Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-04-02001/USCOURTS-ca8-04-02001-0/pdf.json

Parties Involved:
Jo Anne B. Barnhart
Appellee
Max M. Mason
Appellant

Document Text:

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The Honorable Fernando J. Gaitan, Jr., United States District Judge for the

Western District of Missouri.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 04-2001

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Max M. Mason,

Appellant,

v.

Jo Anne B. Barnhart,

Commissioner of Social Security,

Appellee.

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Appeal from the United States

District Court for the

Western District of Missouri.

 [PUBLISHED]

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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. 

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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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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.

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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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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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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). 

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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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