MARK TROMPETER, Employee/Appellant, v. BOISE CASCADE CORP., SELF-INSURED/SEDGWICK CLAIMS MGMT. SERVS., INC., Employer.
WORKERS’ COMPENSATION COURT OF APPEALS
MAY 18, 2011
TEMPORARY PARTIAL DISABILITY - EARNING CAPACITY; CREDITS & OFFSETS - CREDIT FOR OVERPAYMENT. The compensation judge did not err in using the income reported on the employee’s income tax returns for purposes of determining the employee’s actual earnings, and, consequently, the employer’s entitlement to a credit for overpayment of benefits.
Determined by: Johnson, J., Stofferahn, J., and Wilson, J.
Compensation Judge: Jerome G. Arnold
Attorneys: Lyndon F. Larsen, International Falls, MN, for the Appellant. Edward Q. Cassidy and Lori-Ann C. Jones, Fredrikson & Byron, Minneapolis, MN, for the Respondent.
THOMAS L. JOHNSON, Judge
The employee appeals from the compensation judge’s findings that for the years 1999 through 2007, the income tax returns accurately reflect the employee’s earnings from self-employment, that his earnings from self-employment were insubstantial, that the employee was overpaid temporary partial disability benefits, and that the employee did not receive these benefits in good faith. We affirm.
Mark Trompeter, the employee, sustained an injury on October 15, 1986, arising out of and in the course of his employment with Boise Cascade Corporation, then self-insured with claims managed by Sedgwick Claims Management Services, Inc. The employer admitted liability for the employee’s personal injury. The employee’s weekly wage on the date of his injury was $524.00. In 1988, the employee left his employment with the employer.
In January 1996, the employee began submitting to Sedgwick copies of payroll checks from an auto parts store where he worked. Based upon these checks, Sedgwick paid the employee temporary partial disability benefits. In 1999, the employee also obtained employment at a building supply company, and he submitted copies of those payroll checks to Sedgwick as well.
In February 1999, the employee began a self-employment venture selling airplane kits under the name Rainy Lake Sport Aviation [Rainy Lake]. Effective June 1, 1999, the employee ceased his employment at the auto parts store and began working fulltime in this venture. On the joint 1999 federal tax return filed by the employee and his wife, Rainy Lake was scheduled as a sole proprietorship, with the employee’s wife designated as owner.
In June 1999, the employee submitted to Sedgwick a payroll check from Rainy Lake reflecting biweekly earnings in the amount of $350.00 for the period June 1 to June 11. When the employer initially refused to pay temporary partial disability benefits because no deductions were shown on the check, the employee explained that the earnings were from self-employment. Thereafter, the employee submitted a check to the employer reflecting biweekly earnings of $350.00, less withholding of federal income tax of $15.00, state income tax of $11.00, FICA of $21.70, and a medical deduction of $5.08, yielding a net check of $297.22. The employer then paid the employee temporary partial disability benefits accordingly. Commencing with the June 14, 1999, check and continuing through February 25, 2008, the employee continued to submit to Sedgwick checks from Rainy Lake reflecting payment to the employee of gross income of $350.00 and net income of $297.22. All of the payroll checks were drawn on a Rainy Lake account at Wells Fargo Bank (formerly Norwest) in International Falls, Minnesota. Only eight of these checks were cashed by the employee.
In 2001, the employee began selling monuments and granite countertops under the name Minnesota Monument, a sole-proprietorship of the employee. The employee used the Border State Bank for this business venture. He continued to be active in this business through December 31, 2009, but he did not pay himself wages.
The employee and his spouse filed joint federal income tax returns for the years 1999 through 2009. The returns for the years 1999 through 2007 were prepared by Miller McDonald; the tax returns for 2008 and 2009 were prepared by Randy Pozniak. Schedule C Profit and Loss from Business forms were prepared for Rainy Lake from 1999 through 2009 and for Minnesota Monument from 2001 through 2009. Based upon Schedule C from the employee’s federal tax returns for 2001 through 2007, the net profit of Rainy Lake and Minnesota Monument was as follows:
Year Rainy Lake Minnesota Monument Total
1999 $ (178.00) -$ (178.00)
2000 (791.00) - (791.00)
2001 424.00 (2,478.00) (54.00)
2002 (3,070.00) (1,350.00) (4,420.00)
2003 1,065.00 (1,350.00) (285.00)
2004 2,586.00 (44.00) 2,542.00
2005 (3,108.00) 3,758.00 650.00
2006 (8,478.00) 4,105.00 (4,393.00)
2007 (3,963.00) (3,130.00) (7,093.00)
The self-insured employer filed a petition to discontinue temporary partial disability benefits, asserting an overpayment of temporary partial disability benefits, and sought a credit for the overpayment under Minn. Stat. § 176.179.
