Pursuant to G.L.c.32, §16(4), the Petitioner, Matthew Frazier, is appealing the March 8, 2006 decision of the Respondent, Barnstable County Retirement Board, finding after hearing that he has G.L.c.32, §91A overearnings for the years 2002, 2003 & 2004. (Exs. 2 & 25) The appeal was timely filed. (Ex. 1) Prior to the hearing being held, PERAC sought to intervene. PERAC's review found Section 91A overearnings reaching back to 2000 and 2001, in addition to 2002, 2003 and 2004. PERAC's Motion was allowed April 14, 2006. ("D")
A hearing was held February 22 and May 9, 2007, at the offices of the Division of Administrative Law Appeals (DALA), 98 North Washington Street, 4th Floor, Boston, MA 02114, pursuant to G.L.c.7, §4H. Various documents are in evidence. (Exs. 1 - 38) Six tapes were used. The parties filed pre-hearing memoranda, and there are some stipulations of fact from the information set forth in them. ("A", "B", and "C") The Petitioner testified and presented the testimony of his wife, Wendy Frazier. Eugene Nannini, Esq. gave testimony as a rebuttal witness. The Respondent Barnstable County Retirement Board presented no witnesses. The Respondent/Intervenor PERAC presented the testimony of Robert A. Panico, the PERAC Fraud Manager from 1997 who investigated and evaluated Mr. Frazier's Section 91A Statements and attachments for the years 2000-2004. He also testified as a rebuttal witness. The parties made various procedural claims in regard to the role of PERAC and the purpose to be served by the hearing before the local board the retiree can have. The burden of proof required to demonstrate overearnings was argued. The parties filed briefs by July 30, 2007 when the record closed.
FINDINGS OF FACT
1. Matthew Frazier, d.o.b. 9/29/67, was appointed a Truro Police Officer in about 1988. He had been a Patrol Officer for about a year, when he was struck by a car, injuring his left knee on June 29, 1989. Thereafter, he had two surgeries on that knee. He lost time from work and was involuntarily retired effective July 3, 1992 on accidental disability retirement. Over the years, Mr. Frazier has not been determined from G.L.c.32, §8 reviews to be able to return to work. ("A", "B" & "C". Ex. 20. Testimony)
2. Mr. Frazier grew up in Truro. From his teenage years in this community, he had a small landscaping business. Upon becoming a Truro Police Officer, he continued to work at this business. From about 1985, he did snow plowing and sanding work which he continued after he became a Police Officer. He entered into a contract to do plowing with the Mass. Highway Department. In and around 1987, he began another business of renting portable toilets for construction sites and for events. He never had a business partner. He incorporated his various businesses in 1990 as Matthew Frazier Enterprises, Inc. (MFE), and incorporated the portable toilet rental business as Waste Associates, Inc. in 1992. Because of his knee injury, he could not operate the standard transmission trucks his businesses used, so he had to hire workers. ("A", "B". "C". Exs. 6, 11, 14, 19, 20, 27, 33 & 34. Testimony)
3. Wendy Hilferty was born in 1970. She grew up in the same community as Matthew Frazier and knew him from the time he had his teenage landscaping business. She worked from about 1990 full time for The Box Lunch Restaurant as manager for six to seven years. She earned $20,142 in 1995 and $14,722 in 1996. In 1997, she earned $19,598. She worked full time the 1997-1998 and 1998-1999 school years at the Eastham Elementary School as an Educational Assistant. For calendar year 1999, she received $7,690.54 in wages from the Town of Eastham. She was working for MFE and Waste Associates, Inc. by 1990, but doing minimal tasks and only part time hours. She would do errands, telephone answering, office deliveries and pick-ups, office cleaning, and typing. (Exs. 10, 14, 20, 27 & 28. Testimony)
4. Wendy and Matthew were married in April 1998. Their first child was born in June 1999. Their next two children were born in May 2001 and in April 2004. (Exs. 5, 6, 9, 12 & 27. Testimony)
5. Matthew Frazier did not file 1040 tax returns for 1995 to 1998. For neither 1998 nor 1999 was any joint 1040 tax return filed by the Fraziers. Matthew Frazier had no compensation of any description for himself paid out from MFE until 2003. Corporate earnings of MFE were retained to grow the company. From around the time of their marriage, Wendy Frazier has been a 50%/50% stockholder with her husband of MFE. She made no capital investment in MFE. Matthew Frazier was fully responsible for the start up, overall growth, and business planning of MFE. (Exs. 3, 4, 10, 14, 19 & 27. Testimony)
6. Both MFE and Waste Associates, Inc. grew over time. Wendy Frazier did more comprehensive business growth oriented work for both companies after she married Matthew, albeit always on a part time basis and not always at set hours each day. She made bank deposits, got the mail, retrieved parts for the MFE trucks, and picked up supplies. Later on, she did marketing work including producing a brochure, sent out faxes with job bids, and checked construction newsletters for potential MFE contracts. She eventually became more of a business confidant to her husband, discussing personnel matters with him. Wendy Frazier had this more substantial role in MFE by 2000. (Exs. 14, 19 & 27. Testimony)
