King's Kountry Korner, LLC v. Department of Labor and Industry, Office of UC Tax Svcs.

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

King’s Kountry Korner, LLC, :

Petitioner :

:

v. : No. 2139 C.D. 2014

: SUBMITTED: May 15, 2015

Department of Labor and Industry, :

Office of Unemployment :

Compensation Tax Services, :

Respondent :

BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, Judge

HONORABLE RENÉE COHN JUBELIRER, Judge

HONORABLE PATRICIA A. McCULLOUGH, Judge

OPINION NOT REPORTED

MEMORANDUM OPINION BY

JUDGE LEADBETTER FILED: October 14, 2015

King's Kountry Korner, LLC (Kountry Korner) petitions for review of

the order of the Department of Labor and Industry (Department) denying Kountry

Korner's petition for reassessment of unemployment compensation contributions,

interest and penalties assessed by the Office of Unemployment Compensation Tax

Services (Tax Services). We are asked to decide (1) whether members of Kountry

Korner, a limited liability company, who each owned a 1% interest and received

remuneration for services provided to Kountry Korner, should be deemed

employees of Kountry Korner for the purpose of the unemployment compensation

tax under the Unemployment Compensation Law (Law), Act of December 5, 1936,

Second Ex. Sess., P.L. (1937) 2897, as amended, 43 P.S. §§ 751 - 914; and (2)

whether the payments made by Kountry Korner to parents of Amish children who

provided services to Kountry Korner should be considered "wages" under Section

4(x) of the Law, 43 P.S. § 753(x), subject to the unemployment compensation tax.

We affirm.

The tax agent for the Tax Services, Peter Gill, audited Kountry Korner

for the first quarter of 2008 through the fourth quarter of 2011. On October 17,

2012, the Tax Services reclassified certain individuals as Kountry Korner's

employees and assessed unemployment compensation contributions, interest and

penalties in the amount of $28,139.41. Kountry Korner filed a petition for

reassessment. At a hearing held on July 15, 2014, the tax agent, Gill, and Kountry

Korner's member and assistant manager, Michael King, testified.

The Department made the following factual findings. Kountry Korner

is a limited liability company and operates two retail furniture stores in

Burgettstown and Lancaster, Pennsylvania. Kountry Korner was established in

August 2005 as a general partnership. At that time, Kountry Korner's general

partner and managing member, Raymond King, held a 93% interest, and seven

other members each held a 1% interest. Raymond King executed the assumption

agreement and assigned the partnership's assets, liabilities and legal rights to

Kountry Korner. As of 2009, Raymond King owned 90% of Kountry Korner's

interest, and ten other members each owned a 1% interest.1 Raymond King's

beginning balance with Kountry Korner in 2009 was $376,240. After making

capital contributions of $200,000 and reporting a loss of $47,483, his ending

capital account balance in 2009 was $528,757. Kountry Korner's new members

each contributed $100 and then withdrew that amount. In 2011, seven members

owning a 1% interest contributed $2000 to Kountry Korner's business, and the

1

The Department did not reclassify Raymond King as an employee.

2

remaining three 1% members contributed $3000.

For tax years 2008 through 2011, Kountry Korner filed federal tax

returns as a partnership and reported "guaranteed payments," i.e., compensation

paid to Kountry Korner's members for working at its stores as salespersons or

doing delivery work. Department's Finding of Fact No. 10.2 The guaranteed

payments were "based on the time and effort that a person is putting into the

business." Id. at No. 12. Kountry Korner issued 1099 federal tax forms to the

parents of Amish children who worked at or around its stores.

The Department denied the petition for reassessment, concluding that

the Kountry Korner's members who owned a 1% interest and received

remuneration for services should be deemed employees subject to the

unemployment tax under Section 4(l)(2)(B) of the Law, 43 P.S. § 753(l)(2)(B).

The Department also noted that under Section 8925(a) of the Limited Liability

Company Law of 1994 (Limited Liability Company Law), as amended, 15 Pa. C.S.

§ 8925(a), a domestic or foreign limited liability company is deemed a corporation,

and that a member of such company is deemed a shareholder of a corporation

eligible for unemployment benefits. In addition, even if a limited liability

company is not required to file a federal corporate income tax return, those taxes

must still be computed in Pennsylvania as if such a federal return had been filed.

Id. The Department rejected Kountry Korner's argument that limited liability

companies should be taxed as partnerships in Pennsylvania because they are

required to file a form PA-65 to elect to file federal tax returns as a partnership.

