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IN THE UNITED STATES DISTRICT COURT FOR THE

NORTHERN DISTRICT OF FLORIDA

GAINESVILLE DIVISION

EDWARD L. REED,

Plaintiff,

vs. CASE NO. 1:03CV145-MMP/AK

JO ANNE B. BARNHART,

Defendants.

 /

REPORT AND RECOMMENDATION

Plaintiff brings this cause pursuant to 42 U.S.C. §405(g) seeking judicial review

of the denial of his application for retirement benefits under Title II of the Social Security

Act. (Doc. 1).

I. Procedural History

Plaintiff filed for retirement benefits on February 24, 2000, and this application

was denied initially and upon reconsideration. He requested a hearing, which was held

on May 9, 2002, and which resulted in an unfavorable decision on August 21, 2002. 

Plaintiff filed a Request for Appeals Council review, which was denied on July 11, 2003.

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II. Decision of the Administrative Law Judge 

The ALJ found that based upon the evidence Plaintiff had continued to contribute

substantial and valuable services to the corporation owned by himself, his wife and son,

since his purported retirement at age 62 on January 18, 2000. The increase in his

wife’s salary form $0 in 1999 to $89,988 in 2000, was not commensurate with her

increased duties. The corporate salaries paid to Plaintiff and his wife are “pooled” and

used to support both members of the family. The salary arrangements of the

corporation are not based upon the value of services rendered to the company. Half of

the salary paid to the wife were in fact earnings of the Plaintiff, and therefore his

earnings are subject to the annual earnings test and his benefits subject to reduction

based on excess earnings.

III. Issues 

Plaintiff alleges that he is legitimately retired and entitled to benefits, and that the

ALJ failed “to appreciate [Plaintiff’s] entitlement to 1/3 of the family compensation profits

by reason of his stock ownership,” and Plaintiff has actually retired and should be

entitled to benefits. 

The Commissioner contends that substantial evidence supports the ALJ’s

decision that Plaintiff did not retire, that one half of the salary reported by his wife should

be imputed to him, and that this income constituted excess earnings and resulted in the

withholding of benefits. 

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IV. Standard of Judicial Review

Title 42 U.S.C. § 405(g) sets forth the standard of review for this court. The

Commissioner's decision must be affirmed if it is supported by substantial evidence and

the correct legal standards have been applied. Graham v. Apfel, 129 F.3d 1420, 1422

(11th Cir. 1997). Findings of fact by the Commissioner which are supported by

substantial evidence are conclusive. 42 U.S.C. § 405(g). Miles v. Chater, 84 F.3d 1397,

1400 (11th Cir. 1996). "Substantial evidence" has been defined to mean "such relevant

evidence as a reasonable mind might accept as adequate to support a conclusion." 

Foote v. Chater, 67 F.3d 1553, 1560 (11th Cir. 1995) (citation omitted) (per curiam). It

is more than a scintilla, but less than a preponderance. Bloodsworth v. Heckler, 703

F.2d 1233, 1239 (11th Cir. 1983) (citations omitted). The court may not reweigh the

evidence or substitute its judgment for that of the Commissioner. Wolfe v. Chater, 86

F.3d 1072, 1076 (11th Cir. 1996). It must determine only if substantial evidence

supports the findings of the Commissioner. See Bridges v. Bowen, 815 F.2d 622, 624

(11th Cir. 1987) (per curiam). Even if substantial evidence exists which is contrary to

the Commissioner's findings, where there is substantially supportive evidence of the

Commissioner's findings, the court cannot overturn them. Barron v. Sullivan, 924 F.2d

227, 230 (11th Cir. 1991). Unlike the deferential review accorded to the

Commissioner's findings of fact, his conclusions of law are not presumed valid. Martin v.

Sullivan, 894 F.2d 1520, 1529 (11th Cir. 1990) (citations omitted). The Commissioner's

failure to apply correct legal standards or to provide the reviewing court with an

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adequate basis for it to determine whether proper legal principles have been observed

requires reversal. Id. (citations omitted). 

