SSR 91-1c: Rescinded

Rescinded by Federal Register Vol. 76, No. 213, page 68243 on Nov 3, 2011

SSR 91-1c

EFFECTIVE/PUBLICATION DATE: 02/05/91

20 CFR 404.415(a) and 404.430

Martin v. Sullivan, 894 F.2d 1520 (11th Cir. 1990)

FAY, Circuit Judge:

This case establishes for the Eleventh Circuit the standards for piercing

the veil of fictitious family salary arrangements for the purpose of

obtaining Social Security benefits. Specifically, we must determine if

plaintiff-appellant Ted Martin was retired from his closely held family

corporation on January 1, 1985. Following appropriate proceedings by the

Social Security Administration (SSA), the Secretary of Health and Human

Services (Secretary) concluded that Martin was not eligible for Social

Security payments because he was not retired as he had claimed. Pursuant

to Martin's requested review of the denial of Social Security benefits,

the district court upheld the decision of the Secretary. This appeal

ensued. From our review of the Secretary's findings of fact and

conclusions of law, we also have determined that Martin was not retired,

and therefore not entitled to Social Security benefits. Accordingly, we

affirm.

I. FACTS: TRYING TO DANCE TO THE BEAT OF THE MUSIC MAN

A. Overture

Martin, born November 25, 1921, has been a self-employed musician and

band-leader throughout his working life. Ultimately, he managed his own

band-orchestra business, which included hiring musicians and soliciting

bookings for musical engagements. Martin operated his sole proprietorship

from his home in North Miami Beach, Florida. His wife performed clerical

duties. She has no recollection of whether or not she was paid for her

services while Martin's music business was a sole proprietorship.

R1-5-43.

ely, he managed his own

band-orchestra business, which included hiring musicians and soliciting

bookings for musical engagements. Martin operated his sole proprietorship

from his home in North Miami Beach, Florida. His wife performed clerical

duties. She has no recollection of whether or not she was paid for her

services while Martin's music business was a sole proprietorship.

R1-5-43.

On September 14, 1982, Martin incorporated his music business as Ted

Martin Enterprises, Inc., for the express purpose of obtaining retirement

benefits. R1-5-31. The address of the corporation remained the Martin

residence. Martin was president and his wife was secretary-treasurer. They

were the directors and each owned fifty percent of the corporate stock.

After incorporation, Martin continued to manage the music business and his

wife remained responsible for clerical duties. The corporate tax return

for fiscal year 1982, September 14, 1982 to August 31, 1983, shows gross

receipts of $186,683.00, with Martin's full-time salary as $22,254.00 and

his wife's part-time salary as $5,215.00. R1-5-156-57.

B. The First Tune

Martin filed his first claim for retirement benefits with the SSA on

September 28, 1983. R1-5-53-56. He stated that his total earnings in 1982

were $35,886.00 and that his expected earnings in 1983 and 1984 would be

$24,000.00 and $5,000.00, respectively. R1-5-53,55. Therefore, he claimed

that he would be retired effective January 1, 1984, with monthly earnings

in 1984 of no more than $430.00. R1-5-55. Martin's statements to the SSA

represented that, when he retired in 1984, he would do "less actual work,"

but that he would "continue making all major decisions." R1-5-111.

s in 1983 and 1984 would be

$24,000.00 and $5,000.00, respectively. R1-5-53,55. Therefore, he claimed

that he would be retired effective January 1, 1984, with monthly earnings

in 1984 of no more than $430.00. R1-5-55. Martin's statements to the SSA

represented that, when he retired in 1984, he would do "less actual work,"

but that he would "continue making all major decisions." R1-5-111.

In response to an SSA contact, Martin represented that his wife would

assume the duties of booking engagements, but he also conceded that she

merely obtained information over the telephone and that he remained the

decision maker regarding bookings. R-1-57-58. The contact report concluded

that Martin had failed to prove his intention of future retirement, and

that his retirement appeared "remote." R1-5-58. The SSA Special

Determination, issued on October 11, 1983, denied retirement benefits to

Martin because he had not established his retirement or reduction in work

activity. [1] Martin did not

appeal this SSA determination.

C. Same Song, Second Verse

On January 5, 1984, Martin filed his second application for retirement

benefits with the SSA. R1-5-60-63. Therein, he stated that his total

earnings for 1982 were $21,000.00, and that his expected earnings for 1983

and 1984 would be $19,000.00 and $2,000.00, respectively. R1-5-62. Thus,

Martin again claimed that he would retire effective January 1, 1984,

earning no more than $430.00 a month in 1984. R1-5-62. In response to the

application question asking if he had "ever filed an application for

Social Security benefits," Martin answered "No." R1-5-60. The SSA contact

report shows that Martin had not supported his claims of reduction in his

corporate income and services, and that his intention to make his wife

corporate president was "absurd," since she was not a musician and

performed "very little meaningful work" in the business. R1-5-64.

he had "ever filed an application for

Social Security benefits," Martin answered "No." R1-5-60. The SSA contact

report shows that Martin had not supported his claims of reduction in his

corporate income and services, and that his intention to make his wife

corporate president was "absurd," since she was not a musician and

performed "very little meaningful work" in the business. R1-5-64.

The SSA Special Determination again denied retirement benefits to Martin

because he had not verified his reduction in

services. [2] Martin did not

appeal this SSA decision. By letter on January 12, 1984, the SSA reminded

Martin that he had filed a claim for retirement benefits in September,

1983, and that his second application would be treated as a duplicate

claim; therefore, no action would be taken on the second request. R1-5-67.

