Opinion
CIVIL ACTION NO. 00-1017
March 30, 2004
MEMORANDUM RULING
This matter is before the Court on the parties' cross motions for Partial Summary Judgment [Docs. 74 83] pursuant to Fed.R.Civ.P. Rule 56. The United States (hereinafter "IRS") asks the Court to determine the narrow issue of whether through stock ownership Trans-Serve satisfies the first prong of the definition of employer under the Railroad Retirement Tax Act ( 26 U.S.C. § 3201 et seq.) (hereinafter "RRTA") and the Railroad Unemployment Repayment Tax Act ( 26 U.S.C. § 3321 et seq.) (hereinafter "RURTA"). In its cross motion, Trans-Serve requests a broader inquiry into whether Trans-Serve is under common control with a carrier. Having considered the complete definition of an "employer" codified at 26 U.S.C. § 3231 (a) for the following reasons, this Court finds that Trans-Serve is under common control with the carrier Kansas City Southern Railway. Accordingly, Defendant's Motion for Partial Summary Judgment is GRANTED and Plaintiff's Motion for Partial Summary Judgment is DENIED.
BACKGROUND
Trans-Serve is a Delaware corporation with its primary place of business in Vivian, Louisiana. Trans-Serve is a wholly owned subsidiary of Southern Industrial Services, Inc., which is a wholly owned subsidiary of Kansas City Southern Industries, Inc. (hereinafter "KCSI"). KCSI is also the immediate parent corporation to Kansas City Southern Railway (hereinafter "KSR"). Through this lawsuit, Trans-Serve seeks a tax refund for tax years 1987-1996.During that time period, Trans-serve was audited four times: (1)Tax years 1987 and 1988; (2) Tax years 1989 and 1990; (3) Tax years 1991 and 1992; and (4) Tax years 1993 through 1996. In each of those four time periods, Trans-Serve timely filed a protest letter disputing and appealing the tax assessment. The IRS denied Trans-Serve's claims, and Trans-Serve filed the instant lawsuit.
LAW AND ANALYSIS
I. Standard for Summary Judgment
Summary judgment will be granted when ". . . the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P.56(c); See Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986); Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994). The party moving for summary judgment must demonstrate the absence of a genuine issue of material fact. Liquid Air Corp., 37 F.3d at 1075. A dispute over a material fact is genuine, if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Kee v. City of Rowlett Texas, 247 F.3d 206.210 (5th Cir. 2001). If the moving party fails to meet this initial burden, the motion must be denied, regardless of the nonmovant's response. Liquid Air Corp., 37 F.3d at 1075.
If the movant does, however, meet this burden, the burden shifts and the nonmovant must go beyond the pleadings and designate specific facts showing that there is a genuine issue for trial. Celotex, 477 U.S. at 325. To that end, the court must view the facts and the inferences to be drawn therefrom in the light most favorable to the nonmoving party. Ameristar Jet Charter v. Signal Composites, 271 F.3d 624, 626 (5th Cir. 2001). However, the Court will not assume that the nonmoving party could or would prove the necessary facts.Liquid Air Corp., 37 F.3d at 1075. The nonmoving party's burden will not be satisfied by "some metaphysical doubt as to the material facts," by "conclusory allegations," by "unsubstantiated assertions," or by only a "scintilla" of evidence, id. Therefore, summary judgment is appropriate in any case "where critical evidence is so weak or tenuous on an essential fact that it could not support a judgment in favor of the nonmovant." Armstrong v. City of Dallas, 997 F.2d 62 (5th Cir. 1993); Matsushita Electric Industrial Co. v. Zenith Radio Corp., 106 S.Ct 1348, 1356 (1986). With these principles in mind, we now turn to a review of the definition at issue.
II. Trans-Serve Is Under Common Control with a Carrier
For the purposes of the RRTA and RURTA, the term "employer" is defined in pertinent part as "any company which is directly or indirectly owned or controlled by one or more such carriers or under common control therewith, and which operates any equipment or facility or performs any service . . . in connection with the transportation of passengers or property by railroad . . ." 26 U.S.C. § 3231 (a) (emphasis added), This is a two-pronged test that requires both ownership/control by the carrier and service to the carrier. The parties cross-moving for partial summary judgment seek a determination only as to the first prong, whether Trans-Serve is under common control with a carrier.
The control test first asks whether the company in question is directly or indirectly owned or controlled by a carrier. In the case at bar the IRS concedes that the "carrier" KSR has no ownership interest in Trans-Serve and that KSR does not control Trans-Serve. IRS Memorandum of Law ("IRS Mem."), p. 2. Instead, the IRS maintains that because KSR and Trans-Serve are both subsidiaries of KCSI, Trans-Serve is "under common control" with a carrier. Id. This Court must determine whether under the RRTA statute, Trans-Serve, a wholly owned subsidiary, is under common control with KSR, another wholly owned subsidiary, where their immediate corporate parents are not the same.
IRS Statement of Facts ("ISF") Trans-Serve Statement of Facts ("TSF") ¶¶ 17-20, 25-26.
On this question of statutory interpretation, the language of the statute itself governs. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Unless otherwise defined, statutory words carry their ordinary, contemporary, and common meaning. Perrin v. United States, 444 U.S. 37,42,100 S.Ct. 311, 62 L.Ed.2d 199 (1979). Any reasonable doubts about the meaning of a tax statute should be construed in favor of the taxpayer. Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 62 L Ed. 211 (1917).
