LOS ANGELES RY CORPORATION v. DEPARTMENT OF EMPLOYMENT CALIFORNIA EMPLOYMENT COMMISSION (1946)

This is an appeal by plaintiffs Los Angeles Railway Corporation and Pacific Electric Railway Company from a judgment in favor of defendants in four consolidated actions brought to recover sums paid under protest to California Department of Employment. The amounts involved represent employer's and employees' contributions based upon wages paid to the employees of Los Angeles Motor Coach Lines, formerly Los Angeles Motor Coach Company, which is a system of motor coaches operated jointly by plaintiffs in and around Los Angeles. The service was inaugurated in 1923 and was set up under agreement between the plaintiffs, by the terms of which each of them was to furnish one-half of the equipment and capital necessary for the operation, and was to share equally in the ownership, profits and losses thereof.

The controversy has arisen in the following manner: Prior to July 1, 1939, plaintiffs made reports and payments as required by the California Unemployment Insurance Act of 1935, Stats.1935, chap. 352, p. 1226, to defendant Commission, each plaintiff reporting and paying upon one-half of the wages of the employees of the motor coach company. Pacific Electric Railway Company is a railroad corporation subject to Part I of the Interstate Commerce Act, 49 U.S.C.A. § 1 et seq., and is an ‘employer’ within the definition of that term as contained in, and subject to the provisions of, the Railroad Retirement Act of 1937, Chapter 382, 50 Statutes 307, 45 U.S.C.A. §§ 228a–228s, the Carriers Taxing Act of 1937, Chapter 405, 50 Statutes 435, 45 U.S.C.A. §§ 261–273, now codified as Subchapter B, Chapter 9 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 1500 et seq., and Railroad Unemployment Insurance Act of 1939, Chapter 680, 52 Statutes 1094, 45 U.S.C.A. §§ 351–367. These acts set up a system of social security for the railroad industry. Los Angeles Railway Corporation is a street railway company and is not an ‘employer’ as defined in the three mentioned Federal Acts but is subject to the provisions of Subchapter C of Chapter 9 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 1600 et seq., Social Security Act and to the provisions of the California Unemployment Insurance Act. On July 1, 1939, the Railroad Unemployment Insurance Act went into effect and thereafter Pacific Electric Railway Company made its reports and contributions under that Act and ceased to make them under the California Act. The Railroad Unemployment Insurance Act relieved it of a duty to contribute further under the State Act or under Subchapter C of Chapter 9 of the Internal Revenue Code, designated Federal Unemployment Tax Act, formerly Title IX of the Federal Social Security Act of 1935, 42 U.S.C.A. §§ 1101–1110. In 1939, in order to conform to the Federal Act, section 7.5 was added to the California Unemployment Insurance Act, Stats.1939, Chap. 169, p. 1408, reading as follows: ‘The term employment does not include service performed after June 30, 1939, with respect to which unemployment compensation is payable under the Railroad Unemployment Insurance Act, and service with respect to which unemployment benefits are payable under an unemployment compensation system for maritime employees established by an act of Congress.’ Los Angeles Railway Corporation contributes under the Federal Social Security Act and made contributions to the California Unemployment Commission until March 31, 1942, when it ceased to make contributions on its share of wages paid to employees of the coach company. Defendant Commission did nothing about plaintiffs' discontinuance of contributions under the State Act until June, 1942. From that time on, both State and Federal agencies have laid claim to contributions based upon wages paid by both plaintiffs to employees of the motor coach company. They disagree as to the status of those employees, the Federal agencies having claimed from the beginning that they are the employees of both plaintiffs and that the motor coach system is engaged in transportation by railroad, and defendants insisting that their real employer is the Los Angeles Motor Coach Lines, an entity separate from plaintiffs. It was ruled by the Commissioner of Internal Revenue that Pacific Electric Railway Company's one-half of the wages was subject to the Carriers Taxing Act of 1937 and the Railroad Unemployment Insurance Act of 1939, and not subject to the taxes imposed by Title VIII of the Social Security Act, 42 U.S.C.A. §§ 1001–1011, now codified as Subchapter A, Chapter 9 of the Internal Revenue Code and designated Federal Insurance Contributions Act, 26 U.S.C.A. Int.Rev.Code, § 1400 et seq. The significance of this ruling will be discussed later. Los Angeles Railway Corporation's half of the wages of the employees of the motor coach company was ruled to be subject to taxes under the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. The basis of the rulings was that the motor coach employees were employees of Pacific Electric and within the Federal system, and the effect of the rulings was to take both plaintiffs from under the operation of the California Unemployment Insurance Act with respect to compensation paid to employees of the motor coach company. Plaintiffs accepted the several rulings of the Federal agencies and complied therewith. In June, 1942, defendant Commission first made demands for contributions under the State Act dating from July 1, 1939, as to the Pacific Electric Railway's share, and from March 31, 1942, as to the share of Los Angeles Railway Corporation computed on compensation paid to employees of the Coach Company. Similar demands were made covering later periods. The amounts demanded were paid, with penalties and interest, and the present suits were instituted for the recovery thereof. The question for decision requires a consideration of the nature of the operation of the bus service. If it is a ‘service in connection with the transportation of passengers or property by railroad,’ its employees are to be considered employees of Pacific Electric and subject to the Federal Acts, and not the State Act. In the Railroad Unemployment Insurance Act, and also in the Carriers Taxing Act, the term ‘employer’ is defined as follows: ‘The term ‘employer’ means any carrier (as defined in subsection (b) of this section), and 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, * * *.' Each Act provides: ‘The term ‘company’ includes corporations, associations, and joint-stock companies.'