The Department noted that the instructions to the form PA-65 form itself stated

2

Under federal tax law, a limited liability company with two or more members can elect to

be classified as a partnership. 26 C.F.R. § 301.7701-3(b)(1)(i).

3

that the limited liability companies conducting business in Pennsylvania must file

the RCT-101 (PA Corporate Tax Report).

The Department further concluded that Kountry Korner failed to

establish that the Amish children who worked at its stores were not subject to its

control and direction in their work performance and were engaged in an

independently established trade, occupation, profession or business. The

Department rejected Kountry Korner's attempt to invoke "the 4029 exemption" for

religious groups opposing public or private insurance. July 15, 2014 Hearing,

Notes of Testimony (N.T.) at 36; Reproduced Record (R.R.) at 51a. The

Department stated that such exemption may be available only to federal Social

Security and Medicare taxes. Kountry Korner's appeal to this Court followed.

Kountry Korner challenges the Department's determination that its

members who received remunerations for services should be subject to

unemployment compensation tax as employees. Kountry Korner insists that it

should be treated as a partnership and that its members should be deemed self-

employed.3

The provisions of the Law must be liberally and broadly construed to

achieve its objectives of ensuring that employees who become unemployed

through no fault of their own are provided with some semblance of economic

security. Wedner Unemployment Compensation Case, 296 A.2d 792, 796 (Pa.

1972).

3

A "partnership" is defined as "a domestic or foreign general partnership, joint venture,

limited partnership, limited liability company, business trust or other unincorporated entity that

for Federal income tax purposes is classified as a partnership." Section 301 (n.0) of the Tax

Reform Code of 1971, Act of March 4, 1971, P.L. 6, as amended, added by Section 4 of the Act

of August 31, 1971, P.L. 362, 72 P.S. § 7301(n.0).

4

The term "employment" is broadly defined as "all personal service

performed for remuneration by an individual under any contract of hire, express or

implied, written or oral, including service in interstate commerce, and service as an

officer of a corporation." Section 4(l)(1) of the Law, 43 P.S. § 753(l)(1). Once it

has been shown that an individual has performed service for wages, he or she is

presumed to be an employee. Section 4(l)(2)(B) of the Law; Cameron v. Dep't of

Labor & Indus., Bureau of Emp'r Tax Operations, 699 A.2d 843, 846 (Pa. Cmwlth.

1997). The burden then shifts to the employer to establish an exemption from

employment. Hoey v. Dep't of Labor & Indus., Bureau of Emp't Sec., 499 A.2d

1124, 1127 (Pa. Cmwlth. 1985).

Section 4(l)(2)(B) of the Law provides for the following exemption

from employment:

Services performed by an individual for wages

shall be deemed to be employment subject to this act,

unless and until it is shown to the satisfaction of the

department that—(a) such individual has been and will

continue to be free from control or direction over the

performance of such services both under his contract of

service and in fact; and (b) as to such services such

individual is customarily engaged in an independently

established trade, occupation, profession or business.

It is the right or authority to exercise control or to interfere with the work of

another, not the actual control, that creates an employment relationship. Cameron,

699 A.2d at 846. In order to discern whether the employees were truly employees

or independent contractors, it is necessary to look beyond the contract between the

employer and the employees to the true facts of the employment. Hoey, 499 A.2d

at 1127.

Kountry Korner's managing member, Raymond King, had "the

authority to … [m]onitor, supervise, manage and control the business activities of

5

the Company and its employees." Section 3.7(a) of the Operating Agreement;

Supplemental R.R. at 13b. Kountry Korner's witness, Michael King, conceded that

the guaranteed payments received by Kountry Korner's members were

"compensation for services performed" at the stores as sales representatives or as

delivery persons. Kountry Korner's Brief at 8. Indeed, Finding of Fact No. 17

reflects that the members, each of whom had a 1% share, received compensation

varying from $1425 to $95,485. Because the members performed services for

wages, the burden shifted to Kountry Korner to establish that they were not subject

to its control or direction over their performance and that they were customarily

engaged in an independently established trade, occupation, profession or business.

Section 4(l)(2)(B) of the Law. As the Department correctly noted, Kountry Korner

did not present any evidence to meet its burden.