7. A purchase and sale agreement was entered into on September 23, 1999 between Matthew Frazier, Waste Associates, Inc., and a buyer for the sale of the assets of Waste Associates, Inc. along with the purchase of some trucks owned by MFE. The agreement also called for the seller to put together a report regarding the Waste Associates business for the buyer. Matthew Frazier produced the report for the buyer, and his wife helped him by typing it and piecing it together. The sale included the transfer of all the corporate stock of Waste Associates, and all the corporation's equipment and receivables. Some of the proceeds from the sale were used to pay off outstanding corporate liabilities. The agreement included a non-competition clause covering the next five years for Matthew Frazier. He set up a separate corporation called AMF Consulting Group, Inc. (AMF) to receive the proceeds from the sale. He and his wife were the sole shareholders of AMF. She was assigned an 80% interest and he was assigned the other 20% interest in this corporation. (Exs. 5, 6, 10, 11, 13, 14, 19, 20 & 27. Testimony)
8. During 2000-2001, income was received by AMF, Matthew Frazier, and Wendy Frazier. A payment was also made for producing the report for the buyer during 2000. For 2000, in regard to AMF, Wendy Frazier received a K-1 form showing she received income of $58,101.00 representing an 80% share of the sale profits of Waste Associates of $72,626.00. She also had a property distribution other than a dividend reported on Form 1099-DIV, of $9,331.00 from AMF. For 2000, Matthew Frazier also received a K-1 form showing he received income of $14,525.00 representing a 20% share of the $72,626.00, and a similar property distribution of $2,333.00. For 2000, AMF filed a federal form 1120S for an S Corporation, showing ordinary income of $72,626.00. The AMF form 1120S also showed compensation paid out to an officer of $24,900.00, which was received by Wendy Frazier. She received $1,298 from Eastham Commission on Early Childhood during the calendar year 2000. The total wages reported in the Fraziers' joint 1040 tax return for 2000 was $26,197. (Exs. 5, 10, 13 & 20. Testimony)
9. For 2001, in regard to AMF Consulting Group, Inc., Wendy Frazier received a K-1 form which noted it was the final K-1, and that there was an $8,476.00 income loss for her share of AMF. She received a property distribution other than a dividend reported on a Form 1099-DIV, of $49,754.00. For 2001, regarding AMF, Matthew Frazier's final K-1 form noted an income loss for his share of AMF of $2,119.00. He also received a property distribution of $12,439.00. AMF's 2001 federal form 1120S for an S Corporation, showed an overall ordinary income loss of $10,595.00 ($8,476.00 + $2,119.00). There was a payment was made of $4,200.00 to an officer of AMF. It is not clear to whom this was paid. The total property distribution was listed as $62,193.00 ($49,754.00 + $12,439.00) (Exs. 5 & 20. Testimony)
10. Matthew Frazier was principally responsible for the start up, growth, and worth of Waste Associates, Inc. at the time it was sold. Wendy Frazier's contribution to its growth was much less. She did marketing tasks and would make sales visits to potential customers planning events and needing to rent portable toilets. (Testimony)
11. Starting in and around the spring 2000, Matthew and Wendy Frazier purchased storage containers and dumpsters which they in turn rented out to MFE. MFE was in the business of renting such property and subleased these items. The Fraziers purchased these items since MFE could not gain credit to finance the purchase of them. In doing the purchase, the Fraziers secured a loan and used funds from their joint, 50/50% Merrill-Lynch money market account. Thereafter, with earnings retained in MFE, MFE came to have a positive enough financial state that it qualified for loans to purchase such items on its own. Nevertheless, Wendy and Matthew Frazier have continued to rent their containers and dumpsters to MFE which has continued to sublease them as part of its business. The cost of the items purchased by Wendy and Matthew Frazier and then leased by MFE totaled for the years 2000 and 2001, $65,893.25. They only rented this equipment to MFE. (Exs. 13, 20, 32, 36 & 38B. Testimony)
12. The storage container/dumpster rental income began to be received by Wendy and Matthew Frazier in 2001, when they reported receipt of $3,918.00. For 2002, they reported receipt of $50,420.00. For 2003, they reported receipt of $48,000.00. For 2004, they reported receipt of $32,750.00. (Exs. 5, 6, 7, 8 & 9)
13. Around 2000-2001, Matthew Frazier purchased a commercial building in Eastham which he has been renting. The real estate rental income has been declared in his tax returns. The Frazier's 2000 1040 joint tax return lists rental income from real estate and S corporations, etc./Schedule E, to be $64,121.00. The Schedule E lists rents of $7,800.00 and $32,000.00, totaling $40,500.00. The 2001 1040 joint tax return lists the same kind of rental income as $17,064.00. The 2002 1040 joint return lists the same kind of rental income as a loss amount of $8,409.00. The 2003 1040 joint return lists this kind of rental income as a loss amount of $8,299.00. The 2004 1040 joint return lists this kind of rental income as a loss amount of $4,838.00. (Exs. 5, 6, 7, 8 & 14. Testimony)
