Carl J. Greco, P.C. v. Dep't of Labor & Indus.

176 A.3d 1086

CARL J. GRECO, P.C. a/k/a Greco Law Associates, P.C., Petitioner

v.DEPARTMENT OF LABOR AND INDUSTRY, OFFICE OF UNEMPLOYMENT COMPENSATION TAX SERVICES, Respondent

No. 304 C.D. 2017

Commonwealth Court of Pennsylvania.

Argued December 7, 2017

Decided January 4, 2018

Carl J. Greco, pro se.

Carla P. Arias, Assistant Counsel, Harrisburg, for respondent.

BEFORE: HONORABLE ROBERT SIMPSON, Judge, HONORABLE ANNE E. COVEY, Judge, HONORABLE DAN PELLEGRINI, Senior Judge

OPINION BY JUDGE SIMPSON

Carl J. Greco, P.C. a/k/a Greco Law Associates, P.C. (Greco PC) seeks review of a final decision of the Department of Labor and Industry (Department). The Department denied a petition for reassessment of unemployment compensation (UC) taxes under the Unemployment Compensation Law (UC Law).¹ The Department concluded that payments from Greco PC to its sole shareholder and officer, Carl J. Greco, Esquire (Attorney Greco), were subject to UC taxation based on Attorney Greco's service as a corporate officer. Upon review, we affirm.

I. Background

Greco PC is a statutory S corporation. Greco PC is an employer under the UC Law. Attorney Greco is Greco PC's sole shareholder, officer, and director. He has sole control over all business activities. He decides what clients to accept, what fees to charge, and what employees to hire and fire.

Attorney Greco does not collect a salary. Both he and Greco PC have characterized all payments from Greco PC to Attorney Greco as net profit distributions to him as sole shareholder. Greco PC did not pay UC taxes on the distributions to Attorney Greco.

Following an audit, the Pennsylvania Office of Unemployment Compensation Tax Services (UC Tax Services) reclassified Attorney Greco as an employee for UC tax purposes and assessed UC taxes on Greco PC's distributions to him. Greco PC filed a petition for reassessment, which the parties submitted to the Department for a decision on briefs.

The Department issued a final decision denying the petition for reassessment. The Department focused its analysis on Attorney Greco's status as an officer of Greco PC. The Department apparently did not dispute that both Greco PC and Attorney Greco characterized the monies at issue as distributions of net profits. Nevertheless, it concluded that as an officer, Attorney Greco is an employee for UC tax purposes.

Greco PC filed a timely petition for review with this Court.

II. Issues

On appeal,² Greco PC presents four related issues for review, which we paraphrase as follows: (1) the Department's findings are not supported by substantial evidence because the Department failed to find that Attorney Greco is self-employed and not employed by Greco PC, and because there is no evidence of a contract for hire between Greco PC and Attorney Greco; (2) the Department committed legal error in concluding that Attorney Greco was an employee and that Greco PC's distributions to him were made with respect to employment; (3) the Department committed legal error in assessing UC taxes in light of Attorney Greco's ineligibility for UC benefits; and, (4) the Department committed legal error by relying on federal employment tax laws to support its analysis under the UC Law.

Because Greco PC's arguments are closely related, we address them together.

III. Discussion

Section 4(i) of the UC Law defines an "employee" as including "every individual ... who is performing or ... has performed services for an employer in an employment subject to this act." 43 P.S. § 753(i). Section 4(j)(1) of the UC Law defines an "employer" as including "every corporation ... which employed or employs any employe in employment subject to this act for some portion of a day during a calendar year ...." 43 P.S. § 753(j)(1).

Greco PC asserts that Attorney Greco is not an employee because he is self-employed. Because his alleged self-employed status would make him ineligible for UC benefits, Greco PC argues Attorney Greco cannot be an employee for UC tax purposes either. Pennsylvania law is settled to the contrary. In Bagley & Huntsberger, Inc. v. Employer Accounts Review Board, 34 Pa.Cmwlth. 488, 383 A.2d 1299 (1978), this Court expressly rejected the precise argument Greco PC asserts here. This Court found that ineligibility for UC benefits does not equate with non-employee status for UC tax purposes. Accord Lafond v. Unemployment Comp. Bd. of Review, 41 Pa.Cmwlth. 428, 399 A.2d 460, 562 (1979) (citing Bagley & Huntsberger; holding that collection of UC taxes on shareholder-officers did not entitle them to UC benefits).

