United States Court of Appeals

FOR THE EIGHTH CIRCUIT

____________

No. 96-3610

____________

John F. Johnson, Sr.; *

Joann Johnson; Ella Johnson, *

*

Appellants. *

* Appeal from the United

States

v. * District Court for the

* Eastern District of

Missouri

Shirley S. Chater, Social *

Security Administration, *

*

Appellee. *

____________

 Submitted: April 16, 1997

 Filed: October 16,

1997

____________

Before McMILLIAN, Circuit Judge, HENLEY, Senior Circuit

Judge, and

BEAM, Circuit Judge.

____________

McMILLIAN, Circuit Judge.

John F. Johnson, Sr., his wife, Joann Johnson, and

their daughter, Ella Johnson (collectively claimants),
The Honorable Lawrence O. Davis, United States Magistrate Judge for the 1

Eastern District of Missouri. The case was tried to a magistrate judge pursuant to

the consent of the parties under 28 U.S.C. § 636(c). 

2

appeal from a final order entered in the District Court1

for the
3

Eastern District of Missouri granting summary judgment in

favor of the Commissioner of Social Security. Johnson v.

Chater, No. 1:95CV00075 LOD (E.D. Mo. July 29, 1996)

(order and memorandum). For reversal, claimants argue

(1) the Commissioner did not have the authority to

reallocate undistributed corporate profits as wages to

John Johnson, Sr., in 1991 for the purpose of computing

excess earnings under 42 U.S.C. § 403 and (2) the

Commissioner erred in “piercing the veil” of their family

salary arrangements to reallocate some of the salary paid

in 1990 from Joann Johnson to John Johnson, Sr., and to

attribute self-employment profits to John Johnson, Sr.

For the reasons discussed below, we affirm in part and

reverse in part the order of the district court and

remand the case to the district court for further

proceedings. 

The following statement of facts is taken in large

part from the order and memorandum of the magistrate

judge. John Johnson, Sr., filed an application for

retirement insurance benefits and began receiving

benefits in May 1989. His wife, Joann Johnson, filed an

application for spouse’s benefits, and their daughter,

Ella Johnson, filed for child’s benefits on the record of

her father. In March 1993 the Social Security

Administration (SSA) notified John Johnson, Sr., that he

had received benefits greater than those to which he was

entitled because of excess earnings. The excess earnings

were wages and self-employment income attributable to him

in 1990 and 1991 from two family farming corporations,

Cowhill Farms, Inc., and J & J Hog Farms. John Johnson,

Sr., was president of Cowhill Farms until January 1989,

when he reduced his activities. In May 1989 he
4

officially retired from Cowhill Farms, and Joann Johnson

became president upon her husband’s retirement. John

Johnson, Sr., also retired from J & J Hog Farms in

January 1989. Their son, John Johnson, Jr., took on more

of the management responsibility for the two family

farming corporations. 
5

For 1990 John Johnson, Sr., reported wages of $6,000

and Joann Johnson reported wages of $9,482 from Cowhill

Farms. The SSA reallocated their wages and determined

that John Johnson, Sr., had received $9,482 in wages and

Joann Johnson had received $6,000 in wages from Cowhill

Farms. The SSA also determined that John Johnson, Sr.,

was self-employed with respect to J & J Hog Farms and had

received profits of $6,217 in 1990. For 1991 John

Johnson, Sr., reported wages of $7,000 and Joann Johnson

reported wages of $8,400 from Cowhill Farms. The SSA

agreed that $8,400 was a reasonable salary for Joann

Johnson, but decided that John Johnson, Sr.’s work was

worth twice that of his wife, and thus determined that

his salary was $16,800. The SSA noted that in 1991

Cowhill Farms had “ample” profits available to pay these

wages and to invest in corporate assets. Record at 228

(Special Determination dated Feb. 27, 1993) (noting 1991

corporate profits were $11,102 and expenses were down

$13,484 over 1990)). These amounts exceeded the exempt

earnings amount for 1990 and 1991. The redeterminations

were based on income and corporate tax returns, W-2

forms, self-employment questionnaires, interviews, and

other information. 