Michael Schaefer, a certified public accountant, was retained by the employer to perform a financial analysis of the employee’s self-employment income. Mr. Schaefer reviewed the joint tax returns for the years 1999 through 2008, the bank statements of the employee and his wife, and the bank records of Rainy Lake and Minnesota Monument. Mr. Schaefer reported that, according to his analysis of the bank statements, only eight payroll checks payable to the employee from the account of Rainy Lake were cashed. Mr. Schaefer also stated the tax returns reflected no wage payments to the employee from the Rainy Lake account. From 1999 to 2008, the employee reported to the employer that he had received gross wages from Rainy Lake in the amount of $79,400.00. Of this amount, the employee cashed checks from Rainy Lake totaling only $2,377.00.
Randy Pozniak, a certified public accountant, reviewed the same bank records and tax returns. In addition, Mr. Pozniak’s analysis was based in part on discussions with the employee and reconstruction of financial records. Mr. Pozniak concluded that, over the years 2002 through 2008, Rainy Lake had a net profit of $20,995.03. As for Minnesota Monument, Mr. Pozniak concluded that, for the years 2001 through 2008, that business had a net profit of $43,687.88. Combining and averaging these earnings, the employee contends his income during these years was not insubstantial.
Following a hearing, the compensation judge found the employee had submitted to the employer fictitious checks, purportedly drawn on the account of Rainy Lake, in order to obtain temporary partial disability benefits to which he was not entitled. The judge also found none of the temporary partial disability benefits paid for the period January 1, 1999, through December 31, 2007, were received by the employee in good faith, and that the employee’s tax returns accurately reflected the employee’s earnings from self-employment for the years 1999 through 2009. The employee was ordered to reimburse the employer for the temporary partial disability benefits paid from 1999 through 2007, plus interest, computed as follows:
6/1/99 - 12/31/99 $10,648.48
1/1/00 - 12/31/00 $20,579.00
1/1/01 - 12/31/01 $21,569.46
1/1/02 - 12/31/02 $22,684.06
1/1/03 - 12/31/03 $23,560.44
1/1/04 - 12/31/04 $21,468.93
1/1/05 - 12/31/05 $24,161.03
1/1/06 - 12/31/06 $27,001.89
1/1/07 - 12/31/07 $26,931.19
The judge found the employee’s earnings from self-employment in 2008 and 2009 were substantial and that the employee was entitled to temporary partial disability benefits for those years. Finally, the judge found the employee was not a credible witness because he had intentionally used the Rainy Lake account to obtain workers’ compensation benefits to which he was not entitled. The employee appeals from the compensation judge’s findings regarding the tax years 1999 through 2007.
The compensation judge found that the employee’s tax returns from 1999 through 2009 accurately reflected the employee’s earnings from self-employment. The 2008 and 2009 tax returns were prepared by Mr. Pozniak, and the employee does not dispute the judge’s conclusion as to those tax years. The employee submits, however, that substantial evidence does not support the judge’s findings that the tax returns from 1999 through 2007 accurately represent the employee’s earnings. Rather, the employee contends that the opinions of both Mr. Pozniak and Mr. Schaefer support the conclusion that the employee’s tax returns understated his income from self-employment.
Mr. Schaefer’s testimony, the employee contends, principally concerned two points that the employee admitted: that the payroll checks from Rainy Lake were not cashed, and that tax was not withheld as reflected on the checks. The employee asserts, however, that the key issue in the case is not whether the employee inappropriately submitted false payroll checks from Rainy Lake. Rather, the issue is what the employee actually earned from self-employment and whether these earnings form a basis for calculation of temporary partial disability benefits.
There is no dispute that the employee cashed only eight of all of the payroll checks he issued to himself from Rainy Lake. As the compensation judge recognized, however, that is not the end of the analysis. In a case of self-employment, whether or not the employee receives wage payments from the business may not be definitive. Rather, the question is what the employee actually earned from self-employment. See, e.g., Thelen v. Thelen Heating and Roofing, Inc., 59 W.C.D. 84 (W.C.C.A. 1999). Mr. Schaefer suggested that the employee’s actual earnings from self-employment may have exceeded the amount shown on his tax returns, because actual deposits into the accounts of Rainy Lake and Minnesota Monument exceeded the amounts shown on the tax returns. Mr. Posniak testified the employee’s actual earnings from self-employment exceeded the amounts shown on the tax returns. The employee testified that the Rainy Lake checks he presented to the employer were a fair representation of what he felt he was earning but that he did not cash the checks because of cash flow problems in his businesses. The employee also stated he probably under-reported his sales on his tax returns. This evidence, the employee contends, establishes that the tax returns are not an accurate representation of the employee’s self-employment earnings. As such, the employee maintains, the compensation judge erred in reaching that conclusion. We are not persuaded.
