Escoe v. Shalala

• Decision Date: 18 January 1994
• Docket Number: No. 92-CV-1083 TJM/RWS.,92-CV-1083 TJM/RWS.
• Citation: 842 F. Supp. 646
• Parties: Raphael ESCOE, Plaintiff, v. Donna SHALALA, Secretary of Health and Human Services, Defendant.
• Court: U.S. District Court — Northern District of New York

842 F. Supp. 646

Raphael ESCOE, Plaintiff, v. Donna SHALALA, Secretary of Health and Human Services¹, Defendant.

No. 92-CV-1083 TJM/RWS.

United States District Court, N.D. New York.

January 18, 1994.

COPYRIGHT MATERIAL OMITTED

Raphael Escoe, pro se.

Gary L. Sharpe, U.S. Atty., N.D.N.Y., William H. Pease, Asst. U.S. Atty., Syracuse, NY, for defendant.

MEMORANDUM-DECISION AND ORDER

McAVOY, Chief Judge.

This matter was referred to Magistrate Judge Ralph W. Smith, Jr. for a report and recommendation pursuant to 28 U.S.C. § 636(b) and Local Rule 44F. This action is brought pursuant to section 205(g) of the Social Security Act (Act), as amended, 42 U.S.C. § 405(g), to review a final determination of the Secretary of Health and Human Services (Secretary) denying plaintiff's application for retirement benefits. Briefs were filed by the parties in accordance with the Standing Order of May 4, 1988, letters were submitted to the court by the pro se plaintiff, and no oral argument was heard.

The magistrate judge's Report-Recommendation, dated February 25, 1993, recommends that plaintiff's claim be dismissed. The plaintiff has filed objections addressing specific portions of the magistrate judge's Report-Recommendation. After examination of the objections, the court finds them to be without merit and adopts the report-recommendation of the magistrate judge.

I. BACKGROUND

A. Social Security Earnings Test

Retirement insurance benefits are payable to individuals who have attained 62 years of age, are fully insured and have filed an application. 42 U.S.C. § 402(a). The Act, however, requires that such retirement benefits be reduced for claimants aged 62 to 70 who have excess earnings from wages or self-employment income in a taxable year. 42 U.S.C. § 403(f)(4)(A). More specifically, the Act provides, in pertinent part:

... an individual will be presumed, with respect to any month, to have been engaged in self-employment in such month until it is shown to the satisfaction of the Secretary that such individual rendered no substantial services in such month ... The Secretary shall by regulations prescribe the methods and criteria for determining whether or not an individual has rendered substantial services with respect to any trade or business.

42 U.S.C. § 403(f)(4)(A).

In 1991, the monthly amount of exempt earnings for retirement benefits was $810, or $9720 per year. See 42 U.S.C. § 403(f)(4)(D); 1991 Cost of Living Increases and Other Determinations, 55 Fed.Reg. 45,856 — 45,858 (Oct. 31, 1990). If the claimant's earnings exceeded that amount, $1 for every $3 of excess earning would be withheld from benefits due for those months in which the claimant was under the age of 70 and either worked for wages of more than $810 or rendered substantial services in self-employment. This is the so-called "earnings test".

B. Facts

Plaintiff was a self-employed dentist prior to his sixty-fifth birthday on March 5, 1991. His wife, Dorcas Escoe, worked with him as a part-time dental hygienist. (Rec. 16). According to his 1990 Federal Income Tax return, in 1989 his business grossed $200,203, netting $62,052. (Rec. 190). He and his wife filed a joint return and their income was commingled. (Rec. 16).

On March 4, 1991, plaintiff and his wife purportedly signed a document entitled "Property Transfer and Contract" which provided the following:

For one dollar ($1.00) given me in hand and other good and valuable consideration²: I, Raphael Escoe, 88 Andrews Street, Massena, N.Y. 13662 sell my dental office at this address to Dorcas Escoe.

It is agreed as part of this transfer of property that Dorcas Escoe will run this office as office manager and practice her profession there. She agrees that under no circumstance will I be paid more than $9720 per annum for my service to the office as a dentist.

It is agreed that at the option of Dorcas Escoe she may return the dental office to Raphael Escoe in return for a 5 year contract as office manager. Her salary renumeration sic as office manager shall be a commission. Her commission shall be all net profit beyond $9720 which shall go to Raphael Escoe. Dorcas Escoe agrees that under no circumstance sic will Raphael Escoe be paid more than $9720 per year. Dorcas Escoe controls the earnings of Raphael Escoe or as owner of the dental office, or as office manager, on commission. Raphael Escoe does not control his earnings.

(Rec. 101).

