Max K. Mason v. Jo Anne B. Barnhart ( 2005 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 04-2001
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Max M. Mason, *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* Western District of Missouri.
Jo Anne B. Barnhart, *
Commissioner of Social Security, * [PUBLISHED]
*
Appellee. *
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Submitted: January 13, 2005
Filed: May 5, 2005
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Before LOKEN, Chief Judge, HANSEN and MORRIS SHEPPARD ARNOLD,
Circuit Judges.
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HANSEN, Circuit Judge.
The Social Security Administration (SSA) issued a notice of overpayment of
benefits to Max M. Mason concerning social security retirement benefits that he
received in 1997. Mason appeals the district court’s1 grant of summary judgment to
the Commissioner upholding the SSA’s determination, and we affirm.
1
The Honorable Fernando J. Gaitan, Jr., United States District Judge for the
Western District of Missouri.
I.
Mason owned and operated a real estate development company called Asset
Management & Service Corp. (“the company”), which elected to be treated as a
“small business corporation,” or an S corporation, under relevant federal tax laws.
See 26 U.S.C. § 1362(a), I.R.C. § 1362(a) (2000). In 1991, Mason sold one-third of
his interest in the company to his son and one-third of his interest to his daughter,
retaining a one-third interest in the company. He entered into a consulting agreement
with the company in 1990, under which he was to receive $100,000 upon signing the
agreement and $5,000 per month through December 31, 1996. The agreement and
the consulting fee were extended through 2000. Mason did not receive payment
under the contract, but in 1997 he reported $264,398 as Schedule C income on his
individual Form 1040 income tax return pursuant to a Form 1099 issued to him by the
company. The company, an accrual-basis taxpayer, experienced $283,000 of earned
but uncollected income in 1997 and sought to minimize the tax effect of that income
on its shareholders by deducting the $264,398 consulting fees paid to Mr. Mason
against the same period’s income. Mason admitted making the conscious decision
to handle the consulting fees in this manner as he was the “only one” able to obtain
the funds necessary to pay any applicable taxes.2 The company did not pay Mason
the $264,398 but issued him a “promise” to pay it when the company sold some
developing lots that it anticipated would be sold a few years down the road. Mason
borrowed over $20,000 to pay the resulting income and self-employment taxes
computed on his 1997 tax return.
2
As an S corporation, the company does not pay taxes on its net income but
passes the net income through to its shareholders on a pro rata basis. See I.R.C. §§
1363(a), 1366(a). In effect, Mason took the full brunt of the income earned by the
company, alleviating his children, as shareholders, from reporting their share of the
income and paying taxes on income they did not receive.
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Mason turned 62 in 1992 and began receiving social security retirement
benefits at that time. The SSA issued a notice in 1999 advising Mason that it had
overpaid his benefits in 1997 by nearly $10,000 because the self-employment
earnings reported on his 1997 Form 1040 reduced his social security benefits to $0
for the year. Mason sought a hearing before an administrative law judge (ALJ),
where he argued that he had “prepaid” the income taxes on the reported income,
which he had yet to receive. As a cash basis taxpayer, he argued that the reported
income was not earnings that could be used to reduce his social security benefits
under the social security regulations. The ALJ upheld the SSA’s determination. The
Appeals Council denied Mason’s request for review, and he brought suit in district
court, seeking review of the Commissioner’s final decision. The district court granted
summary judgment to the Commissioner, and Mason appeals.
II.
We review de novo the district court’s grant of summary judgment, applying
the same standards applied by the district court. See Reeder v. Apfel, 214 F.3d 984,
986-87 (8th Cir. 2000). The Social Security Act provides for judicial review of final
decisions of the Commissioner, which is limited to determining whether substantial
evidence in the record as a whole supports the Commissioner’s decision, and whether
the Commissioner correctly applied the relevant legal standards. See 42 U.S.C. §
405(g) (2000); Berger v. Apfel, 200 F.3d 1157, 1161 (8th Cir. 2000).
The Social Security Act permits a retired person to engage in some work
activity without losing social security retirement benefits. See 42 U.S.C. § 403(b),
(f) (2000). Once the individual’s earnings exceed the applicable exempt amount,
which was $13,500 in 1997, see 64 Fed. Reg. 57506, 57509 (Oct. 25, 1999), social
security benefits are reduced one dollar for each three dollars earned above the
exempt amount. See § 403(b),(f); 20 C.F.R. §§ 404.415(a), 404.430. The issue in
this case is whether the self-employment earnings reported on Mason’s 1997 Form
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1040, for which he received no cash in 1997, are earnings for purposes of determining
whether Mason had excess earnings that would reduce his social security retirement
benefits.
