Written by Guy Schmitz J.D., LL.M.
The constant concern of practitioners is a new client who wants to start a new business. The business plan may be a jewel beyond compare, but the client may know nothing about running a business. Practitioners cannot speak to issues such as hiring and firing because such issues are beyond their competency. But practitioners can speak to matters of taxation at the first meeting with the new client. Some issues must be discussed in throwaway lines so the new client does not think he or she is being treated as a child: you are not the entity you formed so separate checking accounts are critical; you must have substantiation for expenses. But that first meeting should touch upon more subtle issues, and here the client must really be listening. A recent such issue is found in a Chief Counsel Advice memorandum (CCA 201447025): reporting requirements for a limited liability company (LLC) rather than a corporation.
The taxpayer in the CCA was protesting certain adjustments proposed by the examining agent. The taxpayer argued that the agent should not include payments to LLCs as reportable payments under Code Section 6041 because the LLCs were exempt payees. Because of the alleged exemption, the taxpayer argued that no backup withholding was required with respect to the LLCs under Code Section 3406. The Chief Counsel advised differently.
As the CCA stated, all persons engaged in a trade or business who make payments of $600 or more to another person are required to report such payments to the IRS under Code Section 6041(a). There are exemptions from Code Section 6401(a), including payments to corporations described in Reg. Section 1.6049-4(c)(1)(ii)(A). LLCs may “check the box” to be taxed as corporations. If LLCs do not check the box, they are taxed, of course, as single member LLCs or if there is more than one member, as a partnership. In the CCA, there was no evidence that the LLCs had checked the box to be treated as corporations. By default, the LLCs were single member LLCs or partnerships, depending on membership, and the payments by the taxpayer in the CCA were subject the Code Section 6041 reporting requirements.
Will the client like to hear this kind of subtlety? Of course not. He or she has a great business plan and wants to get on with it, but if nothing else, the practitioner has introduced the client to his or her brave new world of the taxation of businesses.