STATE OF WISCONSIN
LABOR AND INDUSTRY REVIEW COMMISSION
P O BOX 8126, MADISON, WI 53708-8126 (608/266-9850)

PRAIRIE NURSING FACILITY LLC, Employer
d/b/a PRAIRIE MAISON

UNEMPLOYMENT INSURANCE CONTRIBUTION LIABILITY DECISION
Account No. 821527, Hearing No. S0500165MD


An administrative law judge (ALJ) for the Division of Unemployment Insurance of the Department of Workforce Development issued a decision in this matter. A timely petition for review was filed.

The commission has considered the petition and the positions of the parties, and it has reviewed the evidence submitted to the ALJ. Based on its review, the commission agrees with the decision of the ALJ, and it adopts the findings and conclusion in that decision as its own.

DECISION

The decision of the administrative law judge is affirmed. Accordingly, the employer is required to finance any unemployment insurance benefit costs by means of the contributory tax method beginning with the 2004 calendar year.

Dated and mailed May 2, 2007
prairnu . ssd : 110 : 1  ER 451  ER 453

/s/ James T. Flynn, Chairman

/s/ Robert Glaser, Commissioner

MEMORANDUM OPINION

The petitioner herein, Prairie Nursing Facility LLC ("Prairie Nursing"), owns and operates a nursing home and community-based residential facility in Prairie du Chien. This case presents the issue of whether Prairie Nursing is a "nonprofit organization" within the meaning of § 108.02(19). The significance of this issue is that if Prairie Nursing is a "nonprofit organization" it may elect reimbursement financing -- which it wants to do. The department determined that Prairie Nursing was not a "nonprofit organization" within the meaning of that term as used in the Act. Prairie Nursing has appealed.

The question of whether an entity is a "nonprofit organization" under the Wisconsin UI Act is addressed by Wis. Stat. § 108.02(19), which provides that a "nonprofit organization" is "an organization described in section 501(c)(3) of the internal revenue code which is exempt from federal income tax under s. 501(a) of the internal revenue code." In addition, the department has adopted an administrative rule that further defines exactly what is required for an entity to be found to be a "nonprofit organization" for Wisconsin UI tax purposes. This rule, Wis. Admin. Code § DWD 110.05, provides, in relevant part:

DWD 110.05 Conditions for status as a nonprofit organization; reporting requirements. Except as further provided in this section, no employing unit may be considered to be a nonprofit organization eligible to apply for reimbursement financing until the date on which the department receives a copy of the letter issued by the internal revenue service determining that the employing unit is exempt from taxation under section 501(c)(3) of the internal revenue code. . . .

The complication in this case has to do with the organizational structure of Prairie Nursing and a related entity, Community Health Services Corporation ("Community Health"), and with the different way such entities are viewed under Wisconsin's law and the Internal Revenue Code. Prairie Nursing is a single-member limited liability company organized under Wis. Stat. Ch. 183. Limited liability companies are not "corporations". They are made up of "members", which may either be individual persons, or corporations. An LLC may have multiple members, but it is also possible for an LLC to be formed with only one entity as its member. Prairie is such a "single member LLC". The single member of Prairie is Community Health, which is a non-stock corporation organized under Wis. Stat. Ch. 181.

For federal tax purposes, a single member LLC is considered a "disregarded entity". Unless it has affirmatively made an election to be classified as an association taxable as a corporation (which has not happened here), a single-member LLC is disregarded as an entity separate from its owner. Treas. Reg. § 301.7701-3(a), (b)(1)(ii). In those situations in which a single-member LLC is disregarded as an entity for federal tax purposes, "its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner." Treas. Reg. § 301.7701-2(a). The IRS interprets these regulations to mean that in the case of a disregarded single-member LLC, the owner is the employer for employment tax purposes. See, Kandi v. United States, 2006 U.S. Dist. LEXIS 2687; 97 A.F.T.R.2d (RIA) 721; Unemployment Ins. Rep. (CCH) P17,786 (DC WD Washington, 2006).

One consequence of this is that, since it is not considered to have any separate existence, a single-member LLC cannot obtain its own separate status as a tax-exempt organization. Indeed, as Prairie Nursing points out in its brief, the IRS specifically instructs single-member LLCs not to file separate applications for tax-exempt status. The application for tax-exempt status must come from the single member of such an LLC, with the activities of the LLC being described in that application. The IRS letter determining the exemption will then be issued to, and in the name of, that single member. Thus, in this case, the IRS has issued a letter to Community Health, the single member of Prairie Nursing, determining that it (i.e., Community Health) is a tax-exempt organization under § 501(c)(3).

