Opinion
Cause No. IP99-1387-C-H/G
October 16, 2000
Bull; Charles D Hankey Attorney at Law Indianapolis, IN 46202
Thomas E Kieper United States Attorney's Office Indianapolis, IN 46204-3048
ENTRY ON JUDICIAL REVIEW
This unusual case concerns the allocation of family farm income between a now-divorced husband and wife for purposes of the Social Security Act. At issue is the Social Security Administration's overpayment of approximately $900 in retirement insurance benefits to plaintiff Robert G. Royer. During Mr. Royer's marriage to Peggy L. Latham, Mr. Royer reported all income from the family farm as his own self-employment income. After their divorce, and shortly after both Mr. Royer and Ms. Latham began receiving Social Security retirement benefits, Ms. Latham raised the issue of income allocation with the Social Security Administration.
After a hearing in which both Mr. Royer and Ms. Latham were represented by counsel, an ALJ found that Mr. Royer ran the farm in partnership with Ms. Latham and that the farm income therefore should have been split equally and reported as partnership income on both of their social security accounts.
The reallocation to Ms. Latham's account of some of the income that Mr. Royer reported as self-employment income increased her benefits but reduced the amount of benefits to which Mr. Royer is entitled, resulting in the finding of overpayment. The ALJ found that recovery of the overpayment was not waived because recovery would neither defeat the purpose of the Social Security Act nor be against equity or good conscience. The Appeals Council modified the decision on grounds not challenged here, but upheld the ALJ's central findings. For the reasons discussed below, the Appeals Council's decision requiring repayment is affirmed.
Background
Mr. Royer was born on January 20, 1927, and began receiving retirement insurance benefits in February 1989. R. 360-61. Ms. Latham, formerly Mrs. Royer, was born on October 21, 1931, and filed for retirement insurance benefits based on her own earnings record in October 1993. R. 374. She and Mr. Royer were divorced in April 1990. R. 180.
In April 1994, the Social Security Administration (the "Administration") determined that Mr. Royer and Ms. Latham operated a farm partnership from 1962 through 1990. R. 374-75. The Administration therefore removed from Mr. Royer's earnings record one-half of his self-employment income for the relevant period. Id. This income was then credited to Ms. Latham's earnings record. Id. Because of the modifications to Mr. Royer's earnings record, the Administration lowered Mr. Royer's benefit amounts and notified Mr. Royer that he had been overpaid $11,243.00. R. 376-86.
Upon Mr. Royer's request for reconsideration, the Administration affirmed its determination but decreased the amount of overpayment to $936.00. The Administration adjusted the overpayment amount because of its policy of "administrative finality," which prohibits the reopening of a prior determination after four years. R. 391-95. The reduced amount represented the overpayment for the years 1990-1994. See id.
Mr. Royer disagreed with the adjusted determination and requested an administrative hearing. R. 414-17. Administrative Law Judge Robert E. Hanson conducted a hearing on October 15 and 16, 1996.
R. 38-357. The ALJ determined that Ms. Latham was an interested party because the allocation of the farm income would affect her benefits, as well. R. 21-34. The ALJ found that Mr. Royer and Ms. Latham had a farm partnership from 1962 until 1990 and that Mr. Royer therefore had been overpaid retirement insurance benefits based on his incorrectly posted self-employment income. Id. He further found that, although Mr. Royer was not at fault for the overpayment, the recovery of the overpayment would not defeat the purpose of the Social Security Act or violate equity and good conscience. Id.
The Appeals Council granted Mr. Royer's request for review under the error of law provision of 20 C.F.R. § 404.970. R. 7-16. The Appeals Council issued the final decision of the Commissioner, concurring in and adopting most of the ALJ's findings. The Appeals Council modified the ALJ's decision regarding the transfer of Mr. Royer's distributive share of the net farm profits to Ms. Latham for the years 1965, 1966, 1968, 1974, 1975, 1977, and 1978. Id. For those years, Mr. Royer posted the maximum amount of self-employment income allowed under the Act. Id. The farm's actual net reported income exceed the maximum amount that could be credited for those years. Id. The Appeals Council reasoned that, because 42 U.S.C. § 405(c)(5)(G) provides for an adjustment to the amount of earnings actually posted to an individual's account, Ms. Latham is entitled to credit only for the difference between one-half the farm's actual reported net profit (which will be Mr. Royer's adjusted self-employment income for those years), and the amount originally posted to Mr. Royer (the statutory maximums for the years in question).
