Letz v. Weinberger, Civ. A. No. 74-A-909.

• Decision Date: 22 September 1975
• Docket Number: Civ. A. No. 74-A-909.
• Parties: Johannah L. LETZ, Plaintiff, v. Caspar W. WEINBERGER, the Secretary of Health, Education and Welfare, Defendant.
• Court: U.S. District Court — District of Colorado

401 F. Supp. 598

Johannah L. LETZ, Plaintiff, v. Caspar W. WEINBERGER, the Secretary of Health, Education and Welfare, Defendant.

Civ. A. No. 74-A-909.

United States District Court, District of Colorado.

September 22, 1975.

Hindry & Meyer, P. C., by Thomas J. Constantine and John M. Titler, Denver, Colo., for plaintiff.

James L. Treece, U. S. Atty., by Carolyn J. McNeill, Asst. U. S. Atty., Ronald S. Luedemann, Acting Regional Atty., and Hamilton T. Brown, Asst. Regional Atty., Dept. of Health, Education and Welfare, Denver, Colo., for defendant.

MEMORANDUM OPINION AND ORDER

ARRAJ, Chief Judge.

Plaintiff Johannah Letz has instituted this action pursuant to 42 U. S.C. § 405(g), to review a "final decision" of the Department of Health, Education and Welfare (HEW) partially denying her old-age insurance benefits under the Social Security Act.¹ Both parties, after waiving oral argument, have moved for summary judgment, and the case is before the Court upon the pleadings, the briefs of the parties, and a certified copy of the record, including the transcript of the proceeding before the Appeals Council.²

Mrs. Letz is a "corsetiere," and according to her testimony operates a unique "bra and corset" shop—the only one like it "between Chicago and San Francisco." She designed and patented the first "up-lift" brassiere in 1932, and is the author of the book A Youthful Figure is Forever. Mrs. Letz has long advocated, with the apparent agreement of several doctors, the medical and therapeutic advantages of her designs over the more commercially popular "stretch" undergarments. However, she testified that "after pulling girdles for forty years" her work now "takes the stretch out of" her, and she has developed a condition similar to arthritis, which she terms "corsitis." She therefore determined in the early 1970's to sell her business.

Plaintiff was advised that the sale of the business, of which she was owner and sole proprietor, could be facilitated in several respects by incorporation. She thereafter incorporated the business pursuant to the laws of Colorado as Bra-Corset, Ltd., effective January 1, 1972. She became the owner of 55% of the stock of the corporation, with one son receiving 25% and another the remaining 20%. In 1972 the corporation paid Mrs. Letz for her duties as President, Secretary, and employee of the corporation $140 per month, the maximum monthly salary which she could earn without deductions being made from her Social Security benefits for "excess earnings."³

The corporation and shareholders also elected in 1972 to become a Small Business Corporation pursuant to Subchapter S of the Internal Revenue Code.⁴ The effect of this election was to avoid the duplication of taxes upon the corporate earnings and dividends paid to the shareholders. The net profits of the corporation were taxed to the shareholders as dividends, and the corporation itself was taxed as a partnership. The net taxable income of the corporation in 1972, after payment of plaintiff's "salary" of $1,680, was $1,736.00. That income, together with corporate profits from subsequent years, has been invested in a savings account as an "interest bearing corporate asset." None of the funds so invested have been distributed to Mrs. Letz or any other Bra-Corset, Ltd., shareholders.

Plaintiff filed her initial application for retirement insurance benefits with the Social Security Administration in 1968. She was awarded benefits in each year prior to 1972, subject to deductions for certain months in which she derived net earnings from self-employment in excess of the maximal amount permitted.

In 1972, the year here in question, the Administration determined that in spite of incorporation and receipt of a monthly salary below the maximum allowed plaintiff's benefits were still subject to deductions in several months. After notification of this determination in October, 1972, plaintiff sought reconsideration, and upon failing to obtain a recomputation, requested a hearing before an Administrative Law Judge, Bureau of Hearings and Appeal, Social Security Administration.

