SSR 64-38c: SECTIONS 203 and 211. -- WORK DEDUCTIONS -- SUBSTANTIAL SERVICES IN SELF-EMPLOYMENT -- TRANSFER OF BUSINESS

SSR 64-38c

STAVROPOULOS v. RIBICOFF, U.S.D.C., S.D.N.Y., 61 Civ. No. 929 (3/1/62) (CCH U.I.R. Fed. Par. 14,273)

The plaintiff became entitled to monthly benefits effective March 1958, on the basis of an application filed in March 1959. Deductions were imposed against his benefits beginning with the first month of entitlement, since it was determined that he was continuing to render substantial services in the operation of his rooming house business and would continue to derive net earnings in excess of $1,200 a year. The plaintiff alleged, however, that on January 2, 1959, he had sold the business to his wife, as recited in a bill of sale, and that he thereafter performed no services in connection with the business. The evidence showed that he did not receive the consideration recited in the bill of sale, that he continued to work in the rooming house, and that he continued to receive the proceeds from the business. Held, there was no effective transfer of the business from the plaintiff to his wife; and since the plaintiff continued to perform substantial services in self-employment and to derive the income therefrom in excess of $1,200 a year, deductions were properly imposed against his benefits.

DAWSON, District Judge:

This is a motion for an order pursuant to Rule 12(h)(1) of the Rules of Civil Procedure for judgment on the pleadings in favor of the defendant. The action is brought under Section 205(g) of the Social Security Act, as amended, 42 U.S.C. ยง 405(g), for judicial review of a final decision of the Secretary of Health, Education and Welfare suspending payments of old-age insurance benefits to the plaintiff.

The only issue in the case is whether there is substantial evidence in the record to support the Secretary's decision that plaintiff's old-age insurance benefits during 1958, 1959 and 1960 were subject to deductions because in that period plaintiff continued to render substantial services in self-employment and had net earnings exceeding $1,200 in each year.[1]

The plaintiff filed an application for old-age insurance benefits on March 2, 1957.[2] He stated that he was born on January 31, 1889; that he was self-employed, and that he did not expect his earnings in that year to exceed $1,200. The Bureau of Old-Age and Survivors Insurance approved an award of old-age insurance benefits to the plaintiff in the amount of $82.50 a month, effective March, 1958, which amount was increased to $88.00 beginning in January 1959. Deductions were imposed against the beneficiary beginning with the month of entitlement, due to the fact that plaintiff's earnings exceeded $1,200 during 1958 and 1959 and because he continued to render substantial services in self-employment.

Plaintiff had a hearing before a Hearing Examiner of the Social Security Administration. The Hearing Examiner rendered his decision on December 13, 1960, upholding the Bureau's action. Plaintiff then requested review by the Appeals Council which request was denied on January 26, 1961. The Hearing Examiner's decision thereupon became a final decision of the Secretary of Health, Education and Welfare, subject to judicial review pursuant to the provisions of Section 205(g) of the Social Security Act, as amended, 42 U.S.C. ยง 405(g).

The Court has reviewed the papers in the case, including the testimony taken before the Hearing Examiner.

The findings showed the petitioner, shortly after arriving in the United States, purchased for $800 a rooming house business which was conducted in two rented buildings. The buildings contained thirty-one individual furnished rooms which plaintiff rented while he and his wife resided in a two and one-half room apartment in the basement. Plaintiff admitted that in 1957 and 1958 he managed and operated the rooming house business all by himself and received all the money therefrom. Plaintiff, however, alleged that in 1959 he sold his rooming house business to his wife and thereafter performed no services in connection with this business. The Hearing Examiner considered whether this alleged transfer to the wife was a "paper" transaction. The evidence indicates that there was a purported bill of sale executed on January 2, 1959, which recites the sale by the plaintiff to his wife, for a consideration of $800, of the rooming house business. Plaintiff stated that he received only $400 in cash from his wife at the time of this transaction and that they did not have an agreement as to when he would receive the balance. Plaintiff testified that he had opened a special checking account with The Chase Manhattan Bank with the $400 in cash he received from his wife. However, the record contains a letter from the bank stating that the special checking account in plaintiff's name was opened in March, 1957, two years before the alleged payment by the wife to the plaintiff of part of the alleged purchase price of the rooming house.

