United States District Court, E.D. Kentucky, Central Division, Lexington
MEMORANDUM OPINION AND ORDER
L. Banning United States District Judge.
brought this action pursuant to 42 U.S.C. § 405(g) to
obtain judicial review of an administrative decision of the
Commissioner of Social Security, challenging the
Commissioner's determination that his benefits should be
reduced by one-third. The Court, having reviewed the record
and the parties' dispositive motions, and for the reasons
set forth herein, hereby affirms the decision of the
FACTUAL AND PROCEDURAL BACKGROUND
Hunter Lafayette Bowden is a young man with an intellectual
disability and Non-Mosaic Down's Syndrome, who resides in
Versailles, Kentucky. (Tr. 10, 13). On October 2, 2013, the
Plaintiff, through his guardian/mother, protectively applied
for Supplemental Security Income ("SSI"), alleging
disability beginning July 15, 1995 - the day he was born.
(Tr. 17-21, 22-23). Presumptive SSI payments began in October
2013, and the Plaintiff was formally awarded benefits upon
initial consideration on March 7, 2014. (Tr. 24). However, on
May 8, 2014, the Commissioner determined that pursuant to the
Social Security Administration's income regulations, the
Plaintiff's monthly benefit would be reduced by one-third
because he received food and shelter from his parents while
living in their homes. (Tr. 33-40). This reduction was upheld
on reconsideration. (Tr. 66-68).
Plaintiffs request, an administrative hearing was conducted
on July 22, 2015, before Administrative Law Judge
("ALJ") Karen R. Jackson. (Tr. 135-151). On
September 25, 2015, ALJ Jackson issued an unfavorable
decision, finding that the one-third reduction of Plaintiffs
benefits was appropriate. (Tr. 13-16). This decision became
final on May 3, 2016, after the Appeals Council considered
additional evidence provided by the Plaintiff and denied
Plaintiffs request for review. (Tr. 4-8). Having exhausted
his administrative remedies, the Plaintiff filed the instant
action on June 30, 2016. (Doc. # 1). The matter has
culminated in cross-motions for summary judgment, which are
now ripe for adjudication. (Docs. #10, 15, and 18).
first glance, this case appears to raise an issue of first
impression. Namely, should this Court join the Seventh
Circuit,  Second Circuit,  and the Eastern District of
Virginia and prohibit the Commissioner from
imputing "unearned income" and reducing an SSI
recipient's benefits because he rents shelter from a
related-landlord below fair market value?
an understanding of the complex regulatory framework, when
applied to the particular facts of this case, reveals that
this case does not present the same issue that was before the
Seventh Circuit, Second Circuit, or the Eastern District of
Virginia. Therefore, this matter is much simpler and the
questions presented are these: First, is the
Commissioner's application of the one-third reduction
rule supported by substantial evidence? Second, is the
Commissioner's regulation entitled to Chevron
deference? Third, is the Commissioner's interpretation of
its regulation entitled to Auer deference? Fourth,
regardless of whether the interpretations are permissible, is
the Commissioner's application of the one-third reduction
rule in this context arbitrary and capricious? And finally,
has the Commissioner violated the Plaintiff's
any of these questions can be answered, the Court must
provide context. Accordingly, the Court will first explain
the complicated regulatory framework. Then, the Court will
discuss the Commissioner's decision and address the
merits of the Plaintiff's arguments.
Overview of the Regulatory Framework
XVI of the Social Security Act, which authorizes the SSI
program, provides benefits to the elderly, blind, or disabled
who meet certain statutory income and resource limitations.
42 U.S.C. §§ 1381-1382b. Generally speaking, as a
person's income increases, his benefits are reduced until
his income reaches a threshold point, making him ineligible
for SSI benefits. 20 C.F.R. § 416.1100. Congress defined
"income" to include "both earned income and
unearned income, " and defined "unearned
income" to include "support and maintenance
furnished in cash or kind." 42 U.S.C. §
In-Kind Support and Maintenance as "Unearned
Social Security Administration has promulgated regulations
that explain in-kind support and maintenance and establish
"special rules for valuing food or shelter that is
received as unearned income (in-kind support and
maintenance)." 20 C.F.R. § 416.1130(a).
Specifically, "in-kind support and maintenance means any
food or shelter that is given to [a claimant] or that [the
claimant] receive[d] because someone else pay[ed] for
it." 20 C.F.R. § 416.1130(b). Under the
regulations, "[s]helter includes room, rent, mortgage
payments, real property taxes, heating fuel, gas,
electricity, water, sewerage, and garbage collection
a claimant is "not receiving in-kind support and
maintenance in the form of room or rent if" the claimant
pays rent "under a business arrangement."
Id. Pursuant to the regulations, the existence of a
"business arrangement" varies depending on the
state in which the claimant resides. In the majority of the
United States, a "business arrangement exists when the
amount of monthly rent required to be paid equals the current
market rental value." Id. Thus, if a claimant
pays rent, but that rent falls below the current market
value, he is receiving "unearned income" which may
affect his SSI eligibility or the amount of his benefits.
