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Stark v. Flemming

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Brief Fact Summary. Stark, (Appellant), appeals a district court decision affirming the Secretary of Health, Education, and Welfare ruling that she was not entitled to old-age benefits.

Synopsis of Rule of Law. The motivation behind the formation of a corporation is not relevant to the corporation’s validity.

Points of Law - Legal Principles in this Case for Law Students.

In the present case the department was well within its province in determining from all the circumstances the ultimate issue--i.e., whether the applicant had in fact been an employee in receipt of wages from a corporation or had in fact created a mere device to disguise the actual fact of receiving rents from real estate.

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Facts. Prior to the commencement of her social security payments, Appellant placed her assets, a farm and a duplex, in a newly organized corporation and drew a monthly salary. Appellant properly adhered to the normal corporate routines. The Secretary of Health, Education and Welfare ruled that Appellant was not entitled to old age benefits because the corporation was clearly a sham created to qualify Appellant for the maximum amount of social security payments. The district court affirmed.

Issue. Whether the motivation to obtain social security by organization a corporation defeats the validity of the corporation.

Held. No. Since Appellant properly adhered to the normal corporate routines, others must respect the corporate arrangement.

Discussion. Congress could have provided that the motivation to obtain social security by organizing a corporation would defeat the end but it did not. Therefore, since Appellant properly adhered to the normal corporate routines the court will require that others respect the corporate arrangement. However, the Secretary is justified in taking exception to the amount paid Appellant for her services. The Secretary is entitled to make an objective reappraisal of the salary to determine what would have been a reasonable salary for Appellant for the services she performed.

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