Plaintiff filed an application for retirement insurance benefits on February 22, 1991, and was asked to supply the Social Security Administration (SSA) with various documents and an estimate of his 1991 self-employment income. (Rec. 85-86). Plaintiff responded that his 1991 income would be "exactly $9720 in wages. I have given my entire outfit, practice, building, etc. to another licensed health care professional who will own and manage all and pay me wages ..." (Rec. 92). Based upon this information, and the data received from the plaintiff's accountant, SSA sent plaintiff a revised application and requested documentation of the business transfer. (Rec. 97-99). Plaintiff responded to the SSA and enclosed a copy of the "Property Transfer and Contract." (Rec. 100-101).

On May 7, 1991, plaintiff filed his revised application for retirement insurance benefits in which he stated that he expected to earn $9720 that year. (Rec. 102-104). Prior to rendering an initial decision, SSA advised plaintiff that if he wished a decision to be made at that time, Social Security regulations would prevent the allowance of any payment of monthly benefits, apparently because of the contractual agreement between he and his wife. (Rec. 105). He was referred to an Eleventh Circuit case, Martin v. Sullivan, 894 F.2d 1520 (11th Cir.1990), which SSA maintained had many similarities to his claim.

Plaintiff was further advised of an optional course of action which might have resulted in the authorization of payments during 1991. (Rec. 105-106). In order to make a determination concerning this alternative, however, the SSA needed a copy of plaintiff's 1988 partnership tax return which had been requested of plaintiff's accountant. (Rec. 106). Plaintiff was advised that if he did not respond within 21 days, a final decision would be made based on the current evidence in the file. (Rec. 106). That return was not submitted, and on June 10, 1991, an initial determination was issued denying plaintiff's claim for insurance benefits. (Rec. 109-110). That decision was affirmed upon reconsideration. (Rec. 121).

Plaintiff then requested an administrative hearing, which was held on October 18, 1991, by an administrative law judge (ALJ) who considered the matter de novo. At that hearing, plaintiff waived his right to counsel (Rec. 30), and both he and his wife testified. Plaintiff testified that following the purported transfer he continued to practice general dentistry as he did before the transfer, he continued to see the same number of patients per week, and both he and his wife estimated that their income from the dental practice would be the same following the transfer.

In a decision dated November 15, 1991, the ALJ concluded that the plaintiff was not eligible for retirement insurance benefits. (Rec. 20). In reaching this conclusion, he found that after March 4, 1991, plaintiff "continued to perform general dental services to approximately fifty patients per week, which services have been substantial and valuable." (Rec. 19). Furthermore, he determined that "for Social Security purposes, the purported conveyance was not a bona fide transfer to the claimant's wife; it was a scheme to permit the claimant to continue to practice dentistry, while diverting the bulk of his income to his wife, so that he would become eligible to receive retirement insurance benefits." (Rec. 19). The ALJ, therefore, found that the plaintiff was "not `retired' within the meaning of the Act." (Rec. 19).

In a decision dated July 17, 1992, the Appeals Council denied plaintiff's request for review. (Rec. 4-5). Consequently, the ALJ's decision is the final decision of the Secretary, and, therefore, that is the only decision that is before this court for review.

II. DISCUSSION

A. Standard of Review

In reviewing the Secretary's final decision, it is not the court's function to consider the case de novo, but, assuming the Secretary has applied the correct legal standards, which is the case here, the court must merely decide whether the decision is supported by "substantial evidence." 42 U.S.C. § 405(g); Richardson v. Perales, 402 U.S. 389, 401, 91 S.Ct. 1420, 1427, 28 L.Ed.2d 842 (1971); Alexandrou v. Sullivan, 764 F.Supp. 916, 917 (S.D.N.Y.1991). "The substantial evidence test applies not only to findings of basic evidentiary facts, but also to inference and conclusions drawn from such facts." Alexandrou, 764 F.Supp. at 917-18 (citing Levine v. Gardner, 360 F.2d 727, 730 (2d Cir.1966)).

B. Substantial Evidence Supports the Secretary's Decision

After careful review of the administrative record, briefs filed by both parties, and the Report-Recommendation of the magistrate judge, this court finds that the Secretary's final decision is clearly supported by substantial evidence.

It is well established that the Secretary has the authority and the obligation to examine substance over form, determine the bona fides of family business transactions, and pierce a fictitious family financial arrangement created only to make a claimant eligible for retirement insurance benefits. Martin v. Sullivan, 894 F.2d 1520, 1532-33 (11th Cir. 1990); Gardner v. Hall, 366 F.2d 132, 135 (10th Cir.1966); Dondero v. Celebrezze, 312 F.2d 677, 678 (2d Cir.1963); Newman v. Celebrezze, 310 F.2d 780, 781 (2d Cir.1962); Poss v. Ribicoff, 289 F.2d 10, 11 (2d Cir. 1961); Toner v. Schweiker, 537 F.Supp. 846, 854 (W.D.N.Y.1982). It is clear in the instant case that the contractual arrangement between the plaintiff and his wife was merely a subterfuge for...