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Herbst v. Finch

decided: December 11, 1972.


Friendly, Chief Judge, and Mansfield and Timbers, Circuit Judges. Mansfield, Circuit Judge (concurring).

Author: Timbers

TIMBERS, Circuit Judge:

The simple issue on this uncomplicated appeal is whether appellant, now a 74 year old retired buyer and seller of seeds, was entitled for the year 1967 to receive old-age insurance benefits under the Social Security Act without having deducted from such benefits wages and salary that he never received. We hold that he was.

Appellant Fred P. Herbst (Herbst) appeals from a judgment entered on April 3, 1972 in the Southern District of New York, Lloyd F. MacMahon, District Judge, 342 F. Supp. 765, on cross-motions for judgment on the pleadings in an action commenced by Herbst on March 18, 1969 seeking judicial review of a decision of the Secretary of Health, Education and Welfare (the Secretary) denying him old-age insurance benefits for the year 1967 on the ground that there had been constructive payment of wages to him during that year. The court, after reviewing the administrative record but without an evidentiary hearing, concluded that there was substantial evidence to support the Secretary's decision. Accordingly, it granted defendant's motion and denied plaintiff's motion, thus dismissing the complaint and affirming the decision of the Secretary. For the reasons stated below, we reverse and remand.


Herbst has been engaged in the business of buying and selling seeds since the early 1900's. While still a youth, he worked for his father in the operation of his seed business. After his father died in 1929, Herbst and his brother Gustave carried on their father's business as a partnership. In 1948, the business was incorporated and became Herbst Brothers Seedsmen, Inc. (Herbst Brothers). Herbst Brothers is a mail order business. Through a catalog, it offers and sells seeds to selected nurserymen and florists. After the business was incorporated, each of the brothers held 250 of the 500 issued shares. In 1965, Gustave retired and Herbst purchased Gustave's 250 shares for $125,000. On June 20, 1965, Herbst became president of the company.

In March 1966, Herbst began to consider retirement. At that time, he applied for federal old-age insurance benefits. The Social Security Administration determined that, although he was eligible for such benefits as of March 1965,*fn1 work deductions imposed against such benefits pursuant to § 203(b) of the Social Security Act, 42 U.S.C. § 403(b) (1970), completely cancelled them.

At a board meeting on September 13, 1966, Herbst tendered his resignation as president effective January 1, 1967. At about the same time, he indicated to his sons -- who were to take over the business -- that he was formally retiring but would continue working without remuneration to help them get a start running the business. At the December 27, 1966 board meeting, Herbst's resignation was approved and one of his sons, Fred P. Herbst, Jr., was elected president of the company. During 1967, while giving advice and assistance to his sons, Herbst worked an average of 33 hours per week, as compared to an average of 65 hours per week prior to 1967. On November 15, 1967, he gave to his three sons 498 shares of Herbst Brothers stock. Later he gave the remaining two shares to the corporation.

Going back for a moment, on November 19, 1966, Herbst filed another application for old-age insurance benefits in which he stated that he intended to retire as of December 31, 1966 and requested that such benefits be paid to him beginning January 1967. On June 13, 1967, he was notified that his November 1966 application had been denied. He requested reconsideration of this decision with respect to the year 1967 only. On July 29, 1968, he was notified that a "reconsideration determination" had been made that he had performed services as an "employee" during 1967, that he had "excess earnings", and that deductions therefore must be imposed against benefits for all months of 1967. Herbst then requested a hearing before a hearing examiner of the Bureau of Hearings and Appeals of the Social Security Administration. The hearing was held on September 20, 1968.


Before turning to the decision of the hearing examiner, a brief statement of the statutory scheme as of 1967 for old-age insurance benefits may be helpful. The Social Security Act provides that deductions shall be made from old-age insurance benefit payments if the claimant is charged with "excess earnings". Section 203(b) of the Act, 42 U.S.C. § 403(b)(1970). "Excess earnings" for a taxable year are earnings for such year in excess of the product of $125 (now $140) multiplied by the number of months in such year, except that half of the first $1200 excess shall not be included. Section 203(f) (3) of the Act, 42 U.S.C. § 403(f) (3) (1970). An individual's earnings for a taxable year are the sum of his wages for services rendered in such year and his net earnings from self-employment, minus any net loss from self-employment. Section 203(f) (5) of the Act, 42 U.S.C. § 403(f) (5) (1970). Wages are defined as any remuneration paid for employment. Section 209 of the Act, 42 U.S.C. § 409 (1970). For purposes of imposing deductions under Section 203(b), the Act creates a presumption that an individual in fact rendered services for wages in excess of the allowable maximum. Section 203(f) (4) of the Act, 42 U.S.C. § 403(f) (4) (1970). The claimant thus has the burden of proving that he "did not render such services in such month for more than such amount." Id.

Following the hearing at which the hearing examiner heard the testimony of Herbst and received additional documentary evidence, he filed his decision on October 14, 1968. The examiner found that during the calendar year 1967 Herbst made available to Herbst Brothers his experience and knowledge of the seed business and that he "actually and actively managed the corporation." On the basis of this finding, the examiner concluded that throughout the calendar year Herbst rendered substantial services to the corporation as an employee.

The examiner found as a fact that Herbst was not actually paid a salary or wages during the period. He also found, however, that Herbst still was entitled by a 1963 board resolution to an annual salary of $42,000 for services rendered by him to the corporation; that he was authorized to draw corporate checks; and that corporate funds were available to cover checks amounting to his annual salary. On the basis of these facts, the examiner reached the following conclusion:

"It is obvious that the claimant was either 'constructively paid' the wages to which he was entitled, despite the fact that he did not reduce those wages to his immediate possession, or, in the alternative, that the claimant, by waiving his right to draw the salary of $42,000 per year to which he was entitled by order of the Board of Directors, increased the net assets of the corporation so that the stock of the corporation, of which he was the sole owner, became more valuable, i.e., the claimant received indirectly, in the increased value of ...

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