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single-owner DREs (e.g., SMLLCs) as corporations for employment tax purposes. 27 Thus, the
entity now must use its own taxpayer identification number when it files and pays employment
taxes. 28 An individual owner of a DRE, however, is subject to self-employment tax and is not
treated as an employee of the disregarded entity for employment tax purposes. 29 This special
employment tax provision is applicable with respect to wages paid on or after 1/1/09. 30 The IRS
also recently updated its Employer Tax Guide to reflect the final regulations. 31

In addition, the IRS issued a similar provision with respect to certain excise tax reporting,
registration, and payment obligations. 32 That provision treats an eligible single-owner DRE as a
separate entity for certain excise tax purposes. 33 This special excise tax rule applies to liabilities
imposed and actions first required or permitted in periods beginning on or after 1/1/08. 34

The IRS also issued a final regulation under Section 1361 that mirrors the employment and
excise tax regulation provisions promulgated under Section 7701. 35 Like the check-the-box
regulations' rules, the QSub regulation treats a QSub as a corporation for employment and
excise tax purposes only. 36 The regulation relating to employment taxes applies with respect to
wages paid on or after 1/1/09, but the excise tax provision applies to liabilities imposed and
actions first required or permitted in periods beginning on or after 1/1/08. 37 The IRS probably
did not need to issue separate provisions under Section 1361 because Regs. 301.7701-
2(c)(2)(iv) and (v) appear to cover QSubs as well as SMLLCs. The IRS did not issue special
provisions with respect to REITs, but Regs. 301.7701-2(c)(2)(iv) and (v) should also cover
REITs. There is no authority explicitly extending these rules to grantor trusts.

Tax Liability Considerations

A DRE, including an SMLLC, a QSub, and a QRS, is treated as a separate entity for purposes of:

(1) Federal tax liabilities of the entity for any tax period for which the entity was not
disregarded,
(2) Federal tax liabilities of any other entity for which the entity is liable.
(3) Federal tax refunds or credits. 38

The regulations setting forth these exceptions apply after 3/31/04. 39 The following examples
illustrate these exceptions to the general rule that DREs are treated as tax nothings.

If a domestic corporation merges (pursuant to a state law merger) into a domestic SMLLC owned
by an individual, the SMLLC is the successor to the corporation, for state law purposes, and is
liable for all of the corporation's debts. If the IRS sought to extend the statute of limitations on
assessment with respect to a liability of the corporation for a tax year prior to the tax year in
which the merger occurred, the SMLLC is liable for the corporation's taxes that remain unpaid,
and, therefore, is the proper party to sign the consent to extend the period of limitations. 40 The
result would be the same if the SMLLC was a QSub or a QRS. 41

Using this example, assume that for a tax year ending before the merger occurred the IRS
determines that the corporation miscalculated and underreported its income tax liability. Because
the SMLLC is the successor to the corporation and is liable for the underpayment of the
corporation's taxes, the IRS may assess the deficiency directly against the SMLLC. 42 In the event
that the SMLLC fails to pay the liability after notice and demand, the IRS can file a federal tax
lien against all of the SMLLC's property and its rights to property. 43

With respect to QSubs and QRSs, their owners are not liable for deficiencies relating to a tax
year that precedes the year in which the QSub or QRS election is made, because the tax liability
is for a tax year for which the QSub or QRS was not disregarded. 44 As a result, the IRS may

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