Opinion
Case No. 98 C 2121
March 9, 1999
MEMORANDUM OPINION AND ORDER
The Social Security Administration ("SSA") determined that it overpaid Plaintiff Gregory Tumbarello approximately $38,000 in retirement benefits between 1991 and 1993. Tumbarello vigorously contests this determination. An Administrative Law Judge rendered a decision partly favorable to Tumbarello in 1997; the SSA Appeals Council overturned this ruling, and the decision of the Appeals Council became the agency's final decision. Tumbarello appealed to this court, and the parties have filed cross motions for summary judgment. For the reasons that follow, summary judgment for plaintiff is granted in part, the decision of the Appeals Council is vacated, and the case is remanded for further proceedings.
BACKGROUND
The parties agree on very little. Indeed, in Plaintiff's opinion, "Defendant is so used to living in a dark sinister world of [its] own devising [it] can no longer tell truth from invention and honesty from falsehood." (Answer to Commissioner's Motion for Summary Judgment, at 11.) Because of the differing perspectives about most of what has occurred thus far, few facts in the record are wholly uncontroverted. Nonetheless, the basic sequence of events is not in dispute. Before he retired, Tumbarello practiced personal injury law, and was the sole practicing attorney in his professional service corporation. (Administrative Record [hereinafter AR], at 69-71.) At the end of 1990, Tumbarello advised his clients that he was retiring and transferred his files for ongoing cases to another law firm. ( Id. at 32, 193.) In late January 1991, at the age of sixty-five, Tumbarello filed a claim for Social Security retirement benefits; in making this claim, he advised SSA, "I may receive some fees due for past services. . . . The past due fees may total about $10,000." ( Id. at 69-71.) SSA issued an Award Certificate, and Tumbarello began receiving monthly benefits. ( Id. at 72-74.)
This document is an SSA "Statement of Claimant" form filed by Tumbarello; it represents his initial claim of retirement benefits, filed in January 1991. The third page of the form, (AR, at 71), is a handwritten six-sentence description of Tumbarello's circumstances. In his response to Defendant's summary judgment motion, Tumbarello attacks this third page of his claim form as "rank" hearsay and asserts that it is not in his handwriting. He does not, however, claim that the substance of the text is inaccurate. (Answer to Commissioner's Motion for Summary Judgment, at 3.) Further, Tumbarello cites to this page in his own summary judgment motion, which undercuts his contention that it is not sound authority. The document is not so unreliable that the Appeals Council should have declined to consider it, and the court likewise will consider it as part of the Administrative Record that formed the basis for SSA's decision.
The central dispute here is whether Tumbarello's continued compensation from his legal practice was in excess of the retirement income "caps." Because Tumbarello was an officer of his corporation and in a position to control the reporting of his earnings, SSA required that he report his earnings annually while in retirement. ( Id. at 73.) The parties disagree as to whether Tumbarello satisfied this requirement for 1991. SSA maintains Tumbarello never filed a report; Tumbarello claims he did. No report appears in the record, however, and the fact of its existence is mentioned only in a 1994 letter Tumbarello wrote to SSA. ( Id. at 101.) In May 1993, SSA determined that Tumbarello's wages for 1991 were $125,000, and consequently found he received an overpayment of $12,131.70 in benefits ( i.e. all his benefits were overpayment) for that year. ( Id. at 83.) Tumbarello timely requested reconsideration of this determination, which effectively stayed SSA's recoupment efforts. ( Id. at 84-85.)
If a retiree between the ages of sixty-five and seventy earns more than a certain amount, known as the yearly exempt amount (which was $9,720 for 1991, $10,200 for 1992, and $10,560 for 1993) that retiree's benefits are decreased by one dollar for every two dollars the retiree exceeds the limit. See 20 C.F.R. § 404.430; (AR, at 123-24.)
Precisely how Tumbarello's 1991 earnings came to the attention of SSA is not clear from the record.
In November 1993, Tumbarello submitted an annual earnings report for 1992, with a W2 form attached, which showed wages of $110,000 for 1992. ( Id. at 91-93.) Based on wages of $110,000 for 1992, SSA added $11,973.40 to its calculation of Tumbarello's overpayment amount, and requested his personal and corporate income tax returns and other documentation to indicate when it was that Tumbarello performed the work for which he was compensated in 1991 and 1992, ( id. at 96-97), since this could affect calculation of his benefits. In April 1994, Tumbarello responded to this request with a letter detailing the professional corporation's gross fees and net proceeds, and stating, "The wages reported on the W-2 form should, in my opinion, be reduced for the purpose of your [SSA's] claim to the `net proceeds' received. . . ." (AR, at 101-06.) Tumbarello did not submit his tax returns; he responded to SSA's repeated requests for records and documentation with questions for the agency, such as, "By what authority do you demand to see and examine tax returns which may disclose sources of income and expenses, deductions, etc., which are distinguished from and unrelated to earnings or earned income?" ( Id. at 90) (Tumbarello letter to SSA, September 20, 1993.)