V. Evidence submitted by Plaintiff

a) Minutes of Joint Special Meetings (Exhibit 2)

On February 8, 2000, the minutes reflect that Plaintiff “has now ceased his active

employment with AFVL and Peggy Reed has resumed her employment with the

corporation after an extended leave of absence.” (R. 22). The officers remained the

same, which were Plaintiff as President, his son as Vice-president, and his wife Peggy

as Secretary/Treasurer.

On September 7, 1999, the minutes reflect that “Ed Reed [Plaintiff] has decided

to retire in Jan. 18, 2000. Peggy Reed has agreed to come back to work full time to

replace him. He will keep his corp. position as president but will no longer work in the

laboratory.” (R. 25).

b) Retirement Questionnaire (Exhibit 3)

The questionnaire reflects that All Florida Veterinary Laboratory, Inc., has been

incorporated since April 6, 1994, and involves diagnostic testing for veterinarians. (R.

27). The corporation has three shareholders: Plaintiff, his wife, and his son, who each

hold one share or 33 1/3 of the business. (R. 27). The salary information reveals that

Plaintiff earned $89,988.50 in 1999, but $0 in 2000; his wife earned $0 in 1999, but

$89,988.50 in 2000; and his son earned $38,500. in 1999. The Board determines

salary and there will be no change in the corporate officers as a result of Plaintiff’s

retirement. All three officers can sign checks. Plaintiff will be consulted on all major

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decisions in the business operation, and decisions are reached by “majority rules.” 

Plaintiff claims that he previously worked about 20 hours, but will no longer be devoting

any time to the business. (R. 29). Plaintiff claims that he receives no dividends or

bonuses from the business and will live off his social security checks. (R. 31).

c) Tax Returns (Exhibit 4)

Tax returns for 1998 show that Plaintiff earned $80,548 in salary; W-2 forms for

1999 show that he made $89,988.50. (R. 34-37).

d) Statement of Peggy Reed (Exhibit 5)

Peggy Reed states that she left AFVL in 1994, but agreed to work when Plaintiff

retired. She is a microbiologist and “fully qualified to replace him.” (R. 47).

e) Statement of Nick Reed (Exhibit 5)

Nick Reed states that he has worked full time since 1994 and does all phases of

lab work. (R. 48).

f) SSA Special Determination Form 553 (Exhiibit 6)

The Administration found that based on the facts set forth in the Corporate

Questionnaire, “It is evident from the record that the claimant has attempted to

rearrange his business affairs in an manner to achieve a maximum return from the

corporation as well as to receive fully monthly retirement benefits. Although a person

may properly arrange his business, personal and professional affairs to receive full

benefits under the act and is not required to retire completely, the intent of the act is that

the beneficiary be retired within the meaning of the law to be eligible for the full monthly

cash benefits.” (R. 49). Plaintiff was determined not to be retired. (R. 50).

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g) Reconsideration Determination (Exhibit 9)

The Administration held: “Where an individual is rendering services to a family

corporation and these services are substantial and basically important to the success of

the business and there is not much change in services for which much larger

remuneration was paid before the alleged change, and it is clear that the beneficiary is

actively involved in the operation of the business and could have effected payment of

the current value of services rendered by him, it would be unreasonable to find that

such an individual had retired within the meaning of the Social Security Act.” (R. 57).

h) Affidavit of Nick Reed (Exhibit 12)

Nick Reed attests that Plaintiff has had no role in running AFVL since he retired

in January 2000, and that since his father’s retirement he [Nick] has assisted his mother

in “making all business decisions, taking samples from customers, analyzing samples,

performing milk and animal testing, and assisting with explanations of the samples to

customers.” (R. 65).

i) Affidavit of T.R. Baxter (Exhibit 12)

Dr. Baxter is a veterinarian and a customer of AFVL, who attests that since

Plaintiff retired all his business dealings have been with either Nick or Peggy Reed, and

to the best of his knowledge Plaintiff no longer had any role in running AFVL. (R. 67).

j) Affidavit of Arthur Riley (Exhibit 12)

Dr. Riley is a veterinarian and a customer of AFVL, who attests that since Plaintiff

retired all his business dealings have been with either Nick or Peggy Reed, and to the

best of his knowledge Plaintiff no longer had any role in running AFVL. (R. 69).

