In a case of first impression by an Alabama appellate court, the Alabama Court of Civil Appeals recently considered the appeal of the Alabama Department of Revenue (ADOR) of an adverse circuit court ruling involving whether “the taxpayer” (and we use that term liberally as you will see) had properly appealed his assessment when it was unclear who the taxpayer really was—the single member LLC (SMLLC) or the single member himself. The substantive issue involved whether sales of prepaid authorization number cards for cell phone services were subject to Alabama sales tax at the time the sales were made (Alabama Department of Revenue v. Downing). The appeal time lapsed recently so the decision is now final.
Alabama is one of a handful of states that follows the Treasury Department’s check-the-box regulations not only for purposes of state income tax, but for sales, use, rental, lodging, and several other state taxes as well – but only with respect to LLCs. For other federally disregarded entities, such as Q-subs and disregarded limited partnerships, federal-state conformity stops at income tax (see Ala. Code §10A-5A-1.07; ADOR Revenue Procedure 98-001 (Mar. 16, 1998); see also “Disharmony in Alabama’s Conformity to the Federal Tax Classification of Business Entities” in the March 2010 issue of The Alabama Lawyer).
So, who is the proper taxpayer in an appeal of an ADOR or local tax assessment involving a SMLLC? The sole member? The sole member doing business as the SMLLC? The SMLLC itself? Or maybe both? The ADOR assessed Patrick Lee Downing as “the sole member of Downing Enterprises, LLC, a disregarded entity” for unpaid sales tax. He paid the assessment but soon filed a claim for a refund with the ADOR in his individual name “d/b/a Downing Enterprises, LLC.” The refund claim was denied, and the SMLLC appealed to the Alabama Tax Tribunal, which affirmed the ADOR’s decision. Mr. Downing then appealed to the local circuit court as “sole member” of the SMLLC. The circuit court ruled his way and ordered the ADOR to honor his refund claim. The ADOR then appealed to the Court of Civil Appeals, contending for the first time that the SMLLC had lacked standing to appeal to the Tax Tribunal to begin with, and that “only Downing was the proper party.”
The taxpayer argued that for Alabama sales/use tax purposes, there’s no difference between himself and his SMLLC, citing Alabama’s broad-form version of check-the-box conformity and the above-referenced ADOR Revenue Procedure. Indeed, the Alabama Tax Tribunal’s predecessor, the ADOR Administrative Law Division, had long ago ruled that way in First American Holding, LLC v. ADOR.
The Court of Civil Appeals saved the taxpayer’s (and maybe his attorney’s) bacon by confirming that Alabama indeed conforms to the check-the-box regs for almost all tax purposes with respect to LLCs, and regardless of whether the assessment was issued to the individual or to the SMLLC, both had standing to appeal.
As a disregarded entity, the LLC is not distinguishable from Mr. Downing for the purpose of appealing [to the Alabama Tax Tribunal], and the Department acknowledges that Mr. Downing would have had standing to appeal the denial of his petition for refund to the Tax Tribunal. We therefore conclude that the LLC also had standing to appeal to the Tax Tribunal.
Suffice to say, this is a cautionary tale to tax practitioners who handle state or local tax disputes involving single member LLCs -- or other forms of federally disregarded entities such as Q-subs or disregarded limited partnerships, which may have a different rule. Although the taxpayer won the procedural battle, he lost the substantive war, and he chose not to apply for certiorari to the Alabama Supreme Court.