The SSA contact report on January 17, 1984, documents Martin's failure to

provide information for a current and future earnings determination as

follows: "It appears apparent that W/Es [wage earner's] sole intent is to

avoid work reductions to get his payments. He is indefinite as to what he

will earn and only states that it will (his earnings) be under the allowed

amount since he knows payments could be initiated by saying so." R1-5-68.

The corporate tax return for 1983, September 1, 1983 to August 31, 1984,

shows gross receipts of $236,742.00 and Martin's full-time salary as

$7,200.00 and his wife's part-time salary as $16,800.00. R1-5-148-49.

D. A Different Melody

hat he

will earn and only states that it will (his earnings) be under the allowed

amount since he knows payments could be initiated by saying so." R1-5-68.

The corporate tax return for 1983, September 1, 1983 to August 31, 1984,

shows gross receipts of $236,742.00 and Martin's full-time salary as

$7,200.00 and his wife's part-time salary as $16,800.00. R1-5-148-49.

D. A Different Melody

The corporate tax return for 1984, September 1, 1984 to August 31, 1985,

shows gross receipts of $213,142.00, Martin's full-time salary as

$4,050.00 and his wife's part-time salary as $9,250.00. R1-5-171-72. On

September 9, 1985, Martin's counsel sent to the SSA requested corporate

tax returns for fiscal years 1982 and 1983, and the Martins' personal tax

return for 1984. R1-5-124. Additionally, the corporate minutes of January

7, 1985 were enclosed in order to substantiate the change in corporate

officers and Martin's retirement. Those minutes show that, effective

January 7, 1985, Martin's wife became the new president of the corporation

at a salary of $150.00 per week and that Martin became the new vice

president-secretary at a salary of $100.00 per week. R1-5-130.

On November 22, 1985, the SSA issued a Special Determination that Martin

was not entitled to retirement benefits because the wages proportioned to

him and his spouse were not commensurate with their respective value to

the corporation. [3] This

determination was communicated to Martin in a letter dated November 26,

1985. R1-5-72. The letter also informed Martin that he could request

reconsideration within sixty days as well as submit additional

evidence.

was not entitled to retirement benefits because the wages proportioned to

him and his spouse were not commensurate with their respective value to

the corporation. [3] This

determination was communicated to Martin in a letter dated November 26,

1985. R1-5-72. The letter also informed Martin that he could request

reconsideration within sixty days as well as submit additional

evidence.

On December 9, 1985, Martin requested a SSA hearing and stated his

disagreement with the SSA determination as to his retirement as follows:

"The value of my 1984 wages are irrelevant. I am alleging retirement since

January 1, 1985. I am not alleging retirement at any time between November

25, 1983, upon attaining age 62, and December 31, 1984." R1-5-73.

Therefore, Martin changed his song from his two previous, unsuccessful

applications for retirement benefits by abandoning his prior claims of

retirement on January 1, 1984, and asserting a new retirement date of

January 1, 1985. [4]

On January 21, 1986, an administrative law judge in the SSA Office of

Hearings and Appeals dismissed Martin's request for a hearing as

premature, since he had not requested and obtained the requisite

reconsidered determination. R1-5-76. Martin further was advised that, if

he disagreed with the dismissal of his hearing request, then he had the

right to request the Appeals Council to review the decision within sixty

days. R1-5-75. On January 23, 1986, Martin's counsel completed a SSA

Request for Reconsideration application, alleging Martin's retirement as

of January 1, 1985. R1-5-78.

reconsidered determination. R1-5-76. Martin further was advised that, if

he disagreed with the dismissal of his hearing request, then he had the

right to request the Appeals Council to review the decision within sixty

days. R1-5-75. On January 23, 1986, Martin's counsel completed a SSA

Request for Reconsideration application, alleging Martin's retirement as

of January 1, 1985. R1-5-78.

The SSA Reconsideration Review Section independently reviewed the

evidence upon which the original SSA determination of Martin's

ineligibility for retirement benefits was based. In affirming the initial

decision, the Reconsideration Determination, issued on April 15, 1986,

carefully detailed the record examination and reasoning under the

applicable regulations. R1-5-80-85. The Reconsideration Determination

explains the close SSA scrutiny required when an individual arranges his

business affairs to acquire Social Security benefits that he would not

obtain otherwise:

Reconsideration Determination at 2. R1-5-81.

The Reconsideration Determination contrasts the representations

evidencing his retirement that Martin made to the SSA with the business

realities that the internal investigation revealed. Martin stated that he

was not performing as often as he had before 1985, that he worked fifteen

to twenty hours per month in 1985 as opposed to that amount of time per

week previously, and that his salary as vice president-secretary was

$100.00 per week, while his wife earned 150.00 weekly as president.

Martin's corporate tax returns, however, show gross receipts of

$236,742.00 during fiscal year 1983 and gross receipts of $213,142.00 for

fiscal year 1984

, that he worked fifteen

to twenty hours per month in 1985 as opposed to that amount of time per

week previously, and that his salary as vice president-secretary was

$100.00 per week, while his wife earned 150.00 weekly as president.

Martin's corporate tax returns, however, show gross receipts of

$236,742.00 during fiscal year 1983 and gross receipts of $213,142.00 for

fiscal year 1984. Since the 1984 fiscal year included eight months of

1985, when Martin claimed that he had curtailed his business activities,

the Reconsideration Determination concludes that the slight decrease in

gross earnings in the 1984 fiscal year compare with the previous year

indicated that Martin's business activities and income had not declined

significantly. R1-5-83.

