Opinion
CIVIL ACTION NO. 00-1017
December 17, 2003
MEMORANDUM RULING
This matter is before the Court on the Government's (hereinafter "IRS") Motion to Dismiss Certain Claims for Lack of Subject Matter Jurisdiction [Doc. 99] pursuant to Fed.R.Civ.P. Rule 12(b)(1). The IRS asserts that because there is a "variance" between Trans-Serve refund claim it filed with the IRS and the Amended Complaint filed herein, this Court lacks subject matter jurisdiction. The parties have also submitted cross-motions for Summary Judgment on the issue of whether Trans-Serve is an "employer" for the purposes of 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") [Docs. 74, 83]. For the following reasons, the Court hereby GRANTS in part and DENIES in part the IRS' Motion to Dismiss [Doc. 99].
PROCEDURAL BACKGROUND
On April 19, 2000, Trans-Serve filed suit against the IRS for alleged improper taxation under the RRTA and RURTA for the tax years 1987-1992 [Doc. 1]. The IRS denied payment was improper and counterclaimed for interest and penalties on RRTA and RURTA payments for 1993-1996 [Doc. 4]. Trans-Serve, in turn, counterclaimed that the 1993-1996 payments were improper as well [Doc. 7]. For clarity and efficiency's sake, defendant consented to Trans-Serve amending the complaint [Doc. 37]. The amended complaint was filed on December 6, 2001, and alleged improper taxation under the RRTA and RURTA for the tax years 1987-1992 [Doc. 41]. The amended answer included counterclaims for statutory interest, penalties, and interest on penalties for tax years 1987-1996 [Doc. 39].
The IRS filed a motion for partial summary judgment on the issue of whether Trans-Serve was an "employer" for the purposes of the RRTA and RURTA on June 20, 2003 [Doc. 74]. Trans-Serve filed a cross-motion for summary judgment on the same basis on July 8, 2003 [Doc. 83]. The instant motion to dismiss was filed at the request of the Court [Doc. 95] when the IRS raised subject matter jurisdiction in its memorandum supporting the summary judgment motion.
FACTUAL BACKGROUND
Trans-Serve is a Delaware corporation with its primary place of business in Vivian, Louisiana. [Doc. 93]. During the time in question, Trans-Serve operated three separate divisions: Superior Tie Timber, a railroad tie production plant; Fleet Maintenance, a hyrail and railroad maintenance provider; and STT Sawmill, a sawmill specializing in railroad ties. Trans-Serve is a subsidiary of Kansas City Southern Industries, Inc. (hereinafter "KCSI"). KCSI is also the parent corporation to Kansas City Southern Railroad (hereinafter "the Railroad"). Trans-Serve's claims and the IRS' counterclaims focus on the taxable nature of Superior Tie Timber as related to the Railroad.
The returns at issue in this case are 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. For each of those four time periods, the IRS provided Trans-Serve with a examination report and a thirty-day letter, which provided Trans-Serve with the basis of the tax assessment and the time period to appeal. In each of those four time periods, Trans-Serve timely filed a protest letter disputing and appealing the tax assessment. Next, during what is known as the administrative appeal process, the IRS denied Trans-Serve's protest and imposed the tax. In each period, Trans-Serve paid or secured a bond for the tax owed and filed with the IRS a refund claim. Once these claims were denied, Trans-Serve was able to file the instant lawsuit.
In its motion to dismiss the IRS requests that the scope of Trans-Serve's lawsuit be limited to the extent that: (1) Trans-Serve may only argue that it was not an employer under the RRTA and RURTA because it and the Railroad were not same-tier subsidiaries of KCSI and thus was not under common control with the Railroad; (2) Trans-Serve may not argue that its own subsidiaries be treated as identifiable and separable enterprises; and (3) Trans-Serve may only argue that it is against public policy to utilize the "sales test" to determine if it is an employer under the RRTA and RURTA for the tax years 1993-1996. The IRS bases its motion on the "variance doctrine," which prohibits taxpayers from filing refund lawsuits that substantially vary from the refund claims filed with the IRS.
