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TONER v. SCHWEIKER

April 21, 1982

Irving TONER, Plaintiff,
v.
Richard S. SCHWEIKER,1 Secretary of Health and Human Services, Defendant.



The opinion of the court was delivered by: ELFVIN

MEMORANDUM and ORDER

This is an action to review the Secretary's denial of plaintiff's claims for retirement insurance benefits for 1978 and for Medicare Part B coverage prior to July, 1978. Plaintiff's claim for retirement insurance benefits invokes the question whether he earned wages in excess of the amount permitted under section 203 (42 U.S.C. § 403) of the Social Security Act. With respect to plaintiff's claim for Medicare benefits prior to July, 1978, the basic issue involves the date on which plaintiff properly submitted an application therefor. The Secretary has moved for summary judgment and, for the reasons set out below, I have concluded that his motion must be granted.

 Section 202(a) of the Social Security Act generally provides that every individual who is fully insured (as defined in section 214(a), 42 U.S.C. § 414(a)), who has attained age 62 and who files an appropriate application shall be entitled to receive retirement insurance benefits. 42 U.S.C. § 402(a). However, under section 203(b), deductions are made from payments to which an individual is otherwise entitled if he receives "excess earnings" from wages and self-employment income. 42 U.S.C. § 403(b). Excess earnings for a particular year are defined as fifty percent *fn2" of the individual's earnings in excess of the "applicable exempt amount." 42 U.S.C. § 403(f)(3). For 1978 the applicable exempt amount was $ 333.33 per month, or $ 4000 for the entire year. 42 U.S.C. § 403(f)(8)(D)(i). In 1978 earnings by an individual over the age of 72 would not cause a reduction in retirement benefits. 42 U.S.C. § 403(f)(3). *fn3"

 Medicare Part A benefits are provided to individuals who are age 65 or older and who are entitled to receive retirement insurance benefits under the Social Security Act and to disabled persons. See, 42 U.S.C. §§ 1395c et seq. Benefits provided by Part A generally cover the costs of hospital and related post-hospital services. Medicare Part B is a voluntary insurance program to provide supplementary medical insurance benefits for aged and disabled individuals who elect to enroll in the program. See, 42 U.S.C. §§ 1395j et seq. Every individual who is entitled to receive Part A benefits is also eligible to enroll in the Part B insurance program. 42 U.S.C. § 1395o(1). Part B benefits are financed by premium payments from participants and by funds from the federal government.

 Plaintiff submitted an application for retirement insurance benefits in March, 1978. Apparently, such application also constituted an application for Medicare benefits. The Social Security Administration ("SSA") determined that, although plaintiff was otherwise entitled to receive retirement benefits, he had earned wages in excess of the permissible amount, thereby requiring that part or all of such benefits be withheld. Plaintiff also claimed that he had applied for Part B insurance in January, 1976 and that he was therefore entitled to be reimbursed for the costs of an eye operation which he underwent in September, 1977. However, SSA concluded that plaintiff had not submitted an application for Part B insurance benefits until March, 1978 and that he was therefore to receive such benefits commencing July, 1978. *fn4" Therefore, SSA denied plaintiff's claim for retirement insurance benefits for the year 1978 and for reimbursement for the eye surgery both initially and upon reconsideration. At plaintiff's request, a hearing was commenced before an Administrative Law Judge ("the ALJ") May 15, 1979 but was not concluded that day. After a series of adjournments (apparently due to requests made by plaintiff and his counsel), the hearing was resumed and completed October 23, 1979. Plaintiff was the only witness to testify at the hearings. Although his wife was present at the first hearing, she was not able to testify because of the length of plaintiff's own testimony. She did not appear at the second hearing on the stated grounds that she and plaintiff both believed that the ALJ had unnecessarily harassed plaintiff at the first hearing and that she was unable to testify for health reasons.

 The ALJ issued a lengthy written decision January 24, 1980 concluding that plaintiff had not become entitled to Medicare Part B coverage until July, 1978 and that plaintiff did have excess earnings which required that his retirement insurance benefits be totally withheld for the year 1978. SSA's Appeals Council affirmed the ALJ's findings June 20, 1980, thereby rendering the Secretary's decision final. Plaintiff commenced this action pursuant to 42 U.S.C. § 405(g) and 1395ff(c). *fn5"