Martin also represented to the SSA that neither he nor his wife solicited

business, and that bookings were arranged by the party who hired the band

with whom he and his wife had no dealings. The business expenses for the

1984 fiscal year, however, show telephone expenses of $1,076.00, travel

and entertainment costs $4,028.80, gifts to clients of $735.00, office

expenses of $4,318.00, and stationery and printing costs of $204.00. Id. These expenses indicated to the SSA that Martin actively

solicited business. Furthermore, Martin informed the SSA that he had no

suppliers since the musicians purchased their instruments and clothing.

Nevertheless, the 1984 corporate tax return reveals payments of $1,549.00

for costumes and accessories and $401.00 for entertainment supplies. Id.

tationery and printing costs of $204.00. Id. These expenses indicated to the SSA that Martin actively

solicited business. Furthermore, Martin informed the SSA that he had no

suppliers since the musicians purchased their instruments and clothing.

Nevertheless, the 1984 corporate tax return reveals payments of $1,549.00

for costumes and accessories and $401.00 for entertainment supplies. Id.

Additionally the Reconsideration Determination analyzes the corporate tax

returns, showing the salaries of Martin and his wife. The 1982 return

shows Martin's salary as $22,254.00 and his wife's compensation as

$5,215.00, the 1983 return shows Martin's salary as $7,200.00 and his

wife's pay as $16,800.00, and the 1984 return shows Martin's full-time

salary as $4,050.00 and his wife's part-time earnings as $9,250.00. In

affirming the initial SSA determination, the Reconsideration Determination

concludes that Martin had shifted a significant portion of his salary to

his wife, that the value of his services was more than his salary

represented because his duties had remained the same, and that he was in a

position to control the amount of his

earnings. [5]

E. The Hearing: Martin Sings the Blues

Martin filed a hearing request on April 28, 1986, and claimed that he

disagreed with the SSA reconsidered determination because he was

"retired." R1-5-86. The hearing to determine if Martin was retired on

January 1, 1985, was held on July 3, 1986, before an administrative law

judge. R1-5-17-52. In the hearing, Martin acknowledged that he managed the

business, made the business decisions, arranged the bookings, determined

the corporate salaries, and did promotional work. R1-5-25, 27, 34-35, 38.

Yet, he stated that he worked in the business five to ten hours a week.

R1-5-36. He testified that his wife's responsibilities remained the same

after incorporation. R1-5-34. Nevertheless, they each received a salary of

$400.00 per month after January, 1985. R1-5-36.

ess decisions, arranged the bookings, determined

the corporate salaries, and did promotional work. R1-5-25, 27, 34-35, 38.

Yet, he stated that he worked in the business five to ten hours a week.

R1-5-36. He testified that his wife's responsibilities remained the same

after incorporation. R1-5-34. Nevertheless, they each received a salary of

$400.00 per month after January, 1985. R1-5-36.

Martin explained the diminished bookings, fifteen to eighteen a month

prior to January, 1985, compared with eight or nine per month after that

date, as a reflection of the times and the general preference for younger

bands playing rock music. R1-5-25, 27. Martin testified that he directed

or played with the band on seven or eight bookings a month, or

approximately twenty-five to thirty-five hours a month for which he was

paid $60.00 per hour. R1-5-39-40. This money earned by Martin was in

addition to his monthly corporate salary. R1-5-48. Martin estimated that,

for $100,000.00 gross income per year, he would make $10,000.00 to

$15,000.00 net profit. R1-5-48-49. Martin also testified that the

corporation had $80,000.00 in retained earnings, which he planned to

invest in his retirement plan. R1-5-36-37.

Although his wife became the corporate president on January 1, 1985, she

did not mention any management responsibilities when she testified as to

her corporate duties. She stated that her "office work," performed at

home, consisted of paper work, the payroll and computer work. R1-5-43-45.

While she did the "banking," or made the deposits, she was unable to

approximate the corporate gross income for the then current fiscal year,

commencing September 1, 1985. R1-5-45-46. She also could not estimate the

percentage that business was "down" for that year from the previous year. Id.

ce work," performed at

home, consisted of paper work, the payroll and computer work. R1-5-43-45.

While she did the "banking," or made the deposits, she was unable to

approximate the corporate gross income for the then current fiscal year,

commencing September 1, 1985. R1-5-45-46. She also could not estimate the

percentage that business was "down" for that year from the previous year. Id.

The administrative law judge issued his decision on November 25, 1986.

R1-5-11-16. He reviewed Martin's various applications and representations

in order to receive Social Security benefits as well as the applicable law

and regulations. The decision contains the following reasoning and

conclusions regarding Martin's alleged "retirement:"

Office of Hearings and Appeals Decision at 3-5 (Nov. 25, 1986).

R1-5-13-15. Therefore, the administrative law judge determined that Martin

had failed to establish that he was retired and entitled to Social

Security benefits. Accompanying the decision was a notification informing

Martin that he could request review of the decision by the SSA Appeals

Council within sixty days. R1-5-10.

On December 1, 1986, Martin's counsel requested review of the

administrative law judge's decision by the Appeals Council because Martin

claimed that he had "been 'retired' since January 1, 1985." R1-5-5.

Finding no basis under SSA regulations for granting a review of the

hearing decision, the Appeals Council on February 2, 1987, denied Martin's

request for review and informed him that the hearing decision was the

final decision in his case by the

Secretary. [6] R1-5-3-4. Martin

further was advised that he had sixty days from receipt of the denial of

review of the Appeals Council to file a complaint in district court.

F. The Score of Martin's Music in the District Court

, the Appeals Council on February 2, 1987, denied Martin's

request for review and informed him that the hearing decision was the

final decision in his case by the

Secretary. [6] R1-5-3-4. Martin

further was advised that he had sixty days from receipt of the denial of

review of the Appeals Council to file a complaint in district court.

