Gains, losses alter benefits of disabled

A federal employee who retires with a disability may seek to reduce his reported earnings in order to continue receiving benefit payments. But a recent ruling by the U.S. Court of Appeals for the Federal Circuit should serve as a warning that retirees cannot reduce gains from one type of employment activity with losses from another (Case No. 97-3457; Roy L. Sparks v. Office of Personnel Management; Feb. 25, 1998).

The case involved Roy Sparks, who retired in August 1975 from his government job as a parts worker, classified at the WG 7-3 level. After his retirement, Sparks received a disability annuity, which stopped in April 1996, when OPM discovered the payments should have been terminated June 30, 1993. According to OPM, Sparks' 1992 tax return indicated he had exceeded the earned income level permitted by law for those who receive disability annuity payments.

Regulations that govern disability benefit payments state that an employee who receives disability benefits can have some earnings but not enough so that his "earning capacity" has been "restored." "Earning capacity is deemed restored if in any calendar year the income of the annuitant from wages or self-employment or both equals at least 80 percent of the current rate of pay of the position immediately before retirement," the regulations state.

On Dec. 31, 1992, the base salary for a WG 7-3 employee was $25,461. Sparks' 1992 individual income tax return reported earned wages of $57,492— far more than 80 percent of a WG 7-3 employee's salary. That year, Sparks received disability annuity payments of $9,492, and the remaining $48,000 of his earnings was income received from "business activities" Sparks described only as self-employment.

Sparks responded to OPM by asserting that even though he had reported $48,000 in wages, he did not actually earn that amount in 1992. Line 19 of Sparks' 1992 tax return showed a farm loss of $612,972. Sparks said the Internal Revenue Service had requested that he report a salary from his "Subchapter S" corporations so that he would be subject to Social Security taxes. Sparks also testified that his accountant recommended that he report the $48,000 as wages and pay the associated Social Security taxes. Doing so would entitle him to benefits if he became disabled.

(Although Sparks was receiving a civil service disability annuity, he was not "disabled" under the Social Security Administration's far more stringent definition of disability.)

Sparks argued that he should be entitled to offset these wages with losses incurred as a result of his self-employment activities. That argument did not fly with the Merit Systems Protection Board, which originally heard Sparks' case. The MSPB said Sparks had no evidence that the $48,000 in reported wages was received from the same activity involved in Sparks' farming loss. If it had been, then Sparks might have been able to argue that he engaged in farming activities during 1992 and lost money at it. That would have supported his contention that his earning capacity had not been restored.

However, because the wage income reported was unrelated to farming, the MSPB concluded that Sparks' earning capacity had indeed been restored. The board also quoted the following OPM regulation: "Income earned from one source is not offset by losses from another source. Income earned as wages is not reduced by a net loss from self-employment. The net income from each self-employment endeavor is calculated separately, and the income earned as net earnings from one self-employment endeavor is not reduced by a net loss from another self-employment endeavor. The net incomes from each separate self-employment endeavor are added together to determine the total amount of income from self-employment for a calendar year."

In its review of this case, the appeals court ultimately ruled against Sparks based on the same regulations mentioned in the MSPB ruling.

The regulations cited by the MSPB and the court make sense. In determining whether an individual is still disabled, it is reasonable to measure his earning capacity by what he earns. If, for example, an individual earns $100,000 in one self-employment activity and loses a similar amount in another, it suggests a considerable amount of earning capacity. The fact that the profit from one business is offset by the loss from another does not change that.

For Sparks to reduce his income so that he could still get disability benefits, he had to offset the "wages" he earned with associated business expenses. That meant he had to convince OPM that the source of the wages that brought him over the 80 percent threshold was also the source of the offsetting losses. He failed do that.

-- Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.

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