SSR 75-18c: SECTIONS 211 AND 214(a) (42 U.S.C. 411 and 414(a)) -- NET EARNINGS FROM SELF-EMPLOYMENT -- EXCLUSION OF RENTAL PROPERTY INCOME -- COMPUTATION OF NET EARNINGS FROM SELF-EMPLOYMENT
20 CFR 404.1051-404.1053
Lamb v. Weinberger, U.S.D.C., E.D. of Mo., E.D. No. 72 C 581(4), (6/30/73) (CCH UIR FED ¶ 17,317)
- Where claimant seeks to meet insured status requirement for retirement insurance benefits on the basis of alleged self-employment income received from a partnership. Held, in computing net earnings from self-employment, guaranteed monthly payments paid to the claimant as her distributive share of the partnership's ordinary income must be offset or reduced by claimant's distributive share of the partnership's losses in a given year. Further Held, self-employment income claimed as a result of income from rental property was properly excluded since claimant did not perform services for tenants other than those related to maintenance of property.
WANGELIN, District Judge:
This is an action pursuant to 42 U.S.C. § 405(g), § 205(q) of the Social Security Act, for judicial review of the final decision of the Secretary of Health, Education and Welfare.
On May 28, 1970, plaintiff applied for old age insurance benefits under § 402(a). This application was denied by the Social Security Administration. After reconsideration, the application was again denied.
On November 19, 1971 pursuant to plaintiff's request, an administrative evidentiary hearing was held. Plaintiff was represented by her husband, an attorney. The Hearing Examiner denied the application. This decision was upheld by the Appeals Council on administrative review and the Examiner's decision became the final decision of the Secretary. The Secretary has moved herein for summary judgment and the action is before the Court for a decision on the merits.
Judicial review of the Secretary's final decision is limited in scope. The findings of the Secretary and the reasonable inferences drawn therefrom are conclusive if they are supported by substantial evidence upon the entire record. 42 U.S.C. § 405(g) * * * Further, the decision must comport with the applicable laws and regulations. * * *
The Court has subject matter jurisdiction of the action pursuant to § 405(g).
§ 402(a) provides that every individual, 62 years of age, if he is fully insured as defined in § 414(a) and has filed an application therefor, shall be entitled to old-age insurance benefits. Under § 414(a), a living woman is "fully insured" if she has one quarter of coverage for each year after 1950 up to the year in which she attained the age of 62. Plaintiff became 62 in 1969 and needed eighteen quarters of coverage to be fully insured.
§ 413(a)(1) defines "quarter" as calendar periods of three months ending on March 31, June 30, September 30, or December 31. § 413(a)(2) defines a "quarter of coverage" as a quarter in which the applicant has been paid $50.00 or more in wages or for which she has been credited with $100.00 or more of "self-employment income." Plaintiff is a partner in a real estate business and seeks to qualify by reason of self-employment income.
§ 411(b)(2) defines "self-employment income" as the net earnings from self-employment excluding, inter alia, the net earnings from self-employment in a taxable year if such earnings are less than $400.00.
§ 411(a) defines "net earnings from self-employment" as
- the gross income, as computed under Chapter 1 of Title 26, Internal Revenue Code of 1939, derived by an individual from any trade or business carried on by such individual, less the deductions allowed under such chapter which are attributable to such trade or business, plus his distributive share (whether or not distributed) of the ordinary net income or loss, as computed under section 183 of Title 26, Internal Revenue Code of 1939, from any trade or business carried on by a partnership of which he is a member. . . .
§ 411(c) defines "trade or business" as it is defined in § 23 of Title 26, Internal Revenue Code of 1939, except that the term does not include "the performance of service by an individual as an employee." § 411(c)(2).
§ 411(d) defines "partnership" and "partner" as found in 26 U.S.C. § 761(a) and (b), respectively. A "partnership" includes
- a syndicate, group, pool joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on and which is not, within the meaning of this title, a corporation or a trust or estate.
A "partner" is a "member of a partnership."
The issue presented herein for judicial review is whether the Secretary properly credited the plaintiff with receiving less than $400.00 in net earnings from self-employment income for the years 1967, 1968 and 1969. The Court answers this issue in the affirmative and affirms the Secretary's decision.
