The language in question in the Railroad Retirement Act and Tax Act historically comes from the Railway Labor Act and is also used in the Railroad Unemployment Insurance Act. If legislation is enacted concerning refining the definition of "employer," it is important that the changes be uniform.

H.R. 5144, which Mr. Madigan and I introduced in August, clarifies the scope of the trucking service exception for purposes of the Railroad Retirement Act, Railroad Retirement Tax Act and the Railroad Unemployment Insurance Act, and I now believe it should also amend the Railway Labor Act. The bill would limit the exception to trucking service to the transportation by truck before or after transportation by railroad, but only if such trucking service is the only rail-related service performed by such trucking company. Furthermore, the bill would eliminate the "control" requirement in existing law and would codify those decisions by the Internal Revenue Service, the Railroad Retirement Board, and the courts (Adams v. Railroad Retirement Board, 214 F2d 534 (9th Cir. 1959)), that recognize that within a particular company, certain services, if they are separate and distinct, can be segregated for purposes of the Railroad Retirement Act, Railroad Retirement Tax Act and Railroad Unemployment Insurance Act. This recent focus by your committee has lead me to believe that further refinement to the scope of the trucking service exception in H.R. 5144 will be necessary to avoid further confusion to this already confusing situation. Attention must be directed toward defining who and what activities in terminal activities are railroad "employer" activities, e.g., ramping and deramping. The outcome of legislation dealing with the definition of "employers" has potentially profound effects on the railroads, their employees and the railroad retirement account which is currently operating at a four percent deficit. I am confident that these hearings today will provide the Members of Congress with exact figures as to the number of employees who may be affected if the Internal Revenue Service's interpretation is upheld, how that interpretation would affect the railroads, their employees and the account, under both a retroactive or a prospective application, and how this interpretation will affect both the railroads and the employees, both retroactively and prospectively, with respect to the Railroad Unemployment Insurance Act. If Congress is to change the law, it is imperative that we have the benefit of those facts and figures for a more comprehensive understanding of the issue.

Mr. Chairman, the Railroad Retirement Act, going back to the original act, has been initially negotiated between railroad labor and management and then brought before the Congress. I am confident that in the course of upcoming negotiations concerning future Railroad Retirement Act legislation, the scope of the trucking service exception will be properly addressed and Congress will have an opportunity to review the resolution of this matter.

Mr. GIBBONS. The first set of witnesses will be a panel of railroad representatives, the Honorable George Smathers, former U.S. Senator and now a member of the firm of Smathers, Symington, and Herlong, representing the Railroad Trucking Subsidiaries, Mr. Orval Adam, vice president and tax counsel of Santa Fe Industries, and Mr. Robert T. Molloy, representing the Missouri Pacific. If these gentlemen will come forward, we will be glad to hear from you.

Mr. DUNCAN. Mr. Chairman, what is actually anticipated after these hearings are held? Will we hold other hearings?

Mr. GIBBONS. We are probably going to have some more hearings, Mr. Duncan. I don't know what these hearings are going to produce today. This is not an issue like most of the issues. It is not very simple.

Mr. DUNCAN. I seriously doubt if the minority would wish to present witnesses. but we would like to reserve the right to call any witnesses.

Mr. GIBBONS. Any time you want to do that you have that right, and even without that right we will work with you on that.

Mr. DUNCAN. Thank you, Mr. Chairman.

STATEMENT OF GEORGE SMATHERS, ON BEHALF OF THE FLORIDA EAST COAST RAILWAY CO., ACCOMPANIED BY JOHN J. MULLENHOLZ, TAX COUNSEL

Mr. SMATHERS. Mr. Chairman and members of the committee, first let me say thank you very much for this opportunity to appear here today and discuss a distressing situation as far as we are concerned, and to suggest an immediate, although temporary, solution. As the chairman has stated, with me are Mr. Mullenholz of our firm, and Mr. Orval Adam, vice president and tax counsel of the Santa Fe Industries, and Mr. Robert Molloy of the firm of Molloy, Simpson, and Johnson, who represent the Missouri Pacific Railroad, and the Milwaukee Road. The problem with which we are confronted arises from the arbitrary decision by the Internal Revenue Service to transfer all of the employees of a number of railway trucking subsidiaries from Social Security to the Railroad Retirement System, as you, Mr. Chairman, have outlined.

However, there is by no means a uniform application of that policy throughout the country and as a result of the disparate treatment there is much confusion and a great deal of concern among the employees of the trucking subsidiaries owned by the railroads, administrators, and trustees of the Railroad Retirement Fund, the union members and others.

I want to emphasize at the outset that we are only concerned with trucking subsidiaries of railroad companies at this particular hearing today. The preemptory reclassification by the Internal Revenue Service has had an enormous adverse impact upon all parties, the trucking subsidiaries, their employees, the Railroad Retirement Trust Fund, and the unions. In the case of the Florida East Coast Railway Company and in the case of almost every other railroad involved, the IRS has reversed an earlier ruling of the Railroad Retirement Board and in the process has usurped the jurisdiction not only of the Board but also of the U.S. Congress.