Plaintiff contended that after the sale of the rooming house business to his wife she did all the work in connection with the business. Some doubt is cast on this assertion since evidence was introduced to the effect that plaintiff's wife was employed away from home as an embroidery worker on a piece work basis, and that she worked three, four and five days a week, with varying hours. She testified that her earnings amounted to $2,000 in 1958, between $800 and $1,000 in 1960, while her 1959 income tax return shows earnings of $3,448 from this work.

The evidence introduced at the hearing showed that the husband, after January 2, 1959, continued to do work around the rooming house. He indicated to an investigator from the Social Security office that he was the manager of the houses. He had keys to the various apartments in the house. He admitted that he sometimes carried the trash cans out of the house. Tenants testified that both husband and wife worked in the rooming house and that they had paid the rent to either of them. The net profits from the rooming house business in 1959 were reported by the wife on her income tax return as amounting to $3,096, of which $2,556 remained after taxes and charitable contributions. Testimony given at the hearing indicated that one-half of that amount was used for the support of the husband and wife and the other half was deposited in a trustee account maintained by the wife for the benefit of the plaintiff.

After reviewing the testimony the Hearing Examiner concluded:

"Inasmuch as net earnings of the business exceeded $2,080 for 1959, it is the decision of the hearing examiner that claimant is not entitled to receive benefits for any month of 1959. It is further the decision of the hearing examiner that claimant's benefits should be withheld for past months of 1960 and current months, inasmuch as there is a reasonable expectancy that earnings will exceed $2,080 for 1960."

By action of the Appeals Council the findings of fact and inferences drawn thereunder became the findings of fact and inferences of the Secretary of Health, Education and Welfare. The role of review of the district courts in proceedings under the Act is limited. The section hereinabove cited provides that the "findings of the Secretary as to any fact if supported by substantial evidence shall be conclusive." There is certainly evidence in the record which will support the findings of the Hearing Examiner. In fact, it would seem to be difficult to reach a conclusion other than that found by the Hearing Examiner from a perusal of the record. It appears to the Court that plaintiff, having reached the age where he expected to draw old-age insurance benefits, but being engaged in self-employment, went through a sham transaction with his wife whereby he purported to transfer the business to his wife so that he could claim that he had no earnings from its and thereby be eligible for his social security benefits. However the evidence indicates that he continued to work in the rooming house and continued to receive the benefits of the income therefrom and that these benefits exceeded the amount allowed in the Act. The alleged transfer to the wife did not effect any real change in plaintiff's finances. He did not receive the consideration recited in the purported bill of sale. He did continue to receive the proceeds from the business, a specified portion of which was deposited in a savings bank account held in trust for his benefit, while the balance was used to support the plaintiff and his wife. Thus he continued to realize profits from the business, even when it ostensibly belonged to his wife, and he continued to perform substantial services in connection with the operation of that business.

Conclusion

The facts in this case are similar to those in Lanz v. Fleming decided by District Judge (now Circuit Judge) Smith in the District of Connecticut. CCH Unemp. Ins. Rep., Vol. 1A Fed., para. 8984 (not officially reported). In that case the claimant for old-age benefits transferred ownership of a liquor store to his wife. The court held, after reviewing the record, that there was substantial evidence to support the referee's conclusion that the transfer was a sham and that the profits of the store constituted self-employment income of the claimant for the purpose of making deductions under provisions of the retirement test. A judgment was entered by Judge Smith dismissing the complaint. The same conclusion is reached in this case.

The motion for judgment on the pleadings in favor of the defendant is granted. So ordered.


[1] Section 203 of the Social Security Act, as amended, 42 U.S.C. 403, insofar as it is pertinent to this case, provides that an individual entitled to benefits may be subject to deductions, under certain conditions prescribed therein, provided he renders substantial services with respect to a trade or business, and derives net earnings from self-employment in sufficient amount, during the taxable year. [Ed.]

[2] The application was filed March 2, 1959. [Ed.]


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