In June 1994 a hearing was held before an

administrative law judge (ALJ). The ALJ found that the

SSA had properly reallocated wages between John Johnson,

Sr., and Joann Johnson for 1990 and 1991 and that John

Johnson, Sr., had been overpaid retirement benefits in

1990 and 1991 in the amount of $5,488. (The ALJ also

found that Ella Johnson had been overpaid benefits.) The

ALJ found that John Johnson, Sr., had provided more than

“minimal” services to the two corporations, including 25%
6

of the labor, such as spraying and combining, for Cowhill

Farms. The ALJ also found there had been considerable

commingling of activities among family members, Joann

Johnson’s duties had not substantially increased in 1990

and 1991 to justify the significant increase in her

salary after 1989, and John Johnson, Sr., had continued

to exercise significant decision-making responsibility

and had provided invaluable services to Cowhill Farms.
7

The ALJ’s decision was affirmed by the Appeals

Council. Claimants sought judicial review in federal

district court. 42 U.S.C. § 405(g). The parties filed

motions for summary judgment. The district court denied

claimants’ motion for summary judgment and granted

summary judgment in favor of the Commissioner. This

appeal followed. 28 U.S.C. § 1291; Fed. R. App. P.

4(a)(1). 

We will uphold the final decision of the Commissioner

if it is supported by substantial evidence in the record

as a whole. 42 U.S.C. § 405(g). “Substantial evidence

is that which a reasonable mind might accept as adequate

to support the [Commissioner]’s conclusion.” House v.

Shalala, 34 F.3d 691, 694 (8th Cir. 1994). 

Qualified applicants are entitled to retirement

benefits. 42 U.S.C. § 402(a). However, an applicant who

is eligible for social security benefits may not work or

engage in self-employment which results in income in

excess of a certain amount per year. Id. § 402(f).

“Wages are defined to mean all employment remuneration,

irrespective of the name by which the compensation is

designated or the way in which it is paid.” Martin v.

Sullivan, 894 F.2d 1520, 1531 (11th Cir. 1990) (citing

applicable Social Security regulations). 

An applicant for benefits must submit the

evidence necessary to establish that all

entitlement requirements are met, and failure to

submit such evidence shall be the basis for the

SSA to determine that the conditions for receipt

of Social Security benefits have not been met.

The claimant, therefore, has the burden of

rebutting the presumption of excess earnings

under the Act. 
8

Id. at 1531-32 (citations omitted). 

“[T]he [Commissioner] has the right to examine the

substance over the form of business transactions and

relationships for purposes of the Social Security Act.”

Heer v. Secretary of Health & Human Services, 670 F.2d

653, 655 (6th Cir. 1982) (per curiam). “Determination of

an individual’s earnings for Social Security purposes

must
9

be related to the reality of his [or her] connection with

the labor market and cannot be based on paper allocation

of income.” Martin v. Sullivan, 894 F.2d at 1524, citing

Reconsideration Redetermination at 2. In particular, the

Commissioner can “pierce the veil” of fictitious family

salary arrangements “where a claimant’s alleged

retirement and consequent shifting of salary to a family

member is for the purpose of receiving Social Security

[retirement] benefits.” Id. at 1532. The Commissioner

should consider the following factors before “piercing

the veil” of “fictitious 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; and (3) whether the family member’s income is

used to support the claimant.” Heer v. Secretary of

Health & Human Services, 670 F.2d at 655; cf. Diamond v.

Harris, 512 F. Supp. 216, 219 (W.D.N.Y. 1981) (holding

Secretary cannot allocate half of wife’s salary to

claimant husband absent evidence that her salary was

excessive or that she had not earned it or her salary

increased in direct relation to decrease in his salary

and cannot reclassify distributed Subchapter S dividends

as salary absent evidence that dividends were paid as a

result of his services). 

UNDISTRIBUTED CORPORATE PROFITS

Claimants first argue the Commissioner does not have

the authority to reallocate undistributed corporate

profits as wages to John Johnson, Sr., for the purpose of

computing excess earnings under 42 U.S.C. § 403, citing
10

Ludeking v. Finch, 421 F.2d 499 (8th Cir. 1970).

Claimants also argue that, even assuming the Commissioner

does have the authority to reallocate undistributed

corporate profits, it was an abuse of discretion to do so

because the undistributed corporate profits had been

retained by the corporation for future capital

improvements. 

These arguments have not been preserved for appellate

review. In the statement of facts in the memorandum in

support of their motion for summary judgment in the
11

district court, claimants referred to the SSA’s

determination that Cowhill Farms had “ample profits” to

pay John Johnson, Sr., a salary of $16,800 in 1991, mem.

at 6, funds which John Johnson, Sr., had never received,

id., and which Cowhill Farms had retained for

“grading/leveling” corporate lands. Id. at 7. Claimants

challenged, among other things, the determination that

John Johnson, Sr.’s services were worth twice as much

those of Joann Johnson and the failure to specify what

those invaluable services were. Id. at 9 (¶ 5).

Claimants did not challenge the reallocation of

undistributed corporate profits in the district court

review proceeding. However, we cannot affirm the

decision of the Commissioner unless it is supported by

substantial evidence. We have found nothing in this

record which supports the Commissioner’s decision to

“reallocate” funds that have never in fact been

distributed in any form by Cowhill Farms or received by

claimants. For that reason, we reverse that part of the

Commissioner’s decision attributing to John Johnson, Sr.,

$16,800 in wages from Cowhill Farms in 1991, an increase

of $9,800 over the $7,000 that he reported. 

“The [Commissioner] has, without question, the

authority and the duty to pierce any fictitious

arrangements among family members, and others, to shift

salary payments from one to the other when the

arrangement is not in accord with reality.” Gardner v.

Hall, 366 F.2d 132, 135 (10th Cir. 1966) (citing cases

shifting salary payments from one family member to

another). This is what the Commissioner did with respect

to the wages reported by the claimants for 1990. The

Commissioner examined the wages reported by the claimants
12

in light of their respective corporate offices,

experience, responsibilities, and hours worked, and

reallocated their wages, reducing those reported by Joann

Johnson by $3,482 and increasing those reported by John

Johnson, Sr., by $3,482 (as well as $6,217 in

self-employment income). For 1991, however, the

Commissioner did not reallocate salary payments between

John Johnson, Sr., and Joann Johnson, but instead

reallocated undistributed profits from Cowhill Farms to

John Johnson, Sr. 
13

Reallocation often arises in cases involving

Subchapter S corporations because, for income tax

purposes, the net profits of Subchapter S corporations

are taxable to the shareholder as dividends. The

corporation is treated as a partnership. For social

security purposes, dividends are excluded from

“self-employment income,” 42 U.S.C. § 411(a)(2), but are

not specifically excluded from “wages.” Id. § 409. For

this reason, benefits claimants would often argue that

all earnings of a Subchapter S corporation, whether or

not denominated as dividends for income tax purposes, are

not wages for social security purposes and that the SSA

has no authority to classify or recharacterize Subchapter

S dividends as wages. The courts rejected these

arguments and distinguished between distributed and

undistributed corporate dividends. For example, in

Ludeking v. Finch, the claimant received no salary from

the Subchapter S corporation but did receive $8,400 in

the form of corporate dividends. The Secretary found

that the claimant was much more than a mere shareholder,

that he had not retired and was the principal officer of

the corporation, and that his services were worth a

minimum of $400 per month, or $4,800 per year. The

Secretary determined that $4,800 of the $8,400 received

as Subchapter S dividends was in reality remuneration for

services rendered and should be denominated as wages for

social security purposes. This court upheld the

Secretary’s authority to reclassify or denominate as

wages such portion of distributed Subchapter S corporate

dividends as found to reasonably constitute wages or

salary for the purpose of determining whether a claimant

had excess earnings. 421 F.2d at 502-04, citing Gant v.

Celebrezze, No. C-124-G-62 (N.D.N.C. Mar. 6, 1964)
14

(claimant was president of newly incorporated Subchapter

S corporation actively engaged in its operation and who

received distributed corporate dividends but no salary

and was considered to be employee of corporation

receiving wages for social security purposes); accord

Owens v. Sullivan, 790 F. Supp. 195, 197-98 (E.D. Ark.

1991) (holding claimants who received Subchapter S

distributed dividend income, part of which was in

exchange for services rendered, were recipients of wages

for social security purposes). 
15

The distinction between distributed and undistributed

corporate profits is important. Although the distinction

often arises in cases involving Subchapter S

corporations, we think the distinction is not limited to

Subchapter S corporations and instead reflects the

broader distinction between actual and merely theoretical

or constructive payments of corporate profits in any

form, whether as salary, dividends or otherwise. For

example, in Somers v. Gardner, 254 F. Supp. 35 (E.D. Va.