14. For 2000, Wendy Frazier did not receive a W-2 from MFE. For 2001, she was issued a W-2 by MFE for $25,397.00. For 2002, she was issued a W-2 by MFE for $32,860.00. For 2003, Wendy Frazier was issued a W-2 by MFE for $46,573.00. For 2004, Wendy Frazier was issued a W-2 by MFE for $33,080. Covering fiscal year April 1, 2000 ending March 31, 2001, MFE's Form 1120 tax return showed total income of $44,548.00. After deductions, the taxable income was listed as a loss of $26,315.00. MFE showed no officers compensation paid out and no salaries or wages paid out for this same fiscal year. (The Form 1120 for MFE for fiscal year April 1, 2001 ending March 31, 2002 was not part of the documentation available for review.) The Form 1120 for MFE for fiscal year April 1, 2002 ending March 31, 2003, showed total income of $498,411, and a taxable income of $19,495. It showed officers compensation of $34,340 received by only Wendy Fraizer. It listed salaries of $26,640. The Form 1120 for MFE for fiscal year April 1, 2003 ending March 31, 2004, showed total income of $651,553.00 and a taxable income following deductions of $14,735.00. It listed salaries paid of $82,059.00. It listed compensation paid out to officers of $47,823.00, which was reported as $43,990.00 to Wendy Frazier and $3,833.00 to Matthew Frazier, although it listed both as 50%/50% shareholders of the corporation. Matthew Frazier was also issued a W-2 for 2003 of $3,833. This was the first distribution out of MFE to Matthew Frazier for his direct services. (Exs. 6, 7, 8 & 10. Testimony)
15. MFE and not Matthew Frazier as an individual, holds a certification to do calibrations through the Massachusetts Highway Department in regard to snow plow sander equipment. MFE has a vendor stamp as an authorized calibration vendor. MFE performed calibrations during the winters of 2000-2001, 2001-2002, and 2002-2003. (Exs. 17, 30, 35 & 38C)
16. Each year during 2001-2005, the Massachusetts Highway Department (MHD) paid MFE to do snow plowing. MFE purchased equipment for sanding and plowing between 2001-2004. The MHD records show MFE was paid: $19,610 for fiscal year 2001; $5,494 for fiscal year 2002; and, $59,541 for fiscal year 2003. Their records show no payment to MFE for fiscal year 2000. The records kept by MFE show MHD paid to MFE: $2,880 in MFE's April 1, 2000 - March 31, 2001 fiscal year; $21,288.50 in MFE's April 1, 2001- March 31, 2002 fiscal year; $16,394 in MFE's April 1, 2002 - March 31, 2003 fiscal year; $98,273.69 in MFE's April 1, 2003 - March 31, 2004 fiscal year; and, $104,931.25 in MFE's April 1, 2004 - March 31, 2005 fiscal year. (Exs. 15, 16, 29, 36 & 38A)
17. By 2003, MFE had two full time employees with Wendy Frazier still working part time at various hours per week, and Matthew Frazier working full time as the head of the company, overall business planner and manager. (Ex. 14. Testimony)
18. For its April 1, 2000 to March 31, 2001 fiscal year Form 1120, MFE had capital gains of $5,500.00. (Missing is MFE's Form 1120 tax return for April 1, 2001 - March 31, 2002.) For its April 1, 2002 to March 31, 2003 fiscal year Form 1120, MFE had capital gains of $6,799. For its April 1, 2003 to March 31, 2004 fiscal year Form 1120, MFE had no reported capital gains. For its April 1, 2004 to March 31, 2005 fiscal year, MFE had no reported capital gains. (Exs. 5, 6, 7, 8, 9 & 12)
19. The salaries paid to Wendy Frazier and the compensation paid to her as an officer from MFE, between 2000-2004, do not reflect the actual value of the services she provided to MFE and are inflated. During those years, relative to his wife, Matthew Frazier took out very little in compensation for his services or for officer compensation as MFE grew. A fair breakdown of the earnings of MFE attributable to the contributions of Wendy Frazier, is a quarter of the earnings, with the remaining seventy-five percent attributable to only Matthew Frazier. This breakdown shows that Wendy Frazier had begun to function as a partner in MFE with her husband and not performing as just an employee by 2000; a function she continued through 2004. (Exs. 5, 6, 7, 8, 9 & 12)
20. Between 2000-2004, Matthew Frazier filed the required Section 91A Statements on his earnings with PERAC. Due to the MFE fiscal year of April 1 - March 31, and due to some years when he filed tax return extensions, the underlying documentation to support his answers to the Section 91A Statements, were late in being filed with PERAC. PERAC sought further documentation to review his potential excess earnings. (Exs. 5, 6, 7, 8, 9, 10 & 12. Testimony)
21. After PERAC's review finding overearnings by Mr. Frazier under the G.L.c.32, §91A criteria and formula for the time period 2000-2004, Mr. Frazier sought a hearing before the Barnstable County Retirement Board. Prior to the hearing, the Board's counsel who was going to be the designated Hearing Officer, reviewed PERAC's evaluation with Robert A. Panico, the PERAC Fraud Investigations Manager whose unit had gathered documentation and other information, including interviewing Mr. Frazier. PERAC had found overearnings during each calendar year, 2000-2004. Testimony was taken at the Board's hearing from Mr. Frazier but not from Mr. Panico. The hearing occurred on September 30, 2005. The only years the Board addressed were the calendar years 2000-2003. At the time, the Board found the evidence on 2004 to be incomplete. The Board accepted the findings and calculations made by the designated hearings officer and found Section 91A overearnings only for the years, 2002 and 2003. The Board forwarded its determinations onto PERAC for PERAC to do recalculations of Mr. Frazier's earnings consistent with its determinations. (Exs. 12, 13, 14, 18, 19, 20 & 21. Testimony)
22. PERAC reviewed the Barnstable County Retirement Board's calculations and conclusions on them, and responded by letter to the Board of January 19, 2006. PERAC asked that the Board reconsider its determinations since PERAC felt it had support for finding overearnings to the level it had for all the years 2000-2004. In this regard PERAC wanted the Board to add the calendar year 2004 into its reconsideration. PERAC did not agree with the methodology employed by the Board, and felt that PERAC did not have live witnesses to rebut the live testimony of Mr. Frazier. (Ex. 22)