The Law Judge, on April 12, 1974, upheld the initial administrative decision. He found that plaintiff continued to render "substantial services" to the corporation in 1972 for value in excess of the amount permitted in every month except July and August. On April 22, 1974, plaintiff requested a review of the decision of the Administrative Law Judge by the Appeals Council. The request was granted and a decision rendered on August 7, 1974. The Council upheld the decision of the Law Judge, with the modification that plaintiff was also entitled to benefits for October, November, and December of 1972, but not the first six months. The determination was based upon the finding that plaintiff had "rendered services for wages" of $3,416 in the calendar year 1972, derived by adding the net corporate profit for the year to the salary paid to plaintiff. This was the "final decision" of HEW and the present action was then instituted for review of that decision.

Every individual who attains the age of 62 and satisfies certain specified conditions is entitled to old-age insurance benefits.⁵ Deductions may be made from the monthly payments, however, where the applicant has "excess earnings."⁶ Earnings is defined as the sum of wages for services rendered and net earnings from self-employment.⁷ Nevertheless, no part of excess earnings may be charged to any month in which the applicant did not engage in self-employment, or render services for wages in an amount greater than the maximum permitted.⁸ Thus, the benefits for any such month may not be reduced regardless of the total earnings during the year. It must therefore be determined whether plaintiff had "excess earnings" in 1972, and if so, to which months they may be applied.

The findings of the Secretary of course cannot be disturbed if supported by substantial evidence. 42 U.S.C. § 405; Hedge v. Richardson, 458 F.2d 1065 (10th Cir. 1972); Trujillo v. Richardson, 429 F.2d 1149 (10th Cir. 1970); Gardner v. Hall, 366 F.2d 132 (10th Cir. 1966). It is equally clear that the courts should not abdicate their "conventional judicial function to review," and where the administrative decision is based upon conclusions not reasonably reached upon due consideration of all the relevant issues presented, or it applies an arbitrary standard, or misinterprets the provisions of the Act or regulations or misconstrues other applicable law, the court may properly reject the agency's decision. Brannon v. Ribicoff, 200 F.Supp. 697, 700-01 (D.Mont.1961), and cases cited therein.

Under the Social Security Act provisions here in question, "net earnings from self-employment" means the gross income derived by an individual from any trade or business carried on by such individual, less allowable tax deductions.⁹ The performance of services by an individual as an employee, is not so included,¹⁰ but rather is "wages for services rendered."¹¹ The term "wages" means all remuneration for employment,¹² and generally are received by an employee at the time they are paid, whether actually or constructively.¹³ Wages are constructively paid when "they are credited to the account of or set apart for an employee so that they may be drawn upon by him at any time although not then actually reduced to possession."¹⁴

While it appears that the Administrative Law Judge based his decision on a finding that Mrs. Letz had net income from self-employment in excess of the maximum allowable,¹⁵ the Appeals Council found that plaintiff rendered services for wages as an employee in the same amount. It is not clear whether the Appeal Council's finding based on wages was an intentional or inadvertent reversal of the Law Judge's finding based on self-employment. It is in any event immaterial, for neither conclusion is supported by substantial evidence.

In upholding the decision of the Administrative Law Judge the Appeals Council found that the "corporate profit" must be considered "wages" because, although assigned to the corporation the funds were available to the plaintiff "at any time." There is no evidence to support the Council's conclusion, nor could such an inference be made from the evidence before it. There was no finding, nor any evidence presented, that Mrs. Letz received directly or indirectly any of the corporate funds. There was no assertion that the traditional fiduciary duties imposed upon Directors and Officers of corporations do not equally apply to those in similar positions with corporations which elect to be taxed as a Small Business Corporation under Subchapter S of the Internal Revenue Code. Nor was there any assertion that a majority stockholder who holds such positions does not owe the same duties to the corporation. The conclusion that the funds were available to Mrs. Letz "at any time" ignores the corporate existence, yet there was no finding, and no evidence presented, that the corporation was other than valid and in bona fide existence. Without any such evidence the finding must be considered "clearly erroneous as a matter of law." Nickol v. United States, 501 F.2d 1389 (10th Cir. 1974).

The thrust of the Secretary's contention appears to be that the plaintiff nevertheless has constructively received as dividends the corporate profit, and that such constructive dividends may be reclassified by the Secretary as salary for services rendered. The Secretary's position is not as well supported as Mrs. Letz's garments.

The Secretary has without question the authority and the duty to pierce any fictitious arrangements among family members, and others, to shift salary payments from one to the other when the arrangement is not in accord with reality. Gardner v. Hall, 366 F.2d 132 (10th Cir. 1966). However, the remuneration must be paid by the employer and received by the employee, either actually or constructively, before that power may be brought to bear...