Department of Health and Human Services
Departmental Appeals Board
FDC QUALITY CONTROL REVIEW PANEL
SUBJECT: Texas Department of
Human Services
Docket No. A-92-20
DATE: December 20, 1991
DECISION
The Texas Department of Human Services (State) appealed a
determination
of the Acting Regional Administrator of the
Administration for Children and
Families (ACF), dated
October 8, 1991, that the payment of an Aid to
Families
with Dependent Children (AFDC) grant of $158 to E.C. for
the
review month of April 1991 was erroneous. 1/ ACF
determined that E.C. was ineligible for the month because
of the receipt
of in-kind income in the form of a rent-
free apartment, which the federal
reviewers valued at
$250. The State agreed that in-kind earnings must
be
counted as income, but argued that the State policy was
to assess the
value based on how much the employer would
pay in cash. Since the
employer here would offer only
free rent, with no cash alternative, the
State concluded
that the value of the in-kind income was zero.
For the reasons set forth below, we uphold ACF's
determination that E.C.
was ineligible as result of the
under-valuation of in-kind income by the
State.
Background
Under the AFDC program, the State must take into
consideration the
"earned income" of applicants, after
certain permitted "disregards" in
computing their
eligibility and grant amounts. Sections 402(a)(7)(A)
and
402(a)(8) of the Act. Federal regulations define "earned
income" to include income "in kind earned by an
individual through the
receipt of wages, salary,
commissions, or profit from activities in which he
is
engaged . . . as an employee." 45
C.F.R. �
233.20(a)(6)(iii). Neither party identified any
federal regulation
governing the specific method of
valuation for in-kind income.
However, any income must
be "reasonably evaluated." 45 C.F.R.
�
233.20(a)(3)(ii)(E).
The State's policy before November 1988 exempted all in-
kind
income. State Notice of Appeal at 3. Upon
notification that such
a policy was not in accord with
federal law, the State adopted the policy in
effect at
the time of this case:
Count the value of "in-kind" benefits if received as
a substitute
for wages. Determine countable earned
income as follows:
1. Verify what the employer would pay the client
if he
did not provide "in-kind" benefits.
2. If the earnings would increase, count the
higher
amount as the gross earnings.
Do not count other in-kind items.
Texas Income Assistance Handbook (TIAH), section A-739,
quoted in ACF
Brief (Br.) at 2.
E.C. served as resident manager for an apartment complex,
for which she
received free rent for an apartment. The
State reviewers contacted the
employer, who stated that
E.C. "was offered only free rent -- with no offer
for
cash payment of any amount." State Notice of Appeal at
3. 2/ Based on this response, the State reviewers
valued the in-kind income at zero. The federal reviewers
again
contacted the employer and elicited the fair market
value (FMV) for rental
of the apartment to a non-
employee. The resulting monthly rate of $250
was then
counted as the in-kind income. ACF Br. at 5.
The free rent was received during the base month used for
prospective
budgeting as well as during the review month.
However, since the
federal reviewers found the estimate
of prospective income inaccurate, they
recalculated
eligibility using the actual income in the review month,
as
well as in-kind income valued at $250 and found E.C.
ineligible.
Analysis
The State's position was that its policy was reasonable
and constituted a
permissible state practice, since no
particular method of valuation of
in-kind income is
prescribed in federal law or regulations. The State
characterized the ACF error finding as an attempt to
impose a new
federal policy on valuation without prior
notice. State Notice of
Appeal at 4-5. During a
telephone conference, ACF conceded that the
State's
policy was reasonable and permissible as written.
Summary
of Results of Telephone Conference (Summary) at 1
(November 25, 1991).
However, ACF contended that the
State's policy was applied unreasonably
here.
The State's policy calls for a determination of "what the
employer would
pay . . . if he did not provide 'in-kind'
benefits." TIAH, section
A-739 (emphasis added). 3/
The plain language of this
section requires an inquiry
into a hypothetical, contrary-to-fact situation,
i.e.,
what would occur if the in-kind payment were not an
option.
The State reviewers' conversation with the
employer reflects only that the
employer was not actually
willing to offer a cash alternative to her
apartment
manager. The State reviewers failed to elicit from the
employer the information necessary to make the
hypothetical
determination, i.e., to engage in the
necessary speculation as to what the
employer would have
had to pay if free rent were not available as an
alternative. 4/
If the employer refused to provide this information, it
seems reasonable
to require the State to arrive at the
closest possible figure by other
means. However, the
record here does not reflect that the employer
refused to
provide the necessary information, but rather that she
was
never made to understand that a hypothetical answer
was sought.