The social security regulations define “earnings” as “an individual’s earnings
for a taxable year,” which include both “wages” and “net earnings from
self-employment.” 20 C.F.R. § 404.429(a). Net earnings from self-employment are
determined under subpart K of the social security regulations (20 C.F.R. §§
404.1001-404.1096). See § 404.429(b). In explaining “earnings in a taxable year,”
the regulations provide that “[n]et earnings from self-employment . . . are derived, or
incurred, and are includable as earnings . . . in the year for which such earnings . . .
are reportable for Federal income tax purposes.” § 404.428(b). See also 20 C.F.R. §
404.1080(d)(3) (“Your taxable year for figuring self-employment income is the same
as your taxable year for the purposes of subtitle A of the [Internal Revenue] Code.”).
The Social Security Act and the Internal Revenue Code are to be construed similarly,
as one determines on what earnings an individual will receive credit for benefit
purposes, and the other determines on what earnings an individual must pay social
security tax. See 20 C.F.R. § 404.1001(c). Thus, we must determine whether
Mason’s 1099 income was “reportable” for income tax purposes in 1997 to determine
whether it was properly included as excess earnings for social security purposes.
Mason argues that as a cash basis taxpayer, the 1099 income was not reportable
until he received it, even though he actually reported it on his 1997 return, relying on
20 C.F.R. § 404.1080(c) (defining “net earnings from self-employment” by providing
that “[y]our gross income from a trade or business includes gross income you
received (under the cash basis method) or that accrued to you (under the accrual
method) from the trade or business in the taxable year.”). The Tax Code is not as
simple as Mason would have it. Many interrelated provisions are involved. The
Code requires a business that pays remuneration to any person for services performed
during the calendar year to file an information return, a Form 1099, reporting the
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recipient’s name and address and the amount of the payment. I.R.C. § 6041A(a). If
the business is related to the person performing the services, the business cannot
deduct the payment on its corporate tax return as a business expense unless the
recipient includes the payment as income on his individual tax return in the same
year. See I.R.C. § 267(a)(2).3 Receipt of a Form 1099 does not conclusively
establish that the recipient has reportable income. If a recipient of a Form 1099 has
a reasonable dispute with the amount reported on a Form 1099, the Code places the
burden on the Secretary of the Treasury to produce reasonable and probative
information, in addition to the Form 1099, before payments reported on a Form 1099
are attributed to the recipient. See I.R.C. § 6201(d).
Applying these tax provisions to the facts of this case, it is clear that Mason
received reportable income in 1997. Asset Management & Service Corp. issued a
Form 1099 to Mason reporting payments of $264,398. Mason did not invoke the
procedures of I.R.C. § 6201(d) or otherwise dispute the amount reported. Rather, he
reported the amount on his cash-basis Schedule C of his 1997 Form 1040 as earnings
from self-employment and paid the corresponding income and self-employment taxes.
Asset Management & Service Corp. deducted the reported payment as a consulting
fee on its S Corporation tax return, greatly reducing the income subject to taxation
that passed through to its shareholders. Mason made a conscious decision to treat the
income as reportable (and so reported it) and now must accept all of the resulting
consequences. See Bean v. Comm’r, 268 F.3d 553, 557 (8th Cir. 2001).
3
Related taxpayers for purposes of § 267(a)(2) include an individual and a
corporation if the individual owns, directly or indirectly, more than 50 percent of the
outstanding stock of the corporation. § 267(b)(2). An individual is considered to
constructively own the stock owned by his family, including his lineal descendants.
§ 267(c)(2), (4). Thus, Mason constructively owns 100% of the stock of Asset
Management & Service Corp. because he directly owns one-third of the outstanding
stock and his children own the other two-thirds of the outstanding stock.
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Having established that the 1099 income was reportable for income tax
purposes, we conclude that it was also earnings under the social security regulations
and properly included in calculating Mason’s excess earnings for social security
purposes. See § 404.428(b); 20 C.F.R. § 404.1080(d)(3). Mason cannot have it both
ways. Either the 1099 income was reportable for both income tax and social security
purposes, or it was not. Having reported the income on his tax return, the income
must be recognized as excess earnings for social security purposes. See Carlson v.
Bowen, 831 F.2d 814, 817 (8th Cir. 1987) (“[W]hen Carlson . . . reported the earnings
as income taxable in 1982, the result was inclusion of the $4,200 in earnings for the
purpose of applying the annual earnings test in 1982.” (citing 20 C.F.R. §
404.428(b)).
III.
The district court’s judgment is affirmed.
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