The opinion of the court was delivered by: COWEN
This is an action in which plaintiff seeks judicial review pursuant to § 205(g) of the Social Security Act ("Act"), as amended, 42 U.S.C. § 405(g), of a final determination of the Secretary of Health and Human Services ("Secretary") finding that the plaintiff's application for retirement insurance benefits was erroneously awarded and denying plaintiff's entitlement to a waiver of overpayment.
On April 1, 1983, the plaintiff, John Woodworth, filed an application for retirement insurance benefits (Tr. 53-56). The application was initially granted, however, on July 16, 1984, Woodworth was notified that he had been overpaid from April 1983 through January 1984 because he lacked sufficient quarters of coverage for entitlement to retirement insurance benefits (Tr. 70-71). On April 5, 1984, Woodworth filed a request for reconsideration of this determination, and upon reconsideration the determination was found to be correct (Tr. 64-69). Woodworth then filed a request for hearing on September 4, 1984 to review the determination denying benefits. The hearing was held before Administrative Law Judge Samuel J. Dantoni (hereinafter "ALJ"), (Tr. 23), who on April 29, 1985 issued a decision finding that Woodworth was not entitled to benefits for the period at issue and that he was overpaid benefits which could not be waived (Tr. 16-22). The decision of the ALJ became the final decision of the Secretary when the Appeals Council denied Woodworth's request for review on December 15, 1985 (Tr. 3-4). Woodworth then commenced this action on February 24, 1986, seeking a review of the Secretary's decision.
Woodworth, who was born on November 11, 1919 (Tr. 53), filed an application for retirement insurance benefits on April 1, 1983. To qualify for benefits, Woodworth needed thirty quarters of coverage for fully insured status (Tr. 18). In his application for benefits, Woodworth reported self-employment income in 1979 extending through 1982, which he claimed entitled him to quarters of coverage during these particular years. However, the Secretary found that, despite Woodworth's having reported self-employment income as a result of activities between 1979 and 1982, these activities were not self-employment and the monies represented as self-employment income could not be applied against the required quarters of coverage to render him fully insured within the meaning of the Act (Tr. 18).
Woodworth was a designer of mechanical and electrical systems with a background as an electrical engineer (Tr. 37). He had been employed by the United States Government and in 1977 retired with a pension (Tr. 37-38). Woodworth stated that in 1979 he formed a partnership with his son for the purpose of investing in real estate property.
He indicated that the partnership owned an apartment house which produced gross rents of approximately $ 15,000.00,
and a piece of property in Long Branch (Tr. 36).
Woodworth testified that in 1979 he began to operate a maintenance and repair business with the purpose of earning a profit. He added that he never hired any employees or subcontracted any work (Tr. 31). Thereafter, he would work on the buildings which were owned by the partnership. The other partner performed no substantial maintenance or repair work (Tr. 47-48).
The partners entered into an agreement whereby each partner would be responsible for contributing $ 200.00 per month for repair work on the two apartment buildings which were in poor condition when first acquired (Tr. 41). Woodworth also stated that the partnership would pay him at the rate of $ 12.00 per hour and that his earnings would be credited against the required $ 200.00 per month contribution for any hours he worked (Tr. 44). Woodworth testified that he would make a monthly computer summary of his hours (Tr. 45). He noted that rather than taking cash he would reinvest it in the partnership, thereby increasing his equity in the company (Tr. 39-40). He stated that he paid Social Security withholding based on the $ 12.00 per hour rate he charged the partnership. Woodworth added that he never received a check from the partnership which would indicate that he received wages for the maintenance work he performed, rather, the evidence which substantiated his receipt of wages were the partnership books, tax returns, and computerized records (Tr. 43).
Woodworth noted that it would have cost the partnership $ 4,000.00 to $ 5,000.00 per year to hire someone to complete the jobs he performed (Tr. 44). Woodworth worked approximately 10 hours per week and indicated that the partnership determined which jobs he would perform (Tr. 44). Woodworth stated that he reported between $ 1,500.00 and $ 2,000.00 per year on his self-employment tax return (Tr. 45-46). He further noted that when he reported partnership income, he took the work he performed as an expense. Id.
Woodworth stated that he entered the partnership with the intention of making a profit and that he went into the maintenance business with the same intention. He indicated that he also performed maintenance work for some of his neighbors, but instead of accepting monetary payment for the work he was taken out to dinner in exchange for the work he performed (Tr. 49).
Woodworth added that the partnership operated on a negative cash flow, (Tr. 42), and that for IRS purposes expenses such as electricity, gas, water, fuel, heating, maintenance and repairs were deducted from the property's income, thereby creating a loss (Tr. 42). He noted that the partnership profits were split evenly and when one of the buildings was sold and a profit was made, the profit was distributed equally between the parties (Tr. 48).
The Appeals Council summarily affirmed the ALJ's decision which denied Woodworth benefits, and found that the overpayment of benefits to Woodworth could not be waived. The ALJ after considering the evidence, stated:
It must therefore be concluded that the claimant was overpaid retirement insurance benefits, that the claimant lacked the required quarters of coverage in order to be entitled to retirement insurance benefits and that recovery of overpayment cannot be waived.
(Tr. 21). The ALJ noted the following with respect to the question of whether or not Woodworth was actually engaged in self-employment activities:
The particular question for resolution is whether or not the claimant did in fact engage in self-employment, received self-employment income and therefore did actually earn quarters of coverage so as to be entitled to retirement insurance benefits.
In order to be considered to be a self employed individual, an individual must be engaged in a trade or business or earnings as a partner in a partnership must be received from a trade or business under Section 404.1081 of Regulation No. 4.
In this particular case, it appears, based upon the facts that the claimant was not engaged in a trade or business for the years questioned. The facts reveal that the claimant never held himself out as engaging in any trade or business. He worked exclusively for the partnership and never for any other party. He never advertised. He determined how much should be paid out of the partnership monies. No actual cash transaction was ever incurred. No payments were ever paid over to the claimant. No contracts were ever drawn as to the nature of the work. The claimant determined what projects should be completed, when they should be completed, and only a paper transaction was ever made with respect to the income paid to the claimant. The claimant simply transferred the amount that he felt was due him to the capital account partnership. Based upon the characteristics of the transactions, it shows clearly that there was no arms length transactions involved in the claimants work activity and the claimant was actually involved in a boot strap situation where minimal taxes were paid in 1979 through 1982 in order to insure the claimant's entitlement to retirement insurance benefits for an extended period of time. The characteristics of the claimant's activities and the method in which the business he was engaging in was transacted and the method of payment persuaded the undersigned to conclude that the claimant was not engaged in a trade or business which is characterized by arms length transactions between separate parties in which each party is free to negotiate and to determine the nature, and cost of such work.
In light of the fact that the claimant was not engaged in a trade or business, it must be concluded that the claimant did not have income for the purposes of quarters of coverage in any period between 1979 and 1982. Therefore, the claimant must be considered to have less than the required 30 quarters of coverage in order to be entitled to retirement insurance benefits.
Since the claimant has received $ 1308 in retirement insurance benefits [to] which he is not entitled, it must be concluded that this was an actual overpayment of benefits.
The ALJ then made the following relevant ...