See 42 U.S.C. § 403(f)(5)(A) ("earnings for a taxable year shall be (i) the sum of . . . wages for services rendered in such year"); 20 C.F.R. § 404.428(b) ("Wages . . . are derived and includable as earnings for the months and year in which the beneficiary rendered the services."); (AR, at 110) (August 29, 1994 SSA letter to Tumbarello) ("Wages count towards the Retirement Test when they are earned, not when they are paid.").
In August of 1994, SSA wrote Tumbarello, "Your earnings for 1993 show a significant decline to $9,500.00, so we need an explanation for the decline in earnings." ( Id. at 110.) In April 1995, SSA issued a "Reconsideration Determination," in which it rejected Tumbarello's position and concluded he was not retired beginning in January 1991 and for the years following. ( Id. at 122-27.) SSA applied the "Retirement Test," under which the agency measures the claimant's remuneration for services rendered against the yearly exempt amount of income, and found Tumbarello's earnings so far exceeded the caps that he was ineligible for benefits. ( Id.) Tumbarello sought a hearing before an Administrative Law Judge (ALJ).
SSA apparently obtained information regarding Tumbarello's income through a mechanism called the "annual earnings enforcement program." (AR, at 122.) How this program works is unexplained.
In December 1996, Tumbarello appeared before ALJ Allyn A. Brooks. ALJ Brooks inquired whether the wages paid to Tumbarello in 1991-93 were for work performed in those years or earlier. Tumbarello allowed that since he had incinerated nearly all of his records in 1993, he had to rely on "opinion and memory." ( Id. at 43.) ALJ Brooks ultimately gave "full credibility to [Tumbarello's] memory and testimony" and "accept[ed] his allocation of income between the various years-year earned contrasted with year paid." ( Id. at 18.) The ALJ found Tumbarello's net earnings made him ineligible for benefits in 1991 and part of 1992. The ALJ concluded Tumbarello was overpaid in 1991 and part of 1992, but not 1993. ( Id. at 20-21.)
The Appeals Council, on its own motion, decided to review the ALJ's decision. In anticipation of this review, Tumbarello sent the agency a lengthy letter and some sixty pages of attachments on November 11, 1997. ( Id. at 158-225.) Included in these materials was the 1993 short form tax return for Tumbarello's corporation, indicating he was paid wages of $9,500 for that year. ( Id. at 182-83.) In February 1998, the Appeals Council ruled that the ALJ's decision contained an error of law, and was not supported by substantial evidence. ( Id. at 6.) Although the ALJ regarded Tumbarello as self-employed, the Appeals Council disagreed, and found Tumbarello was an employee of the corporation. Consequently the Appeals Council ruled that the ALJ should have considered Tumbarello's gross, rather than net, wages when calculating his benefit entitlement. ( Id. at 9.) As to the $9,500 in wages Tumbarello declared for 1993, the Appeals Council held:
Inasmuch as the claimant is in a position to control the amount of wages reported and he has not provided substantial evidence to establish why such reported wages decreased significantly from the amount of wages reported in 1992 (despite reporting total business deductions for 1993 close to the amount reported in 1992), the Appeals Council presumes and so finds, that the claimant's 1993 wages were identical to his reported 1992 wages.
( Id. at 9-10.) Further, the Appeals Council concluded:
In view of the claimant's discrepant statements, including his previous statement that his past-due fees may total only about $10,000 in 1991 (Exhibit 3), his inability or unwillingness to provide complete copies of his 1991-1993 individual and corporate tax returns, including supporting documentation, his self-serving and unsupported allegations based on "memory and opinion" that $140,433.38 of the fees received in 1991, $96,040 of the fees received in 1992 and $11,850 of the fees received in 1993 are for services performed in years prior to 1991, are neither credible nor sufficient to rebut the presumption under 20 C.F.R. § 404.429(d) that the originally reported wages of $125,000 in 1991 and $110,000 in 1992 were earned in those years.
( Id.) In sum, the Appeals Council concluded that Tumbarello had wages of $125,000 for 1991, $110,000 for 1992, and $110,000 for 1993, that this compensation was earned in the years Tumbarello received it, that this compensation exceeded what Tumbarello could earn and still qualify for benefits, and therefore all benefits paid from 1991 to 1993 were overpayment. ( Id. at 10-11.)
