STATE OF WISCONSIN
LABOR AND INDUSTRY REVIEW COMMISSION
P O BOX 8126, MADISON, WI 53708-8126 (608/266-9850)

DARCEY N PIPPING, Employee

CAREY FRAMEWORKS LLC, Employer

UNEMPLOYMENT INSURANCE DECISION
Hearing No. 08000137MD


An administrative law judge (ALJ) for the Division of Unemployment Insurance of the Department of Workforce Development issued a decision in this matter. A timely petition for review was filed.

The commission has considered the petition and the positions of the parties, and it has reviewed the evidence submitted to the ALJ. Based on its review, the commission makes the following:

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The employee, Darcey Pipping, worked for over three years for the employer, Carey Frameworks LLC, a framing company. The employee's work involved doing accounting, assembly of frames, and preparation of products for final fitting. The employee's last day of work was on October 24, 2007 (week 43).

The employer is a multimember limited liability company. A limited liability company is a form of business organization, provided for in Chapter 183 of the Wisconsin Statutes, composed of one or more "members". The members of the employer are Pipping, John Carey, and Bob Carey. Each of the three members have an equal 1/3 ownership interest in the company. John Carey and Bob Carey are brothers. Pipping is not related in any way to the Careys.

The issue for decision is whether the base period wages utilized to compute total benefits payable to the employee should be limited as provided in Wis. Stat. § 108.04(1)(g), a provision of the UI Act which limits total benefits payable to an individual claimant in certain situations where the claimant was a part-owner of the employer. The department determined that such a limitation should be applied, and on Pipping's appeal an administrative law judge, acting as an Appeal Tribunal for the department, affirmed the department's determination.

The specific part of Wis. Stat. § 108.04(1)(g) which the department applied here was § 108.04(1)(g)3., which applies to an individual employed by a corporation or a limited liability corporation that is treated as a corporation under the Act.  (1)   That subdivision provides:

Wis. Stat. § 108.04(1)(g) Except as provided in par. (gm)  (2),   the base period wages utilized to compute total benefits payable to an individual under s. 108.06 (1) as a result of the following employment shall not exceed 10 times the individual's weekly benefit rate based solely on that employment under s. 108.05 (1):
. . .
3. Except where subd. 2. applies, employment by a corporation or limited liability company that is treated as a corporation under this chapter, if one-fourth or more of the ownership interest, however designated or evidenced, in the corporation or limited liability company is or during such employment was owned or controlled, directly or indirectly, by the individual.

As a result of the department's application of this provision to the employee, her benefit entitlement was effectively reduced to four weeks of benefits. (3)
  

Discussion -- Wis. Stat. § 108.04(1)(g)3. requires for its application that two conditions be met. One of these, which is met here, is that the employee have had at least a 1/4 ownership interest in the business. The other condition, however, has to do with the fact that the statute applies only in the case of:

employment by a corporation or limited liability company that is treated as a corporation under this chapter...

The employer here is not a corporation, but an LLC. Therefore, in order for § 108.04(1)(g)3. to be applicable, the employer must be an LLC "that is treated as a corporation under [the UI Act]".

The question of whether a limited liability company is one that "is treated as a corporation under [the UI Act]", is expressly governed by another provision of the UI Act, § 108.068. It is thus necessary to interpret and apply this provision.  (4)

Wis. Stat. § 108.068 provides:

Wis. Stat. § 108.068 Treatment of limited liability companies and members. (1) Subject to subs. (2) to (6) and (8), the department shall treat a multimember limited liability company as a partnership and shall treat a single-member limited liability company as a sole proprietorship under this chapter unless the company has filed an election with the federal internal revenue service to be treated as a corporation for federal tax purposes and files proof with the department that the internal revenue service has agreed to treat the company as a corporation for such purposes.

(2) The department shall treat a limited liability company that files proof under sub. (1) as a corporation under this chapter beginning on the same date that the federal internal revenue service treats the company as a corporation for federal tax purposes, except that for benefit purposes the treatment shall apply to benefit years in existence on or beginning on or after the date that the federal internal revenue service treats the company as a corporation for federal tax purposes if the benefit year to which the treatment is to be applied has not ended on the date that the department first has notice of a benefit eligibility issue that relates to treatment of that limited liability company.

(3) Subject to subs. (1), (2), and (6) to (8), a limited liability company that is treated as a corporation for federal tax purposes shall be treated as a corporation under this chapter, and each member of the limited liability company shall be treated as a corporate officer for contribution and benefit purposes.

(4) Subject to subs. (2) and (6) to (8), a multimember limited liability company that is not treated as a corporation for federal tax purposes shall be treated as a partnership under this chapter, and the members of the limited liability company shall be treated for contribution and benefit purposes as partners of that partnership.

(5) Subject to subs. (2) and (6) to (8), a single-member limited liability company that is not treated as a corporation for federal tax purposes shall be treated as a sole proprietorship under this chapter, and the member shall be treated as a sole proprietor for contribution and benefit purposes.

