SSR 65-9c: SECTION 211(a)(1). -- NET EARNINGS FROM SELF- EMPLOYMENT -- MATERIAL PARTICIPATION

SSR 65-9c

PARK v. CELEBREZZE, U.S.D.C., S.D. Ill., S. Div. Civ. No. 2926 (4/2/64), CCH U.I.R. Fed. Par. 16,224.

Where claimant, owner of farm, moved to town several miles away and rented farm to son by oral agreement which provided claimant would share in the proceeds of the crop but did not provide for material participation by claimant; where son operated farm as he wished, doing planting, spraying, and fertilizing, without consulting claimant; where claimant sometimes visited farm but did not supervise son's activities or inspect crops; where claimant occasionally volunteered advice to son but stated that she had confidence in his ability to operate farm without her advice or help; held, Secretary's decision that claimant did not materially participate in operation of farm and had no arrangement with him for such participation, and that she accordingly realized no net earnings from self-employment pursuant to section 211(a)(1) of Act, was supported by substantial evidence.

POOS, District Judge:

This is an action brought pursuant to Section 205(g) of the Social Security Act, 42 U.S.C.A. et seq., whereby the plaintiff, after exhausting all administrative remedies, seeks a review of the final decision of the Secretary of Health, Education and Welfare denying her application for old age benefits under Title II of the Act, as amended.

The claimant was 65 years of age when she filed an application on May 9, 1958 for old age insurance benefits. She had lived all her life on a farm in McLean County, Illinois, until she moved to Shirley, Illinois, approximately 4« miles from the farm, around Christmas of 1949. The record indicates that the claimant and her husband had operated the farm, inherited by the claimant, from her father and aunt, for at least twenty years before they moved to Shirley. Since the claimant's change of residence the farm has been operated by her son, Charles. The rental agreement between mother and son was entirely oral.

The Bureau of Old-Age and Survivors Insurance denied the plaintiff's claim of May 9, 1958, and determined that her income from the operation of the farm constituted rentals from real estate, and net earnings from self-employment. The basis of the Bureau's decision was that the claimant did not materially participate in the production or management of production of farm commodities produced on her farm in 1956 and 1957.

The claimant disagreed with this determination, and filed a request for a hearing and also requested that the matter be disposed of on the basis of the record before the Hearing Examiner. The Hearing Examiner accordingly marked as exhibits all relevant documents in the Bureau's files, and rendered a decision affirming the Bureau's determination.

Mrs. Parks thereupon requested the Appeals Council to review the decision of the Hearing Examiner. The Appeals Council, in order to afford the claimant an opportunity to appear and testify, vacated the decision of the Hearing Examiner and remanded the case to another Hearing Examiner. At this second hearing the claimant appeared personally and was represented by counsel. This hearing resulted in a decision upholding the Bureau's action in denying benefits to her. On February 2, 1961, Mrs. Parks requested a review of the Hearing Examiner's decision by the Appeals Council. This request was denied on February 6, 1961.

The nature and scope of review of such decisions is found in Section 205(g) of the Act (420 U.S.C.A. Sec. 405(g)) which provides in part: "The findings of the Secretary as to any fact, if supported by substantial evidence, shall be conclusive . . ." The Administrative Procedure Act, 5 U.S.C.A., Sec. 1001 et seq., also provides for judicial review of the action of administrative agencies. Section 10(a) of that Act, (5 U.S.C.A. Sec. 1009) declares:

"So far as necessary to decision and where presented the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning of applicability of the terms of any agency action. It shall . . . (B) hold unlawful and set aside agency action, findings and conclusions found to be (1) arbitrary, capricious, and abuse of discretion, or otherwise not in accordance with law; . . . (3) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right; . . . (5) unsupported by substantial evidence in any case . . . reviewed on the record of an agency hearing provided by statute; . . . In making the foregoing determinations, the Court shall review the whole record or such portions thereof as may be cited by any party, and due account shall be taken of the rule of prejudicial error."