DISCUSSION
Tumbarello challenges the Appeals Council's ruling in three respects. First, he maintains that although he is an employee of his corporation and not self-employed, SSA should nevertheless consider his net earnings when calculating his retirement benefits. Second, he objects to SSA's determination that he has not rebutted the presumption that wages received in a particular year were earned in that year. Lastly, he contends the agency wrongly concluded that his wages for 1993 were the same as for 1992, namely, $110,000. Defendant's response, and cross motion for summary judgment, stands largely on the reasoning of the Appeals Council's decision, and its attendant citation to the record.
Legal Standards
The court's inquiry is limited. The Appeals Council's determination is conclusive unless it is based on an error of law or is not supported by substantial evidence. 42 U.S.C. § 405(g); Knight v. Chater, 55 F.3d 309, 313 (7th Cir. 1995). Substantial evidence is more than a scintilla but less than a preponderance; it is "`such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.'" Knight, 55 F.3d at 313 (quoting Richardson v. Perales, 402 U.S. 389, 401, 91 S. Ct. 1420, 1427 (1971)). The court may not reweigh the evidence, decide facts anew, or substitute its judgment for that of the Appeals Council, and the court must affirm the SSA's decision even where substantial evidence also supports the opposite conclusion. See Diaz v. Chater, 55 F.3d 300, 305 (7th Cir. 1995); Mullen v. Bowen, 800 F.2d 535, 545 (6th Cir. 1986) ( en banc). However, the court's review is not merely "an uncritical rubber stamp," and "[b]oth the evidence favoring the claimant as well as the evidence favoring the claim's rejection must be examined, since review of the substantiality of the evidence takes into account whatever in the record fairly detracts from its weight." Bauzo v. Bowen, 803 F.2d 917, 923 (7th Cir. 1986). Put another way, the agency's determination must consider all of the evidence in the record and address any significant evidence contrary to the ruling. See Lauer v. Apfel, No. 98-2773, slip op. at (7th Cir. Mar. 2, 1999) (citing Diaz, 55 F.3d at 308; Green v. Shalala, 51 F.3d 96, 101 (7th Cir. 1995)).
Tumbarello has sworn out an affidavit in support of his motion. As Defendant correctly notes, the court may not consider materials outside the administrative record in deciding this appeal, 42 U.S.C. § 405(g); Dugan v. Sullivan, 957 F.2d 1384, 1388 n. 5 (7th Cir. 1992), and the court therefore has disregarded this affidavit. However, Tumbarello attached a number of pages from the Administrative Record to his affidavit as exhibits, and the court has thoroughly reviewed those materials.
Under 42 U.S.C. § 404, SSA is entitled to recover overpayments of benefits pursuant to regulations prescribed by the agency. The statute does not specify which party bears the burden of proving the existence of an overpayment, and the court's research has not uncovered a Seventh Circuit case on point. The consensus among courts that have considered the issue, however, is that it is the Commissioner's burden to establish the fact of an overpayment. See Cannuni ex rel. Cannuni v. Schweiker, 740 F.2d 260, 263 (3rd Cir. 1984) ("The statute does not designate which party bears the burden of proof to establish the fact of overpayment. We agree with the Court of Appeals for the Eighth Circuit that when the government seeks to recover an alleged overpayment, it must demonstrate that the claimant was not entitled to the Social Security funds."); Burrow v. Finch, 431 F.2d 486, 491 n. 5 (8th Cir. 1970) ("Where the Secretary asserts the claim of overpayment by reason of `fault' under § 404(b) . . . there is no logical reason why the party asserting the claim should not bear the traditional burden of proving it."); see also United States v. Smith, 482 F.2d 1120, 1124 (8th Cir. 1973); Morency v. Bowen, 677 F. Supp. 260, 262 (D.N.J. 1988); McCarthy v. Bowen, 668 F. Supp. 1439, 1441-1442 (D. Or. 1987). Defendant disagrees, and argues that the agency "`may suspend benefits when it has information that may reasonably be expected to result in deductions.'" (Commissioner's Memo, at 9 n. 7 (quoting 42 U.S.C. § 403(f)(6), (h)(3)).) This agency prerogative is not inconsistent with resting the ultimate burden with SSA, however. The court concludes that SSA bears the burden of demonstrating overpayment to Tumbarello, and examines whether SSA has met that burden.