Id. The Appeals Council concluded that the recalculation of the retirement insurance benefits due to Mr.
Royer and Ms. Latham was necessary. R. 11. The precise amount of the overpayment to Mr. Royer, which remains to be determined, will be less than $936.00. R. 14. In this proceeding for judicial review, neither party has challenged the Appeals Council's modification of the ALJ's decision. The issues presented on judicial review are only those Mr. Royer has raised as to which the Appeals Council agreed with the ALJ.
Standard of Review
The Social Security Act provides for judicial review of the Commissioner's decision regarding an overpayment of benefits. 42 U.S.C. § 405(g). The Commissioner has delegated his authority to make final decisions to the Appeals Council. Arbogast v. Bowen, 860 F.2d 1400, 1402-03 (7th Cir. 1988) (citations omitted). This court therefore reviews the Appeal Council's decision. Id. In this case, however, because the Appeals Council modified the ALJ's findings, the court reviews the ALJ's decision as modified by the Appeals Council. Id. If the Commissioner's findings of fact, as set forth by the ALJ, are supported by substantial evidence, the findings must be upheld by a reviewing court. 42 U.S.C. § 405(g); Maggard v. Apfel, 167 F.3d 376, 379 (7th Cir. 1999).
Substantial evidence is "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Diaz v. Chater, 55 F.3d 300, 305 (7th Cir. 1995), quoting Richardson v. Perales, 402 U.S. 389, 401 (1971). To determine whether substantial evidence exists, the court reviews the record as a whole, but does not attempt to substitute its judgment for the ALJ's by reweighing the evidence, resolving material conflicts, or reconsidering facts and/or the credibility of witnesses. Luna v. Shalala, 22 F.3d 687, 689 (7th Cir. 1994). The court must examine the evidence that favors the claimant as well as the evidence that supports the Commissioner's conclusion. Nelson v. Apfel, 131 F.3d 1228, 1237 (7th Cir. 1997). "Where conflicting evidence allows reasonable minds to differ," the court must defer to the Commissioner's resolution of that conflict. Binion v. Chater, 108 F.3d 780, 782 (7th Cir. 1997).
A reversal and remand may be required, however, if the ALJ or the Appeals Council committed an error of law, Nelson v. Apfel, 131 F.3d at 1234, Perkins v. Chater, 107 F.3d 1290, 1293 (7th Cir. 1997), or if there have been serious factual mistakes or omissions. Sarchet v. Chater, 78 F.3d 305, 309 (7th Cir. 1996).
Discussion
The Social Security Act defines the circumstances under which the Administration may recover an overpayment of benefits provided under the Act. The general rule is that "proper adjustment or recovery shall be made." 42 U.S.C. § 404(a). An overpayment shall not be recovered, however, from any person "without fault" if such a recovery would defeat the purpose of the Act or would be against equity and good conscience. 42 U.S.C. § 404(b). If the overpayment cannot be recovered under Section 404(b), it is deemed waived.
The ALJ found that Mr. Royer received an overpayment of benefits because he erroneously reported as his own self-employment income earnings that should have been reported as his and Ms. Latham's partnership income. The ALJ then considered whether the overpayment was recoverable. He concluded that Mr. Royer was without fault, noting that family businesses often do not observe partnership formalities. The ALJ further found that recovery of the overpayment would not violate the purpose of the Act or be against equity or good conscience. The ALJ noted that Mr. Royer admitted that he could make the repayments (which were then $26/month) and that none of the other factors mentioned in the relevant regulations applied to Mr. Royer's situation. The Appeals Council adopted these findings without modification.
Mr. Royer challenges the ALJ's decision on two grounds. First, for several reasons, Mr. Royer disputes the finding that he and Ms. Latham were "partners" in farming while they were married. Second, Mr. Royer contends that the overpayment determination is improper because the time limit on modifying his self-employment income reports has expired. As explained below, the ALJ's decision is supported by substantial evidence and is consistent with applicable law.
I. The Partnership Determination
If the ALJ erred in finding that Mr. Royer and Ms. Latham operated a farm partnership, there would be no overpayment to Mr. Royer. Under the Social Security Act, "net earnings from self-employment" include gross income derived by an individual from any trade or business that he carried on, plus the individual's distributive share of income or loss from any trade or business carried on by a partnership of which he is a member. 42 U.S.C. § 411(a). "Partner" and "partnership" have the same meanings as under the Internal Revenue Code where a "partner" is a member of a "partnership." 42 U.S.C. § 411(d); 26 U.S.C. § 761(b). The question of whether a business entity is a partnership for federal tax purposes is governed by federal law. Rev. Rul. 54-75, 1954-1 CB 169, 1954 WL 8810.
