Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 81 C 6158 -- John F. Grady, Chief Judge, No. 83 C 5713 -- Nicholas J. Bua, Judge.
Bauer, Chief Judge, and Posner and Easterbrook, Circuit Judges.
These consolidated appeals by two affiliates of the Atchison, Topeka and Santa Fe Railway -- Standard Office Building Corporation and Santa Fe Land Improvement Company -- present two difficult questions: one under the Railroad Retirement Tax Act, 26 U.S.C. §§ 3201 et seq. ; the other under the Internal Revenue Code's three-year statute of limitations on the assessment of past-due taxes, 26 U.S.C. § 6501(a).
The Railroad Retirement Tax Act, passed in 1937, is to the railroad industry what the Social Security Act is to other industries: the imposition of an employment or payroll tax on both the employer and the employee, with the proceeds used to pay pensions and other benefits. For background see Deford, The Railroad Retirement Act: A Short Trip Down the Main Track, 17 Clearinghouse Rev. 90 (1983). The Act requires the railroad to pay an excise tax equal to a specified percentage of its employees' wages, and also to withhold a specified percentage of its employees' wages as their share of the tax. The railroad retirement tax rates are much higher than the social security tax rates. For example, for this year the employer's social security tax is 7.15 percent of the first $43,800 of the employee's wages, see 26 U.S.C. §§ 3111(a), (b), while the corresponding figure under the Railroad Retirement Tax Act is at least 21.90 percent, see 26 U.S.C. §§ 3221(a)-(d). The employee's tax is also higher. Compare 26 U.S.C. §§ 3101(a), (b), with id., §§ 3201(a)-(c), 3231(e)(2).
Economic theory suggests that most of the burden of a payroll tax is borne by the employees, in the form of lower wages or fewer employed, rather than by the employer -- and this regardless of whether the tax is nominally on the employer or the employee. An employer willing to pay $20 an hour for a worker does not care whether he pays the worker the whole $20 or pays $18 to the worker and $2 to the government, but he will not pay the worker $20 if he must pay $2 to the government and the worker is worth only $20 to him. This is not to say, however, that the employer will be indifferent to the tax. Collective bargaining arrangements (compulsory in the railroad industry) may prevent him from reducing wages, at least immediately; and the reduction in the employee's after-tax wage (if the employer finds it feasible to make the reduction) may drive the best workers from the industry. These effects may be small, for a variety of reasons including the fact that a larger pension is a benefit to the worker, partially offsetting the fall in his after-tax wage. Nevertheless it is not surprising that Congress feared that some employers would try to avoid the tax; to prevent this the statute defines "employer" as either "any [rail] carrier" or
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 (except trucking service, casual service, and the casual operation of equipment or facilities) in connection with the transportation of passengers or property by railroad, or the receipt, delivery, elevation, transfer in transit, refrigeration or icing, storage, or handling of property transported by railroad. . . .
26 U.S.C. § 3231(a). The same definition appears in the statutes entitling railroad employees to pensions and unemployment benefits. See Railroad Retirement Act, 45 U.S.C. § 231(a)(1); Railroad Unemployment Insurance Act, 45 U.S.C. § 351(a). Those statutes are the expenditure side of the coin; the Railroad Retirement Tax Act is the revenue side.
We have italicized the portions of the statute that pertain to this case. Both Standard Office Building and Santa Fe Land Improvement are conceded to be under common ownership with the Atchison, Topeka and Santa Fe Railway, all being subsidiaries of Santa Fe Southern Pacific Corporation. Both deny, however, that they perform any service in connection with rail transportation. The district court rejected Standard Office Building's denial as a matter of law, by granting the government's motion for summary judgment. Santa Fe Land Improvement's denial has not been litigated yet, as we shall see.
The question whether a particular constellation of activities adds up to "service . . . in connection with" rail transportation is the kind of "mixed" question of fact and law (really, the application of a legal standard to facts) that, in this circuit at least, is governed by the clearly-erroneous standard. See, e.g., Mucha v. King, 792 F.2d 602, 605 (7th Cir. 1986), and cases cited there; Wright v. United States, 809 F.2d 425, 428 (7th Cir. 1987). This is not the universal view. Atlantic Land & Improvement Co. v. United States, 790 F.2d 853, 855 (11th Cir. 1986), for example, a case similar to the present case as we shall see, states that appellate review of mixed questions of fact and law is plenary. If the question whether Standard Office Building is a covered employer is, as we believe, subject to the clearly-erroneous standard, then our expected course should we disagree with the district judge's grant of summary judgment would be to remand for a trial of the issue. But the district court, the parties, and the courts in the other cases dealing with the question of a railroad affiliate's performing services in connection with railroad transportation all treat the question as a pure question of statutory interpretation. The Internal Revenue Service wants us to decide the question as one of law, and we shall do so, deeming the Service to have waived any right to a trial that it might otherwise have.
Standard Office Building Corporation was formed in 1902 to own and operate the Railway Exchange Building, which is on Michigan Avenue in downtown Chicago (and, by a coincidence, visible from the chambers of all three members of this panel). At first the Atchison, Topeka and Santa Fe Railway was a minority shareholder of the corporation and a minor tenant of the building, but over the years both its share ownership and its tenancy grew, and by 1980 its parent corporation, Santa Fe Southern Pacific Corporation, owned all of the stock of the corporation and the railroad was the lessee of 57 percent of the usable office space in the building. The railroad used most of this space itself, for the headquarters of various departments such as the engineering, freight and passenger traffic, and mechanical and transportation departments. What it did not use itself it sublet to tenants, some of which are affiliated with the railroad, others not. The record is unclear on both the activity of the affiliated subtenants and the percentage of space in the building actually occupied by the railroad during the relevant period; but it seems the percentage was between 42 and 57 percent. The building is managed by an independent contractor; however, the building's maintenance staff of 64, consisting mainly of janitors (49) but also of electricians, elevator operators, and others, is employed by Standard Office Building Corporation, although supervised by the building manager. These workers belong to unions, but not railway unions. Their unions have negotiated collective bargaining agreements with Standard Office Building under which the workers are to receive a pension, in addition to social security benefits, when they retire, but not a railroad pension.
Although aware of the relevant corporate relationships and the use made of the building by the railroad, the Internal Revenue Service until recently believed that Standard Office Building was liable for social security tax rather than railroad retirement tax on the wages of the building's maintenance staff. In 1973, after an audit, the IRS expressly determined that the company was not subject to the Railroad Retirement Tax Act. It changed its mind, however, and in 1981 and 1983 assessed past-due railroad retirement tax for the period 1972 through 1980 of (after various adjustments) some $500,000. Standard Office Building paid a portion of the assessment and then brought this suit for refund. On cross-motions for summary judgment the district judge held that the company was liable for the tax and rejected the company's argument that the assessment for the years before 1979 was barred by the Internal Revenue Code's three-year statute of limitations. 640 F. Supp. 549 (N.D. Ill. 1986). The judge certified his order for an immediate appeal under 28 U.S.C. § 1292(b); we agreed to hear the appeal.
Santa Fe Land Improvement Company, created in 1900, is a real estate subsidiary of Santa Fe Southern Pacific Corporation and, like the railroad, a tenant of the Railway Exchange Building. It too had never paid railroad retirement tax on its employees' wages; in 1949 the Railroad Retirement Board had ruled that it was not subject to the Railroad Retirement Act and had advised the IRS of this ruling. It too was assessed railroad retirement tax in the early 1980s for the period 1972 through 1980, paid a portion of the assessment, and brought a suit for refund. The district judge denied Santa Fe Land Improvement's motion for partial summary judgment based on the statute of limitations and on a statute of forgiveness in the Revenue Act of 1978, and certified his order for an immediate appeal under section 1292(b); we agreed to hear the appeal and consolidated it with Standard Office Building's appeal. The record on appeal is silent on whether Santa Fe Land Improvement Company performs any service in connection with railroad transportation.
On whether Standard Office Building performs such service, the parties at argument took unreasonable positions. The company's position is that only the railroad's "operating employees" (idiosyncratically defined) and senior executives perform such service. Nonoperating employees, estimated by counsel to be one-third of the railroad's total employees, do not, with the exception as we have said of senior executives. So the employee who cleans the railroad cars performs a service in connection with rail transportation, but the employee who cleans the first employee's mops does not. This is the peculiarity in the company's definition of "operating employee." The Interstate Commerce Commission, in the periodic reports of railroad employment issued by its bureau of accounts, classifies railroad employees as follows: executives, officials and staff assistants; professional and administrative; maintenance of way and structures; maintenance of equipment and stores; transportation (other than train ...