While some might argue that the ultimate resolution of this matter should be left to the courts, we believe that the damage should be stopped now through a legislatively imposed moratorium.

Guidance and precedence is found in the identical action taken by the Congress exactly 1 year ago on the independent contractor/ employee dispute, a much more pervasive problem. As in that case, the delay will only exacerbate an already critical state of confusion and anxiety. The employees of these trucking subsidiaries have operated under a well-defined system for many years. Social security benefits, workmens' compensation, and State unemployment relief have been relied upon by these workers in the past. Now the IRS has decreed that everything should be changed and the employees must shift to the federally operated retirement system.

Meanwhile, of course, this decision is being vigorously opposed at all levels by their employers. Of necessity, the trucking companies must seek a refund of previous payments to the States under the other programs. Since IRS is imposing its position retroactively, workmen's compensation premiums may not protect the employers during the

years in dispute, and the companies must seek return of those premiums.

One can logically ask, where does the injured employee stand? Is he improperly receiving workmen's compensation? Must he now proceed directly against the employer under the Federal Employers Liability Act?

And what of his retirement? Should he apply for, and receive, railroad retirement benefits knowing that this issue will be litigated for the next several years? What is his liability to the Railroad Retirement Trust Fund if the courts finally decide that the Railroad Retirement Act does not apply to the companies and their employees?

For most of the employees of these companies throughout the United States, the future is much more seriously clouded. A survey taken in 1976 found that approximately 70 percent of the trucking companies' employees were organized by the Teamsters Union. Contributions to the Teamsters pension funds by the employees and the employers have been made over the years. What happens to the employees' rights under those funds if the companies are forced by IRS to fund a different retirement program? Years of service and thousands of dollars of contributions by these employees may be lost. Surely IRS does not presume that these companies can afford to fund two pension programs.

This leads to the much more fundamental question of labor relations. On the one hand, the rail transportation unions wish to broaden the base of the railroad retirement system. On the other hand, the Teamsters Union naturally wishes to protect its members and its jurisdiction.

The National Mediation Board established a rule in 1975 which is directly contrary to the position now taken by the IRS. Under that rule, any trucking subsidiary holding an ICC certificate is not subject to the Railway Labor Act. This decision would seem to favor the Teamsters Union, and yet it is faced with a diametrically opposed interpretation by IRS of an identical statute for pension purposes.

The railway unions and the railroads have a number of substantive problems to resolve in the railroad retirement area. In fact, the chairman of the House Interstate and Foreign Commerce Committee, the Honorable Harley Staggers, has introduced a comprehensive bill on the subject. On the question of trucking service, that bill, which we understand reflects the views of the railway unions, is at odds with the IRS position.

The anomalous result of the enactment of that bill would be the transfer back to social security of a substantial portion of the employees whom the IRS has reclassified.

Finally, one must consider the effect of the IRS action on the Railway Retirement Trust Fund. While the Service is restricted by statutes of limitation in asserting additional taxes against railroads, the employees who would be transferred into the fund have many additional years of service. In the case of the FEC, the major trucking subsidiary was started in 1960. Assessments by IRS, however, go back only to 1973. Therefore, a shortfall of 13 years of unfunded service will be created.

The Railroad Retirement Fund is already in serious financial difficulty, as this committee well knows. The additional burden of vested unfunded benefits for many years, places the fund in even greater jeopardy. If additional employees are to be added to the fund under these circumstances, the Congress must, through its deliberative process, arrive at a funding solution. Arbitrary, dissimilar treatment of the railroads by IRS is an unacceptable substitute for congressional action.

I should add the obvious, that if IRS is prohibited from reclassifying these employees, there will be no additional benefits due and clearly no revenue loss. Therefore, Mr. Chairman, we earnestly suggest that, until this matter can be settled by the Congress, the hand of the Internal Revenue Service be stayed and the trucking companies and their employees returned to the status quo prior to IRS action for all periods before January 1, 1980.

A moratorium of this nature, similar to that imposed in the independent contractor-employees dispute, will give, in proper sequence, the Interstate and Foreign Commerce Committee the opportunity to consider this issue along with many others. Such a moratorium will enable the Congress to write upon a clean slate. It will afford the railroad unions and the railroads an atmosphere, cleansed of the present confusion, in which they can negotiate a resolution to the present to the Interstate and Foreign Commerce Committee and to the Congress for action.

[The prepared statement follows:]

STATEMENT OF GEORGE A. SMATHERS, ON BEHALF OF THE FLORIDA EAST COAST RAILWAY Co.

Thank you for the opportunity to appear here today to discuss a most distressing situation and to suggest an immediate, although temporary solution.

In April of this year, the Internal Revenue Service began making a series of assessments for Railroad Retirement Tax Act taxes against five corporate subsidiaries of the Florida East Coast Railway Company. Of the five companies, two are engaged in providing trucking service and my remarks today will be confined to these two corporations almost exclusively.

