Chapter 7 Single Member Disregarded Entity LLCs

Introduction. When a Limited Liability Company (LLC) that is not treated as an association has a single member that is an individual, the income of the LLC is reported on the Form 1040, U.S. Individual Income Tax Return, of the member. Caseworkers must determine who is responsible for any liability, the single member or the LLC. Once it is determined who is liable, follow paragraphs (2) through (4) below for procedures on working the individual single member disregarded entity LLC case. See IRM 5.9.13.14, Limited Liability Companies (LLC), and subsections, for determining responsibility. Additional information on LLCs can be found in IRM 5.1.21, Collecting from Limited Liability Companies (LLCs). The LLC is a "single member disregarded entity" LLC. Responsibility for the liability is based on the type of tax owed and when the respective tax period began:

Except for unpaid excise taxes on indoor tanning services, the LLC is liable for unpaid excise taxes for periods beginning on or after January 1, 2008. The LLC is liable for unpaid excise taxes on indoor tanning services for periods beginning on or after July 1, 2012. (See Section 301.7701-2(c)(2)(v) of the Procedure and Administration Regulations, for additional information.)

The single member, not the LLC, is liable for excise taxes on indoor tanning services for periods beginning prior to July 1, 2012, and for all other excise taxes for periods beginning prior to January 1, 2008. (See Section 301.7701-2(e)(6) of the Procedure and Administration Regulations, for additional information.)

The LLC is liable for any employment tax periods beginning on or after January 1, 2009. Separate rules apply for backup withholding and for tax on self-employment income. For additional information, see Section 301.7701-2(c)(2)(iv) and 301.7701-2(e)(5) of the Procedure and Administration Regulations.

Other than backup withholding and tax on self-employment income, the single member, not the LLC, is responsible for employment taxes on periods beginning prior to January 1, 2009.

Individual Single Member Only Liable. There is no discharge of the debtor in the Chapter 7 case filed by an LLC. When there are no excise taxes due for periods beginning on or after January 1, 2008; or no withholding taxes for periods beginning on or after January 1, 2009; the single member, not the LLC, is liable for the debt. There is no need for a TFRP investigation. The single member is liable for the entire amount due, not just the trust fund tax. The liability is not claimed on the proof of claim filed in the bankruptcy case of the LLC. The liability of the single member is included on a proof of claim in the bankruptcy case of the individual, if that single member files a bankruptcy case. Per IRM 5.9.13.14.1(3), Collection Against SMO, a TC 520 cc 84 must be input to IDRS for the modules owed by the individual single member to alert IRS employees to contact Insolvency before taking any collection action. Insolvency will advise the employee that collection must be limited to assets of the single member individual. Collecting from assets of the LLC is a violation of the bankruptcy stay. Once an initial case analysis has been completed and it has been determined that the debt is owed only by the single member, the case can be transferred from FI to the CIO. The FI caseworker must take the following actions:

Open an "LLC" case classification on AIS.

Document that the LLC is a single member disregarded entity in the AIS history.

Document that all liability is for excise tax periods beginning prior to January 1, 2008, or withholding taxes owed for tax periods beginning prior to January 1, 2009, in the AIS history.

Document that the debt is owed only by the single member, not the LLC, in the AIS history.

Notate the name and SSN of the single member responsible for the debt in the AIS history.

Document that all pre-petition returns have been filed and there is no danger of the LLC incurring any debt in the AIS history.

Request input of the TC 520 cc 84, if needed. The TC 520 cc 84 may have been input by IIP during initial case processing.

Add a SUMMARY HISTORY on AIS in all capital letters stating, "SUMMARY HISTORY - NO ISSUES EXIST, INSTRUCTIONS TO CIO; INPUT TC 521 CC XX ON XX-XXXXXX (LIST ALL PERIODS REQUIRING TC 521 FOR THE SINGLE MEMBER) UPON CLOSURE BY THE COURT. DO NOT CLOSE CASE UNTIL CASE IS CLOSED BY THE COURT. IN THE RARE INSTANCE THAT THE CASE IS DISMISSED, INPUT TC 521S USING THE DISMISSAL DATE AS THE TC 521 DATE. THERE IS NO NEED TO KEEP THE DISMISSED CASE OPEN UNTIL THE CASE IS CLOSED BY THE COURT AS THE STAY IS LIFTED UPON DISMISSAL."

The LLC has no liability. Add "No Liability" as the method of closure on AIS but do not close the case on AIS.

Reassign the case to the CIO.