(6) The department may, in the interests of justice or to prevent fraud upon the unemployment insurance program, determine that a member of a limited liability company is an employee of that company.

(7) Subject to subs. (2) to (6), if a limited liability company is treated as a corporation under this chapter the department shall treat the company as a partnership under this chapter, if the company has multiple members or shall treat the company as a sole proprietorship under this chapter if the company has a single member if the company files proof with the department that the internal revenue service has agreed to treat the company as a partnership or sole proprietorship for federal tax purposes.

(8) The department shall treat a limited liability company that files proof under sub. (7) as a partnership or sole proprietorship under this chapter beginning on the same date that the federal internal revenue service treats the company as a partnership or sole proprietorship for federal tax purposes, except that for benefit purposes the treatment shall apply to benefit years in existence on or beginning on or after the date that the federal internal revenue service treats the company as a partnership or sole proprietorship for federal tax purposes if the benefit year to which the treatment is to be applied has not ended on the date that the department first has notice of a benefit eligibility issue that relates to treatment of that liability company.

Subs. (1) of this provision states a general rule that multimember limited liability companies will be treated as partnerships (and that single-member limited liability companies will be treated as sole proprietorships), unless two conditions are met:

the company has filed an election with the IRS to be treated as a corporation, and

the company "files proof with the department that the internal revenue service has agreed to treat the company as a corporation for such purposes".

The purpose of subs. (2) appears to be simply to describe when an LLC which satisfies the requirements of subs. (1) will begin to be treated as a corporation for purposes of the UI Act. Significantly, it effectively reiterates the requirement in subs. (1) that in order to obtain treatment as a corporation, a limited liability company must file proof with the department as stated in that subsection.

While subs. (3) contains a statement that "a limited liability company that is treated as a corporation for federal tax purposes shall be treated as a corporation under this chapter", it prefaces that statement with the proviso, "Subject to subs. (1), (2), and (6) to (8)" (emphasis added). For this reason, the commission does not read subs. (3) as creating an alternative route for a limited liability company to be treated as a corporation under the UI Act without filing with the department the proof required by subs. (1). The purpose of subs. (3) appears to be to clarify the status of members of limited liability companies which are treated as corporations pursuant to subs. (1), as themselves being treated as corporate officers for contribution and benefit purposes.

Subsection (4), which states that "a multimember limited liability company that is not treated as a corporation for federal tax purposes shall be treated as a partnership under this chapter" (emphasis added), essentially restates the general rule of subs.(1) which applies when the two conditions of that subsection are not met. It parallels subs. (3) in that its purpose appears to be to clarify the status of members of limited liability companies which are not treated as corporations pursuant to subs. (1), as themselves being treated as partners for contribution and benefit purposes. (5)  Subsection (5) parallels subs. (4) except that it involves single-member rather than multimember LLCs.

Subsection (6) does not relate directly to the issue of whether or not an LLC is treated as a sole proprietorship, a partnership, or a corporation under the UI Act.

Subsection (7) essentially provides a way for an LLC which has met the requirements to be treated as a corporation under the UI Act, to have its treatment for purposes of the UI Act changed back to the default (i.e., partnership or sole proprietorship) if its treatment by IRS changes back to that default. Like subs. (2) in relation to subs. (1), subs. (8) has to do simply with when an LLC which satisfies the requirements of subs. (7) will begin to be treated as a partnership or sole proprietorship for purposes of the UI Act.

With this understanding of the statute in mind, the commission turns to the question of whether Carey Framing LLC was "a ... limited liability company that is treated as a corporation under this chapter".

The first condition which must be satisfied in order to arrive at the conclusion that Carey Framing LLC was "a ... limited liability company that is treated as a corporation under this chapter" is that it filed an election with the federal internal revenue service to be treated as a corporation for federal tax purposes. There is actually no direct evidence in the record that Carey Framing LLC ever filed such an election. However, there is indirect evidence of this, in the form of assertions from both John Carey and Pipping that the LLC is taxed as an S Corporation. From the fact that the IRS is treating the Carey Framing LLC as an S Corporation for purposes of federal taxation, it may be inferred that the LLC must have filed an election for such treatment.

The second condition which must be satisfied in order to arrive at the conclusion that Carey Framing LLC was "a ... limited liability company that is treated as a corporation under this chapter" is that it has filed proof with DWD that the internal revenue service had agreed to treat the company as a corporation for federal tax purposes. Here the situation differs. There is no evidence in the record, direct or indirect, that the LLC ever filed any "proof" with DWD that the IRS had agreed to treat it as a corporation.