Analysis
1. SSA Properly Considered Tumbarello's Gross Wages
The first issue is whether the Appeals Council properly found that Tumbarello was not self-employed but an employee of his own corporation, and therefore that his gross wages rather than net earnings determined his income for each year. Tumbarello does not claim that he was self-employed; nor does he deny he had wages of $125,000 for 1993 and $110,000 for 1992. He nonetheless insists his gross wages should be reduced by his expenses, according to his calculations in his April 1994 letter to SSA. (AR, at 101-06.) Tumbarello argues, "The defendant's denial and rejection of all corporate expenses as proper deductions is impossible to comprehend. How is it possible to engage in any business without incurring and paying overhead expenses." (Answer to Commissioner's Motion for Summary Judgment, at 23-24.) Plaintiff does not support these assertions with any citation to authority, however, and he does not explain why he himself would pay business expenses after receiving a salary from the corporation, rather than having the corporation pay the expenses prior to compensating him.
SSA has defined "wages" as all remuneration paid as compensation for employment. 20 C.F.R. § 404.1041. While agency regulations provide for deduction of expenses from self-employment earnings, Tumbarello was not self-employed. He was an employee of his own professional corporation, which was the entity presumably responsible for the expenses Tumbarello seeks to deduct from his wages. Tumbarello's position is contrary to SSA regulations, which expressly state that "[w]ages include the gross amount of an individual's wages rather than the net amount." 20 C.F.R. § 404.429(c). Under these regulations, the Appeals Council's decision to consider Tumbarello's gross wages rather than net income was correct as a matter of law.
2. In What Year was Tumbarello's Income Earned?
The Appeals Council also decided Tumbarello earned this income in the years in which he received it. The Appeals Council found Tumbarello's resistance to disclosing his tax returns, his discrepant statements, and his "self-serving" allegations based on "memory and opinion" were "neither credible nor sufficient" to rebut the presumption that wages are earned in the years they are received. (AR, at 9.) This presumption is established by 20 C.F.R. § 404.429(d), which provides that where reports show wages "were paid to an individual during a taxable year, it is presumed that they were paid to him for services rendered in that year until such time as it is shown to the satisfaction of the Administration that the wages were paid for services rendered in another taxable year." The question for the court is whether substantial evidence supported the Appeals Council's decision that Tumbarello did not defeat this presumption.
Tumbarello insists that because of the nature of his law practice he could not predict what he was going to receive in past-due fees, except for $10,000 he received each year from a settlement agreement dating to 1985. Tumbarello made a belated effort to provide SSA with documentary support for his claim that the fees he received between 1991 and 1993 were in payment for work performed in earlier years, submitting several attachments to his November 1997 letter. (AR, at 158-225.) The Appeals Council surveyed this material and concluded that "only one [document] actually indicat[es] payment during the years in question for services performed in prior years"-the 1985 settlement agreement. ( Id. at 10.)
The court's review of these materials in the record, however, revealed several other documents ostensibly relevant to the Appeals Council's inquiry. For instance, Tumbarello produced a 1992 "Restricted Release of All Claims" related to a 1984 accident, along with copies of two accompanying checks from Illinois Insurance Guaranty Fund for $54,470 and $20,084.08, payable to Tumbarello on April 7, 1992 and showing a "date of loss" of June 11, 1984. ( Id. at 198, 218, 219.) Tumbarello also submitted a copy of a June 1992 "Restricted Release and Assignment of Claim" from the Wisconsin Insurance Security Fund, which indicated payment of $150,000 to Tumbarello's client for a February 17, 1987 judgment. ( Id. at 212-13.) Additionally, Tumbarello tendered a copy of an April 1991 attorney receipt, signed by him, that acknowledges payment of $62,500 in fees and $16,869.35 in costs for a lawsuit arising out of a 1986 incident. ( Id. at 222.) In the court's view, these documents shed light on the question of the extent to which Tumbarello's income in the years in question was derived from work done in prior years. The Appeals Council evidently did not consider them relevant: the Council expressly stated that it believed only the 1985 settlement agreement to be indicative of deferred payment for earlier services. Still, the Appeals Council was obligated to at least mention these documents favorable to Tumbarello's position, and it did not do so.
The Illinois statute of limitations for personal injury claims is two years, 735 ILCS 5/13-202 (West 1996), a strong indication that Tumbarello's client filed suit before June 1986, and thus that in 1986 Tumbarello performed at least some of the services for which he received later payment.
