          IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Carl J. Greco, P.C.                        :
a/k/a Greco Law Associates, P.C.,          :
                        Petitioner         :
                                           :
             v.                            :   No. 304 C.D. 2017
                                           :   Argued: December 7, 2017
Department of Labor and Industry,          :
Office of Unemployment                     :
Compensation Tax Services,                 :
                        Respondent         :

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


OPINION
BY JUDGE SIMPSON                           FILED: January 4, 2018



             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.




      1
        Act of December 5, 1936, Second Ex. Sess., P.L. (1937) 2897, as amended, 43 P.S.
§§751-919.10.
                                   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.



                                           2
                                            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.




       2
          Our review of a final decision by the Department is limited to determining whether the
Department lacked substantial evidence for a material finding of fact, made an error of law,
violated the petitioner’s constitutional rights, or failed to follow agency procedures. Ductmate
Indus. v. Unemployment Comp. Bd. of Review, 949 A.2d 338 (Pa. Cmwlth. 2008) (citation
omitted). Substantial evidence is relevant evidence sufficient to allow a reasonable mind to reach
a conclusion. Kauffman Metals, LLC v. Dep’t of Labor & Indus, 126 A.3d 1045 (Pa. Cmwlth.
2015), appeal denied, 135 A.3d 588 (Pa. 2016). This Court examines the evidence in the light
most favorable to the party that prevailed before the agency, giving that party the benefit of any
inferences that can logically and reasonably be drawn from the evidence. Danielle Viktor, Ltd. v.
Dep’t of Labor & Indus., Bur. of Emp’r Tax Operations, 892 A.2d 781 (Pa. 2006).
        Where an issue is one of statutory interpretation, it is a question of law subject to plenary
review. Id.


                                                 3
                                   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, 383 A.2d 1299 (Pa.
Cmwlth. 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, 399 A.2d 460, 562 (Pa. Cmwlth. 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



                                          4
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., 499 A.2d 1124
(Pa. Cmwlth. 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



                                          5
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




                                         6
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
              Act[3] [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).


       3
        August 16, 1954, ch. 736, Sec. 1(d) [Internal Revenue title, chapter 23], 68A Stat. 439,
as amended, 26 U.S.C. §§3301-3311.


                                               7
              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 unqualified. It
defines an “employee” as including “any officer of a corporation ….” 26 U.S.C.
§3121(d)(1). There is no requirement that the officer be employed at a salary or
under any express or implied contract of service. Courts in Pennsylvania recognize
that the UC Law includes as “wages” any payments subject to taxes under FUTA.
See Wilkes-Barre Council of Newspaper Unions v. Office of Emp’t Sec., 426 A.2d
1294 (Pa. Cmwlth. 1981); Golfview Manor, Inc. v. Dep’t of Labor & Indus., 414
A.2d 722 (Pa. Cmwlth. 1980).


              Moreover, federal courts interpreting FUTA have expressly determined
that profit distributions to shareholders of S Corporations are subject to FUTA
taxation. In Nu-Look Design, Inc. v. Commissioner, 356 F.3d 290 (3d Cir.), cert.
denied, 543 U.S. 821 (2004), the Third Circuit held that an S Corporation was subject
to FUTA taxation on profit distributions to its sole shareholder, based on his services
as a corporate officer.


              The Third Circuit in Nu-Look also cited with approval a Seventh
Circuit decision, Joseph Radtke, S.C. v. United States., 895 F.2d 1196 (7th Cir.

       4
        August 16, 1954, ch. 736, Sec. 1(d) [Internal Revenue Title, chapter 21], 68A Stat. 415,
as amended, 26 U.S.C. §§3101-3128.



                                               8
1990), in which the court addressed and rejected the exact argument under FUTA
that Greco PC asserts here. Like Attorney Greco, Radtke was an attorney and the
sole officer and shareholder of his S corporation. Radtke received no salary, only
shareholder dividends based on the corporation’s profits. The Seventh Circuit found
that payments made as dividends rather than a salary were not exempt from taxation
under FUTA. Id.


            This Court defers to federal courts’ holdings on questions of federal
employment tax law. See Jay R. Reynolds, Inc. v. Dep’t of Labor & Indus., 661
A.2d 494 (Pa. Cmwlth. 1995). As discussed above, federal courts construe FUTA
as imposing employment tax on S Corporations for shareholder distributions made
to corporate officers; service as a corporate officer constitutes “employment” under
FUTA. Therefore, this Court concludes that such distributions are likewise subject
to UC taxation based on the definition of “employment” in Section 4(l)(6) of the UC
Law, which includes services defined as such under FUTA.


            Greco PC failed to rebut this conclusion. In its principal brief, Greco
PC offered merely a bald assertion that federal tax law definitions of “employment”
are inapplicable under the UC Law. Greco PC cited no authority for and did not
otherwise develop this assertion. It therefore waived this argument. Berner v.
Montour Twp., 120 A.3d 433 (Pa. Cmwlth. 2015).


            Although Greco PC attempted to bolster the argument in its reply brief,
“a reply brief cannot be a vehicle to argue issues raised but inadequately developed
in appellant’s original brief.” Commonwealth v. Fahy, 737 A.2d 214, 219 n.8 (Pa.



                                         9
1999). Moreover, regardless of waiver, Greco PC provided no basis to overcome
the clear applicability of the FUTA definition of “employment” to corporate officers
and to the definition of “employment” under the UC Law. Greco PC focused its
argument on application of the federal requirement that shareholder employees of S
corporations must receive reasonable salaries, and on whether the UC Law imposes
a similar requirement. This argument missed the mark. Greco PC still failed to
refute, or even address, the straightforward statutory language providing that service
as a corporate officer constitutes employment for federal employment tax purposes.
Under Section 4(l)(6) of the UC Law, service as a corporate officer constitutes
employment for UC tax purposes as well.


                                  III. Conclusion
             For the foregoing reasons, we affirm the Department’s decision.



                                       ROBERT SIMPSON, Judge




                                         10
       IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Carl J. Greco, P.C.                    :
a/k/a Greco Law Associates, P.C.,      :
                        Petitioner     :
                                       :
            v.                         :   No. 304 C.D. 2017
                                       :
Department of Labor and Industry,      :
Office of Unemployment                 :
Compensation Tax Services,             :
                        Respondent     :


                                     ORDER


            AND NOW, this 4th day of January, 2018, the decision of the Office of
Unemployment Compensation Tax Services is AFFIRMED.




                                      ROBERT SIMPSON, Judge
