SSR 69-37c

MUSSELMAN V.GARDNER, Civil No. 67-CV-127 (11/20/67) N.D., N.Y. (CCH UIR Vol. 1A, Fed. Par. 14,913).

Claimant owned a building containing stores and apartments. He leased it during 1962 and 1963 to a family corporation limited to the management of real estate. He is its treasurer, his wife is president and secretary, and his son is a shareholder. The claimant contended that it was agreed that he would manage the building as an employee at a fixed salary. But he submitted no writings to show an employer-employee relationship existed or the extent of his duties and powers. However, his testimony showed that he exercised full control over the rental and janitorial activities of the corporation. It also showed that he ignored or bypassed the alleged employment contract by collecting the rentals and using the money as he saw fit. The court held, the absence of evidence that the corporation was functioning as a bona fide entity, coupled with substantial evidence that it was used only as a conduit whereby the rentals were to be channeled into the possession of the claimant as a return from his capital investment, supported the Secretary's conclusion that no employer-employee relationship existed. The amounts received by the claimant were rentals from real estate and therefore were properly deleted from his earnings record. Accordingly the claimant had not acquired sufficient quarters of coverage for entitlement to old-age benefits.

BRENNAN, Senior Judge:

This review, authorized under the provisions of Title 42 U.S.C. 405(g), challenges the determination of the Secretary to the effect that the plaintiff did not have sufficient quarters of coverage to entitle him to old-age insurance benefits as provided under the provisions of the statute generally referred to as the Social Security Act. The ultimate problem involved here is the determination of the alleged employee status of the plaintiff in the matter of services rendered to a small family corporation.

The plaintiff was born January 23, 1896. He concededly was properly credited with three quarters of coverage under the pertinent statutes by reason of his employment by the United States Census Bureau in 1960. On February 13, 1964 he filed an application for old-age insurance benefits with the Social Security Administration. 42 U.S.C. 402(a). It appears to be undisputed that in order to qualify for the requested relief under the above statute, plaintiff must show that he is a "fully insured individual" having ten quarters of coverage under the provisions of the Act. 42 U.S.C. 414.

Plaintiff's application is based upon the contention that he had accumulated four quarters of coverage each in the years 1962 and 1963 when the reported earnings for each year were in the amount of $4800. Such earnings represented payments made to the plaintiff by a corporation known as 221-31 State Street, Inc. Through administrative action, the amounts received by the plaintiff for the years 1962 and 1963 were deleted from his earning record upon the ground that no employer-employee relationship existed between the corporation and the plaintiff. Reconsideration was denied or more properly the above decision was affirmed. The plaintiff thereafter requested a hearing which came before an Examiner on June 29, 1966. The plaintiff appeared in person and by an accountant as his representative. After consideration of the oral and documentary evidence received, a decision was rendered denying plaintiff's application. Such decision was reviewed by the Appeals Council. In effect the Examiner's decision was affirmed January 24, 1967 and this action to review was timely instituted. Plaintiff now moves for a summary judgment for the relief originally requested and the defendant in its answer request judgment dismissing the complaint and affirming the decision under attack. The controversy is presently before the Court upon the pleadings, the transcript of the record filed by the defendant as required and the briefs submitted by the litigating parties. A brief background history, which points up the controversy, would seem to be necessary for an understanding of this decision. Same is set out below.

In the early 1940's, the plaintiff purchased in his own name premises referred to as the Lansing Building at 221-31 State Street, Watertown, New York. He is presently the owner thereof. The premises consisted of stores and residential apartments for which monthly or weekly rentals were received by him. In the latter part of May 1962, the plaintiff, his wife and son filed a certificate of incorporation under the state law and brought into existence a corporation known as 221-31 State Street, Inc. Each of the incorporators subscribed for one share of stock. It may be generally stated that the powers of the corporation were limited to the management of real property and the right to deal therein. Thereafter thirty-six shares of stock in said corporation were issued, nine to the plaintiff and twenty-seven to plaintiff's wife, Mary C. Musselman. The consideration for the issuance of said stock was the sale by plaintiff to the corporation of furnishings located in the building of the value of $2936.00. Plaintiff's wife was and is President and Secretary of the corporation and the plaintiff was and is its Treasurer. On May 26, 1962, the plaintiff, as the owner of the Lansing Building, leased same by a written instrument to the corporation for a period of one year, the monthly rental being $175.00. Under the terms of the lease, the corporation was to pay all maintenance, heating and utility charges furnished to the property and to maintain all insurance thereon except fire insurance. an agreement was then made that plaintiff would "manage" the building for the benefit of the corporation at a weekly compensation of $150 which was later reduced to $400 per month. No writings are available to show the above arrangement, the duties of the plaintiff or the limitations of his powers. It appears however in plaintiff's oral testimony that he collected the rents; performed services which may be termed as those of a janitor; such as cleaning the hallways, shoveling snow and making minor repairs and improvements. He interviewed prospective tenants and signed leases in behalf of the corporation as the Treasurer thereof. The tenants were not notified that the corporation rather than the individual plaintiff was their landlord. At least one of the utilities furnished to the premises was billed to the plaintiff as an individual rather than to the corporation.