The bank records for Rainy Lake were not available for the three-year period from 1999 through 2001. As such, the only direct evidence of income or loss from the operation of Rainy Lake is contained in Schedule C of the federal income tax returns for those years. Schedule C reflects a net loss for Rainy Lake in 1999 and 2000 and a net profit of only $424.00 in 2001. Mr. Pozniak, however, provided an alternative method for computing the net profit of Rainy Lake for that period. He testified that a reasonable estimation of the net profit of Rainy Lake from 1999 through 2001 could be obtained by determining the profit percentage from sales for the period 2002-2008 and then applying this percentage to the sales for the period 1999-2001. Using this approach, Mr. Pozniak found that Rainy Lake showed a net profit of $4,582 in 1999, $2,964 in 2000, and $9,191 in 2001. Mr. Pozniak also determined the employee had a net profit from Minnesota Monument of $2,058.15 in 2001. The employee asserts these earnings figures, rather than the Schedule C amount, should have been used by the compensation judge to compute the employee’s earnings from self-employment for 1999 through 2001.
Income tax returns may be used by a compensation judge to determine post-injury earnings if the returns are shown to be reliable. Gilles v. S.B. Foot Tanning Co., 48 W.C.D. 183 (W.C.C.A. 1992). In signing the tax returns, the employee affirmed that the figures contained therein were true, correct, and complete. For the years 1999 through 2001, we find no legal or factual basis to reject the profit or loss from self-employment as reflected on Schedule C of the employee’s tax returns in favor of the hypothetical analysis of Mr. Pozniak. For Rainy Lake, the tax returns reflect a net loss in 1999 and 2000. In 2001, Rainy Lake showed a net profit of $2,424.00 and Minnesota Monument showed a net loss of $2,478.00. Thus, based on the tax return, the employee had no self-employment earnings during 1999, 2000, and 2001. The employee was not, therefore, entitled to temporary partial disability benefits for those years, and the compensation judge’s finding that the employee did not receive those benefits in good faith is affirmed.
The judge’s decision as to tax years 2002 through 2007 is also supported by the record. Mr. Posniak testified that he reviewed all of the deposits that went into the Rainy Lake and Minnesota Monument accounts and determined which deposits represented sales. For the deposits as to which he was uncertain, Mr. Pozniak had discussions with the employee and then determined that some of those deposits were, in fact, due to sales. Based upon these subsequent adjustments to the gross sales of the two business ventures, Mr. Pozniak concluded the employee’s self-employment income exceeded the amounts reflected on the tax returns for the years 2002 through 2007.
Clearly, the additions to the gross sales figures above those set forth on Schedule C are based in significant part on information received by Mr. Pozniak from the employee. However, the compensation judge specifically found that the employee was not a credible witness. The judge then rejected Mr. Pozniak’s reconstruction of the employee’s self-employment income because it was founded on non-credible statements of the employee. The assessment of witness credibility is the unique function of a factfinder. Tews v. Geo. A. Hormel Co., 430 N.W.2d 178, 41 W.C.D. 410 (Minn. 1988). It is not the role of this court to evaluate the credibility and probative value of witness testimony and choose different inferences from the evidence than the compensation judge. Krotzer v. Browning-Ferris/Woodlake Sanitation Serv., 459 N.W.2d 509, 43 W.C.D. 254 (Minn. 1990). Having found that the employee was not a credible witness, the compensation judge reasonably rejected Mr. Pozniak’s opinion.
We also note that Mr. Pozniak used an averaging method for computing the net income from Rainy Lake and Minnesota Monument. In his report, Mr. Pozniak totaled all of the deposits into the Rainy Lake account during the years 2002 through 2008, subtracted expenses, and concluded that Rainy Lake had a net profit during these years of $20,995.03. Using the same analysis for Minnesota Monument for the years 2001 through 2008, Mr. Pozniak concluded that business had a net profit of $43,687.88. Based on this analysis, Mr. Pozniak suggested that the yearly income from each business venture be determined by dividing the total net income by the number of years to reach an average net income.
Two methods of analyzing temporary partial disability benefits have been accepted by this court, a week-by-week method and the averaging method. In general, the week-by-week method is favored and should be applied in most cases. However, self-employment situations nearly always present difficult wage-related questions and what the employee chooses to pay himself may not accurately reflect his actual earnings. See, e.g., Wallak v. Ace Plumbing & Heating, 43 W.C.D. 772 (W.C.C.A. 1990). A determination of the method by which to compute the employee’s earnings for purposes of temporary partial disability benefits should be made by the compensation judge on a case-by-case basis. Erdrich v. Ford Motor Co., 49 W.C.D. 528 (W.C.C.A. 1993), summarily aff’d (Minn. Dec. 14, 1993). The primary problem with the averaging method is that there is no established or standard period of time over which to average the wages. Nutter v. United Parcel Serv., 58 W.C.D. 183 (W.C.C.A. 1997).
In effect, the employee seeks to average his self-employment earnings from 2002 through 2007 over this entire six year period. However, pursuant to case law, the compensation judge was entitled to reject this method and instead choose to rely on a yearly computation of income based on the employee’s tax returns. We cannot conclude the judge’s use of the income tax returns was unreasonable under the facts of this case. Accordingly, the compensation judge’s decision is affirmed in its entirety.
 Bank records for Rainy Lake were available for the years 2002 through 2008. Bank records for Minnesota Monument were available for the years 2001 through 2008.