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  • July 01, 2024

    Failure to Report Gross Income on Unemployment Form Means Repayment

    A woman who reported payments, but not gross income, from self-employment when applying for unemployment benefits was overpaid, the Wisconsin Court of Appeals has held.

    Jeff M. Brown

    Seen From Directly Overhead, A Pair of Hands Guides A Polka-Dottd Piece of Pink Fabric Beneath The Presser Foot Of A Sewing Machine, With Measuring Tapes, Scissors, And Spools Of Thread Lying On The Table Around The Sewing Machine

    July 1, 2024  – A woman who reported payments, but not gross income, from self-employment when applying for unemployment benefits was overpaid, the Wisconsin Court of Appeals (District II) has held in Morgan v. Labor Industry Review Commission, 2023AP1010 (June 5, 2024).

    In May 2020, Kathryn Morgan applied for Pandemic Unemployment Assistance (PUA) benefits under the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act). On her application, Morgan said the pandemic had forced her to close her in-home daycare business.

    Morgan received PUA benefits for multiple weeks between the 12th week of 2020 (the week ending March 21, 2020) through the 35th week of 2021 (the week ending Aug. 28, 2021).

    Between the 12th week of 2020 and the 35th week of 2021, Morgan held a 40% ownership interest in a sewing business. During that time, she did sales, marketing, and sewing for the business.

    However, Morgan and her partner in the sewing business only paid themselves when the business had enough money to justify the payments.

    Form Confusion

    Because of her role in the sewing business, Morgan didn’t know how to answer the question about self-employment on her application for PUA benefits.

    Jeff M. Brown Jeff M. Brown , Willamette Univ. School of Law 1997, is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6126.

    A claims specialist told Morgan that she should answer the question as it pertained to her daycare business. Consequently, when the form asked whether Morgan had “work in your self-employment,” she answered ‘No.’

    Morgan did report the income from her sewing business, by answering ‘Yes’ to the question ‘Did you receive another type of income you haven’t reported?”

    That answer prompted Morgan to call the state Department of Workforce Development (DWD) and report the income from the sewing business, which she did.

    Administrative Appeal

    In September 2021, DWD determined that Morgan had under-reported her income form the sewing business.

    For the period March 21, 2020 through Jan. 2, 2021, DWD determined that Morgan had been overpaid $2,577. For the period Jan. 9, 2021 through Aug. 28, 2021, DWD determined that Morgan had been overpaid $260.

    After a hearing, an administrative law judge (ALJ) affirmed the DWD determinations and concluded that Morgan was required to repay the amounts.

    The ALJ concluded that, given Morgan’s ownership stake in the sewing business, she should have reported 40% of the business’ weekly gross income during the periods at issue.

    The ALJ increased the amount of the overpayment for the second period from $260 to $1,671.

    LIRC Affirms

    The Labor and Industry Review Commission (LIRC) affirmed the ALJ’s ruling.

    However, LIRC reduced the overpayment for the second period to $260. The reduction was based on the conclusion that Morgan had been overpaid only to the extent of her share of the amounts that she and her partner periodically paid themselves from the sewing business.

    LIRC also concluded that the state could not waive the repayments because the overpayments were caused by Morgan’s failure to give complete information about her wages during the relevant periods.

    The Waukesha County Circuit Court affirmed the LIRC decision. Morgan appealed.

    What Is Gross Income?

    Judge Lisa Neubauer began her opinion for a three-judge panel by explaining that under 20 C.F.R. section 625.6(f)(2), a CARES Act regulation, PUA benefits payable to a self-employed person who was unemployed are to be reduced by the amount of any income received during the week for performing self-employed services.

    Neubauer pointed out that neither the CARES Act regulations nor state unemployment insurance statutes or regulations provide a definition for gross income.

    Morgan argued that only the amounts she and her partner periodically paid themselves from the sewing business should count as gross income under 20 C.F.R. section 625.6(f)(2).

    Morgan cited Wis. Stat. section 108.02(26)(a), which defines wages for the purposes of unemployment insurance as “every form of remuneration payable, directly or indirectly, for a given period … by an employing unit to an individual for personal services.”

    LIRC argued that the definition of gross income in Wis. Stat. section 71.03(1), a provision of the state’s tax code, should apply.

    Under that statute, “‘[g]ross income’ from a business or farm consists of the total gross receipts without reduction for cost of goods sold, expense or any other amounts.”

    Judge Neubauer concluded that LIRC had the better argument. She reasoned that Morgan’s reliance on Wis. Stat. section 108.(02)(26)(a) conflicted with the distinction in 20 C.F.R. section 625.6(f)(2) between wages and a self-employed person’s gross income.

    “Morgan fails to supply a persuasive justification for treating wages as gross income when the regulation specifically directs us not to,” Neubauer wrote.

    ‘Phantom Income?’

    Morgan argued that LIRC’s determination failed to consider the sewing business’s basic costs and created “phantom income” for self-employment applicants.

    As a result, Morgan argued, LIRC had multiplied her actual income from the sewing business fivefold – a result that undercut the purpose of the CARES Act, namely, to provide economic stimulus.

    But Judge Neubauer noted that Morgan had failed to point the court to an alternate definition of gross income.

    “We are bound to apply the federal regulations regarding PUA benefits as they are written,” Neubauer wrote.

    No Erroneous Exercise of Discretion

    Morgan also argued it was an erroneous exercise of discretion for LIRC to decide that it couldn’t waive her repayment obligations.

    Judge Neubauer pointed out that under federal regulations, a state agency administering PUA benefits may waive a repayment obligation where the agency determines that, under state law, the applicant wasn’t at fault for the overpayment.

    Morgan argued that LIRC had given no rational explanation for denying her a waiver. But Neubauer concluded that LIRC hadn’t erroneously exercised its discretion.

    “Though LIRC found that [Morgan] was initially confused about what information to report regarding her self-employment, the confusion was not about whether she should report the sewing business’s total sales receipts or her weekly distributions  – rather, it concerned whether she should report self-employment income from the sewing business or her daycare business,” Neubauer wrote.

    The Court of Appeals affirmed the order issued by LIRC.

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    WisBar Court Review, published by the State Bar of Wisconsin, includes summaries and analysis of decisions from the Wisconsin Supreme Court, the Wisconsin Court of Appeals, and the U.S. Court of Appeals for the Seventh Circuit, as well as other court developments. To contribute to this blog, contact Joe Forward.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

    © 2024 State Bar of Wisconsin, P.O. Box 7158, Madison, WI 53707-7158.

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