Chief Counsel Reasons that IRS can’t Levy on SMLLC Property to Satisfy the Liability of the Owner
April 25, 2011Administrative Actions
In CCA_2011032112062926 Chief Counsel was asked whether it is appropriate to levy on the assets of a single member LLC to satisfy the owner’s tax liability and the answer was No. However, CC also suggested that a reverse piercing veil approach may be appropriate. Nonetheless, it also acknowledged that the piercing standard is pretty high in most states. CC further reiterated that the proper approach is to levy on the LLC interest and issue a notice to the LLC for any distributions going to the owner.
Why am I talking about this? Most asset protection planning revolves around isolating a particular property in a separate entity established in a favorable jurisdiction such as Delaware or somewhere offshore such as the Cook Islands. Then the taxpayer would claim that the only remedy available to the creditor is a charging order or a lien on the interest, thus, hoping that as long as no distributions are coming from the entity, the creditors will be left with nothing. The theory being that a charging order is the appropriate remedy because granting the creditor full ownership rights would likely disturb the ongoing business of the entity. The interesting thing here is that the IRS seems to think that this strategy has merit even in the SMLLC context. I for one am not an asset protection expert, but from the little I know and from the cursory research that I’ve done, it is my understanding that while there may be differences in the various jurisdictions, generally, SMLLCs offer very little protection (compared with say multi-member entities and trusts governed by an independent trustee).
How does all of this apply to investment funds? Well, the managers and investors often have a special purpose vehicle through which they conduct their fund related activity. It may make sense for investors or fund managers who desire to limit their creditor exposure to leave their fund related earnings in the special purpose vehicle instead of drawing everything out. It is difficult to predict whether this approach would be effective if the special purpose vehicle is a SMLLC, but judging by the analysis in the CCA, the argument has some merit with respect to IRS claims. Of course, before adopting such a strategy in the hopes of realizing asset protection benefits, the investor or fund manager should ensure that the state of formation extends the asset protection benefits afforded multi-member LLCs to SMLLCs. The CCA can be found below. Tags: