Johnson v. Chater, 96-3610

• Decision Date: 16 October 1997
• Docket Number: No. 96-3610,96-3610
• Citation: 127 F.3d 756
• Parties: , Unempl.Ins.Rep. (CCH) P 15790B John F. JOHNSON, Sr.; Joann Johnson; Ella Johnson, Appellants. v. Shirley S. CHATER, Social Security Administration, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 756

127 F.3d 756

54 Soc.Sec.Rep.Ser. 325, Unempl.Ins.Rep. (CCH) P 15790B

John F. JOHNSON, Sr.; Joann Johnson; Ella Johnson, Appellants. v. Shirley S. CHATER, Social Security Administration, Appellee.

No. 96-3610.

United States Court of Appeals Eighth Circuit.

Submitted April 16, 1997.

Decided Oct. 16, 1997.

Michael Moroni, Bloomfield, MO, argued, for Appellants.

Joseph Moore, Asst. U.S. Atty., St. Louis, MO (Edwin B. Brzezinski, Asst. U.S. Atty., St. Louis, MO, Sandra L. Wallace, Social Security Regional Counsel's Office, Kansas City, MO, on the brief), for Appellee.

Before McMILLIAN, Circuit Judge, HENLEY, Senior Circuit Judge, and BEAM, Circuit Judge.

McMILLIAN, Circuit Judge.

John F. Johnson, Sr., his wife, Joann Johnson, and their daughter, Ella Johnson (collectively claimants), appeal from a final order entered in the District Court ¹ for the Eastern District of Missouri granting summary judgment in favor of the Commissioner of Social Security. Johnson v. Chater, No. 1:95CV00075 LOD (E.D.Mo. July 29, 1996) (order and memorandum). For reversal, claimants argue (1) the Commissioner did not have the authority to reallocate undistributed corporate profits as wages to John Johnson, Sr., in 1991 for the purpose of computing excess earnings under 42 U.S.C. § 403 and (2) the Commissioner erred in "piercing the veil" of their family salary arrangements to reallocate some of the salary paid in 1990 from Joann Johnson to John Johnson, Sr., and to attribute self-employment profits to John Johnson, Sr. For the reasons discussed below, we affirm in part and reverse in part the order of the district court and remand the case to the district court for further proceedings.

The following statement of facts is taken in large part from the order and memorandum of the magistrate judge. John Johnson, Sr., filed an application for retirement insurance benefits and began receiving benefits in May 1989. His wife, Joann Johnson, filed an application for spouse's benefits, and their daughter, Ella Johnson, filed for child's benefits on the record of her father. In March 1993 the Social Security Administration (SSA) notified John Johnson, Sr., that he had received benefits greater than those to which he was entitled because of excess earnings. The excess earnings were wages and self-employment income attributable to him in 1990 and 1991 from two family farming corporations, Cowhill Farms, Inc., and J & J Hog Farms. John Johnson, Sr., was president of Cowhill Farms until January 1989, when he reduced his activities. In May 1989 he officially retired from Cowhill Farms, and Joann Johnson became president upon her husband's retirement. John Johnson, Sr., also retired from J & J Hog Farms in January 1989. Their son, John Johnson, Jr., took on more of the management responsibility for the two family farming corporations.

For 1990 John Johnson, Sr., reported wages of $6,000 and Joann Johnson reported wages of $9,482 from Cowhill Farms. The SSA reallocated their wages and determined that John Johnson, Sr., had received $9,482 in wages and Joann Johnson had received $6,000 in wages from Cowhill Farms. The SSA also determined that John Johnson, Sr., was self-employed with respect to J & J Hog Farms and had received profits of $6,217 in 1990. For 1991 John Johnson, Sr., reported wages of $7,000 and Joann Johnson reported wages of $8,400 from Cowhill Farms. The SSA agreed that $8,400 was a reasonable salary for Joann Johnson, but decided that John Johnson, Sr.'s work was worth twice that of his wife, and thus determined that his salary was $16,800. The SSA noted that in 1991 Cowhill Farms had "ample" profits available to pay these wages and to invest in corporate assets. Record at 228 (Special Determination dated Feb. 27, 1993) (noting 1991 corporate profits were $11,102 and expenses were down $13,484 over 1990). These amounts exceeded the exempt earnings amount for 1990 and 1991. The redeterminations were based on income and corporate tax returns, W-2 forms, self-employment questionnaires, interviews, and other information.

In June 1994 a hearing was held before an administrative law judge (ALJ). The ALJ found that the SSA had properly reallocated wages between John Johnson, Sr., and Joann Johnson for 1990 and 1991 and that John Johnson, Sr., had been overpaid retirement benefits in 1990 and 1991 in the amount of $5,488. (The ALJ also found that Ella Johnson had been overpaid benefits.) The ALJ found that John Johnson, Sr., had provided more than "minimal" services to the two corporations, including 25% of the labor, such as spraying and combining, for Cowhill Farms. The ALJ also found there had been considerable commingling of activities among family members, Joann Johnson's duties had not substantially increased in 1990 and 1991 to justify the significant increase in her salary after 1989, and John Johnson, Sr., had continued to exercise significant decision-making responsibility and had provided invaluable services to Cowhill Farms.

The ALJ's decision was affirmed by the Appeals Council. Claimants sought judicial review in federal district court. 42 U.S.C. § 405(g). The parties filed motions for summary judgment. The district court denied claimants' motion for summary judgment and granted summary judgment in favor of the Commissioner. This appeal followed. 28 U.S.C. § 1291; Fed. R.App. P. 4(a)(1).

We will uphold the final decision of the Commissioner if it is supported by substantial evidence in the record as a whole. 42 U.S.C. § 405(g). "Substantial evidence is that which a reasonable mind might accept as adequate to support the [Commissioner]'s conclusion." House v. Shalala, 34 F.3d 691, 694 (8th Cir.1994).

Qualified applicants are entitled to retirement benefits. 42 U.S.C. § 402(a). However, an applicant who is eligible for social security benefits may not work or engage in self-employment which results in income in excess of a certain amount per year. Id. § 402(f). "Wages are defined to mean all employment remuneration, irrespective of the name by which the compensation is designated or the way in which it is paid." Martin v. Sullivan, 894 F.2d 1520, 1531 (11th Cir.1990) (citing applicable Social Security regulations).

An applicant for benefits must submit the evidence necessary to establish that all entitlement requirements are met, and failure to submit such evidence shall be the basis for the SSA to determine that the conditions for receipt of Social Security benefits have not been met. The claimant, therefore, has the burden of rebutting the presumption of excess earnings under the Act.

Id. at 1531-32 (citations omitted).

"[T]he [Commissioner] has the right to examine the substance over the form of business transactions and relationships for purposes of the Social Security Act." Heer v. Secretary of Health & Human Services, 670 F.2d 653, 655 (6th Cir.1982) (per curiam). "Determination of an individual's earnings for Social Security purposes must be related to the reality of his [or her] connection with the labor market and cannot be based on paper allocation of income." Martin v. Sullivan, 894 F.2d at 1524, citing Reconsideration Redetermination at 2. In particular, the Commissioner can "pierce the veil" of fictitious family salary arrangements "where a claimant's alleged retirement and consequent shifting of salary to a family member is for the purpose of receiving Social Security [retirement] benefits." Id. at 1532. The Commissioner should consider the following factors before "piercing the veil" of "fictitious family salary arrangements": "(1) whether the claimant continues to contribute substantial and valuable services to the corporation; (2) whether the family member receiving the income increases his or her duties commensurate with the increase in salary; and (3) whether the family member's income is used to support the claimant." Heer v. Secretary of Health & Human Services, 670 F.2d at 655; cf. Diamond v. Harris, 512 F.Supp. 216, 219 (W.D.N.Y.1981) (holding Secretary cannot allocate half of wife's salary to claimant husband absent evidence that her salary was excessive or that she had not earned it or her salary increased in direct relation to decrease in his salary and cannot reclassify distributed Subchapter S dividends as salary absent evidence that dividends were paid as a result of his services).

UNDISTRIBUTED CORPORATE PROFITS

Claimants first argue the Commissioner does not have the authority to reallocate undistributed corporate profits as wages to John Johnson, Sr., for the purpose of computing excess earnings under 42 U.S.C. § 403, citing Ludeking v. Finch, 421 F.2d 499 (8th Cir.1970). Claimants also argue that, even assuming the Commissioner does have the authority to reallocate undistributed corporate profits, it was an abuse of discretion to do so because the undistributed corporate profits had been retained by the corporation for future capital improvements.

These arguments have not been preserved for appellate review. In the statement of facts in the memorandum in support of their motion for summary judgment in the district court, claimants referred to the SSA's determination that Cowhill Farms had "ample profits" to pay John Johnson, Sr., a salary of $16,800 in 1991, mem. at 6, funds which John Johnson, Sr., had never received, id., and which Cowhill Farms had retained for "grading/leveling" corporate lands. Id. at 7. Claimants challenged, among other things, the determination that John Johnson, Sr.'s services were worth twice as much those of Joann Johnson and the failure to specify what those invaluable services were. Id. at 9(p 5). Claimants did not challenge the reallocation of undistributed corporate profits in the district court review proceeding. However, we cannot affirm the decision of the Commissioner unless it is supported by substantial evidence. We have found nothing in this record which supports the Commissioner's decision to "reallocate" funds that have never in...