23. The Barnstable County Retirement Board sought and PERAC provided to it, PERAC's calculation for overearnings for Mr. Frazier for the calendar year 2004. PERAC provided its reasoning for inclusion of certain amounts to be overearnings for Mr. Frazier. (Exs. 23 & 24)
24. Thereafter, a Supplemental Hearing Officer's Report was produced on February 7, 2006 for the Barnstable County Retirement Board. The report noted how PERAC and not the local board conducts "an independent investigation" about a Section 91A Statement. The report noted the local board reviews information provided to it "from all appropriate sources and renders a decision." The concern raised was that PERAC expected the Board to fully adopt PERAC's determinations. The Hearing Officer produced some supplemental findings and provided a modified decision that included calendar year 2004. Overearnings were found owed for 2002, 2003 and 2004. No overearnings were once again found in the calendar years 2000 and 2001. In rendering this new Hearing Officer's Report no further hearing was found necessary to conduct. In not agreeing with each of PERAC's determinations, the Report found there was a need for PERAC to have substantial evidence to support its determinations and that was not always found. The Report addressed the burden of proof and discussed how the member has an obligation to provide all the appropriate information needed to effectively assess whether or not there are Section 91A overearnings, but that PERAC has a burden to show there are overearnings by substantial evidence. The report discussed the role of the board hearing and noted how the hearing must mean something which it would not if PERAC's determinations could not be overcome by the hearing process. (Ex. 25)
25. At its February 28, 2006 meeting the Barnstable County Retirement Board adopted the Report of the designated Hearing Officer and found Mr. Frazier had Section 91A overearnings for the years 2002-2004, but not for the years 2000-2001. At its meeting, "the Board listened to PERAC'S presentation and asked questions of the PERAC representatives. The Board also listened to … [Mr. Frazier's] presentation and sought a synopsis of the matter from the Board's counsel." The Board agreed with the Hearing Officer's determinations about the burden of proof and the role of the hearing before the Board. The Board found that to allow PERAC, through its review of the Board's Section 91A hearing decision, to impose an order that PERAC's determinations and calculations must prevail, makes meaningless the Section 91A right of a member to the hearing. The letter of decision provided appeal rights to the Contributory Retirement Appeal Board (CRAB) to its decision. (Ex. 2)
26. Mr. Frazier timely appealed to CRAB, noting the following:
Matthew A. Frazier is hereby aggrieved by the decision of the Barnstable County Retirement Board in the matter of his … overearnings for the years 2002, 2003 and 2004 … Mr. Frazier is hereby aggrieved by PERAC's determination of such overearnings for the years 2000, 2001, 2002, 2003 and 2004. (Ex. 1)
27. As set forth in G.L.c.32, §91A, Matthew Frazier's salary or "amount of regular compensation which would have been payable to … [him] if … [he] had continued in service in the grade held by him at the time he was retired" was the following for him as a Truro Police Officer for the years 2000-2004:
2000 - $42,205.20
2001 - $44,728.64
2002 - $46,073.44
2003 - $48,130.48
2004 - $50,352.64 (Exs. 18 & 26)
The retirement allowances Mr. Frazier had for each of these years was the following:
2000 - $20,711.28
2001 - $20,969.28
2002 - $21,329.28
2003 - $21,689.28
2004 - 22,049.28 (Exs. 18 & 26)
G.L.c.32, §91A states in pertinent part:
Every person pensioned or retired … for disability, including accidental disability, shall in each year on or before April fifteenth subscribe, under the penalties of perjury, and file with … [PERAC] a statement, in such form as … [PERAC] shall prescribe, certifying the full amount of his earnings from earned income during the preceding year. Such pensioned or retired person shall annually submit to … [PERAC] all pertinent W-2 forms, 1099 forms, other requested tax forms and proof of income, and any other documentation requested by ... [PERAC] … If such pensioned or retired person fails to submit such statement or such forms, and unless such person shall show good cause for such failure … the member's rights in and to the retirement allowance provided for in section six and seven shall terminate until the member has complied with his reporting requirements under this section. If such earnings exceed an amount which when added to the member's retirement allowance is greater than the amount of regular compensation which would have been payable to such member if such member had continued in service in the grade held by him at the time he was retired plus the sum of five thousand dollars, said member shall refund the portion of his retirement allowance for such preceding year equal to such excess and until such refund is made, his pension or retirement allowance shall be held as security therefor. Prior to any termination or reduction of benefits pursuant to this section, the member shall be given a written notice and an opportunity to be heard by the retirement board and, upon such termination or reduction of benefits, shall have the right to appeal such action to the contributory retirement appeal board ….
