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BIDDULPH v. CALLAHAN

March 30, 1998

MARY ANN BIDDULPH, Plaintiff,
v.
JOHN J. CALLAHAN, ACTING COMMISSIONER OF THE SOCIAL SECURITY ADMINISTRATION, Defendant.



The opinion of the court was delivered by: GREEN

MEMORANDUM OPINION AND ORDER

 Plaintiff Mary Ann Biddulph ("Biddulph") challenges the determination of the Commissioner of the Social Security Administration ("the Commissioner") that she is ineligible for Retirement Insurance Benefits under Section 202 of the Social Security Act, 42 U.S.C. § 402. This case turns on whether the income Biddulph earned from babysitting, taking in boarders, baking, and sewing from her residence in Australia qualifies as earnings from operation of a trade or business. The Commissioner applied the wrong legal standard when he determined that Biddulph's income-producing activities were not a trade or business. Additionally, his conclusion that Biddulph had not accurately reported the amount of her earnings is not supported by substantial evidence. For these reasons, the decision of the Commissioner must be reversed.

 BACKGROUND

 Mary Ann Biddulph is a 71-year-old United States citizen, born on February 9, 1927, who pursued a career of nursing and missionary work primarily in India and New Guinea. She currently resides in Queensland, Australia.

 A. First Application for Retirement Insurance Benefits

 While living in Australia, she filed her first application with the Commissioner for Retirement Insurance Benefits on May 31, 1991. See Administrative Record ("AR") at 71. On August 5, 1991, the defendant agency made an initial determination that Biddulph was not insured under the Social Security Act, and therefore was not entitled to old age benefits. According to the agency, Biddulph's earnings history showed that she had only acquired 35 of the 38 "quarters of coverage" needed to qualify for benefits. AR at 75 (Letter of Joseph R. Muffolett, Office of Disability and International Operations, dated August 5, 1991). In the same letter, she was told: "You should apply again if you earn the additional credit you need." Id. She was also advised of her rights to appeal. Id.

 One of the reasons that Biddulph was determined to have lacked sufficient quarters is that from 1952 to 1957, she served as a missionary nurse in India under the sponsorship of the Church of the Nazarene, Kansas City, Missouri. Biddulph was under the impression that during those years the Church was paying social security tax on her behalf. It appears that Biddulph was mistaken, and she received no credit for any of the quarters during those years. AR at 69, 104-05, 108-110.

 Biddulph took at least two steps in response to this initial determination. First, she promptly requested reconsideration. AR at 77 (Biddulph's letter of August 20, 1991 with attachments). Second, although 65 years of age (as of 1992) and in failing health, *fn1" she began a business out of her home in order to gain more credits. AR at 88 (letter of April 17, 1993).

 On February 17, 1993, the defendant, after reconsideration, affirmed the disallowance of her claim. AR at 83-85 (Letter of Joseph R. Muffolett). Biddulph then requested review by the SSA Office of Hearings and Appeals. On January 25, 1994, the Administrative Law Judge ("ALJ") reviewing the case denied her appeal. AR at 65. In each step of the process, the defendant agency determined that under the applicable law, 42 U.S.C. §§ 413-414, Biddulph had earned only 35 quarters of covered work -- three short of the 38 quarters required for persons of Biddulph's age.

 1. Final Appeals Council Decision

 In the final step of the administrative process, Biddulph sought review from the Appeals Council in April 1994. AR at 63. By letter dated November 10, 1994, the Council informed Biddulph that "absent new and material evidence or pertinent legal argument" it was prepared to grant Biddulph review limited to increasing her coverage from 35 to 36 quarters of coverage based on a reevaluation of her earnings in 1959. AR at 112-13, 98-99.

 By letter dated November 26, 1994, Biddulph asserted that, in the interval between filing her application and receiving the Appeals Council's November 1994 letter, she had earned additional quarters of coverage. AR at 114. While she had previously indicated to the agency that she had filed a 1992 tax return that reflected self-employment income, AR at 88, it was only with her November 26, 1994 letter that she enclosed copies of her 1992 and 1993 federal income tax returns. These reflect taxes paid on $ 1,724 and $ 2,291, respectively, in gross receipts from self-employment. AR at 114-125.

