Roper v. Secretary of Health and Human Services, 1:89CV0395.

• Decision Date: 02 November 1990
• Docket Number: No. 1:89CV0395.,1:89CV0395.
• Parties: Steven ROPER, Plaintiff, v. SECRETARY OF HEALTH AND HUMAN SERVICES, Defendant.
• Court: U.S. District Court — Northern District of Ohio

769 F. Supp. 243

Steven ROPER, Plaintiff, v. SECRETARY OF HEALTH AND HUMAN SERVICES, Defendant.

No. 1:89CV0395.

United States District Court, N.D. Ohio, E.D.

November 2, 1990.

Charles P. Royer, Irwin S. Haiman, McCarthy, Lebit, Crystal & Haiman, Cleveland, Ohio, for plaintiff.

Michael A. Jeter, Office of The U.S. Atty., Cleveland, Ohio, for defendant.

MEMORANDUM AND ORDER

ANN ALDRICH, District Judge.

Steven Roper seeks review of a final determination of the Secretary of Health and Human Services ("Secretary") that Roper is obliged to repay $13,739 received as Social Security retirement benefits for the years 1983, 1984, and 1985. That determination was based on the Social Security Administration's ("SSA") decision that, for those three years, Roper had earnings from employment in excess of the statutory limits on such earnings by retirees.

The case was referred to a magistrate for preparation of a report and recommendation pursuant to 28 U.S.C. § 636(b)(1)(C). The magistrate has submitted his report recommending the Secretary's final determination be set aside and judgment be entered in Roper's favor. The magistrate found that Roper did not have excess earnings for the years 1983, 1984, and 1985, and is therefore not obliged to repay the social security retirement benefits he received during those years. The Secretary filed objections to this recommendation.

In accordance with 28 U.S.C. § 636(b)(1)(C), this Court has conducted a de novo review of the record. For the reasons stated, this Court adopts the magistrate's report and recommendation and reverses the Secretary's final determination, and enters judgment for Roper.

I.

Roper was born on November 7, 1921. He filed an application for social security retirement benefits in August 1983, and began receiving those benefits in December 1983.

Roper's wife and son were full owners of S. Roper Company. Roper was full owner of Real Care, Inc., a Subchapter S Corporation, whose primary function was to provide administrative services for S. Roper Company.

Roper spent about seven and one-half hours per day on the premises of the two businesses, not all of which time was spent on the performance of company business. Roper received about $500 a month from Real Care, Inc. for his services in 1984 and 1985. According to Roper, he did not receive more because the company could not afford to pay him more. He claims that these wages represent the total amount applicable to the earned income provisions of the Social Security Act. Roper had no earned income in 1983; $5,000 in wages from Real Care, Inc. in 1984; and $4,000 in wages from Real Care, Inc. in 1985.

In November 1986, SSA informed Roper that, based on its findings, he had earnings of $31,577 in 1983; $48,152 in 1984; and $29,174 in 1985; and that therefore, he was not entitled to social security retirement benefits for those years because the earnings were in excess of the statutory limit on employment earnings for retirees. See 42 U.S.C. § 403(b). SSA demanded repayment of the benefits Roper received during those years, $13,739.

The basis of SSA's determination of Roper's earnings was that he had used Real Care, Inc., and S. Roper Company to hide earnings under the guise of receipt of payments for rents, professional fees and services from one company to the other, and loans. According to SSA, this resulted in income far in excess of that permissible for Roper for the years in question.

Roper disputed SSA's determination of earnings and requested a reconsideration. SSA upheld its prior determination. Roper then filed a timely request for de novo review and a hearing. The case went before an Administrative Law Judge ("ALJ").

The ALJ addressed the specific bases of SSA's determination, then explored other possible ways Roper could have diverted, converted, or shielded income. After review of the record, the ALJ entered his decision. He found that:

(1) Roper was not converting earnings into non-earned income via rental receipts;

(2) the evidence demonstrated beyond any reasonable doubt that payments of professional fees and services by Real Care, Inc., and S. Roper Company constituted bona fide business expenses, and Roper did not receive any of those payments;

(3) payments from S. Roper Company to Real Care, Inc. constituted reasonable compensation for services performed and could not be added to Roper's earnings;

(4) Roper was not using the repayment of corporate obligations as a vehicle for diverting income from earnings to other forms;

(5) Roper was not diverting income to family members;

(6) Real Care, Inc., and S. Roper Company were active business concerns;

(7) Real Care, Inc. and S. Roper Company were separate and distinct legal entities both from each other and from Roper; and

(8) it was not likely that Roper created the corporations for the purpose of diverting earnings to a form not subject to the excess earnings deductions.