F. The Score of Martin's Music in the District Court

Having exhausted his administrative remedies, Martin filed a complaint in

the United States District Court for the Southern District of Florida on

March 12, 1987, pursuant to section 205(g) of the Social Security Act (the

Act), codified as amended at 42 U.S.C. § 401(g).

(1982). [7] R1-1. Plaintiff

Martin moved for summary judgment alleging that he had proved that he was

retired within the meaning of the Act, that he was entitled to perform

significant services on a limited basis as an employee of the corporation,

that his salary represented a valid corporate decision as to the value of

his reduced services, that there was no evidence that wages were shifted,

and that plaintiff's actual compensation was less than the amount which

would necessitate a deduction. The Secretary moved for judgment on the

pleadings, contending that the evidence showed that, after formation of

the corporation, plaintiff and his wife shifted salaries in a manner which

was not commensurate with the value of their services. Accordingly,

defendant argued that Martin's services in 1985 were in excess of the

exempt amount for retirement and that plaintiff failed to establish his

retirement, effective January 1, 1985, for Social Security purposes.

ence showed that, after formation of

the corporation, plaintiff and his wife shifted salaries in a manner which

was not commensurate with the value of their services. Accordingly,

defendant argued that Martin's services in 1985 were in excess of the

exempt amount for retirement and that plaintiff failed to establish his

retirement, effective January 1, 1985, for Social Security purposes.

After reviewing the entire record, the district court on June 10, 1988,

issued its opinion affirming the Secretary's final decision, denying

plaintiff's motion for summary judgment, and granting defendant's motion

for judgment on the pleadings. R1-14. The district court concluded that

Martin had failed to meet his burden of proving that he had not earned

wages in excess of the maximum amount provided by law. R1-14-11.

Specifically, the district court found that the Secretary's decision was

correct because Martin and his wife shifted incomes without substantial

changes in their corporate services, and because the Martins' 1985

personal income tax return shows an unexplained dividend payment of

$32,599.00. R1-14-10-11.

Plaintiff timely moved to alter or amend judgment under Federal Rule of

Civil Procedure 59(e). R1-15. With respect to the dividend payment

appearing on the Martins' 1985 personal income tax return, plaintiff

argued that he had not been questioned by the SSA regarding this amount

and that the dividends were first mentioned by the Secretary in the

memorandum in support of his motion for judgment on the pleadings. Martin

contended that he should not be denied Social Security benefits based on a

factual issue first raised on judicial review and that the administrative

record ordinarily could not be supplemented at the appellate level

by the SSA regarding this amount

and that the dividends were first mentioned by the Secretary in the

memorandum in support of his motion for judgment on the pleadings. Martin

contended that he should not be denied Social Security benefits based on a

factual issue first raised on judicial review and that the administrative

record ordinarily could not be supplemented at the appellate level.

Nevertheless, he added to the record a copy of the Martins' entire 1985

personal tax return in order to show that the subject dividends were from

investments independent of Ted Martin Enterprises, Inc., as well as the

Martins' 1986 individual tax return and the 1984 and 1985 corporate tax

returns in order to show that the corporation was not paying him dividends

in lieu of salary. Pending the district court's decision regarding

altering or amending judgment, plaintiff appealed the district court's

judgment to this court to preserve his appellate right in the event that

the pending motion did not toll the appeal time under Rule 4 of the

Federal Rules of Appellate

Procedure. [8]

The district court's December 12, 1988 order concerning plaintiff's Rule

59(e) motion reaffirms as reasonable the administrative law judge's

conclusion that Martin was not retired within the meaning of the Act as

well as its consideration of the subject dividends. R2-22. Regarding the

dividends, the district court found that the tax information was part of

the record reviewed by the administrative law judge and that plaintiff

could have supplemented the record at the administrative hearing or before

entry of the district court's judgment. Therefore, the district court

rejected plaintiff's submission of new evidence at the judicial level when

the proper forum was the administrative level and denied plaintiff's

motion to alter or amend the judgment

ord reviewed by the administrative law judge and that plaintiff

could have supplemented the record at the administrative hearing or before

entry of the district court's judgment. Therefore, the district court

rejected plaintiff's submission of new evidence at the judicial level when

the proper forum was the administrative level and denied plaintiff's

motion to alter or amend the judgment. Consequently, the district court

concluded that all parties had the opportunity to present their positions

and that the dividend issue was properly

considered. [9] Because the

district court's ruling on plaintiff's Rule 59(e) motion nullified

Martin's former appeal to this court pursuant to Rule

4(a)(4) [10] , plaintiff Martin

filed a second notice of appeal on December 14, 1988, from the June 10,

1988 final judgment of the district court to this court.

II. THE LEGAL ORCHESTRATION

A. The Critical Review of Martin's Music

Our review of the Secretary's decision, as that of the district court, is

demarcated by a deferential reconsideration of the findings of fact and an

exacting examination of the conclusions of law. See Graham v.

Bowen, 790 F.2d 1572, 1574-75 (11th Cir. 1986). The Act dictates that

the Secretary's factual findings are conclusive if supported by

"substantial evidence." [11] 42

U.S.C. § 405(g) (1982). Therefore, "[w]e may not decide the facts anew,

reweigh the evidence, or substitute our judgment for that of the

Secretary;" rather "[w]e must scrutinize the records as a whole to

determine if the decision reached is reasonable and supported by

substantial evidence." Bloodsworth v. Heckler, 703 F.2d 1233, 1239

(11th Cir. 1983) (citations omitted); see Powell ex rel. Powell v.