The phrase, "earned income" is not defined in Chapter 32. Annual gross earned income is defined in G.L.c.32, §1. The introduction to Section 1 states the definitions reach Sections 1-28 inclusive, so not directly Section 91A. It is defined as "that income earned by a retired member under any provision of this chapter, and referring to compensation earned for performing personal services actually performed, including wages, salaries, fees, commissions or gratuities, or similar income, during each calendar year." If at all pertinent in terms of what to attribute to a retiree under Section 91A, it is the part of this definition that refers to services actually performed and also how it can cover a range of compensation forms.
PERAC has developed a definition of "earned income" for purposes of Section 91A evaluations. At 840 CMR 10.14(4), it reads:
The term "earnings from earned income" as used in G.L.c.32, §91A shall mean income that implies some labor, management or supervision in the production
thereof, not income derived from ownership of property. For purposes of G.L.c.32, §91A, if an individual operates a business for profit, individually or through an agent,
that individual does not have the option of classifying such income as dividends as opposed to wages. Profits derived from the operation of a business through some
labor, management or supervision of such profits are earned income, regardless of how a retiree categorized such income for income tax or other purposes.
PERAC's regulation also addresses the process to be pursued in evaluating a Section 91A. Annual Earnings Statement for overearnings. 840 CMR 10.14(3) sets forth the following process:
Upon receipt of notice from … [PERAC] that a disability retiree has had earnings in excess of the amount allowed by M.G.L. 32, § 91A, the board shall request the member to refund the retirement allowance for that year or a portion thereof equal to such excess, as the case may be. Initial notice of a request for refund shall include the calculation on which the request is based and shall state that the member may, within 15 days, file a written request for a hearing to show cause why the disability retirement allowances should not be suspended or terminated or why no refund is due. If a retiree files a request for hearing, such hearing shall be held within 30 days of such request for hearing. The board shall notify the member of its decision, including a final request for refund, if any, within 30 days of the hearing.. If the member is to be required to refund an amount to the board, the notice of the board's decision shall include notification that the member's allowance shall be withheld until the refund is made. The member shall also be notified that if the refund is not made, payment of the retirement allowance shall be resumed only when the amounts withheld are sufficient to pay the amount of the refund. A copy of M.G.L. c. 32, § 16(4) shall be included with the notice of decision and, upon request, the retirement board shall advise and assist the applicant or retired member, as the case may be, in the filing of an appeal.
840 CMR 10.14(1) calls upon the local board in this situation to do the following:
The retirement board shall provide such information as … [PERAC] shall require to assist it in performing its responsibilities pursuant to M.G.L. c. 32, §§ 91A and 91B.
The PERAC regulation on earned income in Section 91A is not reaching passive investment income. It is seeking to include as earned income in the context of a business operated by the retiree, the fruits of the retiree's labor, supervision, etc., to directly achieve business income. It reaches the profits the business achieves in any given year, so the retained earnings are Section 91A earned income.
Case law has addressed the Section 91A calculation processes and standards to employ in determining excess earnings. The parties have disagreements as to what should and should not be earned income in any given calendar year to a member in the context of someone like Mr. Frazier who has a business he runs without a partner other than his wife, and whose business realized profits. Boston Retirement Board v. CRAB & PERAC (Theodos case), 441 Mass. 78 (2004), addressed the retiree in a Section 91A situation who like Mr. Frazier had a business he had a role in operating. Mr. Theodos received a distribution of corporate profits to himself as a salaried shareholder-employee. Mr. Theodos owned equal shares with a son and daughter in a Subchapter S corporation. He was working for the company four hours a day with weekly pay of about $250, and also served as the company's treasurer and clerk. He received, as did his two children, what he argued was a dividend. PERAC's position was that Mr. Theodos cannot operate a business for profit and then control the amount, if any, of earned income he receives from his company by characterizing what he received as a dividend as opposed to wages, to escape the reach of Section 91A. PERAC argued Mr. Theodos's dividends were not a distribution from a passive investment. At the time, PERAC had issued a memorandum to the local boards on the scope of what is earned income for Section 91A evaluations. The language mirrors what would become 840 CMR 10.14(4). The Supreme Judicial Court agreed with PERAC, and the dividend was found to be earned income. The local board in this matter, following Mr. Theodos' hearing, disagreed with PERAC and found the dividend was not earned income under Section 91A. Then, PERAC, pursuant to G.L.c.32, §21(d) review powers, remanded the matter to the local board to compel that it view the dividend as earned income. Mr. Theodos appealed this PERAC determination. The local board challenged PERAC's ability to overcome its determination made at the hearing. The Court found PERAC had the right to overrule the local board's determination as to what is earned income and to rely in doing so on its memorandum definition. No subsequent case has altered this view of the Section 91A procedural course.
