Mrs. Williamson inherited a life estate in a 240 acre farm from her deceased husband. She and her son later became stockholders in a corporation formed for the ostensible purpose of operating a farm. However, the farm was never transferred to the corporation. Mrs. Williamson’s son, who was an attorney, did most of the work for the corporation. He negotiated leases, collected rents, and arranged for maintenance of the rented portions of the farm. Mrs. Williamson claimed income from the corporation on her taxes in the late 1950’s. She was named President of the corporation in January 1958.
On August 10, 1959 Mrs. Williamson applied for old age social security insurance benefits. Her application was denied, and she appealed and was granted a hearing. The question was whether or not she had sufficient quarters of coverage to qualify for benefits. If her alleged income from the corporation was not considered to be wages as an employee of the corporation, then she did not qualify for benefits.
Prior to the hearing, the Hearing Examiner had instructed her to bring certain documentation, including corporate books, corporate journals, ledgers, accounts and payroll records. However, she did not produce this evidence, although she did provide minute entries from corporate meetings.
Following the hearing, the Hearing Examiner issued a decision in which he determined that the corporation was a hollow shell and that Mrs. Williamson was not a bona fide wage employee of the corporation. Mrs. Williamson appealed. The Appeals Council denied her appeal and she took an appeal to federal district court.
The court noted that it was not illegal or improper to form a corporation for the explicit purpose of generating wages in order to qualify for social security benefits. However, it was also legitimate for the social security agency to look at the bona fides of the corporation and determine if Mrs. Williamson was truly a wage earning employee.
With this background in mind the court held that it was proper for the fact finder to consider the following questions: 1) Has there been a transfer of property (realty or personalty) to the corporation? 2) Were corporate directors and tax returns filed? 3) Did the corporation maintain accounting records, books, and journals? 4) is there evidence that business was transacted with others and/or in behalf of the corporation? 5) was business transacted in the corporate name?
In the case at bar there was scant evidence that there was a bona fide corporation. There was no documentary evidence that the corporation owned any assets at all, let alone the farm, the operation of which was the corporation’s ostensible primary purpose. There were no third parties who remembered any dealings with the corporation; indeed, it appeared that Mrs. Williamson and her son were the only people aware of its existence.
Under these circumstances, the federal district court found that there was substantial evidence to support the Hearing Examiner’s decision that Mrs. Williamson’s income from the farm was properly characterized as real estate rental income rather than creditable social security wages. Because she did not have enough social security credits, the court affirmed the denial of her claim for benefits.
See Social Security Ruling (SSR) 66-31c.
This material should not be construed as legal advice for any particular fact situation, but is intended for general informational purposes only. For advice specific to any individual situation, an experienced attorney should be contacted.