1966), the claimant was the president of a Subchapter S

corporation, owned all of the outstanding stock, and

exercised complete control over the corporation. He

performed services for the Subchapter S corporation but

did not in fact receive any income from the corporation

in any form. The Secretary argued that the claimant had

received constructive dividends for income tax purposes

and that, for social security purposes, such constructive

dividends could be reclassified as salary for services

rendered. The district court rejected the Secretary’s

argument and held that the Secretary could not reclassify

the undistributed net income of a Subchapter S

corporation as wages but could reclassify distributed

dividends as wages. Id. at 36-38. The district court

carefully noted that 

where dividends are in fact received by the sole

stockholder who had performed services for his

corporation, there may be authority for

permitting the Secretary to reclassify the de

facto dividends as salary to reflect appropriate

compensation for such services. Additionally,

there is substantial authority for the general

principle that the Secretary can allocate funds

in fact paid out by a corporation in order to

properly reflect the value of services rendered
16

by employees and to prevent fraudulent

arrangements which are tantamount to “shifting

wages.” However, no case has been cited nor

found by this Court which authorizes the

Secretary to “reallocate” moneys which have

never in fact been distributed in any form by

the corporation involved. 

Id. at 36-37 (citations omitted). 
17

Similarly, in Gardner v. Hall, the Secretary

contended that undistributed income and earnings had been

“channeled” to the claimant. The claimant, his wife and

their sons operated a ranch first as a partnership and

then as a Subchapter S corporation. The claimant was in

active charge of the ranch, and his wife was actively

involved in the bookkeeping and related activities. Each

family member was a shareholder and corporate officer.

Each corporate officer, except the claimant, received a

salary. The claimant received no salary or other

remuneration directly from the corporation for his

services. His wife deposited her salary into a joint

checking account and some of the household expenses were

paid from that account. The Secretary argued that part

of the salary paid to the wife should be reallocated to

the claimant. The court of appeals disagreed, holding

that this was not a reallocation case because there was

no evidence or finding that the wife’s salary was

excessive or not earned by her or that there was any

shifting in the corporation of salary payments from the

claimant to the wife. 366 F.2d at 135. In addition, and

more important to our analysis, the court of appeals held

that the Secretary had no authority to allocate a portion

of the corporation’s undistributed profit and income to

the claimant as remuneration for his services. Id.;

accord Herbst v. Finch, 473 F.2d 771, 774-76 (2d Cir.

1972) (holding it was improper to make excess earnings

deduction where corporation did not actually or

symbolically set aside funds to pay salary to claimant

and neither he nor corporation contemplated payment);

Taubenfeld v. Bowen, 685 F. Supp. 237, 240 (S.D. Fla.

1988) (holding Secretary cannot allocate retained

corporate earnings as additional wages to claimant); Letz
18

v. Weinberger, 401 F. Supp. 598, 602 (D. Colo. 1975)

(holding Secretary could not allocate to claimant

corporate profits of Subchapter S corporation that had

not been distributed and were not available for personal

use of claimant, emphasizing that remuneration must be

paid by the employer and received by the employee, either

actually or constructively, before Secretary can

reallocate or shift salary payments). 

The present case is analogous to Notini v. Heckler,

624 F. Supp. 552 (D. Mass. 1986), in which the

Secretary’s theory was essentially that the claimant had

been underpaid. In that case the claimant had been the

chief executive officer and plurality
19

shareholder of a successful corporation. In 1979 he

worked part-time, about 12 hours per week, mostly, in his

words, “puttering around,” and later retired; he attended

directors meetings several times a year but did not make

significant managerial decisions or control daily

management. The corporation paid him wages of $4,410 in

1979, $4,960 in 1980 and $5,500 in 1981, and a bonus of

$100,000 in 1982. The Secretary determined that the

claimant’s services to the corporation were worth more

than the wages paid and that his benefits for 1979-1981

would instead be based on estimated earnings of $37,925

(which represented 25% of his 1978 income of $151,700).