Further clarification of the Section 91A evaluation process was made in the case of William Gorman v. CRAB & PERAC, 67 Mass.App.Ct. 123 (2006). The Appeals Court determined that tax liabilities, including taxable income that is the result of gross income being adjusted by allowable tax deductions or credits, does not apply to a Section 91A evaluation of income. The Court noted how the language of Section 91A calls for reporting "the full amount of … earnings from earned income," which would not be the income after application of tax deductions or credits. Id., at 125. Mr. Gorman sought to use an income figure that reflected deductions for his travel expenses. The Appeals Court disagreed, addressed PERAC Memo # 64/1998, and determined that it was properly employed to prevent this deduction from income, noting the ruling in Boston Retirement Board (Theodos), supra. The Appeals Court noted that although the Theodos case involved business profits and not wages, "the analysis in the … memorandum is pertinent to wages" Mr. Gorman earned. Id., at 127.
What has not specifically been addressed by these Court decisions, is Mr. Frazier's situation of not distributing corporate profits to himself through dividends or higher wages - MFE's retained earnings. PERAC contends that such retained earnings are Section 91A earned income pursuant to 840 CMR 10.14(4). This is a fair and supportable reading of this regulation. In Teti v. PERAC, CR-05-190 (DALA, 3/8/06) (CRAB, 7/5/06), real estate property ownership rental income was found not to be Section 91A earned income, even though Mr. Teti did not employ a real estate management company in connection with renting his property. He had three properties with fourteen rental units. He managed the properties. He hired subcontractors to do maintenance and repairs. His wife was the bookkeeper for the properties. He took no salary out of the rental income received. His wife did not have an ownership interest in the properties. The facts of Mr. Teti's case were found to show a passive investment situation and not an active business to make his rental income earned income under Section 91A to need reporting.
The Barnstable County Retirement Board cites to the case of Paul Conway v. Medford Retirement Board, CR-04-436 (DALA, ) (CRAB, 4/12/05) to find instruction on the proper standards to employ in a Section 91A evaluation. In this case there was a lack of substantial evidence found to support certain overearnings PERAC had found. CRAB acknowledged how PERAC investigates the data provided by the retiree, but the fruits of its investigation must be to a substantial evidence level of proof to prove overearnings. PERAC could also turn the matter over to law enforcement if PERAC believes the retiree is trying to evade the reach of Section 91A on certain earnings he is responsible for. The DALA Magistrate concluded that Mr. Conway's wife did indeed by the time of the year in question, take on a substantial role in the close corporation Mr. Conway and his wife's cousin owned as 50/50% shareholders. By then, she had taken over his 50% share in the company, and was working for the company for full time hours each week. The Medford Retirement Board had simply done what PERAC had instructed, despite the Board hearing, and found overearnings for 2002. CRAB disagree with the DALA Magistrate's assessment and found the evidence from the Conways to be insufficient proof of Mrs. Conway's claimed substantial role in the company; that the Conways' evidence and testimony was too self-serving. But, since PERAC had not met its burden of proof to show overearnings, no overearnings were found by CRAB. Nevertheless, CRAB pointed out in a footnote: "This is not, of course, necessarily the end of this story … if PERAC's fraud unit believes that a §91A certificate is fraudulent, it must either take the time and effort to investigate and prove the facts or refer the matter to another law enforcement agency … There are no shortcuts."
In Robert Benoit v. Everett Retirement Board, CR-05-1311 (DALA, 11/2/06) (No CRAB Decision), a disability retiree had a 10% ownership interest in a company. His partner had the remaining 90% ownership interest. In 2004, Mr. Benoit's share of the company's ordinary business income of $221,746 was $22,175. This is the amount listed as ordinary business income on his K-1 form. He received out of this $22,175, only $15,970. The remaining $6,205 was kept in the business to grow it as retained earnings. This $6,205 was found to be Section 91A reportable earned income for 2004. The Gorman, Appeals Court case, supra, was relied upon to support this decision. Also used to support the decision was the decision as to deferred compensation taken out of wages that was found to be earned income, in Gorman v. PERAC, CR-01-492 (DALA, 8/17/01) (CRAB, 1/31/03).