However, in other states (Illinois, Indiana, Wisconsin, New
York, Connecticut, Vermont, and Texas),  a "business
arrangement exists when the amount of monthly rent required
to be paid equals or exceeds the presumed maximum
value." Id.; see also POMS SI
00835.380(B)(7). Under this rule, if a claimant's rent
reaches a certain level, even though below the current market
value, the claimant has not received "unearned
claimant is found to be receiving "unearned income"
in the form of in-kind support and maintenance, the
Commissioner must value the unearned income received. There
are "two rules for valuing" in-kind support and
maintenance: the one-third reduction rule and the presumed
value rule. 20 C.F.R. § 416.1130(c). The one-third
reduction rule applies if the claimant lives "in the
household of a person who provides ... both food and
shelter." Id. Therefore, for the Commissioner
to apply the one-third reduction rule, three criteria must be
established: (1) the recipient must live in another
person's household, (2) the recipient must receive food
from the person in whose household he is living, and (3) the
recipient must receive shelter from the person in whose
household he is living. 20 C.F.R. §§
416.1131(a)(1)-(2). "[I]n all other situations where
[the claimant is] receiving in-kind support and maintenance,
" the presumed value rule applies. Id.
Presumed Value Rule
presumed value rule is applied if any of the one-third
reduction requirements are not satisfied (i.e., if
the claimant lives in his own household or if he
does not receive both food and shelter from the
person in whose household he is living). 20 C.F.R.
§§ 416.1131; 20 C.F.R. §416.1140. Under this
valuation method, "[i]nstead of determining the actual
dollar value of any food or shelter [the claimant]
receive[s], " the Commissioner will "presume that
it is worth a maximum value." 20 C.F.R. §
1140(a)(1). However, the claimant has the opportunity to
rebut the "presumed value" presumption. 20 C.F.R.
§ 416.1140(a)(2). If the claimant can show that his
"in-kind support and maintenance is not equal to the
presumed value, " the Commissioner will impute "the
actual [lesser] amount" of unearned income received and
reduce his benefits by that amount instead. 20 C.F.R.
One-Third Reduction Rule
one-third reduction rule applies, the claimant's benefits
will be automatically reduced by one-third, regardless of the
actual value of the in-kind support and maintenance received.
20 C.F.R. §§ 416.1131(b)-(c). The Commissioner
applies the one-third reduction rule "in full or not at
all;" thus, the claimant does not have the opportunity
to challenge or rebut the amount of the reduction. 20 C.F.R.
§ 416.1131(b). Instead, the claimant would have to
disprove the existence of one of the one-third rule
requirements - that he lives in his "own household"
or that he does not receive both food and shelter from the
person in whose household he is living. 20 C. F. R.
§§ 416.1131 (a)(1)-(2).
the claimant lives in "another person's
household" or his "own household" is dictated
by another regulation. See 20 C.F.R. §
416.1132. Put simply, a claimant can reside with another
person, but still live in his "own household."
There are five ways that a claimant can prove that he lives
in his "own household": (1) the claimant has
"an ownership interest or a life estate interest in the
home;" (2) the claimant is "liable to the landlord
for payment of any part of the rental charges;" (3) the
claimant lives "in a noninstitutional care
situation;" (4) the claimant pays "at least a pro
rata share of household and operating expenses;" or (5)
"[a]ll members of the household receive public income -
maintenance payments." 20 C.F.R. §§
416.1132(c)(1)-(5). Two of the aforementioned avenues are
relevant in this case and discussed in more detail below: (1)
liability for rental charges ("rental liability")
and (2) pro rata sharing of household and operating expenses.
Rental Liability as Basis for "Own
an individual has liability for rent sufficient to establish
his "own household" is governed by the Social
Security Administration's Program Operations Manual
System ("POMS"), "a policy and procedure
manual that employees of the Department of Health [and] Human
Services use in evaluating Social Security claims."
Davis v. Sec'y of Health & Human Servs., 867
F.2d 336, 340 (6th Cir. 1989). Pursuant to the POMS, an
individual is determined to have "rental liability"
if he lives in a "separate household from the
landlord's." POMS SI 00835.120(A)(4). The POMS
further define a "separate household" as a
"separate economic unit, " which functions
independently. Id. "If the individual and the
landlord do not function as separate economic units, the
individual is not in a separate household" and cannot
rely on his "rental liability" to establish that he
lives in his "own household." Id.
Commissioner considers four factors to determine whether
separate households exist within one dwelling. POMS SI
00835.120(E)(1)(c). First, the household organization is
examined. Do the claimant and the landlord "make joint
decisions regarding home repairs, improvements, and other
aspects of daily activities?" Id. Is the
"individual responsible for any bills connected with the
operation of the residence?" Id. Do the
claimant and the landlord "pool money for any household
expenses?" Id. An answer in the affirmative to
these questions may indicate that the claimant and the
landlord do not function independently. Id. Second,
the rent requirements are considered. Is the rent "based
on the current market value?" Id. If the
claimant stopped paying rent, would he be evicted or liable
for back rent? Id. An answer in the affirmative to
these questions tends to establish that the claimant is
functioning as a "separate economic unit."