Under federal tax law, "a partnership is generally said to be created when persons join together their money, goods, labor or skill for the purpose of carrying on a trade, profession or business and when there is a community of interest in the profits and losses." Commissioner v. Tower, 327 U.S. 280, 286 (1946).
The Supreme Court has identified the following factors for determining whether a partnership exists for tax purposes:
whether, considering all the facts — the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent — the parties in good faith and acting with a business purpose intend to join together in the present conduct of the enterprise.
Commissioner v. Culbertson, 337 U.S. 733, 742 (1949).
The absence of a formal partnership agreement does not necessarily mean that a partnership does not exist. Social Security Ruling 84-11, 1984 WL 49793 (S.S.A. 1984). Many husband-and-wife businesses that do not follow other customary partnership formalities may be considered as operating partnerships. Id. The Internal Revenue Service has recognized that small family partnerships often do not comply with business formalities. Id., citing Rev. Proc. 81-11 (eliminating penalties for failure to file partnership tax returns for "partnerships that have not historically filed").
Substantial evidence supports the ALJ's finding, based on the standards described above, that Mr. Royer and Ms. Latham operated a farm partnership from 1962 through 1990. In support of his finding, the ALJ concluded that Mr. Royer and Ms. Latham had an intent to join together to carry on the farm operation; that they both contributed services to the farm; that they made many management decisions jointly; and that they shared profits and losses. R. 27-31.
At the hearing, the evidence showed that Mr. Royer and Ms. Latham made a joint decision to go into farming in 1961; that both contributed to the farm financially; and that Mr. Royer and Ms. Latham had a joint bank account for the farm. R. 191-94, 201, 512-13. From this account, they paid all monthly bills, including farm supply bills and other farm expenses. R. 201, 512-13. In addition, both Mr. Royer and Ms. Latham were liable for all debt incurred in the financing of the farming operation. R. 512, 514.
The ALJ credited Mr. Royer's testimony that he made most of the critical decisions; that he was the largest contributor to the farm's capital; and that he performed most of the manual labor. However, the ALJ based his conclusion about the partnership on evidence that Ms. Latham also contributed to the farm operation in important ways. R. 28. For example, the record shows that, among other things, Ms. Latham was primarily responsible for the farm's book-keeping. In addition, from time to time, she helped move machinery; hauled grain, gas, and supplies; and transported hired hands to the fields and made and delivered lunches to them. See R. 206, 208, 210-11, 296-97, 308, 310, 319, 511, 513, 529, 530, 533, 535, 537, 679.
Mr. Royer contends that principles of estoppel, res judicata, and public policy should operate against the ALJ's finding of a partnership. First, Mr. Royer argues that Ms. Latham never "acted, documented, behaved, or treated the farm operation as a partnership" until she realized that a partnership determination could increase her own social security benefits. He also notes that Ms. Latham did not take the position that the farm operation was a partnership during the couple's divorce proceedings in state court. Second, Mr. Royer suggests that the ALJ's determination is or should be barred by Mr. Royer's and Ms. Latham's divorce decree. Third, Mr. Royer generally argues that it is unfair for Ms. Latham, after a "bitter divorce," to reap the benefits of the overpayment. According to Mr. Royer, Ms. Latham inquired about the social security treatment of the farm income because of a desire to obtain more money for herself without any concern for the federal treasury's recovery of an overpayment to Mr. Royer. In addition, Mr. Royer suggests that the partnership determination is out of step with farming community standards and a "realistic view" of domestic relations.
Mr. Royer's arguments do not address the substantial evidence supporting the ALJ's finding and do not establish any error of law. First, even if Ms. Latham did not previously indicate that she believed the farm operation was a partnership, no particular statement, action, or belief by Ms. Latham is legally determinative of the issue of whether there was a partnership for federal tax and social security purposes.
See, e.g., Culbertson, 337 U.S. at 742 (discussing multiple factors that must be considered in making a partnership determination). Also, the court has summarized above the substantial evidence about Ms. Latham's participation in the farm operation that supports the ALJ's conclusion that there was a partnership.
Second, as the ALJ noted, the Indiana dissolution court did not have jurisdiction over social security benefits or taxes. Whether a business entity is a partnership for tax purposes is a question of federal law. Rev. Rul. 54-75; SSR 84-11. Questions about the proper federal tax and social security treatment of the farm income were not before the dissolution court. Indiana state court policies about the finality of property divisions in divorce proceedings simply do not apply to Mr. Royer's debt to the Social Security Administration.
