SSR 73-12: SECTIONS 205(b) and 210(j)(2) (42 U.S.C. 405(b) and 410(j)(2)). -- EMPLOYMENT RELATIONSHIP -- WAGES -- VALIDITY OF CORPORATE ENTERPRISE
20 CFR 404.1004(b) and 404.1026
- Where quarterly earnings reports and corporate tax returns are filed on basis of services reportedly performed by claimant as an officer and director of legally constituted family investment corporation, formed and operated for purpose of providing claimant with covered earnings, held, formation of corporation solely for purpose of enabling claimant to secure social security coverage would not by itself be a basis for deleting such earnings from claimant's earnings account; however, on basis of facts which show that corporation was wholly illusory and did not serve any purpose other than as a device for handling claimant's private investments, income from which is not otherwise creditable under the Act, such earnings must be deleted.
R, the claimant, filed application on March 1, 1972 for retirement insurance benefits based in part on services for the X Investment Company. Total earnings of $1,200 for 1968, $4,800 for 1969 and 1970, and $1,500 for 1971 were alleged from this company in addition to farm rental income derived by use of the optional method of computing farm net earnings from self-employment for 1968 through 1970.
The X Investment Company was issued a Certificate of Incorporation under State law in 1968 and met the legal requirements for establishing its corporate existence. R was elected president and continued in that capacity until 1971 when, for health reasons, she planned to retire. Income derived by the company was comprised of interest, dividends, and profits from the sale of stocks. To facilitate this activity, an open account was established with a stock broker for the sale of stocks, bonds, or securities, and a bank account was opened in the corporate name. A salary of $400 per month was established for R (the only paid officer) for the period October 1968 through December 1970 and $500 per month for the first quarter of 1971, and these amounts were reported quarterly under FICA wage reportings. Federal income tax returns filed by R also reflected these earnings.
Capitalization for the X Investment Company was created with cash and a tax free exchange of personally owned stock from R to the company for preferred voting stock. Information submitted apropos of R's application for benefits establish that the company was organized primarily for the profit of R and her immediate family. It does not have a securities dealer's license, is not listed as a brokerage firm with any stock exchange, and does not deal in investments, for the general public. There are no leases or licenses issued in the firm's name nor does it have a business address or listed telephone as such. The corporate address shown on tax returns and business records was that of a firm operated by R's son-in-law. No record was found that the firm actually conducted a corporate business of investments at any particular premises or that use was ever made of the stock brokerage open account.
The issue to be resolved is whether the income derived by R, from what is ostensibly a legally constituted investment corporation, should be deleted from the claimant's earnings record as derived from an illusory corporation the principal purpose of which is the conversion of R's investment income into covered "wages" for social security purposes.
The Social Security Administration has long held that where the particular circumstances disclose the intentions or expectations of the creators or members of corporations to use the corporate entity for the primary purpose of establishing either social security credits or a higher benefit award on behalf of one or more of its members rather than a business purpose, the corporate entity should be disregarded. Thus, if the evidence does not support corporate ownership of business assets, including property held for sale to customers in the ordinary course of business, and corporate operation of a business and, where appropriate, with respect to corporate members, a bona fide pay and service arrangement, the corporate existence is disregarded (rather than considered nonexistent) with respect to the so called compensation payments. Under this view, the corporate entity would be disregarded where it was created merely to convert noncovered income, such as investment income or a return of invested capital, into wages or net earnings from self-employment. See Williamson v. Celebrezze, U.S.D.C., N.D. Ind. (1963), SSR 66-31c, C.B. 1966, p. 65.
The courts also have held that an individual claiming benefits must establish fully his entitlement and that the burden of proof to establish his entitlement is not satisfied merely by the production of personal and partnership income tax returns. Independent inquiry may be made by the Administration into the employment or self-employment status of individuals claiming benefits under title II even though they may have been reported to the Internal Revenue Service by others as "employed" by them. Halvorsen v. Ribicoff, U.S.D.C., E.D.N.Y. (1961).
While the X Investment Company corporate structure may be valid and formal administrative proceedings were undertaken to evidence its corporate existence pursuant to State requirements, it appears that its primary, if not the sole, purpose was to establish additional earnings for R in order to qualify her for a higher benefit amount. This is evidenced in part by income being claimed in the precise maximum amount which could be allowed as covered earnings for the periods in question and by the apparent lack of any material difference between R's services to the corporation during the period of her alleged employment and her activities after that period with respect to her investments, thereby indicating no material relationship between pay and corporate services. It is also significant that no payments were made to other officers or employees during this period. The corporation did not occupy a particular business premise, have a listed telephone, or hold itself out to the public as being engaged in an investment venture, or to handle any third party business. Corporate tax returns show no receipts from normal business operations such as commissions or purchases and sales of various stocks and securities.
Accordingly, on the basis of the factors enumerated above, it is held that the payments received by R for her alleged services for the X Investment Company constitute neither wages for employment in the form of salary, nor net earnings from self-employment in the form of director's fees; therefore, such earnings must be deleted from the earnings record.