Last week, the Ohio Court of Appeals reversed judgment in favor of the Ohio Department of Job and Family Services concerning whether an entity constituted a successor in interest for unemployment compensation liability merely because it elected S-Corp status for three jointly owned subsidiaries which otherwise satisfied the statutory test to be an employer. Employer’s Choice Plus, Inc. v. Ohio Dept. of Job & Family Servs., 2019-Ohio-4994. Even though the Internal Revenue Code deemed the S-Corp election of the subsidiary corporations to constitute a liquidation of the subsidiaries for purposes of calculating income taxes, Ohio law only imposes successor liability when there has been an actual transfer or conveyance of possession or control of some legal interest in property. Because the legal fiction of “deeming” a liquidation for income tax purposes was not equivalent to a transfer of ownership or possession, the statute was not satisfied and the parent company was not a successor employer.
According to the Court’s opinion, the parent company and the subsidiary companies were all owned by the same individual and their separate payrolls were paid out of the same bank account. That sole shareholder elected S-Corp status for the subsidiary companies. The IRS regulations provide that "[i]f an S corporation makes a valid QSub election with respect to a subsidiary, the subsidiary is deemed to have liquidated into the S corporation." Further, "[a] corporation that is a QSub shall not be treated as a separate corporation" and that "[a]ll assets, liabilities, and items of income, deduction, and credit of a QSub shall be treated as assets, liabilities, and items of income, deduction, and credit of the S Corporation." Following an audit, the ODJFS determined that – even though each of the subsidiaries employed and paid at least one employee each year more than $1500 – that only the parent corporation was a statutory employer for unemployment purposes and that it constituted a successor employer following the S-Corp election. The appeal followed.
The Court noted that an employer can only become a successor employer for unemployment purposes if it (1) voluntarily seeks and obtains from ODJFS that status after substantially all, or a clearly identifiable portion, of the employer’s assets have been transferred to it or (2) involuntarily if all of the employer’s trade or business has been transferred to it. In this case, ODFJS “effectively concluded the QSub election constituted a transfer of the trade or business,” but the Court disagreed because the plain meaning of “transfer” did not include or encompass the legal fiction employed in the IRS regulations.
Although the method or mode of a transfer may encompass a broad range of possibilities, there still must be a conveyance of possession or control of some legal interest in property. Here, the conveyance of possession or control must be a legal interest in a trade or business. That concept is not a broad one.
. . . . Given the common, everyday meaning of the verb form of the word "transfer," we do not find any ambiguity in the express statutory requirement that there be a conveyance of some trade or business from one employer to another to trigger successor-in-interest status under R.C. 4141.24(F) or (G). Although a QSub election may be deemed a liquidation of a subsidiary corporation into the parent for purposes of federal taxation, such election does not effectuate any conveyance of a trade or business under either state or federal law. The fact that federal tax law and Ohio tax law are co-extensive does not change the express requirements of unambiguous statutes. Without some conveyance of possession or control of a trade or business from one employer to another, there can be no successor-in-interest liability under the express terms of R.C. 4141.24(F) or (G).
Relying on the Supreme Court’s opinion in Chevron, the Court refused to grant any deference to an agency interpretation which conflicted with the plain meaning of the statute: “courts grant no deference to an administrative agency's interpretation of a statute when that interpretation conflicts with the express terms of an unambiguous statute.”
In addition, ODJFS also erred in concluding that none of the subsidiaries could qualify as statutory employers. Ohio Revised Code § 4141.01(A)(1) “sets forth the definition of the term "employer" for purposes of unemployment compensation law.”
In relevant part, the statute defines an "employer" as follows: "Employer" means * * * any individual or type of organization including any partnership, limited liability company, association, trust, estate, joint-stock company, insurance company, or corporation, whether domestic or foreign, * * * who . . . .
(a) Had in employment at least one individual, * * * in either the current or the preceding calendar year whether or not the same individual was in employment each such day; or
(b) Except for a nonprofit organization, had paid for service in employment wages of fifteen hundred dollars or more in any calendar quarter in either the current or preceding calendar year[.]
The Court found that the undisputed evidence presented at the hearing showed that each of the subsidiaries during the relevant time period “had at least one employee receiving wages of $1,500 or more. . . . . Based on this undisputed evidence, and applying the definition of "employer" set forth in R.C. 4141.01(A)(1),” it was an abuse of discretion to conclude that none of the subsidiaries constituted “employers under that statutory definition.”
NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.
