holding substantial evidence supported Board’s denial of benefits where claimant’s business was a “sham” corporation “used simply as a conduit for the claimant’s personal funds”
How later courts described this case
- holding substantial evidence supported Board’s denial of benefits where claimant’s business was a “sham” corporation “used simply as a conduit for the claimant’s personal funds”
Written by the judges who cited it.
The opinion
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 11a0010p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
-
J.C. SCOTT,
-
Petitioner,
-
-
No. 09-4045
v.
,
>
-
-
UNITED STATES RAILROAD RETIREMENT
Respondent. -
BOARD,
-
N
On Petition for Review of an Order
of the Railroad Retirement Board.
No. 07-AP-0057.
Argued: November 30, 2010
Decided and Filed: January 11, 2011
Before: SILER, CLAY, and GIBBONS, Circuit Judges.
_________________
COUNSEL
ARGUED: Cary L. Bauer, GILREATH & ASSOCIATES, Knoxville, Tennessee, for
Petitioner. Kelli D. Johnson, U.S. RAILROAD RETIREMENT BOARD, Chicago,
Illinois, for Respondent. ON BRIEF: Sidney W. Gilreath, GILREATH &
ASSOCIATES, Knoxville, Tennessee, for Petitioner. Kelli D. Johnson, Steven A.
Bartholow, U.S. RAILROAD RETIREMENT BOARD, Chicago, Illinois, for
Respondent.
_________________
OPINION
_________________
SILER, Circuit Judge. J.C. Scott petitions for review of the Railroad Retirement
Board’s denial of his request for waiver of recovery of an overpayment in benefits under
45 U.S.C. § 231i(c). While receiving disability payments, Scott earned more per month
1
No. 09-4045 Scott v. United States Railroad Retirement Board Page 2
from work than the Act allowed, resulting in overpaid benefits. He repaid that amount
to the Board, but now seeks a waiver of recovery. The Board denied his request because
it determined that Scott was at fault in causing the overpayment. For the following
reasons, we AFFIRM.
I.
Scott suffered from post traumatic stress disorder resulting from an attack by a
coworker. In 1992, the Board awarded Scott an occupational disability annuity under
45 U.S.C. § 231i(c). The annuity was not payable for any month in which the annuitant
earned more than $400 per month from employment or self-employment, and Scott
agreed to notify the Board if he performed work while receiving his annuity.
From a data exchange with the Social Security Administration in 1997, the Board
was advised that Scott earned $2,800.00 in 1996 through the corporation Scott and
Associates, Inc. The Board interviewed Scott regarding his continuing disability. Scott
indicated that he is president of Scott and Associates, a “family run” Subchapter S
corporation that provides “railroad operations consulting.” He and his wife are the sole
owners of the corporation. Scott reported that he began working in July 1995 and his
monthly earnings were $350.00. The Board determined that Scott continued to be
disabled for his regular employment and remained eligible for benefits. The Board
reminded Scott that he must report earnings of more than $400.00 “from any work.”
In 1999, the Board’s Office of Inspector General (“OIG”) received a complaint
of possible fraud. The OIG found that Scott had become an expert in reconstructing rail
accidents. It discovered that Scott had been involved in approximately 50 cases,
charging the following hourly fees for his services: $175.00 per hour for depositions and
expert testimony; $100.00 per hour for fieldwork; and $85.00 per hour for travel. It also
found that Scott and Associates had received annual revenues of between $50,000.00
and $250,000.00 per year between 1996 and 2001. These earnings paid Scott’s salary
and his wife’s secretarial salary, with the remaining revenue disbursed to pay the
No. 09-4045 Scott v. United States Railroad Retirement Board Page 3
monthly rent for the company’s office space in their home, attorney fees, and various
personal expenses.
During the OIG investigation, in a letter dated December 20, 2001, Scott
informed the Board that he anticipated his monthly income would exceed the $400.00
per month restriction and requested a suspension of his disability annuity. The Board
suspended Scott’s annuity effective January 1, 2002.
The OIG determined that Scott owed $130,372.36 in overpaid benefits because
Scott and Associates did not function as a bona fide corporation. It concluded that
Scott’s reported earnings were not proportionate to the services he rendered to the
corporation. For example, Scott claimed he earned a salary of only $350.00 per month
for his expert services, while his wife earned $750.00 per month as secretary.
