March 31, 2004

 

Wealthy Clients Dismiss Stockbrokers, Turn to Financial Planners

            According to a recent survey conducted, the number of wealthy Americans who rely on stockbrokers has dropped about 27% since 2001 amid concerns that the advice they were receiving wasn’t comprehensive or was biased.

            Brokers are still the favorite advisor overall, but their popularity has declined significantly among the very rich in the past few years.

            Meanwhile, the number of investors turning to financial planners and investment advisors and managers has increased.

            A main concern among those who chose to leave their stockbrokers was that the advice left out important financial discussions, like estate or tax planning.  Some investors were concerned their brokers were giving them biased investment advice, intended to make money for the broker or the firm, rather than for the client.

            One surprising aspect of the study was that investors seemed to care little about compensation; whether advisors were getting commissions, flat fees or a percentage of assets under management seemed to matter less than expertise and independence did.

            In sum, it’s not the fees, it’s the level of expertise, advice and objectivity.  Wealthy people want information about asset allocation, taxes, and estate planning. Wall Street Journal 11/11/03 p. D2

 

IRS Considers How to Collect Unpaid Payroll Taxes from Bankrupt

Single Member LLC

            Because of the amount of single member LLCs we have set up, this discussion assumes great importance.

            In a recent Chief Counsel Advice, the IRS explored how it can collect unpaid payroll taxes from a bankrupt disregarded single member limited liability company (LLC).  The advice concluded the IRS can pursue the owner of the single member LLC for unpaid payroll taxes, but it cannot place a lien on the assets of the LLC for payment of these taxes.  For taxpayers, this was not a good result.

            The owners of an LLC generally are not liable for the debts of the LLC.  A single member LLC can elect to be treated as a corporation.  But, if the single member does not so elect, the LLC is disregarded as a separate entity for tax purposes.  A disregarded LLC’s activities are treated the same as a sole proprietorship.  For example, its income and deductions are reported on a Schedule C attached to the member’s individual return.

            Under IRC 3505(a), if a lender, surety, or “other person” who is not an employer with respect to an employee, directly pays the wages of employees of an employer, the lender, surety, or other person is personally liable for the taxes required to be withheld from the wages by the employer.

            Because a disregarded LLC is not separate from its owner for tax purposes, the single member owner is the taxpayer with respect to liabilities arising from the LLC’s business.  The IRS may collect these liabilities by assessing the single member owner and pursuing administrative collection action, including levy on the single member owner’s property.  As the taxpayer liable for taxes arising from the LLC’s operations, the single member owner must file the tax returns from which the IRS can make assessments.

            Notice 99-6 offers a single member owner two choices for filing employment tax returns:

1.      he can calculate, report and pay the employment taxes of the LLC’s employees under the owner’s own name and tax ID Number, or

2.      the disregarded LLC may separately calculate, report and pay the employment tax obligation incurred with respect to employees of the LLC under the name and tax ID Number of the LLC.

            However, regardless of the choice made, the single member owner of an LLC is the employer for purposes of employment tax liability.

            Under state law, the single member owner has no interest in the LLC’s property.  Thus, as a general rule, even though an LLC is disregarded as an entity separate from the single member owner for tax purposes, and its activities are treated in the same way as a sole proprietorship of its single member owner, the IRS concluded that it could not satisfy the single member owner’s tax liability from the disregarded LLC’s assets.

            The LLC is not an “other person” for payroll tax purposes because an “other person” does not include a person acting only as an agent of the employer.  Also, under state law, the taxpayer/single member owner has no interest in the LLC’s property.  From this perspective, it appears the LLC is a separate entity, which, as the direct payer of the payroll, may be held liable for the failure to remit tax withheld.  However, for tax law purposes, the LLC is disregarded as an entity separate from the single member owner.  Because the LLC is disregarded for tax purposes and treated like the single member owner for purposes of assessment, the Chief Counsel concluded it was not appropriate to treat the LLC as an “other person” for purposes of collection. Federal Taxes Weekly Alert 10/9/03 p.499

 

            If you have any questions about the foregoing or any other financial matters, please call us.  If you want to read more, visit the AOHL Newsletter Archives at www.lisch.com.

 

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