Heckler, 773 F.2d 1572, 1575 (11th Cir. 1985) (per curiam)

reweigh the evidence, or substitute our judgment for that of the

Secretary;" rather "[w]e must scrutinize the records as a whole to

determine if the decision reached is reasonable and supported by

substantial evidence." Bloodsworth v. Heckler, 703 F.2d 1233, 1239

(11th Cir. 1983) (citations omitted); see Powell ex rel. Powell v.

Heckler, 773 F.2d 1572, 1575 (11th Cir. 1985) (per curiam).

Substantial evidence as to the Secretary's factual findings is more than a

scintilla, but less than a preponderance: "[i]t is such relevant evidence

as a reasonable person would accept as adequate to support a

conclusion." [12] Bloodsworth, 703 F.2d at 1239 (citing Richardson v. Perales, 402 U.S. 389, 401, 91 S.Ct. 1420, 1427, 28 L.Ed.2d 842 (1971); see

McRoberts v. Bowen, 841 F.2d 1077, 1080 (11th Cir. 1988); Hillsman

v. Bowen, 804 F.2d 1179, 1180-81 (11th cir. 1986) (per curiam); Walden v. Schweiker, 672 F.2d 835, 838-39 (11th Cir. 1982). Even if

the evidence preponderates against the Secretary's factual findings, we

must affirm if the decision reached is supported by substantial evidence. Sewell v. Bowen, 792 F.2d 1065, 1067 (11th Cir. 1986); MacGregor

v. Bowen, 786 F.2d 1050, 1053 (11th Cir. 1986); Bloodsworth, 703 F.2d at 1239.

In contrast to the deferential review accorded to the Secretary's

findings of fact, the Secretary's conclusions of law, including applicable

review standards, are not presumed valid. MacGregor, 786 F.2d at

1053; Smith v. Heckler, 707 F.2d 1284, 1285 (11th Cir. 1983); Wiggins v. Schweiker, 679 F.2d 1387, 1389 (11th Cir. 1982); Smith v. Schweiker, 646 F.2d 1075, 1076 (5th Cir. Unit A June

1981). The Secretary's failure to apply the correct legal standards or to

provide the reviewing court with sufficient basis for a determination that

proper legal principles have been followed mandates reversal. Gibson v.

Heckler , 779 F.2d 619, 622 (11th Cir. 1986); Bowen v. Heckler ,

748 F.2d 629, 635-36 (11th Cir

Cir. 1982); Smith v. Schweiker, 646 F.2d 1075, 1076 (5th Cir. Unit A June

1981). The Secretary's failure to apply the correct legal standards or to

provide the reviewing court with sufficient basis for a determination that

proper legal principles have been followed mandates reversal. Gibson v.

Heckler , 779 F.2d 619, 622 (11th Cir. 1986); Bowen v. Heckler ,

748 F.2d 629, 635-36 (11th Cir. 1984); Smith, 707 F.2d at 1285; Wiggins, 679 F.2d at 1389; see Ambers v. Heckler , 736 F.2d

1467, 1470 (11th Cir. 1984). Under the differing review standards for

findings of fact and conclusions of law, we analyze the Secretary's

decision in this case.

B. The Composition of the Law: Creating Cadence from Martin's

Cacophony

The administrative law judge based his factual findings not only upon the

hearing before him, but also upon Martin's entire SSA record, including

his September 23, 1983 and January 5, 1984 applications for Social

Security benefits, and his request for reconsideration of the SSA decision

finding that he was not retired. The administrative law judge reviewed the

responsibilities of Martin and his wife before and after the incorporation

of their business in 1982. He found that Mrs. Martin's clerical duties

remained the same.

The administrative law judge carefully examined the participation of

Martin and his wife in the corporation as of January 1, 1985, the alleged

date of Martin's retirement. He found the shifting of corporate offices,

the arbitrary setting of salaries, the amount of time respectively spent

by Martin and his wife on business matters, and the continuing control of

the corporate business by Martin to be significant. The administrative law

judge was influenced by Mrs. Martin's lack of knowledge of the current

fiscal year at the hearing despite the fact that she was president of the

corporation. He found that she was a nominal officer and that she remained

a subordinate employee of the corporation

fe on business matters, and the continuing control of

the corporate business by Martin to be significant. The administrative law

judge was influenced by Mrs. Martin's lack of knowledge of the current

fiscal year at the hearing despite the fact that she was president of the

corporation. He found that she was a nominal officer and that she remained

a subordinate employee of the corporation. In contrast, Martin retained

management and active control of the corporation after his alleged

retirement.

The administrative law judge's review of the Martin's corporate and

personal tax returns revealed that Martin's salary decreased

proportionately with his wife's increase in salary over the period 1982 to

1985. He found that Martin's value to the corporation was worth more than

had been reported and that the unchanged duties of his wife were not

commensurate with her adjusted remuneration. Any decrease in business or

income was attributed to the diminished market for Martin's music rather

than to his retirement. The administrative law judge further determined

that not only was Martin not retired in 1984 or 1985, but also that his

annual earnings for those years were $20,000.00. Based upon his review of

Martin's inconsistent written statements and testimony, the administrative

law judge found that Martin's alleged retirement was unrealistic and that

the various corporate arrangements were manipulated and contrived by

Martin in order to divert his corporate earnings to his wife for Social

Security purposes. After the Appeals Council declined review, the

administrative law judge's decision became the final decision of the

Secretary.

stimony, the administrative

law judge found that Martin's alleged retirement was unrealistic and that

the various corporate arrangements were manipulated and contrived by

Martin in order to divert his corporate earnings to his wife for Social

Security purposes. After the Appeals Council declined review, the

administrative law judge's decision became the final decision of the

Secretary.

