Rafal v. Flemming

• Decision Date: 09 March 1959
• Docket Number: Civ. A. No. 2494.
• Citation: 171 F. Supp. 490
• Court: U.S. District Court — Eastern District of Virginia
• Parties: Solomon RAFAL, Plaintiff, v. Arthur S. FLEMMING, Secretary of Health, Education and Welfare, Defendant.

171 F. Supp. 490

Solomon RAFAL, Plaintiff, v. Arthur S. FLEMMING, Secretary of Health, Education and Welfare, Defendant.

Civ. A. No. 2494.

United States District Court E. D. Virginia, Norfolk Division.

March 9, 1959.

Stanley E. Sacks, Norfolk, Va., for plaintiff.

John M. Hollis, U. S. Atty., Norfolk, Va., for defendant.

WALTER E. HOFFMAN, District Judge.

This is an action under the provisions of the Social Security Act, 42 U.S.C.A. § 401 et seq., in which plaintiff contends that he is aggrieved by the final decision of the Social Security Administration, Department of Health, Education and Welfare, dated May 21, 1957, wherein plaintiff was denied old-age benefits as an alleged fully insured individual having attained a retirement age. 42 U.S. C.A. § 414(a).

The ultimate question for determination is whether plaintiff was a "fully insured individual" who had acquired nine quarters of coverage by reason of "self-employment income" to entitle him to old-age benefits under the Social Security Act, 42 U.S.C.A. § 401 et seq.

Following his written application on April 16, 1956, the local and regional claims offices denied plaintiff any benefits under the Act. Plaintiff was then granted a hearing before a Referee who, on March 21, 1957, after considering the evidence presented, denied the benefits for reasons hereinafter stated. Plaintiff appealed to the Appeals Council of the Social Security Administration of the Department of Health, Education and Welfare, where the decision of the Referee was affirmed on May 21, 1957; the Appeals Council adopting the written opinion of the Referee and his "statement as to the evidentiary facts" and "all of the inferences, findings and conclusions of the referee based upon the evidentiary facts". Having exhausted his administrative remedies, plaintiff seeks this judicial review within the time prescribed by law under 42 U.S.C.A. § 405(g). It is recognized that the statute specifies that "The findings of the Secretary as to any fact, if supported by substantial evidence, shall be conclusive".

The Administrative Procedure Act, 5 U.S.C.A. § 1009(e), prescribes the function of a judicial review of agency action. The Administrative Procedure Act is read in pari materia with the appropriate section of the Social Security Act on the subject of judicial review. Goldman v. Folsom, 3 Cir., 246 F.2d 776; Willapoint Oysters v. Ewing, 9 Cir., 174 F.2d 676, certiorari denied 338 U.S. 860, 70 S.Ct. 101, 94 L.Ed. 527; Julian v. Folsom, D.C., 160 F.Supp. 747. With that in mind, let us consider the facts which are, as stated in the Referee's decision, not in dispute.

Plaintiff was born in Russia on July 5, 1890, but has lived in Norfolk, Virginia, for many years. Some years ago he organized the Rafal Packing Company and associated with him in said business were his two sons, Bernard and David. In 1952 plaintiff decided to retire from business, and he thereupon sold his interest in Rafal Packing Company to his two sons for a consideration of $17,000, evidenced by a promissory note dated January 17, 1952, payable weekly at the rate of $50 beginning January 28, 1952¹. Plaintiff had invested the aggregate sum of $21,000 in said business and, to the extent that it may be considered in light of the total investment, the sales price of $17,000 apparently represented an allowance of $2,000 to each of plaintiff's sons. At the time of his retirement in 1952, plaintiff had accumulated four quarters of coverage for qualification under the provisions of the Social Security Act, whereas, under the terms of the Act, nine quarters are required before one is entitled to old-age benefits. Plaintiff performed no services for Rafal Packing Company after January, 1952, until January, 1954, when the partnership agreement in controversy was executed.

It is conceded by all parties that there is nothing improper or questionable about a person entering bona fide employment for the express purpose of acquiring a wage record which will enable him to qualify for an old-age insurance benefit, and that such action is clearly within the spirit, as well as the letter, of the law.