The common control language was inserted into the Railroad Labor Act to "prevent a carrier covered by the RLA from evading the purposes of the Act by spinning off components of its operation into subsidiaries or related companies." Verrett v. Sabre Group, Inc., 70 F. Supp.2d 1277, 1281 (N.D. Okla. 1999) (cited with approval by Thibodeaux v. Exec. Jet Int'l, Inc., 328 F.3d 742, 752 (5th Cir. 2003)). Unfortunately, neither the RRTA nor the RURTA define "under common control." The regulations of the Railroad Retirement Board, however, provide some guidance.
"The identical definitions in these related Acts [referring to the RRTA, the Railroad Retirement Act, and the Railroad Unemployment Insurance Act] should be identically construed and applied."Universal Carloading Distributing Co. v. Pedrick, 184 F.2d 64, 65 (2nd Cir. 1950).
A company is under common control with a carrier, whenever the control (as the term is used in § 202.4) of such company or person is in the same person, persons, or company as that by which such carrier is controlled.20 C.F.R. § 202.5. In turn, 20 C.F.R. § 202.4 provides:
A company or person is controlled by one or more carriers, whenever there exists in one or more such carriers the right or power by any means, method or circumstance, irrespective of stock ownership to direct, either directly or indirectly, the policies and business of such a company or person and in any case in which a carrier is in fact exercising direction of the policies and business of such a company or person.
Cobbled together from the regulations, the definition of "under common control" is when one company has the right or power to direct the policies and business or does in fact direct the policies and business of a carrier and has the same authority to direct or does in fact direct another company. This "control need not be affirmatively asserted in order to be effective and real." Universal Carloading Distributing Co. v. Railroad Retirement Board, et al., 172 F.2d 22, 26 (D.C. Cir. 1948).
In Union Pac. Corp. v. United States, the Federal Circuit held that, "two companies most naturally fit within the term `under common control' when occupying parallel positions as subsidiaries controlled by a common parent . . . Necessary to a finding of common control is the existence of corporate entities . . . which are in parallel position, both controlled by a single additional corporate entity, such as subsidiaries owned by a common parent." Union Pac. Corp., 5 F.3d at 525 (quotations omitted); Utah Copper Co. v. Railroad Retirement Board, 129 F.2d 358 (10th Cir. 1942) (Copper Co. is under common control with carrier where both Copper Co. and the Railway Co. are wholly owned subsidiaries, with same immediate corporate parent, and common directorates and officers); Universal Carloading Distributing Co. v. Railroad Retirement Board, et al. 172 F.2d 22, 26 (D.C. Cir. 1948) (Trustee company is under common control with carrier where both Trustee and Railroad report directly to same corporate parent). While that may be the "most natural fit" of common control it is not the only one. See e.g., Carland, Inc. v. United States, 1995 WL 218576 (W.D.Mo. February 14, 1995) (second tier subsidiary under common control with first tier carrier subsidiary).
Union Pac. Corp. v. United States, 5 F.3d 523, 525-526 (Fed. Cir. 1993).
Plaintiff's reliance of the "parallel positions" language inUnion Pacific is misplaced. This Court is not bound by that decision, though its discussion of common control is instructive. Moreover, the Appeals Court took the language from the lower court's opinion which offered no statutory, regulatory or case law authority for the proposition. Limiting common control to two subsidiaries that are controlled by their same immediate parent would allow companies to easily avoid coverage by creating intermediate shell companies, a result clearly at odds with the intent of the statute.
When considering the issue of a parent corporation's common control of a carrier and any other company, it is important to remember that, "the dominant characteristics of a holding company is the ownership of securities by which it is possible to control or substantially to influence the policy and management of one or more operating companies . . ." Union Pacific Corp. v. United States, 26 Cl. Ct. 739, 750 (Cl. Ct, 1992) (quotations omitted, emphasis added). In affirming the lower Court's decision, the Court of Appeals held that shareholders of a corporate parent, "exercise some control over the policies of that entity, which in turn, exercises some control over the policies of the Railroad [and other subsidiaries]." Union Pac., 5 F.3d at 527. Most notably, shareholders voting rights give them the power to determine the board members and in some cases the officers of the company. In a case like the one at bar, many of the officers and directors of the three companies are the same people. While corporate directors or officers that simultaneously serve both parent and subsidiary companies, "are subject to different legal obligations when acting for separate corporate entities . . . [and they] do not "control" the corporations in the sense that section 3231(a) uses that word." Id. However, if the parent company becomes displeased with a director or officer, as the sole shareholder, the company could remove the individual through a shareholder vote. See Universal Carloading, 172 F.2d at 26. That is the essence of control.
At all times in question, KCSI owned greater than 99%of KSR's outstanding stock and through Southern Group, Inc. or Southern Industrial Services, Inc., 100% of Trans-Serve's outstanding stock. IRS Mem., pp. 6-8. These ownership stakes allowed KCSI to control both KSR and Trans-Serve. Evidence of KCSI's control is the common identity of many of the three companies' corporate directors and officers. IRS Findings of Fact, pp. 10-12. Because KSR is a carrier under the RRTA, and because KCSI has the ability to control both KSR and Trans-Serve, Trans-Serve is under common control with a carrier for the purposes of § 3231(a).
With this ruling, the Court is not making a determination under § 3231(a) as to whether Trans-Serve is an employer. We are only holding today that Trans-Serve is under common control with a carrier. Accordingly, the IRS' Motion for Partial Summary Judgment is granted.
Therefore:
IT IS ORDERED that Defendant IRS' Motion for Partial Summary Judgment [Doc. 74] shall be GRANTED and Plaintiff Trans-Serve's Cross Motion for Partial Summary Judgment [Doc. 83] is DENIED.