Our review of Martin's SSA record shows substantial evidence for the

administrative law judge's factual findings. Because Martin maintained

control of the corporation after January 1, 1985, we also find that he was

not retired as of that date and that the allocation of compensation for

Martin and his wife was not representative of their respective services.

Even if our review of the facts were not so narrowly circumscribed, we

would conclude that the findings of the Secretary are an accurate

evaluation of the evidence.

Our review of the Secretary's legal conclusions requires a more exacting

scrutiny. We must determine whether or not the Secretary correctly applied

the relevant law to the facts in this case. The Act explicitly specifies

the criteria for entitlement to Social Security benefits:

42 U.S.C. § 402(a) (Supp. II 1984). We conclude, as did the Secretary,

that Martin met the ostensible requirements for Social Security

benefits.

If a qualified applicant continues to receive employment income, then the

Act authorizes the Secretary to impose deductions from retirement benefits

in order to offset earnings in excess of statutory limits. 42 U.S.C. §

403(b) (Supp. II 1984). The Act provides that deductions, based on a

qualified individual's wages or self-employment income, shall be made from

any payment to which an individual is entitled until the total of the

deductions equals the individual's benefit for any month that he is

charged with excess

earnings. [13] Deductions are

determined by applying the "annual earnings

test." [14] 20 C.F.R. § 404.415

The Act provides that deductions, based on a

qualified individual's wages or self-employment income, shall be made from

any payment to which an individual is entitled until the total of the

deductions equals the individual's benefit for any month that he is

charged with excess

earnings. [13] Deductions are

determined by applying the "annual earnings

test." [14] 20 C.F.R. § 404.415

(1985). This test applies to two categories of income recipients: wage

earners and self-employed individuals. In determining the entitlement of

individuals in these two classifications during their initial or "grace

year" of retirement, the Secretary must ascertain that the self-employed

applicant does not continue to provide substantial services to his

business, while the wage-earning applicant is restricted in the amount of

his monthly earnings. 20 C.F.R. §§ 404.430, 404.435(c) & (d), 404.446

(1985).

As an officer of Ted Martin Enterprises, Inc., Martin is a wage-earning

employee. 42 U.S.C. § 410(j)(1) (1982). Therefore, the Secretary

appropriately considered the amount of Martin's monthly earnings pursuant

to the statutory exempt amounts. 20 C.F.R. § 404.430. Under the Act and

regulations, a beneficiary under age sixty-five in taxable year 1985 could

earn $5,400.00; benefits were deductible for any month that the

beneficiary earned in excess of

$450.00. [15] 42 U.S.C. §

403(b) & (f) (Supp. II 1984); 49 Fed.Reg. 43,775, 43,777-78 (1984).

The Act establishes a presumption of excess earnings as follows:

tory exempt amounts. 20 C.F.R. § 404.430. Under the Act and

regulations, a beneficiary under age sixty-five in taxable year 1985 could

earn $5,400.00; benefits were deductible for any month that the

beneficiary earned in excess of

$450.00. [15] 42 U.S.C. §

403(b) & (f) (Supp. II 1984); 49 Fed.Reg. 43,775, 43,777-78 (1984).

The Act establishes a presumption of excess earnings as follows:

42 U.S.C. § 403(f)(4)(B) (1982) (emphasis added). 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. 20 C.F.R. §

404.1041 (1985). 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. 20 C.F.R. §§ 404.701-709 (1985). The claimant, therefore,

has the burden of rebutting the presumption of excess earnings under the

Act. [16] 42 U.S.C. §

403(f)(4)(B). Utilizing this statutory presumption of excess earning for

Martin, the Secretary properly concluded that he failed to provide an

adequate rebuttal.

Furthermore, in the SSA Reconsideration Determination and the final

decision of the Secretary, the intent of the Act was emphasized: in order

for a potential beneficiary to receive monthly cash benefits, he must be

retired under the Act. Therefore, the SSA has the authority and obligation

to scrutinize any tax reporting strategies which appear to be for the

purpose of qualifying for benefits and avoiding benefit deductions. While

incorporation in order to receive Social Security benefits is permissible

under the Act, the Secretary must be assured that the alleged retirement

is legitimate, actual and bona fide

er the Act. Therefore, the SSA has the authority and obligation

to scrutinize any tax reporting strategies which appear to be for the

purpose of qualifying for benefits and avoiding benefit deductions. While

incorporation in order to receive Social Security benefits is permissible

under the Act, the Secretary must be assured that the alleged retirement

is legitimate, actual and bona fide. In this case, the shifting of

corporate offices and salaries, while corporate responsibilities remained

the same, created suspicion as to the realities of the situation.

The Eleventh Circuit has not addressed specifically the facts presented

in this case. In addition to our direction from the Act and regulations,

we approve and adopt the test used by the Sixth Circuit for "'piercing 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 benefits. Heer v.

Secretary of Health & Human Servs., 670 F.2d 653, 655 (6th Cir.

1982) (per curiam). In Heer, the claimant and his wife were the

sole shareholders and, respectively, president-secretary and vice

president-treasurer of a closely held corporation. The corporation so

operated for ten to twelve years, with the claimant receiving twice the

salary of his wife. When the claimant's request for retirement was

accepted by the Board of Directors, consisting of claimant and his wife,

the wife was elected president at the claimant's former salary as

president. The claimant continued to serve the corporation as secretary,

but without compensation. Subsequently, the wife-president's salary was

increased significantly. The facts revealed that, after the claimant's

alleged retirement, his responsibilities changed very little, and that the

duties of his wife did not alter appreciably.

elected president at the claimant's former salary as

president. The claimant continued to serve the corporation as secretary,

but without compensation. Subsequently, the wife-president's salary was

increased significantly. The facts revealed that, after the claimant's

alleged retirement, his responsibilities changed very little, and that the

duties of his wife did not alter appreciably.

