We Are The Other People?

In CCM 200338012, the Service addessed the question of whether a single-member LLC was liable for the unpaid withholding taxes of a business under Code Section 3505. That section imposes liability upon an "other person" who pays the wages of the employees of a delinquent taxpayer. The memorandum is, to say the very least, confusing.

I think (but I'm not certain) that the facts are as follows: LLC, which is a disregarded entity, filed employee withholding tax returns in its own name and using its own EIN. The LLC then files for bankruptcy. Under the authority of IRC Sections 6325 and 6331, coupled with the concept articulated in Treas. Reg. Section 301.7701-2(a) that a disregarded entity is disregarded for all income tax purposes, the Service has the ability to assess all unpaid employee withholding taxes against the sole member. However, the memorandum seems to say that the Service can only go directly against the assets of the LLC if either (i) some form of piercing the "corporate" veil or nominee theory applies or (ii) the provisions of Section 3505(a) apply and the LLC is an "other person" within the meaning of that section.

The memorandum does not discuss the veil piercing or nominee questions on the facts before it, but (I think) it rejects the application of Section 3505(a) because it seems to conclude that the LLC was merely the agent of the individual taxpayer. Thus, it appears that the Service feels that it cannot attach the assets of the LLC directly.

Note the weasel words that I use: "seems to conclude," "it appears." The reason is that I cannot figure out what the Service is saying. Indeed, I'm even somewhat unclear as to the facts. The last sentence of the penultimate paragraph is particularly baffling: "Having disregarded the LLC for federal tax purposes and having treated it like the taxpayer/single member owner for purposes of assessment, we doubt the efficacy of now treating the LLC as an 'other person' for purposes of collection." Huh? Does Section 3505 apply or not? Or is the memorandum hedging on the point so that it can later take a litigation position that, on similar facts, Section 3505 applies. (Yes, I know, these CCM do not bind the Service, cannot be cited as authority, etc. But, of course, we do it all the time.)

Is the Service saying that (a) it need not rely upon Section 3505 because the LLC was, effectively, the taxpayer and an assessment may be made directly against the LLC, as well as the individual owner or (b) that it is somehow estopped from enforcing its assessment directly against the LLC's assets, absent a piercing or nominee situation. I had thought that the Service had previously taken the position that if a business used the LLC form (as a diregarded member, of course) and paid employee taxes under a separate EIN, both the LLC and the individual owner could be assessed. Do any readers disagree with this conclusion? Does the Service in CCM 200338012 disagree with this conclusion?

Any comments that could shed light on these questions are welcome.