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k) Income information for Peggy Reed (Exhibit 16 and 17)

According to her W-2 for 2000, Peggy Reed earned $88,029.50. (R. 71). A

statement from A+ Bookkeeping Center, Inc., states that prior to 2000, Peggy Reed did

not receive a salary from AFVL. (R. 72).

m) Minutes from Corporate Meetings from 1999 to 2002 (Exhibit 18)

These minutes were submitted to the ALJ prior to the hearing (R. 74 to 152). 

Although the minutes reflect that Plaintiff attended the meetings, none of the entries

show job assignments to him or bonuses paid to him. 

VI. Hearing Transcript

The hearing was held on May 9, 2002. (R. 153). Plaintiff was represented by

Attorney Pamela Collins. Plaintiff is president of a corporation called Florida Veterinary

Labs Incorporated, which he described as a business that does bacteriology on

samples that comes from dairies or veterinarians. (R. 157). The samples are received

from couriers, USPS, or overnight carriers. The samples are read for bacteria content

identification and the results faxed within three days to the customers. The three

officers, himself, his son and his wife, hold annual corporate meetings, usually at the

offices of their attorney, Harvey Baxter. (R. 159). Peggy usually decides when the

meeting will be held and she presides over the meetings, insofar as she takes

everything down, but decisions are made unanimously. (R. 160). There are four

employees, Peggy, Nick, and two other girls. (R. 161). Major business decisions are

made by Peggy and Nick, since 1987 Plaintiff has not participated in any major

decisions. Plaintiff has authority to write checks, but has not done so in several years. 

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(R. 162). Plaintiff does not consider himself the expert in the business, his wife is the

bacteriologist, he is a carpenter and has helped with construction of the business. (R.

162). Plaintiff received a salary before 2000 and could not recall if his wife received a

salary at that time also. (R. 163). Plaintiff spends his day in the back of the lab where

he restores antiques. (R. 163). Plaintiff states that neither Peggy nor Nick would ask

him any questions about the business, even if a complicated matter arose, and he was

there in the back. (R. 164). Plaintiff stated that his wife Peggy was “very active” on a

full-time basis in the business before 2000. (R. 165). Plaintiff’s job responsibilities

before 2000 were “minimal,” in that he received samples, did “identification and partial

set-up,” and received a salary of “approximately 60000 annually,” although he could not

remember. (R. 166). He recalls that his son received about “30 some thousand,” and

his wife received about “60000 plus.” (R. 166). The ALJ asked Plaintiff why it was that

his wife had no earnings prior to 2000, and he made twice what his son made even

though he claims that he was basically an assistant to his son, the primary lab worker. 

(R. 167-68). Plaintiff stated that it was “seniority,” and his wife was entitled to the

difference because she had the degrees. (R. 168). Plaintiff states that his wife is

basically doing the same thing she did before 2000, although she reported no income

prior to 2000. (R. 170). Plaintiff explains that she was not being paid even though she

was working because it was a “family thing,” in that he was being paid prior to 2000. (R.

171). The business and home are on the same property. (R. 171). Plaintiff testified

that the idea for the business came from his wife who was working at the UF vet center. 

(R. 173). He was in between jobs at the time and learned the business from her. (R.

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173). Prior to Plaintiff’s retirement, his wife was at the lab working every day. (R. 175). 

She received no salary because what he made “went into one pot and we didn’t have

separate accounts. We just lived on what we needed and agreed to buy something out

of that money.” (R. 176).