Findings of the Hearing Examiner
- 1. The claimant, Patricia M. Lamb, was born April 23, 1907, and became age 62 in 1969.
- 2. The total evidence establishes that the claimant has less than 18 quarters of coverage at the time she attained age 62.
- 3. The evidence establishes that Patricia M. Lamb, Frank H. Lamb, and Sharon Robinson are partners in a business known as the Lamb Real Estate Company and that said partnership was formed in 1950.
- 4. The evidence establishes that the 1967 tax return shows gross sales of $1,796.37 for the partnership and expenses $2,597.17, resulting in a net loss of $800.80; also that based on a guarantee of $40.00 per month Patricia Lamb reported self-employment income of $480.00 for 1967.
- 5. The evidence establishes that the partnership in 1968 had a gross sales of $652.61. Expenses were $1,715.44 resulting in a net loss of $1,062.83 and that based on payments of $480.00 during the year the claimant, Mrs. Lamb, reported self-employment income of $480.00.
- 6. The evidence establishes that in 1969 the partnership had gross sales of $2,004.06. Expenses were $2,036.67 resulting in a net loss of $32.61; that Mrs. Lamb, the claimant, received payments of $240.00; also that in addition Mr. and Mrs. Lamb reported rental income of $2,851.92 and that Mrs. Lamb completed an amended tax return allowing 30% of the total of that income for self-employment income, with « of this amount to be credited to Patricia M. Lamb. Mrs. Lamb credited herself with self-employment income of $427.79; that Mr. and Mrs. Lamb stated that maintenance, repairs, furniture, replacements and decorating were their responsibility and that Mr. and Mrs. Lamb did not perform personal services for their tenants; that their services were those only of protecting their investment.
- 7. The hearing examiner finds that because Mrs. Lamb is not an employee of the business, her guaranteed salary payments are not wages and represent self-employment income which self-employment income must be added to her share or subtracted from her share of the partnership loss; that in 1967 the partnership had a loss of $800.00; in 1968 the partnership had a loss of $1,062.83, and based on the losses and guaranteed payments, Mrs. Lamb did not have net self-employment income of $400.00 in the years 1967 and 1968 that also because it was necessary to exclude rental income reported for 1969, Mrs. Lamb did not have net self-employment income of at least $400.00 in 1969.
- 8. The evidence establishes that the claimant, Patricia M. Lamb, is credited with self-employment income of $480.00 for the years 1965 and 1966 resulting in 8 quarters of coverage; that because claimant needed 18 quarters of coverage she was not fully insured and was not entitled to retirement insurance benefits.
Regarding the terms of the subject oral partnership agreement, the Examiner stated as follows:
- The evidence establishes that Patricia M. Lamb, Frank H. Lamb, and Sharon Robinson are partners in a business known as the Lamb Real Estate Company. Mr. and Mrs. Lamb are husband and wife and Sharon Robinson is their daughter. Mr. and Mrs. Lamb furnished information that the partnership was formed in 1950.
- Mrs. Lamb devotes about 6 hours per day in the business. Frank Lamb spends about 1 hour per day in the business and Sharon Robinson works about 2 hours per day.
- Information from the claimant and Mr. Lamb established that each partner is to receive of the profit. Sharon Robinson is not to share in a loss. Patricia Lamb is guaranteed a payment of $40.00 per month. However, in 1969, Patricia Lamb did not furnish services in the business for the entire year and received payments of only $240.00.
The guaranteed monthly payments of $40.00 paid by the partnership to plaintiff are regarded as her distributive share of the partnership's ordinary income. 26 U.S.C. § 707(c); Int. Rev. Reg. § 1.707-1(c). Such amounts must be offset or reduced by plaintiff's distributive share of the partnership's losses in a given year. 42 U.S.C. § 411(a); 26 U.S.C. § 702(a)(9); Rev. Rul. 56-675, Mertens, Law of Federal Income Taxation, 1954-1957 Rulings, p. 545 (1958 ed.). Kossman v. Folsom, 157 F.Supp. 157 (E.D. N.Y. 1957); aff'd sub nom, Kossman v. Flemming, 261 F.2d 833 (2nd Cir. 1959); Ames v. Finch, 297 F.Supp. 1147, 1149 (C.D. Cal. 1969). And a partner's distributive share of the partnership's losses is determined by the partnership agreement. 26 U.S.C. § 704(a). Rafal v. Flemming, 171 F.Supp. 490, 496 (E.D. Va. 1959).
