SSR 76-31c: SECTION 211(c) (42 U.S.C. 411(c)) -- SELF-EMPLOYMENT -- TRADE OR BUSINESS -- SERVICES OF NON-PROFESSIONAL FIDUCIARY IN ADMINISTERING RELATIVE'S ESTATE
20 CFR 404.1070
Silverman v. Secretary, HEW, USDC, C.D. CA., Civ. No. 75-1142-IH(G) (2/10/76)
- In judicial decision upholding the Secretary's determination denying claimant credit for self-employment income on the basis of fees allowed by Probate Court for his services as trustee of a deceased relative's estate, held, that while there are rare cases in which the activities of a nonprofessional fiduciary for a single estate may be considered to be self-employment, there was substantial evidence supporting the conclusion that the claimant's activities were not sufficiently extensive to constitute the conduct of a trade or business within the meaning of section 211(a) of the Social Security Act.
HILL, District Judge:
This Report and Recommendation is submitted to the Honorable Irving Hill, United States District Judge, pursuant to the provisions of 28 U.S.C. § 636(b)(3) and General Order No. 104-D of the United States District court for the Central District of California.
On April 1, 1975, plaintiff filed a complaint to review the decision of the Secretary of Health, Education, and Welfare concerning retirement benefits.
On August 8, 1975, defendant filed an answer to the complaint, with a certified copy of the transcript of the administrative record.
Thereafter a motion for summary judgment, with memorandum of points and authorities in support thereof, was filed by defendant, and proposed findings of fact, conclusions of law and judgment were lodged. Plaintiff filed opposition thereto.
On October 7, 1975, the Magistrate heard the motion for summary judgment. It was stipulated that the plaintiff's opposition documents be deemed to include a motion by plaintiff for summary judgment, and that the government's Motion for Summary Judgment be deemed to constitute opposition thereto. After hearing oral argument by counsel, the Magistrate ordered the motions for summary judgment to stand submitted for decision.
The Magistrate, having subsequently reviewed the entire transcript, pleadings and memoranda, and having reflected upon the state of the entire record now makes this report.
This action was brought pursuant to § 205(g) of the Social Security Act, as amended, 42 U.S.C.A. § 405(g), to obtain judicial review of a final decision of the Secretary of Health, Education, and Welfare finding that the plaintiff was not entitled to retirement insurance benefits because he was not "fully insured" within the meaning of the Act.
The plaintiff filed an application for retirement insurance benefits on June 12, 1973, alleging that he had been self-employed as a fiduciary from 1969 through 1972. This application was denied initially and on reconsideration on the grounds that the plaintiff did not have sufficient quarters of coverage to be entitled to retirement insurance benefits.
The plaintiff then requested a hearing which was held on October 8, 1974, at Los Angeles, California, where the plaintiff appeared and testified. The administrative law judge considered this testimony and all other evidence of record de novo, and on October 17, 1974, issued his decision finding that the plaintiff was not entitled to retirement insurance benefits.
The administrative law judge's decision became the final decision of the Secretary of Health, Education, and Welfare when it was approved by the Appeals Counsel on February 11, 1975, and that decision is now subject to review by this Court.
The plaintiff, who was born on August 16, 1898, filed an application for retirement insurance benefits, and a statement of claimant in support thereof, on June 12, 1973. Plaintiff had previously worked for several years as a civil engineer and for many years had worked part-time as a real estate broker, neither of which jobs were covered by social security. It is undisputed that plaintiff obtained one quarter of insured coverage in 1956. Having attained age 65 in 1963, plaintiff needed 12 quarters (one for each year after 1950 and prior to 1963) of coverage to establish "fully insured status". Plaintiff sought to have four quarters of coverage for each year from 1969 through at least 1972 credited to his social security account, contending that he was self-employed as a nonprofessional fiduciary during that time.
Plaintiff's uncle died February 27, 1967. Plaintiff served as executor of the estate until 1969, when he assumed responsibilities as trustee of a testamentary trust established by his uncle's will, with the uncle's widow as life beneficiary. Plaintiff was still serving as trustee at the time of his hearing in October, 1974. The estate consisted of a commercial building in Los Angeles which generated rental income by reason of four stores which rented space therein and cash of approximately $10,000. The rental property had an appraised value of $36,000 in 1974, although plaintiff thought it was worth $65,000, so the value of the trust assets, after disbursements, was somewhere between $47,000 and $75,000. Plaintiff received from $500 to $750 per year in fees for his services as trustee, and would receive a one-quarter interest in the estate upon the death of the life beneficiary.