Greco PC also argues that Attorney Greco is not an employee because his income consists of net profit distributions he receives as Greco PC's sole shareholder. Greco PC steadfastly maintains that it pays Attorney Greco only shareholder distributions and not wages. Similarly, Greco PC insists that it exercises no direction or control over Attorney Greco's performance of his services and that he customarily engages in an independently established profession. Significantly, the record contains no evidence to support these assertions, such as corporate or personal tax returns or other records.

Greco PC bears a heavy burden to establish entitlement to a reassessment of UC taxes. See Hoey v. Dep't of Labor & Indus., 92 Pa.Cmwlth. 462, 499 A.2d 1124 (1985). Greco PC, as the party with the burden to demonstrate entitlement to a reassessment, did not submit any evidence of the facts it asserted in support of the reassessment.

However, the Department did not contest Greco PC's characterization of the payments or its lack of control or direction of the performance of Attorney Greco's services. Rather, the Department accepted those facts, but nevertheless determined that Attorney Greco received payments by reason of employment. That determination was a legal conclusion based on the undisputed facts. See Danielle Viktor (determination of an employee/employer relationship is a question of law).

Section 4(l )(1) of the UC Law defines "employment" as including "all personal service performed for remuneration by an individual under any contract for hire, express or implied, written or oral, including service in interstate commerce, and service as an officer of a corporation." 43 P.S. § 753(l ) (1) (emphasis added).

Greco PC contends that although Attorney Greco is a corporate officer, he receives no money in that capacity. Instead, he receives only his profit distributions as a shareholder. The UC Law includes "service as an officer of a corporation" in its definition of "employment," but does not include shareholder status as "employment." See 43 P.S. § 753(l )(1). Greco PC asserts that Attorney Greco's status as an officer does not convert shareholder distributions into payments subject to UC taxation.

The designation of payments as shareholder profit distributions, however, does not determine Greco PC's UC tax responsibility. Assuming Attorney Greco received the payments as shareholder distributions, this Court agrees with the Department that those payments are still subject to UC taxation. See Labe's Men's Shop v. Young, 35 Pa D. & C.2d 135 (C.P. Dauphin 1964). This Court relied on the analysis set forth in Labe's Men's Shop in Bagley & Huntsberger.

Greco PC also argues that Section 4(l )(1) is conjunctive in nature, such that a corporate officer must also be engaging in service under an express or implied contract of hire in order to be engaged in employment for UC tax purposes. This Court rejects such a reading of the statutory language. The Department correctly reasoned that both the plain language of Section 4(l )(1) and common sense support the legislature's intent that service as a corporate officer would stand alone as constituting employment. See 1 Pa. C.S. § 1903.

More importantly, even were this Court to accept Greco PC's construction of Section 753(l )(1) as otherwise tenable, we would still agree with the Department's conclusion that service as a corporate officer is employment within the meaning of the UC Law. Applicable federal employment laws, incorporated into the UC Law, unequivocally make service as a corporate officer "employment" for UC tax purposes.

Section 4(l )(6) of the UC Law defines "employment" as including any activity defined as employment by federal statutes or regulations governing employment taxes, without regard to any self-employment issue under the UC Law:

Notwithstanding any of the other provisions of section 4(l ), services shall be deemed to be in employment, if with respect to such services a tax is required to be paid under any Federal law imposing a tax, against which credit may be taken for contributions required to be paid into a State Unemployment Compensation Fund or which as a condition for full tax credit against the tax imposed by the Federal Unemployment Tax Act³ [FUTA] are required to be covered under this act.

43 P.S. § 4(l )(6) (emphasis added).

Similarly, Section 4(x)(6) of the UC Law defines "wages" as including payments subject to federal employment taxes, also without regard to any self-employment issue under the UC Law:

Notwithstanding any other provisions of this subsection, wages shall include all remuneration for services with respect to which a tax is required to be paid under any Federal law imposing a tax against which credit may be taken for contributions to be paid into a state unemployment fund or which as a condition for full tax credit against the tax imposed by [FUTA] are required to be included under this act.

43 P.S. § 753(x)(6) (emphasis added).

In its final decision, the Department correctly stated that Section 4(l )(6) of the UC Law includes in the definition of "employment" any services subject to taxation under FUTA, which incorporated the definition in the Federal Insurance Contributions Act (FICA).⁴ See 43 P.S. § 753(l ) (6). FUTA (through FICA) defines a corporate officer as an "employee" for employment tax purposes. See 26 U.S.C. §§ 3121(d), 3306(i). The language of the statutory definition is...