LAW AND ANALYSIS
I. Standards for Motion to DismissMotions filed under Rule 12(b)(1) of the Federal Rules of Civil Procedure allow a party to challenge the subject matter jurisdiction of the district court to hear a case. Fed.R.Civ.P. 12(b)(1). In examining a Rule 12(b)(1) motion, the district court is empowered to consider matters of fact which may be in dispute. Williamson v. Tucker, 645 F.2d 404, 413 (5th Cir. 1981). Therefore, lack of subject matter jurisdiction may be found in any one of three instances: (1) the complaint alone; (2) the complaint supplemented by undisputed facts evidenced in the record; or (3) the complaint supplemented by undisputed facts plus the court's resolution of disputed facts. Barrera-Montenegro v. United States, 74 F.3d 657, 659 (5th Cir. 1996).
The burden of proof for a Rule 12(b)(1) motion to dismiss is on the party asserting jurisdiction. McDaniel v. United States, 899 F. Supp. 305, 307 (E.D. Tex. 1995). Accordingly, the plaintiff constantly bears the burden of proof that jurisdiction does in fact exist. Menchaca v. Chrysler Credit Corp., 613 F.2d 507, 511 (5th Cir. 1980). Ultimately, a motion to dismiss for lack of subject matter jurisdiction should be granted only if it appears certain that the plaintiff cannot prove any set of facts in support of his claim that would entitle plaintiff to relief. Ramming v. United States, 281 F.3d 158, 161-162 (5th Cir. 2001 (citing Home Builders Ass'n of Miss., Inc. v. City of Madison, 143 F.3d 1006, 1010 (5th Cir. 1998)). Thus, taking into consideration all the materials before it, this Court must determine whether plaintiff's claims survive subject matter jurisdiction scrutiny.
The jurisdictional basis for a tax refund action is found under 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a). Southwestern Life Insurance Co. v. United States, 560 F.2d 627, 630-632 (5th Cir. 1977), cert. denied, 435 U.S. 995, 56 L.Ed.2d 84, 98 S.Ct. 1647 (1978). Jurisdiction under these provisions is often discussed in terms of "subject matter jurisdiction," however, this description is not accurate because, unlike true subject matter jurisdiction issues which cannot be waived, the variance doctrine can be waived by the government. United States v. Memphis Cotton Oil Co., 288 U.S. 62, 69-73, 53 S.Ct, 278, 77 L.Ed. 619 (1933); Teco Energy, Inc. v. United States, 1999 WL 1273727, *7 (M.D, Fla. 1999) (waiver found due to government delaying in bringing defense, and having previously addressed the issue at the administrative level).
A. Variance Doctrine
The United States has waived its sovereign immunity and allowed itself to be sued by taxpayers seeking tax refunds. 28 U.S.C. § 1346(a)(1). However, under 26 U.S.C. § 7422(a), a taxpayer cannot sue the United States for a tax refund unless it first files an administrative claim for refund. Applicable Treasury Regulations require the taxpayer to state the specific grounds for the claimed refund. See e.g., Treas. Reg. §§ 301.6402-2(b)(1). This specificity requirement is, "calculated to avoid dilatory, careless, and wasteful fiscal administration by barring incomplete or confusing claims." Angelus Milling Co. v. Comm'r, 325 U.S. 293, 297, 65 S.Ct. 1162, 89 L.Ed. 1619 (1945).
The Fifth Circuit requires that a party requesting a refund strictly comply with applicable Treasury Regulations requiring specificity. A suit for a refund must be based on a previously filed claim which sets forth grounds and facts sufficient to apprise the Commissioner of the exact basis thereof. Mallette Bros. Const. Co., Inc. v. United States, 695 F.2d 145, 155 (5th Cir. 1983). Consequently, litigation of a denied refund claim is "limited to grounds fairly contained within the refund claim." Teco Energy, 1999 WL 1273727, at *5. The Court lacks jurisdiction to determine claims that impermissibly vary, augment or are otherwise inconsistent with the grounds originally specified by the taxpayer in its refund claim. See Angelus, 325 U.S. at 295-99. This limitation is commonly referred to as the "variance doctrine."