ACF contended that a value of zero for free rental of an
apartment which
could rent for $250 is "patently
unreasonable." ACF has, nevertheless,
agreed that a
value different from FMV could be acceptable if obtained
by a proper application of the method of valuation set
out in TIAH
A-739. The State argued that no lower limit
was prescribed so that a
value of zero can be acceptable.
State Reply Br. at 2.
5/ However, the employer in
this case simply never answered the
question of what
wages would be paid if free rent were not offered.
Therefore, we need not decide whether any circumstances
could justify a
value of zero under the State's
methodology properly applied. We find
that the State did
not apply
its own method properly here, since it did not request
the required
information from the employer.
A significant portion of ACF's argument was directed to
justifying the
superiority of FMV as a method of valuing
in-kind income. FMV may well
be a more objective and
familiar methodology than the inquiry triggered by
the
State's hypothetical approach. However, ACF conceded
that the
State's method was reasonable. Moreover, the
applicable regulations do
not require any particular
method of valuation to evaluate in-kind income
for AFDC,
so long as it is reasonably evaluated. ACF cannot
therefore impose another method simply based on its
preference.
Accordingly, the analogies relied on by ACF
to the required use of "equity
value" to reasonably
evaluate resources and of "current market rental value"
to evaluate free rent for services in the Supplemental
Security Income
program are not relevant here.
We conclude that the State's method was reasonable as
written and ACF
cannot retrospectively impose a different
method. However, the State's
stated method was not
applied properly in this case. Therefore, the
in-kind
income here was not reasonably evaluated under 45 C.F.R.
�
233.20(a)(3)(ii)(E). The remaining issue is how to
value the in-kind
income in light of the information
presently available.
During the telephone conference, the State rejected the
suggestion that
the employer should have been pressed
further to respond
appropriately. Summary at 2. In
light of the State's failure to
apply its policy
reasonably and the unavailability of the information
needed to do so retrospectively, we conclude that ACF's
estimate based
on FMV is the most reasonable value to
attribute to the in-kind income.
It is uncontested that the actual cash income received in
the review
month would be counted to make the recipient
ineligible, if, as we have
concluded, in-kind income
valued at $250 was received in the base
month. ACF Br.
at 7-8; State Reply Br. at 4. Therefore, we find
that
ACF correctly determined that E.C. was ineligible.
Conclusion
For the reasons set forth above, we conclude that E.C.
was ineligible and
affirm ACF's determination.
____________________________
Carolyn
Reines-Graubard
_____________________________
Maxine
Winerman
_____________________________
Leslie
A. Sussan
* * * Footnotes * * *
1. AFDC payments are made pursuant to
Title IV-A of
the Social Security Act (Act). We identify the recipient
by her initials to protect her privacy. The State
quality control
number for this matter is CP-0681.
2.
E.C. did, however, also receive a cash payment
from the employer during the
review month, although it
did not affect her eligibility when the in-kind
income
was valued at zero.
3. ACF
interpreted the State's position to be that
the in-kind income here was not
a "substitute for wages,"
and therefore need not be counted. ACF Br.
at 3-4. The
State did not rely on this portion of its policy
statement, conceding that the free rent constituted in-
kind earned
income, but rather contended that its value
was zero once the employer
stated that no cash
alternative was offered. State Reply Br. at
2. In any
case, it would be untenable for the State to deny that
the free rent was intended as wages, since the State
itself described
the in-kind income as received "in
exchange for managing the
apartments." State Exhibit
(Ex.) I at 2. Clearly, this income
was earned from the
recipient's activities within the definition of "earned
income" at 45 C.F.R. � 233.20(a)(6)(iii), and therefore
substituted for
the wages which would otherwise be
earned.
4. The non-responsive nature of the conversation
with the employer is
clear in the description provided in
the State's response to the federal
finding. The State
reviewers "contacted the apartment owner and
verified the
following information. [Her] agreement with the client,
E.C., was to provide free rent in exchange for managing
the apartments
(i.e. collecting rent). There was no
option to receive a cash payment
in lieu of free rent."
Letter from Carol Y. Sloan, Acting Director,
State
Quality Control Section, at 2 (September 5,
1991).
5. During the telephone
conference, a scenario was
discussed in which management services would cost
$500
and the employer offers instead $200 cash plus a free
rental worth
$400 in fair market value. ACF conceded
that the State could properly
value the in-kind income in
such a scenario at $300, rather than $400.
Summary at 2.
Similarly, an employer might state that, were no free
rental possible, the services would have to be
compensated at $300 in
cash, reducing the value of the
in-kind income to $100. Theoretically,
management
services might be available for $200, so that an employer
might not offer free rent as an inducement in lieu of
cash but purely as
a convenience because of the
employer's interest in having a manager on the
premises.