The Commonwealth Court has ruled that a Scranton solo attorney is an “employee” who must pay unemployment compensation taxes, even though he is self-employed and his income consists of net profit distributions as the sole shareholder of his firm.

In a published Jan. 4 opinion, a three-judge panel of the court unanimously upheld a final decision of the state Department of Labor and Industry that the law firm Carl J. Greco P.C., also known as Greco Law Associates, owes UC taxes even though it consists of only one attorney, Carl J. Greco.

The court rejected Greco P.C.'s argument that Section 4(l)(1) of the Unemployment Compensation Law states that a corporate officer is only subject to UC taxes if he is also engaged in service under an express or implied contract of hire.

Section 4(l)(1) 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.”

“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,” Judge Robert Simpson wrote for the court.

But Simpson, joined by Judge Anne E. Covey and Senior Judge Dan Pellegrini, added that even if Greco P.C.'s construction of the statute were correct, he'd still be subject to UC taxes.

“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 [Federal Unemployment Tax Act], which incorporated the definition in the Federal Insurance Contributions Act (FICA),” Simpson said. ”FUTA (through [the Federal Insurance Contributions Act]) defines a corporate officer as an 'employee' for employment tax purposes. The language of the statutory definition is unqualified. It defines an 'employee' as including 'any officer of a corporation ….' There is no requirement that the officer be employed at a salary or under any express or implied contract of service.”

Simpson also noted that the U.S. Court of Appeals for the Third Circuit ruled in the 2004 case Nu-Look Design v. Commissioner IRS that an S corporation, like Greco P.C., was subject to FUTA taxation on profit distributions to its sole shareholder because he was a corporate officer.

In Nu-Look, the Third Circuit also cited the Seventh Circuit's 1990 decision in Joseph Radtke, S.C. v. United States, which rejected the exact same argument that Greco made: that payments made as dividends rather than salary were exempt from FUTA taxation.

“This court defers to federal courts' holdings on questions of federal employment tax law,” Simpson said. “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.”

Simpson also waved off Greco P.C.'s argument that because Greco's self-employed status bars him from collecting UC benefits, it also exempts him from paying UC taxes.

Simpson said Pennsylvania law is settled on that issue, dating back to the Commonwealth Court's 1978 ruling in Bagley & Huntsberger v. Employer Accounts Review Board.

Simpson also supported the department's reliance on Bagley & Huntsberger and the 1964 Dauphin County trial court ruling in Labe's Men's Shop v. Young in finding that the designation of payments as shareholder profit distributions had no bearing on Greco's responsibility to pay UC taxes.

Greco, who represented himself in the case, could not be reached for comment. A spokesperson for the department also could not be reached.