Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-04-01241/USCOURTS-ca8-04-01241-0/pdf.json

Parties Involved:
Jo Anne B. Barnhart
Appellee
Robert J. Desselle
Appellant

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 04-1241

___________

Robert J. Desselle, *

*

Appellant, *

* Appeal from the United States

v. * District Court for the Western

* District of Missouri.

Jo Anne B. Barnhart, Commissioner *

of Social Security Administration, *

*

Appellee. *

___________

Submitted: January 14, 2005

Filed: April 27, 2005

___________

Before LOKEN, Chief Judge, and HANSEN and MORRIS SHEPPARD ARNOLD,

Circuit Judges.

___________

MORRIS SHEPPARD ARNOLD, Circuit Judge.

Robert Desselle appeals the district court's affirmance of a final administrative

decision that denied Mr. Desselle disability insurance benefits under Title II of the

Social Security Act, see 42 U.S.C. §§ 401-434. Mr. Desselle challenges the

determination of the administrative law judge (ALJ) that he was not insured for

disability. We vacate the district court's judgment and order the court to remand the

case to the Social Security Administration for further proceedings.

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The Social Security Act divides each year into four three-month quarters, see

42 U.S.C. § 413(a)(1), and to be insured for disability and thereby qualify for

disability insurance benefits, Mr. Desselle must have had at least "20 quarters of

coverage during the 40-quarter period" that ended with the quarter in which he

became disabled or any later quarter in which he was disabled, 42 U.S.C.

§ 423(c)(1)(B)(i); 20 C.F.R. § 404.130(b)(2). For a self-employed claimant such as

Mr. Desselle, the Social Security Act defines a quarter of coverage as a quarter in

which the claimant's net income exceeds a statutory minimum, which varies by year.

42 U.S.C. §§ 411(b), 413(d)(2). But for years after 1977, the Social Security

Administration determines quarters of coverage by examining net income for the

entire year, rather than for a particular quarter. 20 C.F.R. § 404.143. Consequently,

to have four quarters of coverage during a particular year, Mr. Desselle need not have

worked during each quarter, as long as his net income for the year was at least four

times that year's statutory minimum for one quarter of coverage.

The ALJ found that Mr. Desselle was four quarters shy of the twenty quarters

of coverage needed to qualify for disability insurance benefits and that he had no

quarters of coverage in 1993, a year that fell within the forty-quarter period during

which Mr. Desselle was required to have twenty quarters of coverage. Mr. Desselle

contends that, in the proceeding before the ALJ, he offered conclusive evidence that

he earned enough income in 1993 to have four quarters of coverage in that year. The

evidence that Mr. Desselle presented to the ALJ included one tax return for 1993; two

amended tax returns for 1993; a completed Schedule C (a form used to report the

profit or loss of a sole proprietorship) and a completed Schedule SE (a form used to

compute self-employment tax) for 1993; a copy of a check made out to the Internal

Revenue Service to pay for Mr. Desselle's 1993 tax; and a notice of deficiency from

the IRS for overdue 1993 self-employment tax.

Mr. Desselle's initial tax return for 1993 is dated March 29, 1995, which is after

Mr. Desselle filed his application for disability in January, 1995. The initial tax

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return shows $5200 in total income, which was classified as "other income" and

described as "Handyman Income from odd jobs," and no taxes owed. Mr. Desselle's

first amended tax return for 1993, dated April 15, 1996, also shows $5200 in total

income but added $2360 in income tax owed, the calculation of which was not

explained. The second and final amended return for 1993, which is dated April 15,

1997, reclassified the income tax of $2360 owed for 1993 as self-employment tax.

Attached to the second amended return is a Schedule SE that shows $33,405 in selfemployment income for 1993, resulting in $4720 in self-employment tax. Neither of

these two numbers appears on the second amended return itself, although the

deduction for one-half of the self-employment tax of $4720 equals $2360, the amount

entered on the second amended return as self-employment tax. The Schedule C that

Mr. Desselle offered as evidence is undated and shows $3432 in net income from his

business in 1993, a figure that does not correspond to either the Schedule SE or any

of the tax returns. Mr. Desselle in 1996 paid the IRS $2360 toward his 1993 taxes,

but the IRS treated those funds as an overpayment and applied them toward overdue

taxes from 1984 and 1985. After Mr. Desselle filed his second amended return,

however, the IRS sent Mr. Desselle a notice of deficiency, dated June 16, 1997, for

$4720 in self-employment tax plus interest and penalties.

Whether these tax returns are conclusive evidence of Mr. Desselle's selfemployment income for 1993 is a question that the Social Security Act answers.