When determining if the variance doctrine applies, federal courts have long recognized that either a formal or an informal claim may preserve a taxpayer's right to assert a refund claim. United States v. Kales, 314 U.S. 186, 194, 62 S.Ct. 214, 218, 86 L.Ed. 132 (1941); Gustin v. United States, 876 F.2d 485, 488 (5th Cir. 1989). An informal claim is sufficient if it "puts the Commissioner of Internal Revenue on notice that the taxpayer believes an erroneous tax has been assessed and desires a refund for certain years." Gustin, 876 F.2d at 488. Although the claim must contain a written component, the writing need not provide the entire framework for the claim. Id. at 489. The Court must examine the surrounding circumstances to determine "whether under those facts the Commissioner knew, or should have known, that a claim was being made."Gustin, 876 F.2d at 488-89. This inquiry may extend beyond the corners of a taxpayer's claim for refund. Parma v. United States, 45 Fed. Cl. 124, 128 (1999). A violation of the variance doctrine will only be found where there is a substantial difference between the IRS claim and the suit for refund. Id. 45 Fed. Cl. at 129 (citing Lockheed Martin Corp. v. United States, 39 Fed. Cl. 197, 201(1997)). The initial question is whether Trans-Serve filed a formal or informal refund claim with the IRS, that provided sufficient notice and detail regarding its refund claim to enable the Commissioner to undertake an investigation.
B. Waiver
Even if Trans-Serve is found not to have filed an adequate formal or informal refund claim with the IRS, subject matter jurisdiction may still exist. Although the government's defense of variance is jurisdictional in nature, it can be waived by the Service either during its administrative consideration of the refund claim or by allowing without objection the presentation of new grounds by the taxpayer. Mallette Bros., 695 F.2d at 155-57; First Nat'l Bank of Fayetteville v. United States, 727 F.2d 741, 745 (8th Cir. 1984). To prove waiver of the variance doctrine, the taxpayer carries "an extremely heavy burden." Mallette Bros., 695 F.2d at 156.
A waiver by consideration is recognized where there is convincing evidence that the Commissioner examined the merits of a particular claim and took action upon it. Friedmann v. United States, 107 F. Supp.2d 502 (D.N.J. 2000). Clearly, if the Service actually considers a ground during its administrative review of the refund claim, then the claim will be adequate for purposes of bringing suit on such ground. Neptune Mut Ass'n v. United States, 13 Cl.Ct. 309 (1987); Union Pacific Railroad v. United States, 182 Ct.CI 103, 389 F.2d 437 (1968). However, the mere availability of the facts underlying a claim or the IRS' investigation of facts which may relate to the claim will not support a showing of waiver. Mallette Bros, 695 F.2d at 156; Union Pacific, 389 F.2d at 444-45. Therefore, in order to prove the IRS waived the variance doctrine by consideration, "[a] taxpayer must show that the IRS was aware of the particular dispute at issue and deliberately investigated the underlying facts of that dispute with the purpose of deciding its merits."Friedmann, 107 F. Supp.2d at 507.
A waiver by failure to object can be both explicit and implicit. An example of explicit failure to object is when the attorney consents for reasons of expediency to allow the taxpayer's claim to be heard. See Foyt v. United States, 561 F.2d 599 (5th Cir. 1977). Implicit waiver can be found where the IRS waives its right to object to the sufficiency of the taxpayers' claims and complaints because of its failure to timely raise the objections.First Nat'l Bank of Fayetteville v. United States, 727 F.2d at 745 (citing Helis v. Usry, 496 F.2d 1319, 1321 (5th Cir. 1974)). Thus, in order to prove the IRS waived the variance doctrine by failure to object, a taxpayer must show an explicit waiver or unreasonable delay in raising the variance defense.
II. Subject Matter Jurisdiction is Granted in Part and Denied in Part
A. IRS' Requested Limitation on Employer Argument
The IRS requests that Trans-Serve's argument that it is not an employer under the RRTA be limited to the grounds it and the Railroad were not same-tier subsidiaries of KCSI and thus was not under common control with the Railroad. The IRS argues that, "[a] fair reading of the refund claim does not support [Trans-Serve]'s position that matters other than whether [the Railroad] and [Trans-Serve] were same-tier subsidiaries of KCSI were raised in the refund claims." [Doc. 99, p. 13]. Trans-Serve maintains that it broadly and adequately raised issues of common control in both its refund claims and earlier protest letters.
Each of Trans-serve's ten refund claims included the following arguments with regard to being considered an "employer" under the RRTA:
The Taxpayer is not an `employer' within the meaning of the RRTA and has no liability for employment taxes thereunder. To be an `employer' within the meaning of the RRTA, the Taxpayer must meet both an `ownership or control' test and a `service and connection' test. The ownership or control test is met only if the Taxpayer is: (a) a carrier, (b) a company directly or indirectly owned or controlled by a carrier, or (c) a company under common control with a carrier. Section 3231(a). The service and connection test is satisfied if the Taxpayer: (a) operates any equipment or facility in connection with the transportation of passengers or property by railroad, or (b) performs any service (except trucking service or casual service) in connection with the transportation of passengers or property by railroad. Id. Unless both tests are met, the Taxpayer does not constitute an `employer' and therefore, is not subject to the RRTA. . . .