Plaintiff, following his retirement in 1952, discovered that he did not have a sufficient number of quarters to qualify him for coverage under the Act. Admittedly for the recognized legitimate purpose of acquiring the additional quarters to entitle him to old-age benefits, the plaintiff, on January 5, 1954, entered into a partnership agreement with his sons, the details of which included a provision that the three partners would (1) share equally in the losses and (2) give undivided time and attention to the business. No capital was invested by plaintiff. Each of the two sons was permitted to draw $65 per week for living expenses to be charged against his respective share of the profits. As to the plaintiff, the agreement contained the following language which is the crux of this case:

"5. The said Solomon Rafal shall be entitled to the sum of Three Thousand Six Hundred ($3,600.00) Dollars per year from the profits of said partnership, and shall be permitted to draw the sum of Fifty ($50.00) Dollars per week for his living expenses, which said weekly sums so drawn shall be charged against the last mentioned annual sum. It is further agreed between the parties hereto that all such sums so paid to the said Solomon Rafal hereunder shall also be credited against the payment of that certain negotiable promissory note of Seventeen Thousand ($17,000.00) Dollars, bearing date January 17, 1952, and made by the parties of the second part the sons to the order of the party of the first part plaintiff herein; to the end that the obligation of said note shall be reduced by an amount equal to whatever amount the said Solomon Rafal shall draw from this said partnership.

* * * * * *

"8. In the event of the death of the party of the first part, or in any event whereby the said party of the first part shall no longer draw any funds from the firm for living expenses or for annual profits, then the balance due on the promissory note above mentioned shall again become due and payable in the manner therein set out, which provision shall be in lieu of any and all interest of the party of the first part Solomon Rafal in and to said firm and/or its assets, and nothing contained in paragraph 6 of this agreement, shall be construed as creating any interest in the party of the first part Solomon Rafal, or his heirs, other than what is mentioned in this paragraph."

Under the foregoing agreement it will be noted that plaintiff would draw a maximum of $3,600 per annum from the profits, if any, of the partnership, and that this amount, when paid to plaintiff, would automatically be credited upon the balance due on the $17,000 note. The weekly drawing account for living expenses was regularly paid by check and, at the end of each year, plaintiff received a check for the balance to aggregate the sum of $3,600; the total payments to plaintiff being credited upon the note. It is conceded that plaintiff worked 48 hours per week during all of 1954 and 1955, or a total of eight quarters to be added to his four quarters in 1951, or three more quarters than the statutory minimum to qualify for coverage under the Act. The partnership was dissolved as of December 30, 1955, and notice of such dissolution appeared in a legal advertisement contained in a local newspaper from January 12-16, 1956.

Partnership tax returns reflected the distributive share of the profits paid to plaintiff during the years in question. Plaintiff reported on his individual income tax returns the $3,600 received from the partnership for 1954 and 1955.

During the same two-year period, if plaintiff had not performed services as a partner of Rafal Packing Company, he would have received $2,600 per annum at the rate of $50 per week in the form of payments on the note executed by his sons. Admittedly he could properly have used this money as a gift to his sons by crediting the amount upon the note. By entering into the partnership in January, 1954, he received $1,000 per annum in excess of the amount his sons were obligated to pay him according to the terms of the note. The Referee did not discuss this phase of the case.

The essence of the Referee's conclusions is contained in the following language:

"The Social Security Act does not contain any provision prohibiting any individual from obtaining employment for the sole purpose of acquiring quarters for coverage, which was freely admitted in this case. The referee takes no exception to this action on the part of claimant and in no way questioned the credibility of either witness. There is no question of fact in this case as the facts are agreed upon. The sole question is whether the $3,600.00 per annum received by claimant from the Rafal Packing Company was net earnings from self-employment. The evidence is clear that the money received by claimant was credited to the note as provided in the agreement above quoted as was the intention of all parties to the agreement. The generosity of the father to his sons in this case is to be commended. However, it appears that this generosity defeated the purpose claimant had in mind of obtaining additional quarters of coverage. This remuneration received by claimant was, in the opinion of the referee, not a payment from the profits of the business, but was payment made against the obligation of the promissory note, and was, therefore, not net earnings from self-employment. The referee finds that claimant did not have net earnings from self-employment in excess of $400.00 for the taxable years 1954 and 1955. He further finds that claimant has only four quarters of coverage and is not a fully insured individual under the provisions of the Social Security Act."

Effectively, the Referee ruled that plaintiff made a gift of his services during the two years in controversy. Whether he made a gift of his services or a gift of...