Additionally, the corporation’s income was freely available to Scott and his wife for
personal uses. The OIG recharacterized Scott’s contribution to the corporation as 80%
of the corporation’s earnings. With the 80% adjustment, Scott exceeded the $400.00 per
month cap on earnings.
In 2004, Scott and his wife were indicted by a federal grand jury on multiple
counts of mail fraud, theft of government funds, false statements, and making a false
report to the Board. Meanwhile, in January 2005, the Board sent Scott a debt recovery
letter advising him that he had received $130,372.36 in disability benefits that he was
not entitled to receive. Scott repaid that amount to the Board. In May 2005, the jury
acquitted Scott and his wife of all charges.
In light of the jury’s verdict, Scott requested that the Board return his repayment
and waive recovery of the overpayment. The Board responded that Scott had been
erroneously paid benefits, and informed Scott that the verdict in the United States
District Court was not a decision with respect to his entitlement to a disability annuity.
Scott requested reconsideration, arguing that he did not conceal information from the
Board and properly informed the Board of the nature of his business and annual
earnings. In 2006, the Board’s debt specialist determined that Scott was at fault in
causing the overpayment and denied Scott’s request for waiver of recovery. Scott then
No. 09-4045 Scott v. United States Railroad Retirement Board Page 4
appealed to the Board’s Bureau of Hearings and Appeals, maintaining that he had relied
on the advice of his attorney and accountant to set up the corporation to protect personal
assets and comply with the law. The hearings officer again found Scott at fault in
causing the overpayment and denied waiver of recovery.
Scott then appealed to a three-member Board. In 2008, a majority of the Board
found Scott at fault in causing the overpayment and denied his request for waiver. One
member of the panel dissented, pointing out that no findings had been made regarding
whether Scott reasonably relied on his accountant’s advice. The dissent noted, however,
that even if Scott was without fault, he must still show that recovery would cause
financial hardship or be against equity or good conscience. The dissent pointed out that
Scott declined to present financial records or other evidence on those issues. Scott
appealed the Board’s decision to this court.
II.
The findings of the Board as to the facts, if supported by the evidence and in the
absence of fraud, shall be conclusive. 45 U.S.C. § 231g. We should not set aside a
decision of the Board if it is supported by substantial evidence in the record and is not
based on an error of law. Coker v. Gielow, 806 F.2d 689, 693 (6th Cir. 1986). If the
record supports the Board’s decision, we must accept it without making an independent
evaluation of the evidence. Crenshaw v. R.R. Ret. Bd., 815 F.2d 1066, 1067 (6th Cir.
1987).
45 U.S.C. § 231i(a) requires the Board to recover an overpayment of annuity
benefits. Section 231i(c) provides for waiver of recovery when both (1) the individual
is without fault in causing the overpayment, and (2) recovery would be contrary to the
purpose of the Act or against equity or good conscience. By its language, § 231i(c)
gives discretion to the Board in making the decision of whether to grant waiver of
recovery. Phillips v. R.R. Ret. Bd., 833 F.2d 84, 84 (6th Cir. 1987).
Under the first prong, regulations promulgated pursuant to the Act define “fault”
as “a defect of judgment or conduct arising from inattention or bad faith.” 20 C.F.R.
No. 09-4045 Scott v. United States Railroad Retirement Board Page 5
§ 255.11(b). Judgment or conduct is defective when it deviates from the standard of
reasonable care necessary to comply with the Act. Id. “Unlike fraud, fault does not
require a deliberate intent to deceive.” Id. Whether an individual is at fault depends on
the circumstances surrounding the overpayment, and relevant factors include the ability
of the individual to understand the reporting requirements, the particular cause of
overpayment, and the number of occasions an individual may have made erroneous
statements. Id. § 255.11(c). The Board will find an individual at fault when he fails to
provide information to the Board that he “knew or should have known to be material,”
and when the individual makes a statement that he “knew or should have known was
incorrect.” Id. § 255.11(d)(1)(i)-(ii).
Under the second prong, it is contrary to the Act’s purpose to recover from an
individual who needs the overpaid annuity to meet ordinary and necessary living
expenses. Id. § 255.12(a). “If either income or resources, or a combination thereof, are
sufficient to meet such expenses, recovery of an overpayment is not contrary to the
purpose of the Act.” Id. Recovery is against equity or good conscience when an
individual relies on an overpayment, relinquishing a significant and valuable right or
changing his position to his detriment. Id. § 255.13.