The Taxpayer is not a `carrier' as defined by the RRTA, nor is it controlled by a carrier because Taxpayer is not a subsidiary of a railroad. Moreover, common control does not exist. To constitute common control the ownership of the Taxpayer must be direct; indirect ownership is not sufficient. To be under `common control' with a carrier, the common parent must directly control both the carrier and the other company as first tier subsidiaries. Union Pacific Corp. v. United States, 5 F.3d 523 (Fed. Cir. 1993). In this case, KCSI does not directly control the Taxpayer and a railroad.
The Taxpayer is not a carrier, is not controlled by a carrier, and is not under common control with a carrier. Hence, the Taxpayer is not an `employer' within the meaning of the RRTA . . .
Furthermore, Taxpayer does not meet the service and connection test. In order for the Taxpayer to satisfy the service and connection test, it must "perform [a] service in connection with the transportation of passengers or property by railroad." Sections 3231(a) and 3322(a). Taxpayer is a manufacturer and its manufacturing activities do not constitute the providing of a "service." Nor does the Taxpayer operate any equipment or facility in connection with the transportation of passengers or property. Its activities as a manufacturer are not connected with the actual transportation of passengers or property. Accordingly, the Taxpayer does not meet the service and connection test.
Even if the Taxpayer is deemed to have provided a service, any such service is excluded under the service and connection test because it is a casual service or involves the casual operation of equipment or facilities. Section 3231(a). A service or operation is "casual" when the service rendered in connection with the transportation of passengers or property by railroad is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be ongoing, or whenever such service or operation is insubstantial. Treasury Regulation Section 31.3231(a)-1(c). The manufacture of railroad ties by Superior Tie comes within the definition of "casual" because its operation is not substantial in connection with the transportation of passengers or property. The process used by Superior Tie is a manufacturing process and has little, if any, connection with the actual transportation of passengers or property by rail.
Taxpayer does not meet either the ownership or control test or the service and connection test. Accordingly, the Taxpayer is not an "employer" within the meaning of the RRTA, and is not liable for RRTA taxes.
Plaintiff's Exhibits A-1 to A-10 to First Amended Complaint (emphasis in original). In arguing that it is not an employer under the RRTA statute, Trans-serve states generally that it, "is not a carrier, is not controlled by a carrier, and is not under common control with a carrier," and specifically with regard to common control that, "[t]o be under `common control' with a carrier, the common parent must directly control both the carrier and the other company as first tier subsidiaries." Id. Trans-Serve submitted protest letters for each of the time periods which also broadly discusses classification as an "employer" and common control. Defendant's Exhibits 1058-1061 to Motion to Dismiss.
The purpose of the variance doctrine is to allow for resolution of the taxpayer's claim at the administrative level and to prevent surprises during subsequent litigation. Mallette Bros. v. United States, 695 F.2d 145, 155 (5th Cir. 1983) (citing United States v. Felt Tarrant Mfg. Co., 283 U.S. 269, 272, 51 S.Ct. 376, 75 L.Ed. 1025 (1931). The specificity requirement also serves to inform the Commissioner as to which matters he should investigate. Mallette Bros. v. United States, 695 F.2d 145, 155 (5th Cir. 1983). Trans-Serve alerted the IRS in each of its protest letters and in each of its refund claims that Trans-serve did not consider itself an employer under the RRTA, and that it was not under common control with the Railroad. In the refund claims, Trans-Serve specifically addressed one of the tests of common control-ownership as affected by subsidiary tier structure. To allow the IRS to now claim surprise and limit the suit to that one aspect of the common control test would not serve the purposes underlying the variance doctrine. It is clear to this Court that Trans-Serve has consistently maintained that it is not under common control with the Railroad and that neither Trans-Serve's protest letters nor their refund claims vary substantially from the complaint in this action.
Moreover, the facts demonstrate that the government was at all times aware of the common control issue and even considered it in their initial audits. Defendant's Exhibits 1042-1044, 1058 to Motion to Dismiss. This might constitute waiver by consideration, however a dearth of information as to the IRS appeals decisions in this matter prevents the Court from making that determination at this time. Such determination, however, is unnecessary as there has been no variance on this ground. Accordingly, Trans-Serve may proceed on its general claims that it is not an employer for the purposes of the RRTA and its specific claims that it is not under common control with the Railroad. Trans-Serve will not be limited in its proof of that position to the same-tier subsidiary argument. The IRS' motion to dismiss on this variance claim is denied.