Because Mr. Desselle's second amended 1993 tax return was filed within the time

limitation set forth in 42 U.S.C. § 405(c)(1)(B), because that time limitation expired,

and because the Social Security Commissioner's records of Mr. Desselle's selfemployment income contain no entry for 1993, the Act requires the Commissioner to

"include in the Commissioner's records the self-employment income" reported in

Mr. Desselle's second amended return. 42 U.S.C. § 405(c)(4)(C); Jabbar v. Secretary

of Health & Human Servs., 855 F.2d 295, 297-98 (6th Cir. 1988) (per curiam). But

see Matta v. Secretary of Health & Human Servs., 806 F.2d 287, 290 (1st Cir. 1986)

(per curiam). In the circumstances of this case, however, the Social Security Act also

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permits the Commissioner "to delete or reduce the amount of any entry which is

erroneous as a result of fraud." 42 U.S.C. § 405(c)(5)(E); Jabbar, 855 F.2d at 298;

Blohm v. Secretary of Health & Human Servs., 765 F. Supp. 1424, 1427 (D. Neb.

1991). Therefore Mr. Desselle's 1993 tax returns are not conclusive evidence of his

self-employment income in that year, if the Commissioner finds, on a proper record,

that the self-employment income that Mr. Desselle reported is erroneous as a result

of fraud.

We already have rehearsed the inconsistencies in the tax returns that

Mr. Desselle filed, all of which postdated his application for disability insurance

benefits. Additionally, at the hearing before the ALJ, Mr. Desselle's brother and

counsel, Kent Desselle, testified that Mr. Desselle "had no input into" the preparation

of the second amended 1993 return. Instead, according to Kent, Mr. Desselle's family

attempted to reconstruct his income from checks drawn in 1993 on the checking

account of Mr. Desselle's corporation, which he treated as a sole proprietorship.

Those checks, however, do not sum to any of the numbers reported as income on

Mr. Desselle's 1993 tax returns and, more importantly, do not show when the money

in the checking account was earned. Nor do the other business records from 1993,

which include estimates of the costs and profits of a construction project, show

whether Mr. Desselle earned a profit that year. Finally, Kent admitted that even he

could not "make heads or tails out of the [second amended 1993] tax return" and that

he "had no high confidence level that the [second amended 1993] tax return was

accurate." Indeed, when the ALJ asked him whether Mr. Desselle "may have had a

complete loss during [1993] but you can't say one way or another," Kent answered,

"That's right." Thus, the evidence in the record might perhaps support a finding of

error that resulted from fraud, which in turn would allow the Commissioner "to delete

or reduce the amount" of Mr. Desselle's self-employment income for 1993. As far as

we are able to discern, however, the ALJ made no such finding.

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In deciding not to credit Mr. Desselle with four quarters of coverage for 1993,

the ALJ applied 20 C.F.R. § 404.822 (the regulation that implements the Social

Security Act's provisions governing corrections to earnings records) and found that

Mr. Desselle "did not produce satisfactory evidence to warrant amending his earnings

record for 1993." See 20 C.F.R. § 404.822(a). According to the regulation, the Social

Security Administration "will correct SSA records to agree with a tax return of ... selfemployment income" that was "filed before the end of the time limit" in

§ 405(c)(1)(B) "to the extent that the amount of earnings shown in the return is

correct." 20 C.F.R. § 404.822(b)(2)(i). Although the Social Security Administration

wrote § 404.822 with the laudable goal of making the regulation "clearer and easier

for the public to use," Federal Old-Age, Survivors, and Disability Insurance; Records

of Earnings, 44 Fed. Reg. 38,452 (July 2, 1979), the succinct regulation that resulted

appears to overstate the agency's actual discretion in this case. The Social Security

Act positively requires the Social Security Administration to enter into its records the

self-employment income reported in a claimant's tax return when § 405(c)(4)(C)

applies. In the circumstances here, the Act permits the Social Security Administration

to change such an entry only when it "is erroneous as a result of fraud." 42 U.S.C.

§ 405(c)(5)(E). The regulation, however, allows the agency to refuse to enter into its

records self-employment income reported on a tax return even in the absence of fraud.

See 20 C.F.R. § 404.822. To the extent that the regulation thereby extends the Social

Security Administration's discretion beyond the statutory limit, we hold that it is an

unreasonable reading of the statute and thus unenforceable. See 5 U.S.C.

§ 706(2)(C); Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988); United

States ex rel. O'Keefe v. McDonnell Douglas Corp., 132 F.3d 1252, 1257 (8th Cir.

1998).

Because we have determined that § 405(c)(4)(C) and § 405(c)(5)(E) govern this

case, and because the ALJ failed to find that Mr. Desselle's second amended 1993 tax

return was fraudulent, we vacate the judgment of the district court and remand the

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case to that court, with directions to remand to the Social Security Administration for

further administrative proceedings, so that the ALJ can apply the correct rule.

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