Plaintiff's duties as trustee included keeping the commercial building rented, collecting rent, and getting repairs made. He had no business expenses or office, "as my services are relatively simple as fiduciary". He took care of the estate's bookkeeping and correspondence, which his wife typed. Regarding the amount of time spent as trustee, plaintiff testified that "there isn't a day that I don't have something to do with it" and estimated that he had spent 16 hours performing his duties in the month prior to the hearing, September, 1974.
In a letter dated March 13, 1974, plaintiff explained the nature of his trustee responsibilities to support his contention that the trusteeship had been of long duration (since July 15, 1969); involving a complex estate (originally involving two commercial buildings) of very large size (property worth about $60,000, generating $595 monthly rental income). By letter dated October 9, 1974, plaintiff described the amounts of time he spent tending the estate from December, 1973 through February, 1974 as a result of fire damage to the building, and in 1971 due to earthquake damage, including notes of calls and tasks he performed. He also submitted annual reports for each year of his service as trustee of the estate, detailing receipts and disbursements thereof.
The law requires that an applicant for retirement insurance benefits must be "fully insured". 42 U.S.C.A. § 402(a). Pursuant to 42 U.S.C.A. § 414(a), plaintiff herein must have 12 quarters of insured coverage to be fully insured. Plaintiff alleges entitlement to 16 quarters of coverage for the years 1969 through 1972, during which time he received more than $100 in each calendar year. See 42 U.S.C.A. § 413(a). The determinative question here is whether plaintiff's services as a non-professional fiduciary constitute a "trade or business" within the meaning of 42 U.S.C.A. § 411(c) so as to qualify plaintiff as a self-employed individual for social security purposes. The Secretary has determined that plaintiff was not engaged in a trade or business and therefore was not entitled to retirement insurance benefits. This decision is supported by substantial evidence in the record and therefore should be affirmed.
Social Security Ruling No. 27 for 1960, SSR 60-27, C.B. 1960-61, pp. 60-61, concerns whether a non-professional fiduciary, such as an administrator or executor of an estate, is engaged in a trade or business within the meaning of 42 U.S.C.A. § 411(c). This Ruling recognizes that the term "trade or business" shall have the same meaning as in section 162 of the Internal Revenue Code, and states that all the facts and circumstances in a particular case must be considered. SSR 60-27 sets forth the following general guidelines:
(1) a professional fiduciary who regularly engaged in fiduciary services and handles a number of estates is engaged in a trade or business;
(2) a nonprofessional fiduciary (for example, one who serves as executor in isolated instances, and then as personal representative of a deceased friend or relative) generally is not engaged in a trade or business;
(3) a nonprofessional fiduciary who actually carries on a trade or business in connection with administering an estate, such as operating a store which is part of the estate, may have net earnings from self-employment, if:
- (a) the trade or business is an asset of the estate,
- (b) the fiduciary actually participates in the operation of such trade or business, and
- (c) only such fees as are attributable to his operation of the trade or business are net earnings from self-employment.
SSR 60-27 further provides that "in certain rare cases there may be a very large estate which is of such complexity and long duration that its administration requires extensive Management activities over a long period of time." Under such circumstances, "activities of a nonprofessional fiduciary for a single estate may constitute the conduct of a trade or business. . . ." The example presented in SSR 60-27 involved an executrix of an estate consisting of stocks, bonds and a farm, who spent two years distributing the personalty to legatees, renting the farm until a sale could be arranged, and consummating the sale. The executrix did not operate the farm business and it was held that the estate did not require management activities sufficiently extensive to constitute conduct of a trade or business.