In Freitas v. PERAC, CR-00-240 (DALA, 11/6/00) (CRAB, 5/15/01), the services rendered by Mrs. Freitas to her husband's company were found not to have been reflected accurately in the tax records submitted, because more of her reported earnings were really those produced by her husband. Her services were found to "reflect more the status of an employee, while … [his] status reflects that of a principal of a business who charts its course and guides its endeavors … but for his input, there would not be a profit making company." Id., DALA Decision at 11. CRAB upheld PERAC's reference to U.S. Department of Labor tables on median earnings of various professions and jobs to arrive at a fair and reasonable salary for Mrs. Freitas' contribution to her husband's company. The actual services she provided were found to be, bookkeeping, record/keeping, report writing/typing from inspection data, and administrative work … the average from the Occupational Outlook Handbook of the U.S. Department of Labor … median salary level for positions of Administrative Services and Facility Managers … (which encompasses the work of single administrative services manager of small companies) … median salary for the position of non-legal/non-medical secretary … and, the median salary for the positions of Word Processors, Typists, and Data Entry Keyers … represents the fair monetary value of Mrs. Freitas's services …. Id., DALA Dec. at Finding of Fact # 30, at 9.
Also in Freitas, supra, the role of the local board hearing was addressed to find that PERAC had the authority to remand the decision of a local board following a Section 91A hearing back to the Board for taking action consistent with PERAC's conclusions. In this case, the Winchester Retirement Board had disagreed with PERAC's assessment.
Based on a fair reading of Section 91A, of 840 CMR 10.14(4), and in light of the prevailing case law, Mr. Frazier for the years 2000-2004, must declare as earned income, not only the salaries from W-2 forms and the officers' compensation he may have received from MFE and from AMF, but also any retained earnings that MFE had over any of these years. He can only be allowed a percentage deduction from such MFE totals and no deduction from the AMF totals. The evidence shows that Wendy Frazier has become more than a mere part time clerical and marketing helper for MFE and has become a confidant to Matthew Frazier as to some personnel and other business issues. It is not unreasonable or incomprehensible to imagine that Wendy Fraizer has, from 2000 onward, been a partner to some level with her husband in the operations and management of MFE. Pertinent to finding her to have active partner status by 2000, is the fact that she contributed funds to purchase storage containers, etc., that became solely used by MFE. And, the nature of MFE's business does not involve expert knowledge like the more technical skills levels found in Freitas, supra, that Mrs. Freitas simply lacked. Therefore, some portion of the overall income of MFE can be attributed to Wendy Frazier's active partnership status in MFE.
Despite this conclusion, Wendy Frazier's compensation has been overstated in what she received for the years in question as to W-2 salaries and officer compensations. In contrast, the salaries and officer compensations Matthew Frazier received do not reflect his contribution to MFE for any given year, even years when he took no salary or officers compensation. This is because the evidence plainly shows that Matthew Frazier has always had primary control of MFE. It was his capital investment in MFE that was primarily responsible for the company's growth, not primarily or even equally, his wife's contributions. The profit Matthew Frazier produced for MFE was kept in MFE and not distributed to him, and MFE did grow as a result. It does not matter that in any given year, Wendy Frazier was a 50% shareholder and officer of MFE. That is not a true reflection of her actual contribution to MFE for Section 91A purposes. This means that the compensation she received in any given year between 2000 - 2004 as an officer, as well as her salaries should be reduced. The Freites, supra, example could be employed, figuring out an annual salary for her using U.S. Department of Labor salaries of certain job categories, but that would not take into account her active partnership status in MFE. Therefore, I find reasonable and appropriate to find that Wendy Frazier should be allotted with 25% only of any officer compensation paid out in any given year and 25% of any salary paid out to her in any of these years. The remaining 75% value of these payout amounts should be attributed to Matthew Frazier.
Also to be included as earned income for Section 91A purposes is the rental income from the leasing of the storage containers and like items purchased by Wendy and Matthew Frazier from funds in their joint (50/50%) Merrill-Lynch money market account. The record clearly shows that the only reason the Fraziers purchased these items was because MFE could not purchase them due to its insufficient credit. The Fraziers rented the equipment to only MFE which in turn, subleased them. Renting such equipment is the business of MFE. But, as to Matthew Frazier, the amount of contribution he provided to the overall purchase cost of the equipment was only 50% of the total cost. The other 50% was attributable to Wendy Frazier. Therefore, only 50% of the rental income from this source is attributable to Matthew Frazier as Section 91A earned income. No evidence shows the Merrill-Lynch money market account was other than an account independent from MFE. On their 1040 joint tax returns in evidence at line 21 is the yearly rental income the Fraziers received for renting the containers, etc., to MFE. This rental income started in 2001.