In short, the ALJ found that the basis of SSA's determination was wrong. The alleged sources of income could not be attributed to Roper, and amounts directly attributable to him were within the permissible limits and did not require deductions for excess earnings.

However, the ALJ went on to find that Roper had a significant opportunity to control his income because he controlled Real Care, Inc., and his immediate family controlled S. Roper Company. The ALJ determined that Roper provided a large part of the managerial expertise and made most of the major business decisions. As such, he was involved with performing substantial services. The ALJ concluded that Roper's work activities resembled self-employment more than working for wages. Consequently, the actual amount of wages or salary received was not determinative of the issue regarding the extent of earnings. See 20 C.F.R. § 404.429.

The ALJ found that Roper's salary was not representative of the service he provided. According to the ALJ, it was unlikely that someone with Roper's experience and background would perform the services he performed for the two companies if he and his family did not own them. The companies benefited by Roper's willingness to accept below-standard compensation in the amount the value of Roper's services exceeded the amount of salary he was paid. Since Roper owned 100% of Real Care, Inc., and his family owned 100% of S. Roper Company, the ALJ concluded that Roper received a benefit identical to that received by the companies. The ALJ found the value of Roper's services, rather than his salary, to be the proper measure of his earnings.

The ALJ then ascertained the value of Roper's services. He reviewed the payroll records of Real Care, Inc., and found that the highest paid employee had received compensation of nearly $20,000 in 1983. While there was no information concerning the nature of the services performed by that employee, the ALJ concluded that Roper's services must have been more valuable. As a result, the ALJ attributed an additional $20,000 per year income to Roper. This placed Roper's earnings above the amount which would permit him to receive any benefits for the years in question. Accordingly, the ALJ found that Roper was overpaid $13,739, which represents the total benefits he received for the years 1983, 1984, and 1985. The ALJ determined that Roper was required to repay that amount.

Roper presented a request for review of the ALJ's decision to the Appeals Council. His request was denied, and the decision of the ALJ became the final decision of the Secretary for purposes of judicial review.

Upon review, the magistrate recommends that the Secretary's final determination be reversed and judgment entered in Roper's favor because there is no evidence in the record of any irregularities in the structuring of the corporations or of any converting, diverting, or shielding of income which would permit the Secretary to attribute earnings to Roper.

II.

The Secretary's objection to the magistrate's report and recommendation is based on the arguments that: (1) the magistrate improperly shifted the burden of proving retirement to the Secretary; (2) the magistrate precluded the Secretary from arguing that Roper received tax benefits from the companies which can be attributed to him as remuneration that counts toward excess earnings because the operation of Real Care, Inc., and S. Roper Company was a sham; (3) the report and recommendation ignores the ALJ's credibility observations pertaining to Roper; and (4) the magistrate should have remanded the case for further development of the record by obtaining tax, accounting, and financial expertise to evaluate Roper's contentions and documents.

A.

The Secretary's first objection is that the magistrate improperly shifted the burden of proof. This Court recognizes that there is an express presumption that Roper had earnings of more than the applicable exempt amount. 42 U.S.C. § 403(f)(4)(A) & (B). However, the Secretary confuses Roper's burden of proof with this Court's duty to determine whether substantial evidence exists to support the Secretary's findings. See 42 U.S.C. § 405(g); Shelman v. Heckler, 821 F.2d 316, 319 (6th Cir.1987).

Substantial evidence is "more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Richardson v. Perales, 402 U.S. 389, 401, 91 S.Ct. 1420, 1427, 28 L.Ed.2d 842 (1971) (quoting Consolidated Edison Co. v. NLRB., 305 U.S. 197, 229, 59 S.Ct. 206, 217, 83 L.Ed. 126 (1938)). "Substantiality of the evidence must be based upon the record taken as a whole." Allen v. Califano, 613 F.2d 139, 145 (6th Cir.1980) (citing Futernick v. Richardson, 484 F.2d 647 (6th Cir. 1973)). "Substantial evidence is not simply some evidence, or even a great deal of evidence. Rather, the `substantiality of the evidence must take into account whatever in the record fairly detracts from its weight'." Beavers v. Secretary of Health, Education & Welfare, 577...