Third, Mr. Royer's general policy arguments about the impropriety of allowing a former spouse to receive the benefits that flow from an overpayment determination related to a family farm are misguided.
The overpayment provisions of 42 U.S.C. § 404(a) (b) are in full force regardless of the manner by which the Administration learns of a possible overpayment and regardless of another interested party's motives. Similarly, as discussed above, federal law governs the social security treatment of the farm income. Whether or not the partnership determination is consistent with farming community practices or with Mr. Royer's view of domestic relationships is not relevant to this dispute.
II. Time Limits on Modifying Self-Employment Income Reports
Mr. Royer also contends that even if the ALJ was correct in finding a partnership existed, the reallocation to Ms. Latham of self-employment posted to Mr. Royer's earnings record is time-barred. The Social Security Act provides that the Commissioner may change self-employment income records "to correct errors made in the allocation, to individuals or periods, of wages or self-employment income entered in the records of the Commissioner of Social Security." 42 U.S.C. § 405(c)(5)(G). This provision authorizes the reallocation of reported earnings, without regard to the time limits that normally apply to modifications to earnings records, when self-employment earnings are credited to the wrong person. Id.; 20 C.F.R. § 404.822(e)(4). See also Rand v. Sullivan, 924 F.2d 159, 162-63 (9th Cir. 1990) (§ 405(c)(5)(G) permitted reallocation of self-employment income in equal parts to husband and wife who were the sole stockholders of family business); Bocian v. Mathews, 411 F. Supp. 1200, 1202 (N.D.Iowa 1976) (reallocation of self-employment income from husband to wife coproprietors was authorized under § 405(c)(5)(G)).
Mr. Royer argues that "the ALJ's decision tramples on the limit" of the time for changing his record of self-employment income. In support of his argument, he cites 20 C.F.R. § 404.822(e)(4), a regulation that falls under the title "Correction of the record of your earnings after the time limit ends." See Pl. Br. at 6; 20 C.F.R. § 404.822(e)(4) (emphasis added). As noted above, 20 C.F.R. § 404.822(e)(4) authorizes the modification of Mr. Royer's self-employment earnings record because the income at issue should not have been attributed solely to him in the first place. Section 404.822(e)(4) does not contain a time limit for modifications that fall within its purview. The modification of Mr. Royer's reported self-employment income therefore is not time-barred.
III. Waiver Issues
To avoid repayment, the recipient of an overpayment bears the burden of proving that he was "without fault" in causing the overpayment, and that recovery of the overpayment would defeat the purpose of the Social Security Act or be against equity and good conscience. Pliley v. Sullivan, 892 F.2d 35, 39 (6th Cir. 1989); see also 42 U.S.C. § 404(b). Here, the ALJ found, and it is undisputed, that Mr. Royer was "without fault" in receiving the overpayment.
The return of an overpayment would "defeat the purpose" of the Act if it would "deprive a person of income required for ordinary and necessary living expenses." 20 C.F.R. § 404.508(a). Recovery of an overpayment would be against equity and good conscience if the individual (1) changed his position for the worse, or relinquished a valuable right because of reliance on a notice that a payment would be made or because of the overpayment itself; or (2) was living in a separate household from the overpaid person at the time of the overpayment and did not receive the overpayment. 20 C.F.R. § 404.509(a).
The ALJ found that the recovery of the overpayment would not defeat the purpose of the Act or be against equity and good conscience. The ALJ noted that Mr. Royer admitted that he can afford to repay the overpayment. The ALJ then concluded that recovery does not defeat the purpose of the Act.
R. 32. In addition, the ALJ concluded that none of the circumstances identified in 20 C.F.R. § 404.509(a) was present in Mr. Royer's case, so that recovery would not be against equity and good conscience. Id. Substantial evidence supports the ALJ's decision that recovery would not violate the purpose of the Act or be against equity or good conscience. Mr. Royer has the burden of proof on these two waiver issues.
At the hearing, the ALJ gave Mr. Royer the opportunity to develop a record on waiver and he failed to do so. R. 353-56.
Conclusion
For the foregoing reasons, the court AFFIRMS the Appeals Council's decision that Mr. Royer received and must repay the overpayment of retirement insurance benefits. The amount of the overpayment shall be recalculated consistent with the decision of the Appeals Council. Final judgment will be entered immediately.