B. IRS' Requested Limitation on Percentage of Sales Argument
The IRS also requests that the Court limit, to claims from the tax years 1993-1996, Trans-Serve's argument that the "percentage of sales test" is not an appropriate to measure service and connection to determine if it is an employer under the RRTA. While Trans-Serve specifically mentioned the percentage of sales test in refund claims for tax years 1993-1996, the IRS notes that, "[n]o facts supporting such an argument were included in any of these [1987-1992] refund claims . . ." [Doc. 99, pp. 18]. Trans-Serve did, "make arguments regarding this issue in its protest letters for th[o]se tax years," and protest letters can form the basis of informal refund claims. [Doc. 99, pp. 18-19]; Gustin, 876 F.2d at 489. However, in this instance, the IRS is taking the position that because the issue of the percentage of sales test was specifically raised in the protest letters, but not in the refund claims, it was abandoned by Trans-serve. The IRS cites, Foyt v. United States, for support. 561 F.2d 599, 603-05 (5th Cir. 1977).
The IRS also contends that Trans-Serve's failure to offer "factual evidence that the Service had such a formal policy, that the Service directs its agents to employ a percentage of sales test, or that employers or employees are injured given the integrated nature of the Railroad Retirement and Social Security systems," is fatal to Trans-Serve's argument against the use of the percentage of sales test to determine its employer status under the RRTA. [Doc. 99, p. 19]. However a claim should be dismissed for subject matter jurisdiction only if it appears certain that the plaintiff cannot prove any set of facts in support of his claim that would entitle plaintiff to relief. Ramming v. United States, 281 F.3d 158, 161-162 (5th Cir. 2001). The briefs submitted in this matter do not make clear that Trans-Serve would be unable to substantiate its claim. Therefore, to the extent the IRS argues that lack of evidence defeats subject matter jurisdiction, they are incorrect.
As with the case at bar, the taxpayer in Foyt asserted a ground for refund in his protest letter, did not address that ground in his refund claim, and then included it in his refund lawsuit. The Court held that the IRS had affirmatively waived the variance doctrine by agreeing to proceed to trial on the disputed issues. Foyt, 561 F.2d at 605. While not directly addressing whether the taxpayer's failure to include the ground in his refund claim, after having raised it in the protest letter, precluded him from litigating it, the Court stated that, "if the Commissioner is not deceived or misled by the taxpayer's failure to describe his claim accurately, disposing of the claim on its merits in a first trial may be more convenient for the government and is decidedly in the interest of an orderly administrative procedure." id. at 604.
As quoted in Section A above, Trans-Serve's formal refund claims for the tax years 1987-1992 adequately raise the ground of recovery that Trans-Serve does not meet the service and connection prong of the RRTA employer test. The percentage of sales factor is a measure used in that determination and is therefore a proper subject for inclusion in this lawsuit. The IRS cannot claimed to be "deceived or misled" that Trans-Serve is addressing the IRS' use of the sales percentage factor in determining that Trans-Serve is an employer under the RRTA. Again, there are not enough facts in the record to make a determination of whether a waiver by consideration occurred at the administrative level. But, as before, this is not necessary because there is no substantial variance regarding the service and connection defense raised in the refund claim and the instant lawsuit. Therefore, Trans-Serve may argue that the percentage of sales test is not the proper measure of an employer under RRTA for tax years 1987-1996. Accordingly, the IRS' motion to dismiss on this variance claim is denied.
However, this lawsuit does substantially vary from the refund claims for the years 1987-1992, to the extent that Trans-Serve attacks the propriety of the IRS's methodology as a separate, public policy ground for recovery. Trans-Serve clearly laid out a severable, public policy defense in all of its protest letters, and in the refund claims for the years 1993-1996. While an informal refund claim on this ground, based on protest letters alone, could be said to exist for 1987-1996, the inclusion of the ground in the formal refund claims for the years 1993-1996 seems to evidence oversight or purposeful waiver on Trans-Serve's behalf for the earlier periods in question. Accordingly, to the extent that Trans-Serve seeks to raise a public policy basis for recovery for the years 1987-1992, that argument is outside of the jurisdiction of this Court because it varies substantially from the refund claims filed. The IRS' motion to dismiss on this variance claim is granted.