V. Analysis

The requirements for receiving Social Security retirement benefits are: (1) being

fully insured, as defined by the Act; (2) having attained age 62; and (3) filing an

application. 42 U.S.C. § 402(a). If an applicant is still receiving employment income,

this income may be deducted from the benefits, and the amount of the deduction is

determined by the annual earnings test. 42 U.S.C. §403(b)(1); 20 CFR §404.415(a). 

There is a presumption of excess earnings, which Plaintiff must rebut by “convincing

evidence.” 42 U.S.C. §403(f)(4)(B); 20 CFR §§404.703, 404.704. 

The Eleventh Circuit has also established a three-part test for “analyzing and

penetrating the superficialities of unrepresentative family salary arrangements:” 

(1) whether the claimant continues to contribute substantial and valuable

services to the corporation;

(2) whether the family member receiving the income increases his or her

duties commensurate with the increase in salary;

(3) whether the family member’s income is used to support the claimant.

Martin v. Sullivan, 894 F.2d 1520, 1532 (11th Cir. 1990).

Applying this test to the facts at hand, the ALJ found that Plaintiff continues to

contribute substantial and valuable services to the corporation in that the structure of

the corporation was basically the same as it was before, that Plaintiff continued to

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participate in monthly corporate meetings, that Plaintiff was consulted before all major

decisions, and he was able to sign checks. (R. 15). 

Applying the second factor of the test, the ALJ found that although Peggy worked

for the corporation for many years prior to 2000, she was not paid for it, and Plaintiff

testified that they pooled the salary Plaintiff had made. The ALJ found that they were in

a unique position of controlling the duties and salaries they earned because together

they owned 2/3 of the corporation. Thus, the income received was not commensurate

with the services rendered. 

As to the third factor, the ALJ found that according to their tax returns, and

Plaintiff’s testimony, it is clear that Peggy Reed’s salary is used to support Plaintiff and

half of this salary should be attributed to Plaintiff as income. Thus, these earnings are

subject to the annual earnings test, and Plaintiff’s benefits should be reduced

accordingly.

Based on the evidence noted above, the ALJ clearly had substantial evidence for

her decision. The Court would add that there were inconsistencies in the evidence and

Plaintiff’s testimony at the hearing that would further support the ALJ’s findings that “the

claimant’s family salary arrangements were not based upon the value of services

rendered to the company, but were instead based solely upon a desire to avoid the

annual earnings test in order to inflate Social Security benefits to the claimant.” (R. 15). 

For example, Peggy Reed stated that she left the corporation in 1994 (R.47), and

returned “after an extended leave of absence” to replace Plaintiff (R. 22), but Plaintiff

testified that his wife worked full time prior to 2000 and that her job duties were basically

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the same. (R. 165). Plaintiff also testified that even before he retired his job

requirements were “minimal,” (R. 166), again supporting the finding that salaries fixed

by the corporation were not commensurate with the duties performed. Further, in his

brief Plaintiff argues that the ALJ should not have attributed his income from the

corporation to his labor, rather the income came from his stock ownership, but earlier

Plaintiff stated that he received no dividend income from the corporation. (R. 31). 

These inconsistences and the weight of the other evidence presented by the Plaintiff

support the ALJ’s finding.

In light of the foregoing, it is respectfully RECOMMENDED that the decision of

the Commissioner be AFFIRMED.

IN CHAMBERS at Gainesville, Florida, this 25th Day of April, 2005.

S/ A Kornblum

ALLAN KORNBLUM

UNITED STATES MAGISTRATE JUDGE

NOTICE TO THE PARTIES

A party may file specific, written objections to the proposed findings and

recommendations within 15 days after being served with a copy of this report and

recommendation. A party may respond to another party’s objections within 10 days after

being served with a copy thereof. Failure to file specific objections limits the scope of

review of proposed factual findings and recommendations.

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