Section 8925(a) of the Limited Liability Company Law provides in

relevant part:

For the purposes of the imposition by the Commonwealth

of any tax or license fee on or with respect to any

income, property, privilege, transaction, subject or

occupation, a domestic or foreign limited liability

company that is not a domestic or qualified foreign

restricted professional company shall be deemed to be a

corporation organized and existing under Part II (relating

to corporations), and a member of a company, as such,

shall be deemed to be a shareholder of a corporation. …

For purposes of the corporate net income tax and the

capital stock and franchise tax, such a company shall be

considered a "corporation" and an "entity" as defined in

Articles IV and VI of the act of March 4, 1971 …, known

as the Tax Reform Code of 1971, and, if such a company

is not required to file a Federal corporate income tax

return, those taxes shall be computed as if such a Federal

return had been filed. [Emphasis added.]

A corporation is defined to include a limited liability company. Section 401(1)(iii)

6

of the Tax Reform Code of 1971, 72 P.S. § 7401(1)(iii). Section 8946(a) of the

Limited Liability Company Law, 15 Pa. C.S. § 8946(a), further provides that "[a]

member or manager may be an employee or other representative of and engage in

transactions with a limited liability company to the same extent as a person who is

not a member or manager of the company."

Where, as here, the words of a statute are clear and free from all

ambiguity, the letter of it is not to be disregarded under the pretext of pursuing its

spirit. Section 1921(b) of the Statutory Construction Act of 1972, 1 Pa. C.S. §

1921(b). Under the clear and unambiguous language in Sections 8925(a) and

8946(a) of the Limited Liability Company Law, Kountry Korner's members are

treated as shareholders of the limited liability company and may become its

employees earning wages. See Nu-Look Design, Inc. v. Comm'r of Internal

Revenue, 356 F.3d 290 (3d Cir. 2004) (holding that the president and sole

shareholder of the company was an employee under the plain and unambiguous

statutory language in question).

Kountry Korner relies on the form PA-65 that a limited liability

company must file in Pennsylvania to elect to file a federal tax return as a

partnership. Kountry Korner asserts that requiring a limited liability company to

file a PA-65 "would be an indication that the LLC is reporting as a partnership or S

Corporation for tax purposes, having the guaranteed payments to be distributions

under Pennsylvania law, thereby not subject to Unemployment Compensation

Tax." Kountry Korner's Brief at 10. The PA-65 form further states, however, that

all PA S corporations and limited liability companies conducting business in

Pennsylvania must file a RCT-101 (PA Corporate Tax Report), as required by

Section 8925(a) of the Limited Liability Company Law. It is irrelevant whether

7

Kountry Korner is treated as a corporation or a partnership. As long as the

members of the corporation are considered to be employees, they are subject to the

unemployment compensation tax under the provisions of the Law.4

Finally, the payments made by Kountry Korner to the parents of the

Amish children were wages subject to the unemployment compensation tax. The

term "wages" is defined as "all remuneration … paid by an employer to an

individual with respect to his employment …." Section 4(x) of the Law. Kountry

Korner made the payments to the Amish parents to compensate services performed

by their children at or around the stores. Kountry Korner claimed, however, that it

paid the children's compensation to the parents "due to the 4029 exemption" for

members of religious groups. N.T. at 36; R.R. at 51a. According to Kountry

Korner, the Department has accepted such exemption for workers' compensation.

Kountry Korner, however, fails to cite any authority supporting the alleged

exemption from the unemployment compensation tax or to further develop its

argument to enable the Court to address the issue. It is well established that a

party's failure to sufficiently develop an issue in a brief constitutes a waiver of the

issue. Berner v. Montour Twp., 120 A.3d 433, 437 (Pa. Cmwlth. 2015).

Accordingly, the Department's order is affirmed.

_____________________________________

BONNIE BRIGANCE LEADBETTER,

Judge

Judge Cohn Jubelirer concurs.

4

Kountry Korner does not raise the issue of whether the provisions of the Law have been

preempted by the federal tax statutes. Suffice it to note that a federal statute may be interpreted

as preempting a state statute only if such result is clearly intended by Congress and that federal

preemption of a state's power is not favored. Bayada Nurses, Inc. v. Dep't of Labor & Indus.,

958 A.2d 1050, 1059 (Pa. Cmwlth. 2008), aff'd, 8 A.3d 866 (Pa. 2010).

8

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

King’s Kountry Korner, LLC, :

Petitioner :

:

v. : No. 2139 C.D. 2014

:

Department of Labor and Industry, :

Office of Unemployment :

Compensation Tax Services, :

Respondent :

ORDER

AND NOW, this 14th day of October, 2015, the order of the

Department of Labor and Industry in the above-captioned matter is AFFIRMED.

_____________________________________

BONNIE BRIGANCE LEADBETTER,

Judge