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Disregarded entity for tax purposes


Belgarath
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I'm really not sure about this. Suppose you have a tax-exempt (non-governmental) corporation sponsoring a 457(b) plan. This corporation also has a couple of 1-person LLC's that are "disregarded entities" for tax purposes. Question is - can those employees (1 in each LLC) be allowed to participate in the sponsoring organization's 457(b) plan? (Assuming they otherwise qualify in the select group of management or highly compensated employees.) Common sense (to me) says yes, but does anyone know of anything concrete one way or the other? Or have an opinion? Thanks!

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Belgarath, I will assume that by "one person LLC" you mean the tax-exempt org owns all of the interests in these LLCs. Assuming that, under Treas. Reg. 301.7701-2(a)the LLCs are treated the same as a division of the tax-exempt org for income tax purposes. 457(b) is an income tax section. None of that is common sense, but based on it I would go with your common sense. Get the LLCs to sign up all the paperwork, however, since that is not entirely a Federal income tax issue.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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There is a partly analogous authority—one that is not a precedent (because any letter ruling is not), but that might (to the extent of the on-point and persuasive reasoning) be used as an element in a taxpayer’s substantial authority for an interpretation.

In IRS Letter Ruling 2003-34-040 (May 30, 2003), the Internal Revenue Service treated “for purposes of section 403(b) of the Code” employees of a limited-liability company (which “has not elected to be treated as a corporation or as an entity separate from its owner”) as employees of that company’s sole member. In that ruling’s recited facts, “Company B [the limited-liability company] is engaged in the business of providing management information technology and consulting services to health care organizations such as [charitable] Hospital A [B’s sole member] and other such entities requiring such services.” The ruling’s reasoning was a straightforward application of 26 C.F.R. §§ 301.7701-1, -2, and -3.

Before considering that reasoning regarding an unfunded plan (whether § 451(a)/§ 409A, § 457(f), or § 457(b)), one would consider whether the limited-liability company alone is, or the LLC and its member are, the obligor on the deferred wages. This matters for several accounting, tax, and other legal purposes.

That includes whether a plan is “established and maintained by an eligible employer” that is an organization exempt from tax under the Internal Revenue Code’s subtitle for income taxes. See I.R.C. (26 U.S.C.) § 457(b), 457(e)(1)(B).

Also, your client might check whether a limited-liability company’s executive is that company’s employee, or instead is the parent’s employee leased to or shared with the parent’s subsidiary.

Forms of plan documents available from a plan-documents publisher or a recordkeeper might lack choices and texts adequate to specify exactly which person is, or persons are, obligated to pay the deferred wages of a subsidiary’s, affiliate’s, or other participating employer’s executive. Depending on the scope and nature of your relationship with your client, consider urging your client to ask its lawyers to attend to the details of the obligations.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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