C. IRS' Requested Preclusion of Separate Enterprise Argument
Finally, the IRS' moves this Court to preclude Trans-Serve's argument that its own subsidiaries be treated as identifiable and separable enterprises. The IRS argues that, "it is clear that [Trans-Serve] made no effort to clarify this aspect of its potential claims for refund in its protest letters or in the [refund claims]." [Doc. 99, p. 18]. In fact, Trans-Serve makes no mention of the identifiable and separable argument prior to the Pretrial Order filed in this case, [Doc. 93]. Trans-Serve maintains that its general argument — that none of its employees are appropriate for protection under the RRTA — reasonably includes the proposition that some of its employees are not appropriate for protection under the RRTA. The Court disagrees. The separation of the employee pool into two identifiable divisions is an alternative argument, not a subset of one already made, and therefore varies substantially from the refund claim. However, Trans-Serve will be allowed to make this new argument because the IRS has waived the variance doctrine by consideration.
A waiver by consideration occurs when the IRS is aware of a particular issue and investigated it in order to make a determination on its merits. Friedmann, 107 F. Supp.2d at 507. The IRS concedes that during the relevant period, Trans-Serve operated three divisions or departments: Superior Tie Timber; Fleet Maintenance ("Fleet"); and STT Sawmill ("Sawmill"). [Doc. 93, p. 4]. The parties agree that the IRS did not include the Sawmill in its RRTA calculations, and there is no record evidence that the Sawmill employees were ever considered by the IRS. [Doc. 99, p. 17; Doc. 100, p. 11]. There is evidence however that Fleet employees were treated separately by Trans-Serve and that the IRS struggled with the inclusion of the Fleet employees in its RRTA determination.
The IRS does not discuss, in any of its audits or otherwise, Sawmill and its employees. Other than mentioning that Sawmill exists and was subsequently closed, Trans-Serve likewise avoids discussing Sawmill and its employees. This is consistent with both parties' claim that Sawmill and its employees were irrelevant to the RRTA discussion.
1. IRS Audit Description of Superior
Each of the audit reports created by the IRS describe the taxpayer as "Superior Tie Timber Company," not Trans-Serve. Superior's business is specifically, "provid[ing] the railroad companies with wooden railroad ties that are processed and treated at the tie plant and yard located at Vivian, Louisiana" IRS Exhibits 1042, 1043, 1044, and 1028C (emphasis added). As we know, Trans-Serve also operated Sawmill and Fleet, yet neither of these business functions are mentioned. [Doc. 93, p. 4]. Like Sawmill's conspicuous absence in the audits' descriptive paragraphs, Fleet's absence seems to indicate the IRS did not consider it in the RRTA calculations.
Trans-Serve is described in the audits as Superior's parent corporation.
2. Documentation for Tax Years 1987-1988
Among the documents attached to Audit Form 886-A (Explanation of Items) for years 1987-1988 are the Trans-Serve Summaries of Operating Revenues for 1987 and 1988. IRS Exhibit 1042. The revenue of "Tie Sales TSO Revenue" is tallied separately from the revenue of "Fleet Service Fees." The notations on the document illustrate how the IRS agent combined the two separate divisions to determine the total revenue generated from "affiliated" companies. In 1988, Trans-Serve only shows revenue from Tie Sales; Fleet is not mentioned.
The Court is not at this time considering whether the noted companies were in fact affiliated for the purposes of the RRTA. It is clear, however, that the IRS was treating them so at the time of the audit.
3. Documentation for Tax Years 1989-1990
In 1989-1990's Form 886-A attachments, Fleet reappears in the 1990 revenue statement, again as a separate division. IRS Exhibit 1043. There, the IRS also includes the Fleet revenue in the RRTA computation. Also included in this set of audit attachments is Form 941 — FICA Wages and Tax Statement for Superior Tie. The statement is broken down by "All employees except plant manager" and "Plant Manager." No mention is made of Fleet.
The FICA statement was not included with the 1987-1988 audit documents. The FICA statements discussed in this opinion were prepared by the IRS for inclusion in the Explanation of Items (From 886-A) and therefore are reflective of its consideration of an issue.