In reviewing these facts, the Secretary found that the wife-president's

salary was the sole income of the claimant and his wife. Since the wife's

duties were unchanged, the Secretary assigned to her the amount of her

former salary before the claimant's alleged retirement as the reasonable

value of her services, and the remainder of her salary to the claimant as

the value of his services to the corporation. Because the claimant's

salary then exceeded the exempt amount under the Act, the Secretary denied

him retirement benefits.

Concluding that the Secretary has the authority to examine substance over

form of business transactions and relationships under the Act, the Sixth

Circuit established the following factors for analyzing and penetrating

the superficialities of unrepresentative family salary arrangements:

Id.; see also Gardner v. Hall, 366 F.2d 132, 135 (10th Cir. 1966)

("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."); Dondero v. Celebrezze, 312 F.2d 677, 678

(2d Cir

tative family salary arrangements:

Id.; see also Gardner v. Hall, 366 F.2d 132, 135 (10th Cir. 1966)

("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."); Dondero v. Celebrezze, 312 F.2d 677, 678

(2d Cir. 1963) (per curiam) (The denial of the husband-claimant's

retirement benefits was upheld upon the facts that claimant, the principal

and only paid employee of a corporation that operated from his residence,

placed his wife on the payroll after his alleged retirement, although her

secretarial services did not change materially and the claimant "at all

times remained the 'moving force.'" The Second Circuit affirmed that the

record established a "'scheme of shifting wages' whereby plaintiff

indirectly received 'remuneration which is, in effect, wages to him.'"); Newman v. Celebrezze, 310 F.2d 780, 781 (2d Cir. 1962) (per curiam)

("While we recognize that plaintiff had the right to choose to retire and

receive his old-age benefits irrespective of any dividend or other

non-wage payments he might receive, the record supports the inference that

the payments nominally made to his son constituted a mere device to mask

services actually rendered and compensation received by plaintiff.").

Applying these factors to this case, we find that Martin continued to

manage and control the corporation after his alleged retirement. His wife

did not incur more responsibilities commensurate with her increased

salary, and her knowledge of corporate business gave no indication of her

actual assumption of the corporate presidency other than nominally.

Pursuant to their joint tax reporting following Martin's retirement, Mrs.

Martin's salary as used as family income to support Martin. This case

presents a blatant example of fictitious family salary arrangements. Cf. Taubenfeld v. Bowen, 685 F.Supp

salary, and her knowledge of corporate business gave no indication of her

actual assumption of the corporate presidency other than nominally.

Pursuant to their joint tax reporting following Martin's retirement, Mrs.

Martin's salary as used as family income to support Martin. This case

presents a blatant example of fictitious family salary arrangements. Cf. Taubenfeld v. Bowen, 685 F.Supp. 237, 240 (S.D.Fla. 1988) (this

case was remanded to the Secretary for further proceedings because there

was no finding that the wages of family members were not commensurate with

their alleged increased duties and the record did not show that the

claimant was supported by these family members' increased income.

Furthermore, there was no basis for the Secretary's allocating

undistributed corporate funds to the claimant.).

Under the Act, the applicable regulations, and the test adopted herein,

we conclude that the Secretary was correct in the legal determination that

Martin was not retired on January 1, 1985, and that he was ineligible for

Social Security benefits because his corporate earnings were in excess of

the allowable statutory exempt amount. Under the Act, the district court

had "power to enter, upon the pleadings and transcript of the record, a

judgment affirming . . . the decision of the Secretary, with or without

remanding the cause for rehearing." 42 U.S.C. § 405(g). Since we agree

with the district court's determination that substantial evidence supports

the Secretary's factual findings and that the legal conclusions are

accurate, we

AFFIRM the judgment of the district court.

[1] In pertinent part, the SSA

Special Determination states:

DETERMINATION:

ecision of the Secretary, with or without

remanding the cause for rehearing." 42 U.S.C. § 405(g). Since we agree

with the district court's determination that substantial evidence supports

the Secretary's factual findings and that the legal conclusions are

accurate, we

AFFIRM the judgment of the district court.

[1] In pertinent part, the SSA

Special Determination states:

DETERMINATION:

It appears Mr. Martin incorporated to avoid having to report the business

net profit solely on his record. By incorporating, he has the capability

of paying the earnings via other means, i.e. salaries to family members,

dividends, rents or loan repayments, unusual and not satisfactorily

explained business expenses, etc.

Benefits cannot be paid until his retirement allegation is established

and this cannot be verified in advance of the event. Only when Mr. Martin

has furnished proof of his retirement or reduction in work activity can

benefits be paid. An estimate of $24,000 is established for 1984, based on

his 1983 estimate or earnings.

SSA Special Determination (Oct. 11, 1983). R1-5-59

[2] In pertinent part, the SSA

Special Determination states:

DECISION:

Inasmuch as nothing Mr. Martin has claimed in the way of reduction in

services can be verified at this time, he is being placed in QR status and

assessed the same rate of earnings for 1984 as he had in 1983 ($19,000).

At the end of the year when personal and corporate tax returns are

available, perhaps proof can be obtained to support his allegations. SSA

Special Determination (Jan. 11, 1984). R1-5-66.

[3] In pertinent part, the SSA

Determination states:

DETERMINATION:

verified at this time, he is being placed in QR status and

assessed the same rate of earnings for 1984 as he had in 1983 ($19,000).