 Plaintiff was born January 23, 1911 and received 60 credits towards a general liberal arts degree at Saint Bonaventure College prior to entering the Army in February, 1942. He became an officer in March, 1943 and was discharged in December, 1945. While in the Army, he received technical training in the field of radio communications and served as a Radio Officer, a position which involved some maintenance and service of equipment. However, most of plaintiff's responsibilities as a Radio Officer entailed procedural and operational matters. After his discharge, plaintiff went to work for Rudolf Wurlitzer Company in North Tonawanda, N. Y. as a "liaison engineer." In such capacity, he seems to been involved primarily in general administration and co-ordination of work between the engineering and production departments. After working for Wurlitzer for about three years, plaintiff was employed by Sylvania Television Co. for about ten months. At Sylvania plaintiff's work involved assembling and repairing television chassis. Thereafter, plaintiff worked for about a year manufacturing hi-fidelity loudspeakers. In about 1950 plaintiff opened a radio and television service and repair shop.

 Plaintiff continued to operate his radio and television shop until about 1962 or 1963, at which time he established the Warsaw Television Cable Corporation ("Warsaw Cable") along with his wife and one Daniel Tavernier. *fn6" One share of stock was issued to each of plaintiff, his wife and Tavernier, who were the corporation's sole shareholders. Tavernier became President of the corporation, plaintiff became Vice President and plaintiff's wife became Secretary and Treasurer. No stock certificates were ever issued, nor was the appointment of officers ever formalized in writing.

 During the first few years of its existence, Warsaw Cable did not conduct actual operations but was involved in obtaining a franchise from the Village of Warsaw to operate a cable television system and in negotiating an agreement with the Rochester Telephone Company for the use of its equipment and facilities. Incorporation of Warsaw Cable does not appear to have involved any substantial financial investment by plaintiff, his wife or Tavernier. Whatever money the corporation received was either borrowed or was paid out of a checking account maintained jointly by plaintiff and his wife. Most of the funds in such account were provided by plaintiff's wife, inasmuch as she was employed as a teacher. Tavernier did not supply any capital for the corporation but did provide labor, such as construction, setting poles and stringing lines. Such services were also performed by plaintiff and (eventually) by part-time employees. Warsaw Cable began operating some time around 1965, when it obtained a franchise from the Village and agreed to lease equipment from the telephone company.

 Relations between the Toners and Tavernier soured shortly after the corporation was established. Plaintiff testified that he and Tavernier had disagreed whether to accept the terms of the lease agreement with the telephone company and concerning the need to locate an office in the Village of Warsaw. Tavernier apparently also believed that he should have been paid for installation work performed by him, whereas plaintiff was not paid.

 In 1967 plaintiff and his wife moved from their home in East Aurora, N. Y. to Warsaw and established a corporate office in their new house. *fn7" Plaintiff testified that Tavernier performed an average of only two hours of work each week for Warsaw Cable at this time. Apparently Tavernier ceased performing any services for the corporation shortly thereafter. In 1970 plaintiff became President of Warsaw Cable and Tavernier became Vice President. Plaintiff's wife continued in her capacity as Secretary and Treasurer. Eventually, Warsaw Cable virtually saturated its potential television market. *fn8"

 In 1977 and the early part of 1978, Warsaw Cable underwent a period of transition in anticipation of plaintiff's retirement. This transition entailed plaintiff's withdrawal from field work and the hiring of additional part-time employees to handle administrative matters. Plaintiff testified that in 1976 and 1977 he worked approximately 30-40 hours per week for Warsaw Cable. *fn9" As of such time, corporate policy was determined by plaintiff and his wife, apparently with no input from Tavernier. Plaintiff testified that he and his wife made general corporate decisions jointly, and that his wife might defer to his judgment about fifty percent of the time. Plaintiff's activities on a day-to-day basis in 1977 appear to have consisted mostly of supervising the part-time office workers and the installation of new hook-ups. Apparently, plaintiff only did field work when one of the corporation's other field workers was unavailable. Plaintiff received a salary of $ 15,600 from the corporation in 1976 and 1977. During those same years, his wife received no wages, even though she does appear to have performed office work.

 Plaintiff indicated at the hearing that, as he hired additional office workers and delegated more field work to other workers, he was able to substantially diminish the amount of time he spent working for Warsaw Cable. He also testified that, upon his retirement, his wife began to perform more functions for the corporation. His March, 1978 application for retirement insurance benefits states that he would "still "keep an eye' on the business" but that his "wife will do most of the work." Upon plaintiff's retirement, he became Vice President of Warsaw Cable and his wife became President. For the year 1978 the corporation paid plaintiff wages totalling $ 3600 whereas his wife was paid $ 16,000. All of plaintiff's wages for 1978 were paid to him in the first three months of the year.