4. Documentation for Tax Years 1991-1992
The documents attached to Form 886-A (Explanation of Items) for years 1991-1992 are also somewhat different from the previous years. IRS Exhibit 1044. No revenue statement is attached at all. The FICA statement no longer separates employees into "Plant Manager" and ". . . employees . . .", but instead divides the employees of Superior Tie as working either at the "Tie plant in Vivian" or "Shreveport." Notably, Fleet is located in Shreveport, not Vivian. [Doc. 93, p. 4].
5. Documentation for Tax Years 1993-1996
In the last taxable period at issue, the audit attachments include revenue statements for 1993-1996 and the FICA statement. IRS Exhibit 1028C. The revenue statements include only "Tie Sales TSO Revenue." Fleet is not mentioned. The FICA statement no longer separates the employees, but gives general totals. Finally, Form 4666 is slightly different in this fast period, as compared with the earlier audits. Earlier forms discuss Superior's employees generally, but this audit's Form 4666 specifically addresses the "Vivian plant personnel." Combined with changed reporting on the FICA statement, it appears that the IRS is taxing the Vivian plant, not the Shreveport location.
6. Conclusion
In the record documents, the IRS fails to discuss either Sawmill's or Fleet's place within the Trans-Serve family of businesses, but instead focuses on Superior. The IRS concedes that the Sawmill is not appropriate for inclusion with Trans-Serve for RRTA purposes. A liberal reading of the record would say the same regarding Fleet. However since the Fifth Circuit strictly construes the variance doctrine and the burden to prove waiver is heavy, a more conservative reading is required.
By having knowledge of the Fleet division but failing to discuss it in the description of the business product or directly address its tax liability during the audits, the IRS did not put the taxpayer on notice that Fleet was being included in its assessment under the RRTA. Therefore the taxpayer could not hope to protest on that basis. Now seeking to include Fleet appears to impermissibly vary the basis of the IRS' assessment.
At all relevant times, the IRS knew that there were two identifiable and separable divisions of Trans-Serve other than Superior. The IRS considered whether or not to include the employees of those divisions under the protection of the RRTA. Sawmill's employees were explicitly excluded. Fleet's employees were neither explicitly included or excluded. In each audit cycle, Trans-serve employees are listed by name, but not by division of employment or location of workplace. Therefore, before the 1991-1992 audit, it is not clear whether the IRS considered Fleet employees separately from Superior employees, or whether they were considered at all. In that audit the IRS separated the employees into Vivian and Shreveport locations, which corresponded respectively to the Superior and Fleet divisions.
With regard to the businesses themselves, the IRS audit descriptions focused exclusively on Superior and its business product. There is nary a mention of Fleet's maintenance business. However, Fleet's revenue and employee contributions are used in some financial calculations made by the IRS. Specifically, the IRS combined Fleet's revenue with Superior's revenue in 1987 and 1990, and included Fleet's FICA contributions in 1991 and 1992. As a result, the IRS seems to include Fleet's finances but not its services — a tenuous position.
While its approach does not seem consistent from year to year, the IRS considered whether Fleet was a separate and identifiable enterprise in determining Trans-Serve's RRTA tax liability. This struggle of how to classify Fleet seems to have resulted in an intentional exclusion in the 1993-1996 audits. The documentation and Form 4666 description for those years is focused on the Vivian employees, as separable from the Shreveport employees. By acknowledging this issue, examining it, and making a determination, the IRS has waived this variance by consideration. Accordingly, the IRS' motion to dismiss on this variance issue is denied.
III. Conclusion
The IRS' Motion to Dismiss is granted in part and denied in part. The variance doctrine requires that the scope of Trans-Serve's lawsuit be limited to claims addressed in the administrative refund process. Trans-Serve may not argue as a separate ground for relief that it is against public policy to utilize the "sales test" to determine if it is an employer under the RRTA and RURTA for the tax years 1987-1992, this ground varies substantial from the refund claims. However, Trans-Serve may argue: (1) generally that it was not an employer under the RRTA and RURTA and was not under common control with the Railroad; and (2) that the percentage of sales test is not the proper measure of "service and connection" when determining if Trans-Serve is an employer under RRTA. These grounds for recovery do not vary substantially from the refund claims. Finally, Trans-Serve may argue that its own subsidiaries should be treated as identifiable and separable enterprises for the purposes of consideration under the RRTA. Though this ground does vary substantial from the refund claims filed, the IRS has waived this variance by consideration.
Therefore:
IT IS ORDERED that Defendant IRS' Motion to Dismiss [Doc. 99] shall be GRANTED IN PART and DENIED IN PART.