## Facts

- Catherine C. Stark, a widow over age 65, sought Social Security old-age insurance benefits.
- After consulting her son (an attorney), Stark organized Stark Properties, Inc. and transferred substantially all of her assets to it, including a leased South Dakota farm, cash, and an equity interest in an Oakland duplex; she later added additional funds.
- In exchange for the conveyances, Stark received corporate stock and debenture bonds.
- Stark became the corporation’s president and treasurer; her son served as secretary and her daughter as vice-president, without pay.
- The corporation listed its place of business as the hotel room where Stark lived.
- Stark arranged to receive $400 per month as compensation for services to the corporation.
- The Secretary of Health, Education and Welfare denied benefits, finding no bona fide employment relationship, no payment of “wages,” and no insured status under the Act; the Secretary treated the corporation as a device created to obtain Social Security coverage.
- The district court granted summary judgment for the Secretary, holding the administrative decision conclusive under the substantial-evidence standard.

## Issues

1. Whether an agency may disregard a properly organized corporation solely because it was formed primarily to obtain Social Security old-age benefits and treat the purported employment as a sham.
2. Whether, even if the corporation must be respected, the agency may reassess whether the claimed monthly salary reflects reasonable “wages” for Social Security coverage and benefit calculations.

## Decision

- The Ninth Circuit held the corporation could not be disregarded merely because it was formed to qualify Stark for Social Security benefits.
- The court concluded that motive in organizing a corporation does not, by itself, defeat corporate validity where corporate formalities were observed.
- The court nevertheless held the Secretary could question the $400 monthly salary and make an objective determination of what would be reasonable compensation for the services actually performed.
- The court reversed the judgment insofar as it approved denial of coverage based on disregarding the corporation, and remanded for further proceedings allowing wage reappraisal and recalculation consistent with the correct legal standard.

## Legal Principles

- A corporation that is properly formed and operated with ordinary corporate routines must be recognized as a separate legal entity, even if organized for the purpose of obtaining statutory benefits.
- An administrative agency may not deny statutory benefits based on an erroneous legal rule that a benefit-motivated corporation is automatically invalid or a sham.
- For Social Security purposes, the agency may look beyond labels and determine whether payments characterized as salary constitute reasonable, bona fide “wages” tied to actual services.
- Under substantial-evidence review, factual determinations may be conclusive, but the agency’s decision must rest on correct legal standards; legal error requires remand even in a deferential review posture.

## Conclusion

The Ninth Circuit required recognition of Stark’s corporation as a valid employing entity despite its benefits-related motive, but allowed the Secretary to reassess the reasonableness of the claimed salary to determine actual covered wages, insured status, and any resulting benefits.


Stark v. Flemming, 283 F.2d 410 (9th Cir. 1960)