 After March, 1978, the time of plaintiff's alleged retirement, he still appears to have taken an active role in the corporation. At the time only plaintiff and Tavernier were authorized to sign checks on behalf of the corporation. Thus, because Tavernier was not participating in the business, all of the checks issued by Warsaw Cable in 1978 were signed by plaintiff. Although plaintiff signed the corporation's checks, they were actually prepared by one of its office employees. Plaintiff testified that he examined checks which had been presented for his signature and compared them to the invoice, if any. If an invoice did not accompany the check, plaintiff testified that he might have knowledge about the payment or that he might simply rely on the corporate employee and assume that the check was proper. Because Tavernier would not agree to authorize plaintiff's wife to sign corporate checks (and apparently to relinquish his own authority to do so), a new checking account was established by Warsaw Cable at a different bank in 1979. Thereafter, both plaintiff and his wife executed checks on behalf of the corporation. Plaintiff also testified that he signed the corporation's payroll checks but that these were also prepared by office personnel. He indicated that he sometimes examined the corporation's payroll records but he could not estimate how often he did so.

 Plaintiff also continued to perform other services for the corporation. He testified that supplies such as cables, connections and locks were ordered either by him or by an employee. He stated that, depending on the nature of the supplies, the employee might or might not consult with him prior to making the order. He also indicated that technical knowledge was required in connection with ordering some supplies but not others. Warsaw Cable appears to have done only a minimal amount of advertising in 1978, due to the fact that it had already saturated its potential market. Plaintiff continued to sign reports to the Federal Communications Commission and the New York State Commission on Cable Television after the date of his purported retirement. See, Exhibits 64, 77. Plaintiff indicated that these reports were initially prepared by an office worker and that he made any necessary corrections before signing the reports. Warsaw Cable's tax returns were prepared by its accountant. However, plaintiff testified that he handled the corporation's dealings with its accountant as well as with its attorney. Plaintiff also stated that he was involved in handling the corporation's credit decisions and insurance matters. Plaintiff testified that he estimated the value of all services performed by him for the corporation in 1978 at $ 3600, the amount of wages which he received for that year. In all, plaintiff stated that he spent an average of two hours each day working for the corporation.

 Additionally, in May, 1978 Warsaw Cable purchased the cable equipment which it had been leasing from Rochester Telephone. According to plaintiff's testimony, negotiations leading up to the purchase were conducted for about a year. Plaintiff conducted the negotiations on Warsaw Cable's behalf along with the corporation's accountant and a consultant hired to evaluate the cable system. The purchase agreement was signed on behalf of Warsaw Cable by plaintiff. The purchase was financed (at least in part) by a $ 10,000 loan made by plaintiff to Warsaw Cable. No payments are made by the corporation on the loan except for interest payments. However, no formal note was executed by the corporation to plaintiff.

 Plaintiff testified that, after his retirement, he spent substantially less time working for Warsaw Cable. Moreover, he indicated that, although neither he nor his wife spent a great deal of time working for the corporation, she spent more time than he did. He described his wife's activities as maintaining the house and corporate office, getting meals for the office employees, taking phone calls, handling the corporation's mail and handling credit matters. According to plaintiff, his wife also filled in for the part-time employees if they could not be present. Plaintiff stated that his wife did more work in the second half of 1978 than she had done prior to his retirement, but also seemed to suggest that the increase in amount of work done by her was not very significant. He attributed the increase in the amount of his wife's work to growth in the corporation. However, reports submitted to the New York State Commission on Cable Television indicate that, from June 30, 1977 to June 30, 1978, the number of Warsaw Cable's subscribers rose only from 1100 to 1126. Exhibits 76, 77.

 There are several discrepancies concerning the ownership and management of Warsaw Cable contained in its tax returns. The federal income tax returns for the fiscal years ending June 30, 1977 and June 30, 1978 state that plaintiff owned 67% of the outstanding shares of the corporation. Exhibits 22, 23. The tax return for the fiscal year ending June 30, 1979 states that plaintiff's wife owned 67% of the outstanding shares. Exhibit 74. Nevertheless, it is clear that plaintiff, his wife and Tavernier each owned 331/3% of the corporation during those tax years. A Corporation Franchise Tax Report filed by Warsaw Cable with the State of New York for the 1976-77 fiscal year lists plaintiff as the sole officer of the corporation, but both plaintiff's wife and Tavernier were also corporate officers. A similar report for the 1977-78 fiscal year lists both plaintiff and his wife ...


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