooks the fact that the Chevron opinion uses the terms “reasonable” and “permissible”

interchangeably in reference to statutory construction. See, e.g., 467 U.S. at 843, 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 plaintiff’s 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 portions of the Internal

No. 05-6494 Littriello v. United States, et al. Page 5

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 refuted 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 later 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

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 discretion.” Nat’l 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 plaintiff’s 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. We conclude 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 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.”

Id.

partnership and not a disregarded entity deemed a sole proprietorship 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, 126 T.C., 359 (2006), to the facts here. In this recent opinion, submitted as

v. Commissioner

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 treated as a partnership. But under no

circumstances could Littriello’s single-member LLCs be treated as partnerships for federal tax

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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 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). As a 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, singlemember

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

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.

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.3

CONCLUSION

For the reasons set out above, we reject the plaintiff’s challenge to the “check-the-box”

regulations and AFFIRM the district court’s grant of summary judgment to the defendant.

at 845. As the IRS urges, we conclude that “[b]ecause the further development of permissible 

As of the date of this opinion, the proposed regulations have not been adopted.at 123. Hence, the Court in Galletti was concerned with a business actually organized as a 

. In that case, the Supreme Court noted that “[a] court’s prior judicial construction of a 

, in which the Court addressed the tax code provision that included an “association” withinSee United States v. Kintner, 216 F.2d 418 (9th Cir. 1954).Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).Irwin G. Waterman, SEILLER WATERMAN LLC, Louisville, Kentucky, for 

The Honorable John R. Adams, United States District Judge for the Northern District of Ohio, sitting by