The evidence as to the financial affairs of the corporation and the plaintiff in connection with their relationship is definitely unsatisfactory. Although the corporation maintained a bank account, the plaintiff himself agrees that same does not reflect the rentals received nor the moneys paid to the plaintiff either as rental or for the services which he performed. It appears that the plaintiff collected the rents from the tenants and if he saw fit, he would use the cash received or endorse the checks which he received and pay to himself therefrom the rental payments due him and the money due for this services as manager. In other words, the corporation's finances and business operations were entirely under his control. No check was ever issued to him by the corporation as payment for either rental or services.

The above arrangement continued until December 28, 1963 when the plaintiff resigned as manager and asserts that he performed no services for the benefit of the corporation since that date. He continues however to collect rents as Treasurer of the corporation and to perform services such as cleaning the hallways and shoveling snow from the sidewalks adjacent to the premises. The corporation has not hired a manager to replace the plaintiff. Its only other employee is Mrs. Musselman who, as President of the corporation, receives $99 per month. It may be noted here that the rental paid to the plaintiff for the fiscal years ending March 31, 1963-64-65 and 66 was $2100, $2700, $5175 and $6000 respectively. The corporation's tax returns fail to show that the rental income increased at anywhere near the same ratio. No records are available to show corporate action confirming the above transactions.

The Hearing Examiner's decision, which covers eleven closely typewritten pages, is detailed in its discussion of the evidence and points out in a somewhat lesser detail the deficiencies and contradictions therein which led to the six findings made by him and set out below.

"The Hearing Examiner makes these findings and draws these conclusions:

(1) The income derived by this claimant in 1962, 1963, 1964, 1965 was primarily rentals or profits from capital assets and property belonging to the claimant.

(2) The purpose of the corporation and the residue of its operations was to channel the rental income from this real property (221-31 State Street) through the corporation and to pay it to this claimant in the guise of salary, wages and corporate officer compensation.

(3) The said corporation itself did not actively engage in economic endeavor and did not follow out normal corporate routines.

(4) At no time between May 21, 1962 and June 29, 1966 did this applicant (a) have the status of an employee of the corporation known as 221-31 State Street, Inc., or (b) secure any income from a self-employment enterprise.

(5) Applicant did not acquire any quarters of coverage for the years 1962 through June 1966, inclusive.

(6) For the period January 1937 through June 1966 this claimant is entitled to 3 quarters (1960) of coverage.

WHEREFORE, it is the decision of the Hearing Examiner after consideration of the oral testimony herein, and on the entire record that this claimant (1) has credit for only 3 quarters of coverage out of the requisite (for him) 10 quarters, (2) is not a fully insured individual, and (3) is not entitled nor eligible to receive Old-Age Insurance benefits based on the aforesaid application."

It would seem to be without purpose to repeat here or to further attempt to summarize the evidence or lack of it which prompted the decision under attack. It appears to be the obligation of this court to evaluate the record and apply same in accordance with the provisions of the statue and the guide lines afforded by judicial precedents. The general principles of law which are applicable here are not in dispute so that a brief reference thereto would seem to be sufficient.