At the end of the year when personal and corporate tax returns are

available, perhaps proof can be obtained to support his allegations. SSA

Special Determination (Jan. 11, 1984). R1-5-66.

[3] In pertinent part, the SSA

Determination states:

DETERMINATION:

The reduction in band bookings in 1984 appears reasonable, as does the

reduction in total earnings to $24,000.00. However, the proportion of

wages paid to the NH as musician/bandleader, and to his spouse as

clerk/bookkeeper is not commensurate with their respective value to such a

business, and is not supported by the evidence submitted. It is therefore

determined that the NH's 1984 wages for deduction purposes is $20,000.00,

and "QR" status continues.

SSA Special Determination (Nov. 22, 1985). R1-5-71.

[4] Appellant's brief summarizes

the issue in this case as being the application of retirement benefits

commencing in 1985, and states that "[a]ppellant concedes that he unsuccessfully attempted to secure retirement insurance for 1984,

and that no benefits are payable prior to 1/1/85." Appellant's Brief at

12-13 (emphasis in original).

[5] The Reconsideration

Determination contains the following summary and conclusions pursuant to

the review of Martin's file:

Reconsideration Determination at 5-6. R1-5-84-85.

[6] The following standards

govern review of an administrative law judge's decision by the Appeals

Council:

20 C.F.R. § 416.1470 (1985). */

*/ Since the Martin case involves a title II claim, rather

than a title XVI claim, the more appropriate citation would be 20 C.F.R. §

404.970, which contains language that is identical to § 416.1470. [Ed.

note.]

[7] In pertinent part, § 405(g)

provides:

42 U.S.C. § 405(g) (1982).

review of an administrative law judge's decision by the Appeals

Council:

20 C.F.R. § 416.1470 (1985). */

*/ Since the Martin case involves a title II claim, rather

than a title XVI claim, the more appropriate citation would be 20 C.F.R. §

404.970, which contains language that is identical to § 416.1470. [Ed.

note.]

[7] In pertinent part, § 405(g)

provides:

42 U.S.C. § 405(g) (1982).

[8] In opposition to plaintiff's

motion to alter or amend the judgment, the defendant Secretary contended

that plaintiff's raising arguments which could have been made before

judgment was entered and offering evidence which did not constitute newly

discovered evidence was an impermissible use of Rule 59(e). R2-19-4.

Concern that the district court might be persuaded by this argument was

the basis for plaintiff's filing his notice of appeal while the district

court's ruling on his Rule 59(e) motion was pending.

[9] Appellant's reply brief

states that the subject dividends were unexplained on the Martins' federal

income tax return because they derived from investments unrelated to Ted

Martin Enterprises, Inc. and, therefore, were presumptively excluded as

excess wages pursuant to 42 U.S.C.A. § 411(a)(2). Appellant's Reply Brief

at 18. Since we have found that the dividend payment on the Martins' 1985

personal income tax return is not determinative to our holding herein and

that the shifting of corporate incomes without commensurate changes in

corporate services is sufficient evidence for our decision, we will not

address the dividend payment shown on Martins' 1985 tax return.

[10] In pertinent part, Rule

4(a)(4) provides:

Fed.R.App.P. 4(a)(4).

[11] The Secretary's factual

findings are reviewed by the following standard:

42 U.S.C. § 405(g) (1982).

n and

that the shifting of corporate incomes without commensurate changes in

corporate services is sufficient evidence for our decision, we will not

address the dividend payment shown on Martins' 1985 tax return.

[10] In pertinent part, Rule

4(a)(4) provides:

Fed.R.App.P. 4(a)(4).

[11] The Secretary's factual

findings are reviewed by the following standard:

42 U.S.C. § 405(g) (1982).

[12] The Eleventh Circuit

alternatively has held that "'[t]he "substantial evidence" test is met if

a reasonable person would accept the evidence in the record as adequate to

support the challenged conclusion.'" Holladay v. Bowen, 848 F.2d

1206, 1208 (11th Cir. 1988) (quoting Boyd v. Heckler, 704 F.2d

1207, 1209 (11th Cir. 1983)).

[13] The provisions for

benefit deductions is as follows:

42 U.S.C. § 403(b)(1) (Supp. II 1984).

[14] The annual earnings test

is described as follows:

20 C.F.R. § 404.415(a) (1985).

[15] We note that the

Secretary used the exempt earning amounts applicable to a beneficiary aged

sixty-five in 1985: $7,320.00 annually and $610.00 monthly. R1-5-12.

Because Martin was not sixty-five on January 1, 1985, we have used the

exempt earning amounts for a beneficiary under age sixty-five. Since the

exempt earning amounts for a beneficiary aged sixty-five are greater than

those for a beneficiary under sixty-five, Martin's earnings surpassed the

applicable exempt amounts even more than the Secretary found. The

Secretary's use of the incorrect exempt earning amounts, therefore, is

inconsequential because the result remains the same.

ts for a beneficiary under age sixty-five. Since the

exempt earning amounts for a beneficiary aged sixty-five are greater than

those for a beneficiary under sixty-five, Martin's earnings surpassed the

applicable exempt amounts even more than the Secretary found. The

Secretary's use of the incorrect exempt earning amounts, therefore, is

inconsequential because the result remains the same.

[16] See also Carlson v.

Richardson, 331 F.Supp. 1000, 1002 (D. Conn. 1971) ("To defeat his

claim, the hearing examiner was not required to find affirmatively that

Carlson did in fact receive earnings of such a character and amount, but

only that Carlson had failed to sustain his burden of proving that he had

not. The inquiry here is whether there is substantial evidence on the

record to support the hearing examiner's findings that Carlson's proof of

his own eligibility was lacking.").