Greco v. Department of Labor & Industry, Office of Unemployment Compensation Tax Services
176 A.3d 1086
| Pa. Commw. Ct. | 2018Background
- Greco PC is an S corporation; Carl J. Greco is its sole shareholder, officer, director, and has exclusive control over firm operations.
- Greco PC made regular payments to Attorney Greco characterized by both parties as shareholder net profit distributions; no salary was paid and no UC taxes were withheld.
- UC Tax Services audited and reclassified Attorney Greco as an employee (corporate officer) for unemployment compensation (UC) tax purposes, assessing UC taxes on the distributions.
- Greco PC petitioned for reassessment; the Department denied relief on briefs, concluding officer status rendered the payments subject to UC taxation.
- Greco PC appealed to the Commonwealth Court arguing (1) lack of substantial evidence and no contract of hire, (2) distributions are not wages, (3) Attorney Greco’s ineligibility for UC benefits precludes taxation, and (4) federal employment-tax rules are inapplicable. The court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Whether Department findings lacked substantial evidence / no contract for hire | Greco: No evidence of employment relationship or contract; payments are shareholder distributions (self-employed). | Dept: Accepted factual characterizations but concluded as a matter of law officer service is employment. | Held: Sufficient evidence; legal conclusion that officer service is employment stands. |
| 2. Whether shareholder distributions are exempt from UC taxation | Greco: Distributions are net profits, not wages; officer status alone should not convert distributions to taxable wages. | Dept: Labels do not control; service as officer constitutes employment under UC Law. | Held: Labels irrelevant; officer service can make distributions subject to UC tax. |
| 3. Whether Attorney Greco’s ineligibility for UC benefits precludes taxing payments | Greco: If self-employed and ineligible for benefits, cannot be an employee for tax purposes. | Dept: Eligibility for benefits is separate from employer tax liability; precedent rejects plaintiff’s equivalency argument. | Held: Rejected Greco’s equivalency; ineligibility for benefits does not prevent UC taxation. |
| 4. Whether federal employment-tax definitions (FUTA/FICA) are inapplicable | Greco: Federal tax rules and FUTA salary-reasonable-salary doctrine shouldn’t control UC Law application. | Dept: UC Law incorporates federal definitions; FUTA/FICA treat corporate officers (and S-corp shareholder distributions) as employment for tax purposes. | Held: UC Law’s incorporation of federal definitions controls; federal law supports taxation of officer distributions. |
Key Cases Cited
- Bagley & Huntsberger, Inc. v. Employer Accounts Review Bd., 383 A.2d 1299 (Pa. Cmwlth. 1978) (rejecting claim that UC benefit ineligibility means no employer tax liability)
- Wilkes-Barre Council of Newspaper Unions v. Office of Emp’t Sec., 426 A.2d 1294 (Pa. Cmwlth. 1981) (UC Law includes as wages payments subject to FUTA)
- Nu-Look Design, Inc. v. Commissioner, 356 F.3d 290 (3d Cir. 2004) (S-corporation shareholder distributions subject to FUTA based on officer services)
- Joseph Radtke, S.C. v. United States, 895 F.2d 1196 (7th Cir. 1990) (rejecting argument that dividend treatment shields officer-shareholder distributions from federal employment tax)