The citation of judicial precedents is unnecessary to sustain the principle that the burden of proof to establish his claim is upon the plaintiff. Such burden has been referred to in Kerner v. Flemming, 283 F.2d 916 at 922 as "the ultimate burden of persuasion". While the statue involved is remedial in its nature, the burden imposed should be construed and applied in a practical way. Butler v. Flemming, 288 F.2d 591 at 595. The limit of this court's power of review is found in the statute itself, 42 U.S.C. 405(g). It is expressed in part as follows: "The findings of the Secretary as to any fact, if supported by substantial evidence shall be conclusive. . . ." This provision of the statute has been many times discussed in reported judicial decisions but the holding in Universal Camera Corp. v. N.L.R.B., 349 U.S. 474 at 490 is most often cited as explanatory of the duty of the reviewing court. Factual conflicts in the evidence are matters for the Secretary to resolve, as the trier of the facts, provided substantial evidence is available to support the findings. Adams v. Flemming, 276 F.2d 901 at 903; Celebrezze v. Bolas, 316 F.2d 498. His findings, if supported by substantial evidence, must be accepted even though this court as the original trier of the facts might have arrived at a contrary result. Newman v. Celebrezze, 310 F.2d 780; Palmer v. Celebrezze, 334 F.2d 306 at 308. The existence of substantial evidence to support the finding of the Secretary is then the key to the decision of this court. Substantial evidence, as the term is used in the statute, has been many times defined by reviewing courts. Any attempt to formulate an all-inclusive definition of the term any tend more to confuse than to clarify. Without limiting the definition as appears in reported decisions, it would seem that substantial evidence may be found to exist when there is evidence to justify the refusal to direct a verdict were the case tried to a jury. Laws v. Celebrezze, 368 F.2d 640; Celebrezze v. Bolas, 316 F.2d 498 at 508; Park v. Celebrezze, 214 F.Supp. 153. In determining the existence of substantial evidence, the Secretary is not bound to accept the testimony of the plaintiff although it was undisputed. Palmer v. Celebrezze, supra, at 307. He is entitled to draw inferences and conclusions from the evidence in the record before him, both oral and documentary. Adams v. Flemming, 276 F.2d 901; Rocker v. Celebrezze, 358 F.2d 119 at 121; Poss v. Ribicoff, 289 F.2d 10. Motivation to establish a benefit status under the Social Security Act infers no legal impropriety or illegality. Gilbert v. Commissioner, 248 F.2d 399 at 404-405 followed in Flemming v. Lindgren, 275 F.2d 596 and Stark v. Flemming, 283 F.2d 410. It should be noted here that the decision under attack in no way relies upon such a motivation in the instant case.

The plaintiff appears to rely here upon the decision in Brannon v. Ribicoff, 200 F.Supp. 697 which in turn rests upon the decision of Stark v. Flemming and Flemming v. Lindgren, supra. An examination of these decisions shows that the essential bases thereof are entirely lacking in the instant case. These precedents appear to turn upon the reasonableness of the compensation paid to the claimants by an admittedly bona fide corporation. This is not the situation here even if we make allowance for the informality frequently found in the conduct of a family owned corporation. The bona fides of a corporation such as here involved appears to be principally tested by the "proper adherence to normal corporate routine," Rubenstein v. Celebrezze, 247 F.Supp. 927 and cases above cited in this paragraph. Here the Secretary contends that there was a total lack of such adherence by plaintiff's corporate alleged employer. The defendant's contention, simply stated, appears in effect to urge that the alleged corporate employer never functioned as a legal entity but was used only as a conduit whereby the rentals from the Lansing Building were to be channeled into the plaintiff's possession as a return from his capital investment. It is asserted that normal corporate routines were in no way followed; that plaintiff at all times controlled the corporate finances and activities and that even the required existence of the corporation by third parties was doubtful as a matter of fact and as a matter of law. This court holds that plaintiff has not borne the burden imposed upon him and that the findings of the Secretary are supported by substantial evidence appearing in the record. The above conclusion will be briefly amplified below.

The transcript of the evidence and the documents received and made a part thereof show an entire absence of corporate records with which the alleged transactions between the plaintiff and the corporation could be verified or correlated. No corporate or individual records are available which would show the alleged employer-employee relationship asserted by the plaintiff in this action. No records are available which would explain the substantial doubling of the rent paid by the corporation for the years 1964 and 1965 and just subsequent to the plaintiff's resignation as manager. On the other hand, the record is replete with evidence that the plaintiff exercised full control over the assets, liabilities and activities of the corporation; that the corporate existence was ignored or bypassed by him in the matter of the alleged contract obligations existing between them. The record shows a substantial number of invoices by corporate creditors directed to the plaintiff personally and the continued recognition of the plaintiff by at least one utility and some of the tenants as the owner and landlord of the premises involved. It may well be doubted as to whether or not a third person would be required to recognize the corporate existence of plaintiff's alleged employer. African Metals Corps. v. Bullowa, 288 N.Y. 78. The mere recitation of the above items would seem to foreclose the direction of a verdict in favor of the plaintiff as to the bona fide functioning of plaintiff's alleged employer as a corporation, if such a question were to be submitted to a jury. In such an event, this court necessarily concludes that substantial evidence exists upon the whole record to support the findings of the Secretary. It follows that plaintiff's motion for a summary judgment must be and is denied and that a judgment may be entered dismissing the complaint, and it is SO ORDERED.

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