Scott contends the Board asked the wrong question. He argues that the Board
evaluated whether he understood the earnings limitation, rather than asking whether
Scott knew the revenue from his corporation would be considered “earnings” for
purposes of his annuity. Scott argues that the jury’s acquittal indicates he was without
fault in causing the overpayment. He maintains that he relied in good faith on the advice
of professionals in structuring his corporation.
Substantial evidence supports the Board’s decision. A reasonable person, upon
review of the record, could determine that Scott was at fault in causing the overpayment.
Even though it is not unlawful for Scott to arrange his business affairs through a
corporate entity to qualify for government benefits, the Board may closely scrutinize the
arrangement to determine whether the corporation is bona fide. See Heer v. Sec’y of
Health & Human Servs., 670 F.2d 653, 655 (6th Cir. 1982) (“Secretary has the right to
No. 09-4045 Scott v. United States Railroad Retirement Board Page 6
examine the substance over the form of business transactions and relationships . . . .”);
Skalet v. Finch, 431 F.2d 452, 454 (6th Cir. 1970) (holding substantial evidence
supported Secretary’s determination where “amounts paid to [claimant’s wife] were in
reality compensation to the husband for services rendered”); Rose v. Richardson, 348 F.
Supp. 164, 167-68 (S.D. Ohio 1972) (holding substantial evidence supported Board’s
denial of benefits where claimant’s business was a “sham” corporation “used simply as
a conduit for the claimant’s personal funds”), aff’d, 493 F.2d 1406 (6th Cir. 1974)
(table).1 Courts have permitted the recharacterization of dividends from a Subchapter
S corporation where the dividends were received in lieu of salary, in order to reflect the
compensation commensurate to the individual’s service to the corporation. See Ludeking
v. Finch, 421 F.2d 499, 503 (8th Cir. 1970) (holding that distributed Subchapter S
dividends might properly be considered “wages”).
Moreover, Scott had opportunities to inform the Board of the extent of his
contributions to, and financial benefits from, Scott and Associates. Scott failed to inform
the Board of his return to work in 1995, which he agreed to do upon receiving benefits.
It was not until the Board contacted Scott in 1997 about the wages he filed with the
Social Security Administration that Scott acknowledged his return to work as a railroad
expert. Even after being contacted, Scott did not apprise the Board of the extent of his
work for Scott and Associates. Scott’s services as an expert in railroad related matters
were the sole source of revenue for the corporation, which generated hundreds of
thousands of dollars in earnings. Additionally, while Scott disclosed his $350.00
monthly salary, he failed to disclose his receipt of disbursements or his unfettered use
of corporate funds for personal expenses.
Because substantial evidence supports the Board’s conclusion that Scott was at
fault in causing the overpayment, it is not necessary to consider the second prong of the
analysis. However, even if we were to find Scott not at fault, he fails the second prong.
1
While these cases involved social security benefits rather than railroad retirement benefits, the
standards and rules for determining disability under the Railroad Retirement Act are identical to those
under the Social Security Act. See, e.g., Goodwin v. R.R. Ret. Bd., 546 F.2d 1169, 1172 (5th Cir. 1997);
Burleson v. R.R. Ret. Bd., 711 F.2d 861, 862 (8th Cir. 1983).
No. 09-4045 Scott v. United States Railroad Retirement Board Page 7
First, there is no evidence that recovery of overpayment would cause Scott financial
hardship. See 45 U.S.C. § 231i(a). Scott had sufficient resources in 2005 to write a
$130,372.36 check, and there is no indication he needs the overpayment to meet ordinary
and necessary living expenses. 20 C.F.R. § 255.12(a). As the dissenting member of the
Board pointed out, Scott declined to present evidence suggesting otherwise.
Similarly, there is no evidence that recovery of the overpayment is against equity
or good conscience. See 45 U.S.C. § 231i(c). Scott argues that the decision to bring
criminal charges rather than administrative remedies was designed to retaliate against
him because of his expert testimony against the railroad in numerous cases. He states
that sources which may be judicially noticed support this argument but fails to identify
these sources. Absent such a showing, there is no record evidence that the choice to
pursue criminal charges rather than administrative remedies constituted retaliation or
harassment by the Board.
AFFIRMED.