The leading social security case concerning what constitutes engaging in a trade or business, which has also been cited with approval in income tax cases, is McDowell v. Ribicoff, 292 F.2d 174 (3rd Cir. 1961). In a decision finding that the claimant's services as executrix for her aunt's estate did not result in net earnings from self-employment, the Court in McDowell discussed IRC § 162 and Rev. Rul. 58-5 and set forth the following explanation at p. 178:
- "The phrase 'trade or business' connotes something more than an act or course of activity engaged in for profit. Indeed, the Internal Revenue Code itself, in Section 165(c), 26 U.S.C. § 165(c), distinguishes between a 'trade or business' on the one hand and a 'transaction entered into for profit' on the other. The phrase 'trade or business' must refer not merely to Acts engaged in for profit, but to extensive activity over a substantial period of time during which the Taxpayer holds himself out as selling goods or services. This is substantially the definition underlying the ruling of the Internal Revenue Service under discussion. Moreover, the ruling is a reasonable and accurate application of this definition to the question as to when a nonprofessional fiduciary is engaged in 'trade or business'. We hold, therefore, that the criteria set forth in the ruling and applied by the Secretary in the present case are fully supported by the statute and embody the governing principles in a case such as that at bar."
Application of the criteria set forth in SSR 60-27, Rev. Rul. 58-5 and McDowell v. Ribicoff, supra, to the facts of this case clearly establishes that the plaintiff here was not engaged in a trade or business within the meaning of the Social Security Act and Internal Revenue Code. Plaintiff is a nonprofessional fiduciary serving as executor and trustee of a single estate, that of a deceased relative, his uncle. There was no trade or business among the assets of the estate; plaintiff merely rented space in the commercial building to four stores which carried on businesses therein, but did not himself conduct such a business. Income from the rental of real estate or other investments is not income from a trade or business. See, IRC §§ 162 and 212, 26 U.S.C.A. §§ 162, 212.
It is noted that the income claimed for the "trade or business" self-employment relied on by plaintiff consisted of the fees allowed by the Probate Court for his services as a trustee. The California law does not distinguish between "ordinary" and "extraordinary" services rendered by a trustee, as it does for an executor or administrator of an estate, in determining the compensation to be allowed. Hence the record does not show a division of the fees (approximately $600.00 a year) collected by plaintiff as trustee from 1969-1972.
The extent of this income received is relevant as it bears upon the resolution of whether plaintiff has met the burden of proving entitlement to benefits, including here the establishment of his claim that his fiduciary service in this one estate constituted engaging in a trade or business. It is arguable that the activity of plaintiff is sufficient to be deemed engaging in business.
In an action for retirement benefits, as in other litigation under Title II of the Social Security Act, the Secretary, and not the court, is charged with the responsibility to weigh the evidence, resolve material conflicts in the testimony, and determine the case accordingly. Lessin v. Celebrezze, 314 F.2d 283 (D.C. Cir., 1963); Richardson v. Perales, 402 U.S. 389 (1971); Torske v. Richardson, 484 F.2d 59 (9th Cir. 1973), cert. denied Torske v. Weinberger, 417 U.S. 933 (1974); Waters v. Gardner, 452 F.2d 855 (9th Cir. 1971). The Secretary's decision must be affirmed even though there is substantial evidence which would have supported a finding in favor of plaintiff if such a finding had been made. Rhinehart v. Finch, 438 F.2d 920 (9th Cir. 1971); Jacobs v. Finch, 421 F.2d 843 (9th Cir. 1970).
The function of the court on review is not to try the matter de novo, but to leave the findings of fact to the Secretary and to determine upon the whole record whether the Secretary's decision is supported by substantial evidence. Beane v. Richardson, 457 F.2d 758 (9th Cir. 1972), cert. denied 409 U.S. 859 (1972); Harmon v. Finch, 460 F.2d 1229 (9th Cir. 1972), cert. denied 409 U.S. 1063 (1972), reh. denied 410 U.S. 918; McDowell v. Ribicoff, supra; Lessin v. Celebrezze, supra; Braaksma v. Celebrezze, supra.
Plaintiff has failed to show that he sustained his burden of proving entitlement to retirement insurance benefits, in that there is substantial evidence in the record to sustain the administrative law judge's determination that he was not so entitled.
Pursuant to 28 U.S.C. § 636(b)(3) and General Order No. 104-D, the Court has reviewed the complaint and the proposed Report and Recommendation of the Magistrate on file herein, and on this date concurred with and adopted the findings and conclusions of the Magistrate.
IT IS ADJUDGED that the motion for summary judgment of plaintiff is denied and that the motion for summary judgment of defendant be granted.