Plaintiff, by her complaint herein, asserts that the oral partnership agreement provided that she was not to share in the partnership's losses. It was her duty to prove this factual allegation in the administrative evidentiary hearing; it was not the Secretary's duty to prove to the contrary. Garrett, supra; Carqueville v. Flemming, 263 F.2d 875, 877 (7th Cir. 1959); Fenix v. Celebrezze, 243 F.Supp. 816 (W.D. Mo. 1965); Hernandez v. U.S. Secretary of Health, Education and Welfare, 307 F.Supp. 338 (D.P.R. 1969). During the hearing the Examiner enquired of plaintiff regarding the sharing of profits and losses of the partnership. Plaintiff stated only that her daughter, Sharon, is not to share in the losses. From the failure of plaintiff to testify explicitly that she herself was not to share in the losses and from the statement on Exhibit No. 23, a partnership questionnaire executed in support of the subject application, that partnership losses were to be absorbed by her and her husband, the Examiner reasonably inferred and concluded that she was to share in the partnership losses. There is substantial evidence on the record as a whole to support the Examiner's findings and decision on this point.
Therefore, clearly plaintiff's net earnings from self-employment income, paid to her by the partnership, amounted to less than $400.00 for the years 1967 and 1968.
For the year 1969, plaintiff originally claimed $427.79 in self-employment income. This was reflected on her Form 1040X, Amended U.S. Individual Income Tax Return for the year 1969, resulting from her share in income from rental property owned by herself and her husband. This amount was properly excluded from consideration for insurance coverage upon the Examiner's finding that plaintiff did not perform services for her tenants that were not related to maintenance of the property, in return for this rental income. (Tr. 19). Delno v. Celebrezze, 347 F.2d 159 (9th Cir. 1965); Ames, supra. There was substantial evidence to support this finding. (Tr. 41).
Plaintiff now claims $480.00 of self-employment income for the year 1969 received as guaranteed payments from the partnership. The examiner, however, found that in 1969 plaintiff did not furnish services in the business for the entire year and received payments of only $240.00. (Tr. 19). Plaintiff originally executed, on March 14, 1970, an IRS Form 1040, with a Schedule SE (self-employment) in support of which schedule plaintiff stated that she received $240.00 from the partnership. (Tr. 91). After her instant application for the old-age insurance benefits was originally denied on August 28, 1970, (Tr. 51), and denied after reconsideration on January 26, 1971, (Tr. 55), plaintiff on February 21, 1971, executed a revised IRS Form 1065, U.S. Partnership Return of Income, for 1969. This revised form reflected that plaintiff received $480.00 from the partnership. (Tr. 121). It is plaintiff's contention that the filing of the revised form supplants her earlier claim for credit for insurance coverage by reason of the rental income. Be this as it may, the issue becomes whether the Examiner's findings that plaintiff received $240.00 for the year 1969 from the partnership is supported by substantial evidence. The fact that plaintiff revised her tax return to reflect self-employment income of over $400.00 for 1969 does not conclude the issue. The issue of fact for the Examiner remained whether she received, not merely reported this income. Garner v. Richardson, 339 F.Supp. 1126, 1134 (N.D. Miss. 1971). Plaintiff appeared before the Examiner. The Examiner questioned her; her attorney husband questioned her. The credibility of plaintiff regarding the information reflected in this revised 1969 tax return was for the Examiner to decide. Rasmussen v. Gardner, 374 F.2d 589, 592 (10th Cir. 1967). He ruled against plaintiff on this issue. In light of the statement on the original 1969 IRS Form 1065 (Tr. 93), in light of the chronology of the tax return filings and the denials of plaintiff's application for benefits, the Court finds that the Examiner's finding that plaintiff received only $240.00 in guaranteed payments form the partnership is supported by substantial evidence.
In consequence, the Court is of the opinion that the Secretary's motion for summary judgment must be sustained. The action will be dismissed.
 Unless otherwise specified, all statutory section citations will be to title 42 of the United States Code.