 The Council, after considering the tax returns as evidence of self-employment income, refused to credit Biddulph with any additional quarters of coverage for 1992 or 1993. The Council stated:

 
In questionable cases, the Social Security Administration is not only privileged but is obligated to look behind the form of self-employment tax returns which an individual has filed. It is the actual receipt of self-employment income, not the reporting or payment of taxes thereon, which is the crucial test for establishing a valid claim (Social Security Ruling 70-55c . . . ). The claimant has submitted no information regarding the specifics of her purported self-employment income which would allow the Appeals Council to determine whether such income was the result of her operation of a bona fide trade or business, or the amount of her net earnings from self-employment (i.e., there is no explanation regarding why the claimant did not have any expenses in connection with the operation of her purported business) (20 CFR 404.1007(c) and 20 CFR 404.1006).

 AR at 62. The Council did not specify why it considered Biddulph's to be a "questionable case."

 2. Appeals Council Decision on Reconsideration

 On April 19, 1995, Biddulph sent the Council additional supporting documents to verify her receipt of income during 1992 and 1993, including a cash book reflecting income received, a summary of business expenses, and copies of receipts. AR 7-53. These records reflect income principally from periodic babysitting for the child of a person named Fran Pedro and from providing room and board to Ms. Pedro and/or her child, as well as providing room and board to others on a few occasions. Biddulph also earned income from baking two birthday cakes and from occasional sewing projects, including the two-and-a-half months spent on sewing a quilt, for which she was paid $ 1,000. See AR at 9-18.

 The Council treated Biddulph's submission as a request to reopen its decision. On June 19, 1995, after describing the additional information submitted by Biddulph, the Council again denied Biddulph's application for benefits because:

 
The Appeals Council finds that this information is not sufficient to find that you received self-employment income in 1992 or 1993 or that you acquired additional quarters of coverage. The additional information does not show that you were engaged in a bona fide trade or business baking or sewing because you only made two cakes and only sewed on an occasional basis. The additional information does not show that you held yourself out to the public as a babysitter or as running a boarding house or that you advertised as such; therefore it does not show that you were engaged in a bona fide trade or business in connection with these services. Further in the operation of a babysitting business or a boarding house, there are usually expenses in connection with the businesses, such as electricity, heat, water, insurance, laundry, etc. You did not list any such expenses in determining the amount of your net remuneration (20 CFR 404.1007(c) and Social Security Ruling 89-2a . . .).

 AR at 3 (citation omitted). The Council concluded that it would not reopen its prior ruling and stated that "the Appeals Council's decision of March 1, 1995 stands as the final decision of the Commissioner." AR at 3.

 B. Second Application for Retirement Insurance Benefits

 During the pendency of the administrative review of her first claim for benefits, Biddulph filed a second claim for benefits on July 1, 1994, at the American Consulate in Brisbane, Queensland, Australia. AR at 168-71. Biddulph's second application included copies of her individual income tax returns for the years 1992 and 1993. AR at 143-61.

 The agency's left hand appears not to have known what its right was doing because Biddulph's earnings record, produced on November 3, 1994, and obtained by the International Program Service Center of the Social Security Administration ("SSA International Center"), reflects self-employment income for 1992 and 1993. See Def. Ex. A, Declaration of Martha C. Ulken PP 6-7 & AR at 138-40. With this income, Biddulph had acquired more than enough quarters of coverage.