The distribution of funds to Matthew Frazier from AMF is understated. Having 80% of the distribution from the sale of Waste Associates going to Wendy Frazier does not reflect her actual work contribution to achieve that level of funds. She made no capital contribution to reflect that 80%. She helped grow the portable toilet rental business of Waste Associates, but Matthew Frazier was the major source of work that produced any income for Waste Associates. He also controlled and ran the Waste Associates company. The profits from the sale of Waste Associates were the source of the distributions made by AMF to the Fraziers. That means that other than reducing these totals by a fair amount to reflect Wendy Frazier's contribution, all the income is attributable to Matthew Frazier for Section 91A purposes. This also includes the pay received for the report that was produced and paid for by the purchaser of Waste Associates. At best, Wendy Frazier's primary contribution to its production was typing it up and piecing it together, and not being primarily responsible for its substance. The evidence presented does not show how much that effort would be in terms of the overall effort to figure out a level of payment for her contribution. The Petitioner failed to show sufficient evidence for such a deduction from AMF totals that otherwise are all to be attributed as earned income for Matthew Frazier. The evidence also shows some of the funds realized from the sale of Waste Associates went to MFE. This income becomes part of MFE's earnings for the year MFE received it.
As to the plowing and calibrations income issues, the evidence is quite clear that Matthew Frazier as an individual did not receive that income; that it all was received directly by MFE for the years in question. The ability to do the calibrations is all in the name of MFE and not in the name of Matthew Frazier as an individual. The evidence also shows that MFE hires workers to do plowing work, and that Matthew Frazier can only operate a recently purchased truck by MFE which has an automatic transmission. Due to his knee disability he cannot use standard transmission trucks. This reinforces the conclusion that the plowing and calibration income is properly all MFE income. PERAC's figures for what should be income from such work attributable solely to Matthew Frazier's efforts should not be used. MFE hired persons to do work such as plowing as needed. If as a result of this work, MFE had a profit, that profit will be attributed 75% to Matthew Frazier. There is no basis for using PERAC's projections to inflate MFE's income as its ordinary income figures on its tax returns reflects inclusion of such calibrations and plowing income. This is the kind of work MFE has always done over the years.
When giving consideration to what is MFE profit in any given year, the Gorman case, supra, does not allow a lessening of the amount by tax deductions such as depreciation of assets. But what that means is that after the income MFE produced in any given year is reduced by the costs of doing business including paying out wages or other compensations for services rendered, the remaining profit, if any, must all be Section 91A earned income for Mr. Frazier even if he did not take it out of MFE. It does not matter as per Benoit, supra, that Mr. Frazier keeps the funds in MFE to allow it to grow. This applies to not allowing depreciation reductions from the rental income the Fraziers receive for renting the storage containers, etc., to MFE.
In terms of the hearing process before the local board, the case law also finds that PERAC is able to instruct the local board on what are overearnings, with the board hearing process basically a tool for uncovering information that PERAC might find would alter its determinations. Reading more of a role for the local board than that into G.L.c.32, §91A is not supported by case law. The hearing process does allow the retiree a chance to be heard. The local board may also disagree with PERAC's assessment of the retiree's Section 91A earnings, and report that to PERAC. But, PERAC's assessment will end up being what the retiree appeals in the long run. That is why this appeal hearing will address the years 2000-2004 even though the Barnstable County Retirement Board did not find overearnings in the years 2000 and 2001.
Applying these conclusions to the years in question, involves performing a kind of audit function on all the various tax forms filed. Because MFE has a non-calendar fiscal year, or April 1 - March 31st, there has to be a factoring in of this difference in order to match up MFE income figures, salaries paid out amounts, and officers compensation amounts, with each calendar year under consideration in this appeal. Missing from the record is an MFE tax return for April 1, 2001 - March 31, 2002. There are other missing tax documents in any given year that might help in a review of the figures found on the tax forms toward coming up with exact amounts of MFE ordinary business income to then take 75% of, to attribute to Matthew Frazier. The same can be said of a review of the Fraziers' 1040 joint return each year. To do this kind of calculating is what Section 91A confers upon PERAC. Therefore, this DALA decision simply instructs PERAC how to approach the data, and what standards of review to employ. For instance, PERAC, as per this decision is not allowed to determine some amount of money to attribute to plowing or calibration work to become part of Matthew Fraziers' Section 91A earned income. This is because I have concluded that it has been included as MFE income all along, and is not income to try to calculate as PERAC attempted to attribute to Matthew Frazier. For instance, PERAC must find Wendy Frazier's contribution to MFE for the years in question is at a level of 25% to Matthew Frazier's 75%, and PERAC must find that Matthew Frazier has Section 91A earned income for only 50% of the overall personal property rental income declared on the 1040 joint return form because the storage containers were purchased by funds jointly owned by the Fraziers; the Merrill-Lynch account. There is sufficient instruction in this decision to allow PERAC to perform Section 91A recalculations.
For these reasons, the case is remanded to PERAC to recompute Matthew Frazier's Section 91A earnings in light of the standards set forth in this decision for doing a proper re-assessment of his earnings data.
DIVISION OF ADMINISTRATIVE LAW APPEALS
Sarah H. Luick, Esq.
DATED: February 27, 2008