Plaintiff, James E. Bryan, brings this action for review of a final decision of the Secretary of Health, Education and Welfare, that he was not entitled to receive retirement benefits under the Social Security Act (hereinafter "Act"), 42 U.S.C. § 401 et seq., for the years 1971 through 1973 because he had received wages for services in excess of the amount permitted by section 203 of the Act, 42 U.S.C. § 403. This Court has jurisdiction over the matter pursuant to section 205(g) of the Act, 42 U.S.C. § 405(g), which empowers this Court to review a final decision of the Secretary and to ". . . enter, upon the pleadings and transcript of the record, a judgment affirming, modifying, or reversing the decision of the Secretary, with or without remanding the cause for a rehearing." This matter is now before the Court on the parties' cross-motions for summary judgment.
Mr. Bryan filed his application for retirement benefits under section 202 of the Act, 42 U.S.C. § 402, on April 5, 1971.
The Social Security Administration (hereinafter "Administration") began paying Mr. Bryan such benefits, including certain retroactive payments, in September of 1971.
Thereafter, the Administration discontinued payment of plaintiff's retirement benefits effective September 1973 because it had determined that he had been receiving wages in excess of the allowable monthly limit under section 203 of the Act, 42 U.S.C. § 403, for the period in question.
Section 203 provides for the deduction of certain wages earned by an individual from his retirement benefits under the Act.
Mr. Bryan protested this determination and requested reconsideration.
The Administration rendered its reconsideration on March 14, 1974 in which it determined that Mr. Bryan had failed to establish that he had not earned wages in excess of the amounts provided by section 203 of the Act, 42 U.S.C. § 403, and was therefore precluded from receiving retirement benefits for the period in question, 1971 to 1973. This determination was based on what the Administration viewed as an unrealistic salary arrangement between plaintiff and his wife. The Administration also notified Mr. Bryan that, in accordance with this determination, he had been overpaid in the amount of $6,648.10 beginning with April 1, 1971.
Mr. Bryan then requested a hearing which was held on May 7, 1975 before an Administrative Law Judge. The evidence before the Administrative Law Judge can be summarized as follows:
Mr. Bryan had been for many years the sole shareholder and president of a corporation which provided administrative and consulting services, primarily to medical societies. In 1970, the corporation suffered from business reverses, losing a portion of its clientele, and was obliged to separate its two executive employees.
In 1971, Mr. Bryan married his present wife, Helen Bryan. Prior to their marriage, Mrs. Bryan had been employed by the corporation on a part-time basis. In 1971, she became a full-time employee of the corporation assuming the duties of the departed executives, including bookkeeping, accounting, writing, and organizing duties. She was also made Vice President and Secretary of the corporation. During the period at issue, 1971 to 1973, Mrs. Bryan received an annual salary from the corporation ranging from about $20,000 to $24,000 per year, which apparently represented the entire net earnings of the corporation.
Subsequent to January 1971, and during the period in question, Mr. Bryan received no salary from the corporation. He admitted that during the period in question his duties did not materially change from those he had performed when he was receiving a salary and that he continued to perform substantial services for and was active in the corporation. Plaintiff also conceded that he controlled the corporation's salary arrangement and was responsible for the salary arrangement at issue.
Mr. Bryan and his wife maintained separate checking accounts. Mrs. Bryan's salary check was deposited into her account, and household expenses were also paid out of this account. Mrs. Bryan's salary was also used to make plaintiff's alimony payments to his former wife.
The Administrative Law Judge determined that the salary arrangement between plaintiff and his wife was only a pretext to enable plaintiff to receive retirement benefits and that at least 50 per cent of the income
must be reallocated to the plaintiff. The Administrative Law Judge further determined that, as a result of this reallocation, Mr. Bryan had earned wages which required a 100 per cent deduction of the retirement benefits paid to him and directed the plaintiff to repay the amount of the benefits previously paid to him.
The Appeals Council affirmed the Administrative Law Judge's decision on January 10, 1976.
The Secretary, of course, has the authority in determining eligibility for retirement benefits under the Act to pierce fictitious family salary arrangements and to reallocate income from one family member to another when the salary arrangement is not in accord with reality. See Weisenfeld v. Richardson, 463 F.2d 670 (3rd Cir. 1972); Gardner v. Hall, 366 F.2d 132 (10th Cir. 1966); Walker v. Richardson, 339 F. Supp. 853 (D. Kansas 1971); Koeller v. Finch, 315 F. Supp. 533 (D. Kansas 1970); Rubenstein v. Celebrezze, 247 F. Supp. 927 (E.D. Mo. 1965); see also Poss v. Ribicoff, 289 F.2d 10 (2nd Cir.) cert. denied, 368 U.S. 902, 7 L. Ed. 2d 96, 82 S. Ct. 178 (1961).
The Secretary's findings of fact in such matters are conclusive, if supported by substantial evidence. 42 U.S.C. § 405(g). However, where the reasons relied upon by the Secretary for his determination that a salary arrangement is fictitious and that an applicant for benefits is receiving wages indirectly are not valid or evidence does not support such a finding, the Secretary's decision to reallocate income cannot stand. The principal questions presented here
are whether the reasons relied upon by the Secretary in support of his determination that the salary arrangement was fictitious and that Mr. Bryan was indirectly receiving wages are valid
and whether this decision was supported by substantial evidence.
The Administrative Law Judge made no finding that Mrs. Bryan's salary was excessive or not earned by her, and the reasonableness of her salary was not a factor in his decision. Instead the Administrative Law Judge relied on the following three factors: (1) Mr. Bryan was performing substantial services for the corporation whose value was greater than his remuneration and at least as great as the value of Mrs. Bryan's services; (2) Mrs. Bryan's salary was used to pay for household expenses and to satisfy Mr. Bryan's alimony obligations; and (3) Mr. Bryan controlled the corporation and its salary arrangements. He reasoned that:
The Administrative Law Judge must find that the claimant continued to be employed during all the period he was receiving benefits, and that he was not retired, and that the allocation of the income to his wife was fiction and a device to enable the claimant to draw benefits. It is clear from the evidence that he continued to be supported by the business and that his alimony payments were paid through the business income, as were all household expenses, and the fact that the income was paid through his wife, Helen Bryan, cannot be used as a pretext for obtaining retirement benefits. This is a wholly owned corporation, and the income thereof can be allocated as Mr. Bryan desires. Whatever the worth of Mrs. Bryan's services, for the purpose of this proceeding, there must be at least a 50 per cent allocation of the income to Mr. Bryan, and it must be found that he was receiving each month an amount of money which required 100 per cent deduction of the benefits paid to him. Tr. 24.