There was no evidence of any additional or “hidden”

payments from the corporation to the claimant. The

district court upheld the Secretary’s characterization of

the $100,000 bonus as compensation for 1981, id. at 554,

but held that the Secretary could not allocate

undistributed corporate profits to the claimant on the

grounds that he had been “underpaid.” Id. The district

court noted that no corporate distributions had been

made, in any form, during the period in question and,

thus, there was no plan to “hide” salary in dividends.

Id. Nor was there any evidence that the capitalized

earnings of the corporation had been unusually high

during the relevant period or that the value of the

claimant’s stock had been inordinately affected by his

failure to draw a full salary. Id. 

Here, the Commissioner did not seek to shift 1991

salary payments from Joann Johnson to John Johnson, Sr.

Under the Commissioner’s calculations, Joann Johnson’s

1991 salary of $8,400 remains unchanged. The

Commissioner did not argue that Joann Johnson’s salary

was unreasonable or excessive or had not been earned by
20

her. Rather, the Commissioner determined that John

Johnson, Sr., was underpaid, that is, that his services

were worth $16,800, or $9,800 more than he was paid in

1991. Even though Cowhill Farms apparently had the

corporate funds available to make such a payment, there

is no evidence in this record that such funds (in excess

of the reported $7,000) were actually paid or distributed

to John Johnson, Sr. We hold the Commissioner cannot,

for social security purposes, allocate a portion of

undistributed corporate profits to John Johnson, Sr., as

remuneration for his services for social security

purposes. 
21

Whether or not the corporation is a Subchapter S

corporation is irrelevant, and in fact the record

indicates that Cowhill Farms is not a Subchapter S

corporation (it filed Tax Form 1120 and not Tax Form

1120-S). The Commissioner does not argue that Cowhill

Farms is not a bona fide corporation. 

For this reason, we reverse that part of the district

court order affirming the Commissioner’s reallocation of

$9,800 as wages to John Johnson, Sr., for 1991 and remand

the case to the district court for further proceedings.

REALLOCATION OF FAMILY SALARIES

Claimants next argue the Commissioner erred in

“piercing the veil” of their family salary arrangements

to reallocate some of the salary paid in 1990 from Joann

Johnson to John Johnson, Sr., and to attribute

self-employment profits from J & J Hog Farms to John

Johnson, Sr. Claimants argue that the circumstances did

not justify “piercing the veil” of their family salary

arrangements because John Johnson, Sr., did not

contribute substantial and valuable services to Cowhill

Farms or J & J Hog Farms in 1990 and that Joann Johnson

had increased her corporate duties commensurate with her

increased salary in 1990. Claimants specifically argue

that the ALJ failed to identify the “invaluable services”

provided by John Johnson, Sr., and improperly discounted

Joann Johnson’s farming skills and contributions to

Cowhill Farms. We disagree. 
22

We hold that the Commissioner did not err in piercing

the veil of the family salary arrangements. Substantial

evidence in the record as a whole supports the findings

that John Johnson, Sr., provided substantial and valuable

services to Cowhill Farms and J & J Hog Farms in 1990 and

that Joann Johnson had not increased her corporate duties

commensurate with her increased salary in 1990. The

burden of proof was on the claimants. The record showed

that the operations of the two corporations were the same

as they were in 1989 when it was determined in another

social security
23

proceeding that John Johnson, Sr., had provided valuable

services to Cowhill Farms; there were no written

agreements or corporate minutes showing the manner in

which the two corporations were operated; there was

considerable evidence of commingling of activities among

the Johnsons and their son; and there was evidence that

John Johnson, Sr., had provided at least 25% of the field

work and other “invaluable” services to the corporations,

including significant decision-making responsibilities

and invaluable experience. With respect to Joann

Johnson, no specific evidence showed what corporate

decisions she had made since taking over as president of

Cowhill Farms in 1989 or how her corporate activities had

substantially increased in 1989 to correspond to the

significant increase in her salary since 1988. 

We hold that substantial evidence supports the

determination of the Commissioner that there was a

fictitious family salary arrangement in this case and

that the Commissioner did not err in making adjustments

to John Johnson, Sr.’s wages and income for 1990 for the

purpose of computing excess earnings under 42 U.S.C. §

403. 

Accordingly, the order of the district court is

affirmed in part and reversed in part and the case is

remanded to the district court for further proceedings.

A true copy.

Attest:
24

 CLERK, U.S. COURT OF APPEALS, EIGHTH

CIRCUIT.