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Bowden v. Berryhill

United States District Court, E.D. Kentucky, Central Division, Lexington

June 5, 2017

NANCY A. BERRYHILL, Acting Commissioner of Social Security DEFENDANT


          David L. Banning United States District Judge.

         Plaintiff 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 Commissioner.


         Plaintiff 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).

         At the 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).

         At first glance, this case appears to raise an issue of first impression. Namely, should this Court join the Seventh Circuit, [1] Second Circuit, [2] and the Eastern District of Virginia[3] 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?

         However, 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 constitutional rights?

         Before 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.


         A. Overview of the Regulatory Framework

         Title 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. § 1382a(a)(2).

         1. In-Kind Support and Maintenance as "Unearned Income"

         The 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 services." Id.

         However, 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), [4] a "business arrangement exists when the amount of monthly rent required to be paid equals or exceeds the presumed maximum value."[5] 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 income."[6]

         Once a 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.

         a. Presumed Value Rule

         The 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. §§416.1140(a)(2), (b)(2).

         b. One-Third Reduction Rule

         If the 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).

         Whether 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.

         i. Rental Liability as Basis for "Own Household"

         Whether 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.

         The 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.

         If the 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, [7] a "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).

         ii. Pro-Rata Sharing as Basis for "Own Household"

         A 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 applies.

         B. The Commissioner's Application of the One-Third Reduction Rule

         Because 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 unconstitutional." Id.

         The ALJ 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.

         However, 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, ...

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