It is well-settled that SSA must articulate its grounds for accepting or rejecting evidence in the record, so that reviewing courts may determine if substantial evidence supports the agency's conclusions. See Young v. Secretary of Health Human Svcs., 957 F.2d 386, 392 (7th Cir. 1992); Bauzo, 803 F.2d at 925 ("The Appeals Council failed to articulate the basis for adopting the favorable part of [the evidence] . . . and rejecting the unfavorable part. Such articulation is required here in order to find substantial evidence to support the Council's determination."); Tom v. Heckler, 779 F.2d 1250, 1257 (7th Cir. 1985); Rousey v. Heckler, 771 F.2d 1065, 1069 (7th Cir. 1985) ("[I]t is absolutely essential for meaningful appellate review for the ALJ to expressly articulate his reasons for crediting or rejecting particular sources of evidence.") (quotes omitted). In light of this rule, the court cannot find SSA's determination that Tumbarello failed to defeat the presumption that wages are earned in the year they are received to be supported by substantial evidence, because the Appeals Council's opinion did not discuss all the evidence in the record relevant to this issue. On remand, the Council must determine the import of these documents and articulate its reasons for that determination.
3. What was Tumbarello's Income for 1993?
Finally, Tumbarello challenges the Appeals Council's decision to disregard the ALJ's finding that his wages were $9,500 for 1993, and to presume instead that he had earned $110,000, exactly the amount he reported for 1992. The Appeals Council based this decision on several factors. First, the Appeals Council noted the dramatic decline in Tumbarello's wages from 1992 to 1993, a decline that occurred after SSA had advised Tumbarello of overpayments due to his high wages in 1991 and 1992. This large decrease in Tumbarello's earnings for 1993 occurred despite the fact that his corporation's business expense deductions were similar to those he declared for 1991 and 1992. The Appeals Council further observed that Tumbarello himself exercised control over the amount of wages reported. Finally, the Council was suspicious of Tumbarello's failure to provide the underlying schedules and other documentation for the corporation's 1993 tax return. (AR, at 9-10.) In the Appeals Council's view, this circumstantial evidence outweighed the direct evidence-the 1993 corporate tax return showing Tumbarello's wage to be $9,500-and trumped the ALJ's findings as to Tumbarello's testimony.
Tumbarello explained in his hearing before the ALJ that his wages spiked in 1991 and 1992 due to unexpected payments from old cases, (AR, at 33-36), and, as discussed earlier, he later produced at least some documentary support for this assertion. This evidence not only bolsters Tumbarello's contention that the amounts he collected in 1991 and 1992 were actually earned in prior years; it also sheds light on the related question of why Tumbarello's wages were lower in 1993. Yet the Appeals Council ignored or chose not to credit this evidence, without offering a rationale. "[W]hen the Appeals Council rejects an ALJ's credibility findings, it should do so expressly and state its reasons for doing so." Bauzo, 803 F.2d at 922. Absent further explanation, the court is unable to determine whether the Appeals Council's suspicions concerning Tumbarello's records rebut the explanations and documentary evidence that he has offered.
Similarly, the Council was skeptical of the 1993 return because "[t]he complete corporate return, supporting schedules, documentation, and individual tax returns were missing." ( Id. at 10.) But Tumbarello told the ALJ that his tax returns did not distinguish between income actually earned in the taxable year and income earned earlier and simply received in the taxable year. ( Id. at 55, 57.) The Appeals Council did not explain why it disbelieved this statement, or why the absence of the supporting materials for the 1993 tax return otherwise undercut the return's credibility. Lastly, the Council perceived Tumbarello's relatively high business expenses to be evidence that he was doing more work in 1993 (as well as in 1991 and 1992) than he admitted. Yet Tumbarello explained to the ALJ that the bulk of his expenses, albeit for 1991-92, but presumably for 1993 also, were for insurance and contribution to his pension fund. ( Id. at 48-49.) The ALJ credited this explanation; again, the Council either did not credit the explanation but failed to give the reason for this, or did not consider it at all.
The court is mindful that it is not charged with reweighing the evidence in the record. Still, the court cannot conclude that the SSA's decision is supported by substantial evidence where the agency has not explained all the reasons for its decision, including why it chose to disregard pertinent evidence. This is particularly so where, as here, SSA bears the burden of showing that an overpayment occurred. The SSA's reliance on evidentiary presumptions created by its own regulations are insufficient to meet this burden, in light of Tumbarello's submission of at least some evidence to rebut the presumptions.
CONCLUSION
The court is sympathetic to the apparent frustration of the Appeals Council. Relations between the parties have been contentious, and the record suggests that Tumbarello has been recalcitrant at times. The court also understands the limited extent of judicial competence in this area of administrative expertise. Nonetheless, the findings of the Appeals Council that Tumbarello had earnings of $110,000 in 1993, and that Tumbarello has not rebutted the presumption that wages were earned in the years in which they were received must be vacated. Defendant's motion for summary judgment is denied; Plaintiff's motion for summary judgment is granted in part. This case is remanded for further proceedings consistent with this opinion.