Id. Third, the eating arrangements are evaluated.
Does the claimant purchase, store, prepare, or eat his food
"separately from the rest of the household?"
Id. If so, this indicates that the claimant may be
in a "separate household." Id. Fourth and
finally, access to the premises is considered. Does the
claimant "have access to only part of the
residence?" Id. Does the claimant "have a
bedroom, cooking facilities, or a bathroom for his/her
exclusive use?" Id. If so, the claimant may be
functioning as a "separate economic unit." In this
analysis, "[n]o single factor is controlling" and
the Commissioner's "determination must be based on
... all of the facts in the case." Id.
claimant establishes that he has "rental liability"
as construed by the POMS, then he lives in his "own
household" and the presumed value rule, rather than the
one-third reduction rule, would apply. After finding that a
claimant has "rental liability, " the Commissioner
then considers whether a parent-child relationship exists
between the tenant and the landlord and whether the claimant
is receiving a "rental subsidy." POMS SI 00835.380.
"An individual receives in-kind support and maintenance
in the form of a rental subsidy when the required rent ... is
less than the amount charged under a business
arrangement." POMS SI 00835.380(B)(6). The POMS parrot
the regulations and establish that, in most states,
"business arrangement exists when the monthly required
rent ... equals the [current market rental value] of the
residence." POMS SI 00835.380(B)(7); see also
20 C.F.R. § 416.1130(b). If the claimant is receiving a
"rental subsidy, " the difference between the
current market value and the rent actually paid is treated as
in-kind/unearned income attributable to the SSI recipient.
Id. Accordingly, as interpreted by the Commissioner,
the "business arrangement" exception in 20 C.F.R.
§ 416.1130(b) is relevant only if the presumed value
rule applies; it is not considered if the claimant does not
have "rental liability" and the one-third reduction
rule applies. POMS SI 00835.380(A).
Pro-Rata Sharing as Basis for "Own
claimant can also establish that he lives in his "own
household" if he pays "at least a pro rata share of
household and operating expenses." 20 C. F. R. §
416.1132(c)(4). "Household operating expenses are the
household's total monthly expenditures for food, rent,
mortgage, property taxes, heating fuel, gas, electricity,
water, sewerage, and garbage collection service." 20
C.F.R. §416.1133(c). To determine if a claimant pays at
least a pro rata share of the household operating expenses,
the Commissioner "average[s] the monthly household
operating expenses" and divides that sum by "the
number of people in the household, regardless of age."
20 C.F.R. § 416.1133(b). If a claimant's
"contribution equals or exceeds his or her pro rata
share of household operating expenses, provided the household
expenses include both food and shelter, " the claimant
"is not subject to the" one-third reduction rule.
POMS SI 00835.160(A). Instead, the presumed value rule
The Commissioner's Application of the One-Third Reduction
the Plaintiff's application for SSI was granted, ALJ
Jackson's decision focused on one issue: "if the
one-third reduction rule applies to benefits paid to the
[Plaintiff] due to in-kind support and maintenance."
(Tr. 13). The Plaintiff urged the ALJ to find that the
one-third reduction rule does not apply to him because he has
established that he lives in his "own household by
virtue of" his "rental liability that is equal to
the presumed maximum value." Id. In addition,
the Plaintiff claimed that the "application of the
one-third reduction rule is unfair, discriminatory, and
acknowledged that the Plaintiff had entered into a lease
agreement with his guardian/mother and his father in January
2014. (Tr. 14). Pursuant to the lease, the Plaintiff
"agreed to monthly payments equal to SSA presumed
maximum value, or $260.34 in 'rent, ' divided equally
between his parents, as the [Plaintiff] alternates weekly
residence each month between" his parents' homes.
Id. As a tenant, the Plaintiff "has access to
one individual bedroom in the two residences, with shared
access to the remainder of the houses and lots."
Id. In addition to paying rent, the Plaintiff
"'paid' an average of $130.17 toward
'household expenses' monthly for each residence, not
specifically for food or shelter only." Id.
the ALJ ultimately found that "application of the
one-third reduction rule [was] appropriate ... as the
[Plaintiff] has not established that he is living in his own
household" because "he does not have rental
liability." (Tr. 15). Pursuant to POMS SI 00835.120, the
ALJ considered the four factors for "rental
liability": (1) household organization, (2) rent
requirements, (3) eating arrangements, and (4) access to
premises, and determined that the Plaintiff did not have
"rental liability" that could support a conclusion
that he lived in his "own household." Id.
Specifically, the ALJ made the following factual findings:
There are no separate utilities, groceries are purchased for
the entire household and he shares bathroom, cooking and
dining facilities. He is not expected to contribute to
household repairs. Even if the claimant could not pay
"rent, " he would not be evicted. Bank account
information documents monthly debits from the claimant's
account generally consistent with the amounts reported above
but also other withdrawals in lesser and much greater amounts
with no further explanation (i.e. up to $500 for
"bill pay"). This suggests a combination of funds,