It is important to note that, given the way this condition is stated, it would not be permissible to merely infer that it is satisfied, in the same way it can be inferred that the condition concerning treatment by the IRS is satisfied. That is because this condition does not have to do with the fact of whether the IRS treats the LLC as a corporation for federal tax purposes. Instead, it has to do with whether the LLC ever actually filed anything with DWD proving that IRS treats it as a corporation for federal tax purposes. It would be entirely possible for an LLC to file an election with the IRS to be treated as a corporation for federal tax purposes, and to be granted such treatment by the IRS, but to then never file anything with DWD proving that it had been granted such treatment. Under § 108.068, in such a case that LLC would not entitled to be treated as a corporation for purposes of the UI Act, because of the failure to file the necessary proof. This makes sense if only because, without the filing of the necessary proof that IRS has agreed to treat the company as a corporation for such purposes, it is not possible to apply subs. (2) of § 108.068, which determines the date as of which an LLC will be treated as a corporation for purposes of the UI Act -- a date which is based on the date as of which the IRS begins to treat the LLC as a corporation for federal tax purposes.

The lack of affirmative evidence that Carey Framing LLC ever actually filed proof with DWD that the IRS treats it as a corporation for federal tax purposes is critical, because of the structure of § 108.068, which states a general rule that an LLC will be treated as a partnership, and then sets out a special case or exception which if satisfied will result in the LLC being treated as a corporation. Because of this, it is not sufficient to simply rest on the absence of evidence that the LLC did not file the necessary proof, or on speculation that it may have filed such proof. There must be affirmative proof that it did file such proof, or the conditions of § 108.068 are not met, and in that case the default effect of that section is that the LLC must be treated as a partnership.

Therefore, on the record before the commission in this case, it cannot be concluded under § 108.068 that Carey Framing LLC is appropriately treated as a corporation under the UI Act. For that reason, it must be concluded that Carey Framing LLC is appropriately treated as a partnership under the UI Act. This is determinative of the ultimate issue presented in this case because the provision on which the department based the reduction of claimant's benefits, § 108.04(1)(g)3., only applies to "employment by a corporation or limited liability company that is treated as a corporation under [the UI Act]" (emphasis added). The only part of § 108.04(1)(g) which applies to employment by an LLC treated as a partnership, is subs. 1., and it only applies if a 1/2 or greater ownership interest in the LLC is owned or controlled by the claimant's spouse, child or parents. That is not the case here. Therefore, there is no basis for any reduction of the employee's benefit entitlement under § 108.04(1)(g).

The commission therefore finds that employee's employment by Carey Framing LLC was not employment by a corporation or limited liability company that is treated as a corporation under the UI Act within the meaning of § 108.04(1)(g)3. and § 108.068, and that the base period wages utilized to compute total benefits payable to the employee under s. 108.06 (1) as a result of her employment by Carey Framing LLC are therefore not subject to the limitation provided for in § 108.04(1)(g).

DECISION

The decision of the administrative law judge is reversed. Accordingly, the base period wages utilized to compute total benefits payable to the employee under § 108.06 (1) as a result of her employment by Carey Framing LLC are not subject to the limitation provided for in § 108.04(1)(g).

Dated and mailed March 27, 2008
pipping . urr : 110 :  BR 309

/s/ James T. Flynn, Chairperson

/s/ Robert Glaser, Commissioner

/s/ Ann L. Crump, Commissioner

 

NOTE: The commission did not consult with the ALJ concerning credibility of witnesses. There were no issues of credibility in this case. The commission reverses the ALJ's decision because it takes a different view on the interpretation and application of the relevant statutory provisions.



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Footnotes:

(1)( Back ) Subdivisions 1. and 2. of § 108.04(1)(g) both apply to situations in which at least 1/2 ownership in the employer is held by the claimant and his or her spouse, child, or parent. These subdivisions are not applicable here because the claimant is not related in any way to the other owners.

(2)( Back ) § 108.04(1)(gm) provides that § 108.04(1)(g) does not apply if the claimant's employment was terminated because of involuntary cessation of business of a family corporation. It is undisputed that in this case, there was no involuntary cessation of the business. Therefore, this exception is not relevant.

(3)( Back ) In the employee's case, given her wages in her base period, her weekly benefit rate was $290. Because of the department's application of § 108.04(1)(g) to her, however, her base period wages utilized to compute total benefits payable to her were reduced to 10 times that weekly benefit rate, or $2,900. With that amount of base period wages, her maximum benefit amount was then only $1,160. At her weekly benefit rate of $290, this was exhausted after the employee was paid benefits for weeks 48 through 51 of 2007.

(4)( Back ) The ALJ's decision does not contain an express finding or conclusion that the employer here was an LLC "that is treated as a corporation under [the UI Act]" within the meaning of § 108.068. Indeed, it does not mention that section at all. The ALJ's decision does include a finding that the employer "is taxed as an S corporation". An "S Corporation" is a small business corporation which has filed an election with the IRS to be taxed in the manner provided for in Title 26, Subtitle A, Chapter 1, Subchapter S. However, as discussed below, having filed an election with IRS to be taxed as a corporation is only one of two requirements in § 108.068 that must be met for an LLC to be "treated as a corporation under [the UI Act]".

(5)( Back ) Because this subsection relates to situations in which the company is not treated as a corporation for federal tax purposes, and is therefore treated as a partnership (rather than as a corporation) under the UI Act, it does not bear on the ultimate issue presented here under § 108.04(1)(g)3., which concerns situations in which the LLC is treated like a corporation.

 


uploaded 2008/03/31