The tax claims for the years 1973-1975, which amount to several hundred thousands of dollars, are based on an allegation that the subsidiaries are "employers" as defined by the Railroad Retirement Tax Act. Since incorporation each subsidiary, however, has acted upon the assumption that it was not subject to the Act. In the case of the larger subsidiary, the Railroad Retirement Board provided a written determination that it was exempt from RRTA many years ago, and the IRS did not assess any RRTA taxes during audits of the years 1960 through 1972. Despite the fact that the activities of these two corporations have not changed since that advice was received from those agencies, IRS arbitrarily reversed its decision after almost 17 years. The companies are engaged in the pickup and delivery of shipments before and after movement by rail and in the ramping and deramping (loading and unloading) of trailers on railroad flat cars.

The trucking companies, the Railroad Retirement Board, and presumably the IRS, relied upon the exemption for "trucking service" (26 USC § 3231(a)) when they made the determination that RRTA taxes were not applicable. The legislative history of the RRTA and the traditional practice in the railroad industry strongly support the proposition that the FEC trucking companies are exempt from RRTA. While several other railroads have been treated similarly, there is by no means a uniform application of policy throughout the country. This disparate treatment has, I believe, contributed to the delay in bringing the matter before the Congress.

The reversal in the position of the IRS actually penalizes the FEC companies for relying on the earlier determination of the Railroad Retirement Board because IRS is requiring payment of the taxes retroactively to 1973. For those

years and all other years, the companies paid Social Security taxes (FICA), state and federal (FUTA) unemployment taxes, and workmen's compensation insurance premiums. By subjecting the companies to RRTA retroactively IRS is essentially requiring duplicate payments since railroad employees are covered by a different unemployment compensation system and are protected by the Federal Employers' Liability Act instead of workmen's compensation. In the case of the FEC, nearly a quarter of a million dollars for the years 1972 to 1976 alone was paid in workmen's compensation premiums for all five subsidiaries.

Moreover, the IRS has demanded that the trucking companies pay the employees' share of the tax for the periods prior to 1974. The impact of such a demand is enormous. Payment of the employees' share would constitute taxable income to them. The companies would be required to withhold income tax and RRTA tax from the employees' current income with respect to the amount of the employees' share of the retroactive payments. Whether the companies can recover from those it no longer employs is problematical.

While some might argue that the ultimate resolution of this matter should be left to the courts, we believe that the time to act is now through a legislatively imposed moratorium. Delay will only exascerbate an already critical state of confusion and anxiety.

Guidance is found in the identical action by the Congress exactly one year ago on the independent contractor/employee dispute, a much more pervasive problem. The similarities between the two issues are obvious. Both involve payroll taxes. Both are caused by a change in position by IRS after many years of operations by corporations. Both have created havoc for the corporations and those who perform services for them. And perhaps most importantly, both deserve thorough consideration by the Congress.

The employees of these trucking subsidiaries have operated under a welldefined system for many years. Social Security benefits, workmen's compensation, and state unemployment relief have been relied upon by these workers in the past. Now IRS has decreed that everything should be changed and the employees must shift to the federally operated Railroad Retirement system.

Meanwhile, of course, this decision is being vigorously opposed at all levels by their employers. Of necessity, the trucking companies must seek a refund of previous payments under the other programs such as workmen's compensation. Since IRS is imposing its position retroactively, workmens' compensation premiums may not protect the employers during the years in dispute and the companies must seek return of those premiums. Where does the injured employee stand? Is he improperly receiving workmen's compensation? Must he now proceed directly against the employer under FELA?

And what of his retirement? Should he apply for, and receive railroad retirement benefits knowing that this issue will be litigated for the next several years? What is his liability to the Railroad Retirement Trust Fund if the courts finally decide that the Railroad Retirement Tax Act does not apply to these companies and their employees?

For the majority of the employees of these companies throughout the United States, the future is much more seriously clouded. A survey in 1976 found that approximately 70 percent of the trucking employees were organized by the Teamsters Union. Contributions to the Teamsters pension funds by the employees and the employers have been made over the years. What happens to the employees' rights under those funds if the companies are forced by IRS to fund a different retirement program? Years of service and thousands of dollars of contributions by these employees may be lost. Surely IRS does not presume that these companies can afford to fund two pension programs.

This leads to the much more fundamental question of labor relations. On the one hand the rail transportation unions wish to broaden the base of the railroad retirement system. On the other hand the Teamsters union naturally wishes to protect its members and its jurisdiction.

The National Mediation Board has established a rule which is directly contrary to the position of the IRS. Under that rule, any trucking subsidiary holding an ICC certificate is not subject to the Railway Labor Act. This decision would seem to favor the Teamsters Union and yet it is faced with a diametrically opposed interpretation by IRS of an identical statute for pension purposes.

The railway unions and the railroads have a number of substantive problems to resolve in the railroad retirement area. The RRTA issue will, in fact, be the subject of intensive Congressional scrutiny in the next Session. The Chairman of the Interstate and Foreign Commerce Committee has introduced legisla