 On November 21, 1994, defendant awarded the second claim for benefits and sent Biddulph a notice to that effect. In March 1995, the SSA's Office of International Operations ("OIP"), located in Baltimore, Maryland, appears to have become aware of the Appeals Council's decision refusing to credit Biddulph with self-employment income for 1992 and 1993 and holding that she had not acquired sufficient quarters to be fully insured. On a fax cover sheet to the American Consulate in Australia, an employee of the OIP wrote that "based on a review of the file and the Appeals Council decision dated 03/01/95, the claimant's 1992 and 1993 SEI should be removed." AR at 132. Subsequently, the agency suspended payments on Biddulph's second claim effective September 1995. AR at 127-28.

 C. Filing of the Instant Action

 On January 29, 1996, Plaintiff commenced this action to review the denial of her first claim by filing her Complaint pro se. Defendant answered in June 1996, filing only a partial administrative record. The Court ordered that the entire record be filed and served on Biddulph, and informed Biddulph that she could request appointment of counsel pursuant to Local Rule 702.1(a)(5). Biddulph did request appointment of counsel, and on February 14, 1997, the Court granted the request. Biddulph's counsel entered his appearance on April 11, 1997. *fn2"

 DISCUSSION

 A. The Social Security Act

 The Social Security Act provides for benefits to be paid to retirees in an amount, based in part, on prior and current earnings. 42 U.S.C. §§ 402(a), 415(a)(1)(A), 415(f)(2) (1994 & Supp.). To qualify for benefits, a retiree must have earnings that translate into a sufficient number of "quarters of coverage" as calculated by the formula set forth in 42 U.S.C. §§ 413, 414 (1994 & Supp.). Quarters of coverage are determined by the amount of earnings reflected for an individual in the agency's records.

 Prior to 1950, self-employed individuals were not covered by Social Security because there was no agreement on a feasible method for obtaining reports of their income. See Shore v. Califano, 589 F.2d 1232, 1237 (3d Cir. 1978) (discussing extensively the legislative history regarding coverage of self-employed individuals). In 1950, Congress reached agreement that creation of a separate social security schedule to the federal income tax forms on which self-employment income would be reported was a practical, administratively feasible method for extending Social Security to the self-employed. See S. Rep. No. 1669, 81st Cong., 2d Sess., reprinted in U.S.C.C.A.N. 3287, 3299 (1950).

 Consequently, the Commissioner is required to keep records of past earnings of self-employed individuals for the purpose of determining eligibility. 42 U.S.C. § 405(c)(2)(A). The relationship between self-employment income reported to the Internal Revenue Service and self-employment income kept in the Commissioner's records is closely linked, but they are not necessarily mirror reflections. See 20 C.F.R. § 404.1001(c).

 1. "Self-Employment Income" Under the Act

 The Commissioner is obliged to keep records of "self-employment income," which is a packed term. "Self-employment income" means "the net earnings from self-employment derived by an individual . . . during any taxable year beginning after 1950 . . . ." 42 U.S.C. § 411(b). "Net earnings from self-employment," in turn, means "the gross income . . . derived by an individual from any trade or business carried on by such individual, less the deductions allowed . . . ." Id. § 411(a) (emphasis added), where "trade or business" has the same meaning as it does under Section 162 of the Internal Revenue Code ("IRC"). 42 U.S.C. § 411(c); 20 C.F.R. § 404.1066 (1997). However, the term "trade or business" is undefined in the IRC.

 In this case, in its March 1, 1995 and June 19, 1995 decisions, the agency held, without reference to the controlling statute, that whatever monies Biddulph may have received in 1992 and 1993, they did not constitute "self-employment income" for Social Security purposes because: (1) the Appeals Council did not believe the money had come from operation of a "trade or business;" and (2) the Appeals Council did not accept the amount of income reported on Biddulph's tax return to be the amount of income she actually received. AR at 3, 62. It is those decisions that give rise to this action.

 2. Standard of Review

 This Court's review of the Commissioner's decision is provided for by the Act, which states in pertinent part:

 
Any individual, after any final decision of the Commissioner . . . may obtain a review of such decision by a civil action . . . . The court shall have power to enter, upon the pleadings and transcript of the record, a judgment affirming, modifying, or reversing the decision . . . with or without remanding the cause for rehearing. The findings of the ...

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