Thus the duty of this Court is to determine whether, on the record as a whole, there is substantial evidence to support the Administrator's findings of fact. See Universal Camera Corporation v. National Labor Relations Board, 1951, 340 U.S. 474, 71 S. Ct. 456, L. Ed. 456.

The decision in this case, therefore, turns on the question whether the determination that the claimant's income from the operation of her farm constituted rentals from real estate, and not earnings from self-employment is supported by the substantial evidence of the record taken as a whole.

Section 202(a), 213(a), and 214(a) of the Act (42 U.S.C.A. 402(a), 413(a), and 414(a)) set forth the requirements for entitlement to social security benefits pertinent to this case. These sections reveal that a basic condition of eligibility is the receipt of a stated amount of wages, or of self-employment income. The plaintiff herein bases her claim solely on the alleged receipt of self-employment income.

Self-employment income is defined by Section 211(b) of the Act as "net earnings from self-employment derived by an individual . . . during any taxable year beginning after 1950." The phrase "net earnings from self-employment" is defined in Section 211(a) as amended 42 U.S.C.A. Sec. 411(a), and the corresponding section of the Internal Revenue Code, 26 U.S.C.A., Sec. 1402(a) as follows:

"The term 'net earnings from self-employment' means the gross income, as computed under Subtitle A of the Internal Revenue Code of 1954, derived by an individual from any trade or business carried on by such individual, less the deductions allowed under such subtitle which are attributable to such trade or business . . . (1) There shall be excluded rentals from real estate and from personal property leased with the real estate (including such rentals paid in crop shares), together with the deductions attributable thereto, unless such rentals are received in the course of a trade or business as a real estate dealer; except that the preceding provisions of this paragraph shall not apply to any income derived by the owner or tenant of land if (1) such income is derived under an arrangement between the owner or tenant and another individual, which provides that such other individual shall produce agricultural or horticultural commodities . . . on such land, and that there shall be material participation by the owner or tenant in the production or the management of the production of such agricultural or horticultural commodities and (b) there is material participation by the owner or tenant with respect to any such agricultural or horticultural commodity."

Although the plaintiff herein maintained during all the proceedings that she did "materially participate," the record is replete with statements by her and her son that she did not so act. The son, Charles Park, lived on the farm and operated it as his own with the plaintiff retaining only an interest in the proceeds of the crops. Although it is true that the plaintiff continued to visit the farm after she moved away, it cannot be said that these trips were for the purpose of supervising any activities of her son. The plaintiff, in her testimony before the Hearing Examiner, repeatedly expressed her complete confidence in the ability of her son to carry on the operations of the farm and to make the necessary day to day decisions relating to its management without any help or advice from her. She admitted that her son planted, sprayed and determined the need for fertilizer without consulting her. These are essential elements in the management of a farm, and the plaintiff did not participate in decisions with regard to them in any manner. The plaintiff stated that she had absolute trust and confidence in her son; that he was a good farmer, and that "the farming is left up to him." Mrs. Parks testified that she visited the farm because she was "interested in farming," not to make inspections to see whether it was being run properly. The plaintiff's action cannot be considered "material participation" within the meaning of Section 211(a)(1).

If the plaintiff had been able to prove that she had participated in the management of the farm, which she did not do, she still would not have complied with the statutory provisions for "material participation." The statute requires not only material participation, but also an agreement between the lessor and lessee providing for such participation. Such an agreement is not present in this case. From the plaintiff's testimony it appears that any advice she might have given her son was purely voluntary, and certainly not the result of any agreement requiring her to render such advice.

In Foster v. Flemming, 190 F. Supp. 908, at 924 (1960) the Court held:

"The wording of Clause (a) of Section 211(a)(1) makes it clear that none of the activities which go toward constituting material participation may be counted for this purpose unless such participation is sufficiently provided for in an arrangement between landlord and tenant."

It is the opinion of this Court that the decision of the Hearing Examiner is correct, and is supported by the substantial evidence of the record.

Accordingly, the decision of the Hearing Examiner is affirmed.

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