20 CFR 404.703, 404.704, 404.705, 404.1065, and 404.1066

SSR 86-4c

Schipani v. Heckler, (September 1984-April 1985 Transfer Binder) Unempl. Ins. Rep. (CCH) ¶ 15,821 (U.S.D.C., E.D. N.Y. 1984)

The claimant applied for old-age insurance benefits (OAIB) on May 16, 1980, stating that he had reported self-employment income annually since 1973 and that he had paid self-employment taxes on this income. The claimant, however, refused to disclose the source of his asserted self-employment income because, he contended, it was "borderline illegal" and might expose him to criminal liability. When the Secretary denied his application because he did not have sufficient quarters of coverage to be fully insured, the claimant appealed. The burden of proving his eligibility for AOIB was on the claimant. His conclusory statement that his asserted occupation required the payment of self-employment taxes did not constitute substantial evidence that he was engaged in a "trade or business." Held, since he refused to substantiate that the income he had reported was derived from a "trade or business," the claimant did not sustain his burden of proof that he was eligible for OAIB. Consequently, the denial of his application for OAIB was affirmed.

Claimant seeks judicial review of the Secretary's denial of his application for Social Security retirement insurance benefits. Age 68 at the time of the application, claimant, who claims he remains self-employed, sought only Medicare coverage for himself and his wife. The Secretary's determination was based upon facts developed at a hearing before an administrative law judge (ALJ) who ruled that the claimant's refusal to disclose the source of his asserted self-employment income rendered him ineligible for Social Security coverage as lacking the requisite quarters of coverage.

The relevant facts, which derive almost entirely from claimant's testimony, are not in dispute. He applied for benefits on May 16, 1980, R. at 54, seeking only a medical insurance card. R. at 34, 38. Annually, since 1973 he has filed a tax return declaring income, derived from providing "a service", R. at 39, under the miscellaneous income provisions or category of the Internal Revenue Code. He has also paid the Social Security employment tax on the advice of his accountant, Jerry Feldman.

Feldman explained a "dilemma" which he claimed arises from the interplay between the Internal Revenue Code and the Social Security Act as they affect an individual whose trade or business is illegal. As explained below, the dilemma, if any, arises from claimant's engaging in an asserted occupation the nature of which he does not wish to disclose to the government. His own conclusion that his asserted occupation requires payment of the employment tax does not satisfy the claimant's burden of proving that he qualifies for retirement insurance benefits by having engaged in a "trade or business" for the requisite number of quarters. Apart from the claimant's ipse dixit, there is no evidence from which the Secretary can conclude that claimant actually has engaged in a "trade or business" for the requisite number of quarters.

To be eligible for retirement insurance, claimant had to demonstrate that he had 25 quarters of coverage. 42 U.S.C. § 414(a); see 42 U.S.C. § 413 (defining a quarter of coverage). The earnings from self-employment during these quarters must derive from a "trade or business" as that term is used in Section 23 of the Internal Revenue Code. 42 U.S.C. §§ 411(a) and (c); see Grosswald v. Schweiker, 653 F.2d 58, 59 (2d Cir. 1981).[1]

The burden of proving eligibility for retirement insurance benefits is on the claimant. Covo v. Gardner, 314 F.Supp. 894, 898 (S.C. N.Y. 1970); McSweeney v. Celebrezze, 254 F.Supp. 100, 108 (S.D. N.Y. 1966).

The determination of what activities constitute carrying on a trade or business and what is income derived therefrom, within the terms of the act, is dependent upon the facts of each case.

Lessin v. Celebrezze, 314 F.2d 283, 284 (D.C. Cir. 1963) (per curiam); accord Braaksma v. Celebrezze, 246 F.Supp. 767, 769 (S.D. Cal. 1965).

The fact that plaintiff reported self-employment income for the calendar years [after 1973] and paid taxes thereon is not binding on the Secretary on the question of whether plaintiff actually had such income.

Garner v. Richardson, 339 F.Supp. 1126, 1134 (N.D. Miss. 1971).

