October 12, 2020

LLC in Chapter 7 Bankruptcy Not Obligated to Remit State Taxes on Behalf of Out-of-State Members

Written By

Thomas E. Rutledge
Member, Stoll Keenon Ogden PLLC

North Carolina has a statute providing that the manager of an LLC doing business in North Carolina must on behalf of out-of-state members remit to the state the estimated tax obligations of those out-of-state members. A recent decision from a bankruptcy court, In re North Carolina Tobacco International, LLC, Case No. 17-51077, 2020 WL 4582282 (Bankr. M.D.N.C. Aug. 10, 2020), considered whether an LLC in bankruptcy is obligated to make those tax payments. Spoiler alert—the court said “no.”

North Carolina Tobacco International, LLC (NCTI) was organized in Missouri but did most if not all of its operations in North Carolina. At least two of its four members were not resident in North Carolina. That NCTI was classified as a partnership for purposes of federal and North Carolina state taxation was not in dispute. The North Carolina tax code requires that with respect to each member of an LLC taxed as a partnership, the LLC’s manager is obligated to remit the estimated taxes of the nonresident members. This statute is far from unique; many states have similar mechanisms for collecting taxes on behalf of nonresident partners/members.

In 2017, NCTI sought protection under chapter 11 of the Bankruptcy Code. In early 2018 the case was converted to a case under chapter 7. Thereafter, the chapter 7 trustee effected several sales of NCTI property. Due to the absence of reliable information as to basis, the entire proceeds of the transactions were treated as gain. The opinion does not lay out the path leading to the trustee’s Motion to Determine that the Estate Should Not Remit Pass-Through Taxes on Behalf of Out-of-State Members, and although North Carolina participated and argued against the motion, the individual members on whose behalf the payments would have been made did not.


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