However, the Department considers Prairie Nursing Facility LLC and Community Health Services Corporation to be separate entities. Each has a separate employer account (Prairie Nursing has employer account number 821527, and Community Health has employer account number 822238). They are thus considered by the department to be separate "employing units". The department concluded that Prairie Nursing could not be considered a nonprofit organization under Wis. Stat. § 108.02(19) and Wis. Admin. Code § DWD 110.05 because the IRS has not issued a letter certifying that Prairie Nursing is exempt from taxation under section 501(c)(3).

Prairie Nursing argues that since the nature and activities of the single-member LLC (Prairie Nursing) were described in the application for tax-exempt status filed by the single member (Community Health) and were fully considered by the IRS when it evaluated that application, the decision by IRS to grant tax-exempt status to that single member "effectively" granted tax exempt status to the "disregarded entity" (i.e., the LLC) of that single member. Prairie Nursing points to an IRS Private Letter Ruling of May 22, 2001, in which it stated:

Where the sole member is a tax-exempt organization described in section 501(c)(3), the limited liability company is treated as an activity of the tax-exempt organization. Announcement 99-102 requires that for purposes of the filing requirement the exempt owner of a disregarded limited liability company shall treat the operations and finances of the limited liability company as its own.

Prairie Nursing points out that Wis. Admin. Code § DWD 110.05, the rule declaring that "no employing unit may be considered to be a nonprofit organization [until] department receives a copy of the letter issued by the internal revenue service determining that the employing unit is exempt from taxation under section 501 (c) (3)", predates and has not been amended since the creation of the statutes recognizing limited liability companies, and thus "could not and did not contemplate the complexities of disregarded single-member limited liability companies". It argues that the rule should therefore be interpreted in a manner which recognizes disregarded entities operating as divisions of qualifying organizations, and that therefore Prairie Nursing should be allowed to provide Community Health's 501(c)(3) determination letter in place of its own. Prairie Nursing also argues that it should be considered to qualify as a non-profit organization because it engages in the type of activity contemplated by that definition. It points out that the statutory definition of "nonprofit organization" in Wis. Stat. § 108.02(19) also predates and has not been amended since the adoption of the statutes recognizing single-member LLCs and thus could not and did not contemplate them. It argues that the interpretation of "nonprofit organization" under § 108.02(19) should provide the flexibility to account for single-member LLCs operating as divisions of qualifying nonprofit corporations. Prairie Nursing also argues that the letter from the IRS to Community Health did, in legal contemplation, satisfy the requirement that a letter have been issued to it (Prairie Nursing) as the "employing unit" -- because an IRS determination that a single member of an LLC satisfies s. 501(c)(3) amounts to a determination that the activities of the single member's disregarded entity (the LLC) also satisfy s. 501(c)(3).

The department argues that the case is controlled by the provisions of Wis. Stat. § 108.02(19) and Wis. Admin. Code § DWD 110.05. It disagrees that Prairie Nursing could be found to be a nonprofit organization on a theory that it has "essentially" or "effectively" satisfied the legal requirements for such by virtue of its connection to Community Health. It is undisputed, it argues, that Prairie Nursing was never issued a letter from the IRS stating that Prairie Nursing was a 501(c)(3) nonprofit organization. Thus, it argues, Prairie Nursing simply cannot be found to have satisfied the condition described in DWD § 110.05. The department argues that because this outcome is clearly required under the applicable statutes and rules, arguments for a different result based on public policy considerations should not be considered.

Having carefully considered this matter, the commission affirms the decision that Prairie Nursing has not established that it should be considered a nonprofit organization under Wis. Stat. § 108.02(19) and Wis. Admin. Code § DWD 110.05. The department treats Prairie Nursing as the "employing unit" of the persons employed in the nursing home it operates in Prairie du Chien. The department treats Community Health as a separate "employing unit", as evidenced by the fact that it has a separate employer account. Prairie Nursing has not objected to this. This determines the matter. Wis. Admin. Code § DWD 110.05 provides that "no employing unit may be considered to be a nonprofit organization eligible to apply for reimbursement financing until the date on which the department receives a copy of the letter issued by the internal revenue service determining that the employing unit is exempt from taxation under section 501(c)(3) of the internal revenue code" (emphasis added). Clearly, this requires that before a particular employing unit can be considered a nonprofit organization there must be a determination letter from IRS concerning that same employing unit. It is undisputed, that the letter issued by the internal revenue service on which Prairie Nursing relies, does not determine that Prairie Nursing is exempt from taxation under section 501(c)(3) of the internal revenue code -- rather, it determines that Community Health is exempt from taxation under section 501(c)(3) of the internal revenue code. While Prairie Nursing's arguments explain why this is so, they do not change the fact that it is so.

For the foregoing reasons, the commission affirms the decision of the Appeal Tribunal.

cc:
Attorney John S. Robison, Quarles & Brady LLP
Attorney Michael J. Mathis, DWD UI Division Bureau of Legal Affairs



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