'[T]he Social Security Administration is not only privileged, but in questionable cases, it is obligated to investigate behind the form of self-employment tax returns which an individual has filed. Furthermore the Regulations provide that claimant shall submit proper and complete evidence in order to substantiate the amount of self-employment income reported, which records are subject to verification as is deemed necessary to insure their accuracy.' (emphasis supplied) Picon v. Gardner, 1 CCH Unemployment Insurance Reports, ¶ 12,611.835, 332 F.2d 113 (7th Cir. 1964).

Hernandez v. Secretary of H.E.W., 307 F.Supp. 338, 342 (D.P.R. 1969) (emphasis in original).

Claimant's argument does not respond to the above-cited relevant case authority. He asserts that the is in a "Catch-22" situation because his "borderline illegal" or "potentially illegal" occupation of "primarily a consultant to the labor industry" may expose him to criminal liability.[2] Although the Internal Revenue Service (IRS) routinely assesses Social Security employment taxes against individuals who declare miscellaneous income, claimant does not have to tell the IRS exactly what he does for a living. The Secretary, on the other hand, may require disclosure of the nature of a claimant's activities in order to guard against the false payment of Social Security employment taxes by those who are not eligible for such benefits.

Claimant's argument proves too much because it stems from an erroneous premise. That the Secretary must use the same definition of "trade or business" as the IRS uses does not bind her to the practices of the IRS in collecting revenue. The IRS has never made an adjudication that claimant has earned income from a trade or business. Claimant was free to demonstrate to the IRS that his miscellaneous income was not subject to the employment tax. If successful, he would not pay the tax and, of course, would not be eligible for Social Security retirement insurance benefits.

The system, however, is not the converse of itself. Individuals may be obligated to pay the employment tax even if they never qualify as fully insured and thus remain ineligible for receipt of retirement insurance benefits. As such, past payment of the employment tax, in and of itself, is not the linchpin of eligibility to receive benefits in the future. See Clevenger v. Weinberger, 375 F.Supp. 821 (W.D. Mo. 1974). The claimant must demonstrate that he meets all the requirements for eligibility. His conclusory statement that the engaged in a "trade or business" is substantial evidence of nothing more than his conclusion. The same may be said of his accountant's explanation of the reason he advised claimant to pay the employment tax, i.e., to avoid a problem with the IRS. Essentially, by attempting to intermingle his claim for benefits with an assertion of his privilege against self-incrimination, see, e.g., Selective Service System v. Minnesota Public Interest Research Group, 104 S.Ct. 3348, 3358 (1984), claimant would deprive the Secretary of her fact-finding obligation to determine whether an individual has in fact engaged in a "trade or business."

This Court does not believe that Congress intended to afford applicants a means by which they may conceal their ineligibility for retirement insurance benefits behind what is essentially an assertion of the privilege against self-incrimination. This claimant's alleged "dilemma" stems not from any inequitable interplay between federal statutes, but rather from his decision to prevent the Secretary from performing her duty of assuring that he is in fact eligible for the benefits he seeks.

The Court finds that claimant did not sustain his burden of demonstrating eligibility for retirement insurance benefits.[3] Accordingly, the Secretary's determination is affirmed, and the complaint is dismissed.

So ordered.

[1] Significantly, § 411(c) lists several forms of services, the income from which is not considered self-employment earnings. It appears that these provisions are not at issue.

[2] In his brief at 5, claimant states that he has been incarcerated for criminal acts and that he did not disclose his occupation for fear of potential criminal prosecution.

[3] Contrary to claimant's assertions, the Secretary did not rule that he had not engaged in a "trade or business". At the time of application, when claimant refused to identify his occupation, the Secretary deleted his quarters of coverage from 1977 forward. As she explains in her brief at 4, hew power to correct erroneous earnings credits is limited by statute. More accurately, therefore, the Secretary found that claimant did not possess sufficient quarters of coverage to be considered fully insured under 42 U.S.C. § 414(a).

Back to Table of Contents