In the trial of the present actions the principal facts were stipulated and the trial court concluded therefrom that plaintiffs are not employers of the employees of the motor coach company within the definitions of the Federal Acts, but that the motor coach company is a separate entity, is the employer of those who work for it, and that the amounts in question were properly paid to the State Commission. This holding is supported by the decisions of the Federal courts. Similar rulings have been made in other cases in the Superior Court of Los Angeles County and by the administrators of the State Act.

Since the present appeal was taken, the District Court of the United States, Southern District of California, Honorable Paul J. McCormick, Judge, rendered a decision in consolidated actions brought by these same plaintiffs against the United States for the recovery of taxes paid under the Carriers Taxing Act and for a determination as to whether payments theretofore made by Pacific Electric Railway Company representing its half of employer's and wage earners' contributions upon compensation paid to the employees of Los Angeles Motor Coach Lines should have been made under the Social Security Act and not the Carriers Taxing Act. Pacific Electric Railway Co. v. United States, 64 F.Supp. 796. Judge McCormick delivered an oral opinion evidencing a studious and comprehensive analysis of the authorities, and he found that the Pacific Electric is not an employer within the Carriers Taxing Act, insofar as the operation of the Los Angeles Motor Coach Lines is concerned, and that the latter is a ‘company’ and the employer of those who work for it. Plaintiffs had emphasized the fact, which they stress here, that in their contract they stipulated that their operation of the motor coach lines was not a partnership, but a mere agency. In the course of his opinion Judge McCormick stated: ‘In this case to find that the Pacific Electric Railway and the Los Angeles Motor Coach Lines are one and the same legal entity for the purpose of this legislation would not be in accord with the intention of Congress because such a finding would include within the separate and special social security system provided for the railroad industry, a motor carrier.’ One of the findings in the actions read in part as follows: ‘That said operation is not directly or indirectly owned or controlled by plaintiff, Pacific Electric Railway Company, but is jointly owned and controlled by plaintiff, Pacific Electric Railway Company, with Los Angeles Railway Corporation. That said operation is engaged exclusively in the transportation of passengers by motor coach in intrastate commerce. That said operation does not operate any equipment or facility or perform any service 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.’ A similar finding was made in the instant case. There is no controversy over the facts and we are satisfied that they establish that the business of the motor coach lines is a distinct local operation, entirely separate from the business of the Pacific Electric Railway, and that it does not embrace in any way the transportation of passengers or property by railroad. Judge McCormick's decision is directly in point for, as previously stated, the definition of the term ‘employer’ in the Railroad Unemployment Insurance Act is identical with the definition of that term in the Carriers Taxing Act. In view of that decision, no weight can be accorded the rulings of the Federal Administrative Agencies to the effect that Pacific Electric and Los Angeles Railway are employers of those who work for the motor coach lines.

Earlier decisions of the Federal courts have recognized in the several enactments of Congress an intention to set up a system of social security for the railroad industry, from which other types of carriers would be excluded. In Allen v. Ocean S. S. Co. of Savannah, 5 Cir., 1941, 123 F.2d 469, the steamship company was allowed to recover taxes, which had been collected from it under the Carriers Taxing Act upon the erroneous theory that it was a company which performed services or handled property in connection with the transportation of passengers or property by railroad. The stock of the steamship company was owned by a railroad and its operations were much more closely connected with those of the railroad than are the operations of Los Angeles Motor Coach Lines with those of Pacific Electric Railway Company. In holding that the water carrier was not included within the Carriers Taxing Act, the court said (123 F.2d at page 471): ‘It is quite apparent that the construction appellant contends for will result in cutting across industrial lines and in absorbing into the special railroad insurance system, some parts of other industries because those parts happen to be owned by railroads, while that for which appellee contends, will have no such effect. That consideration alone should, we think, give us pause in construing, indeed should prevent our construing the act as appellant does, unless its language does not reasonably admit of any other result.’

Walling v. Baltimore Steam Packet Co., 4 Cir., 1944, 144 F.2d 130, was an action to recover taxes which had been assessed against a steamship company under the Carriers Taxing Act, and for other relief. The steamship line was owned by railroad carriers and it operated in connection with rail transportation to the extent of establishing and maintaining through routes and joint rates with connecting carriers. It was held that the company was not subject to wage orders of the Fair Labor Standards Act relative to railroad carriers and was not a railroad carrier or employer within the meaning of the Carriers Taxing Act. The court said (144 F.2d at page 134): ‘Certainly the Congressional intent to include water carriers cannot be drawn from the fact, if it be a fact, which appellant makes so much of, that water carriers, in addition to performing purely steamship services, perform for a charge and for themselves, transportation service which the railroad carriers could have undertaken but left to the water carriers to perform. For, if this were the simple criterion, Congress could easily and would have said so, instead, as it did, of confining the application of the act to rail carriers and companies owned by them which performed a part of their transportation service for them.’ Reference was made in the opinion to proceedings before a Senate committee when the Carriers Taxing Act was under consideration, and the reports quoted by the court lend support to the view that carrier-owned steamship companies and bus companies were intended to be excluded from the operation of the Act.

Interstate Transit Lines v. United States, D.C.1943, 56 F.Supp. 332, was an action to recover taxes paid under the Carriers Taxing Act by a bus corporation, the stock of which was owned by a railroad corporation. In holding that the taxes should be refunded the court said (56 F.Supp. at pages 333, 334): ‘We hold therefore that the bus service, in which plaintiff is engaged, is service in connection with the transportation of passengers or property by bus, rather than by railroad, and that any contact, connection or interchange of service between the railroads and the plaintiff are mere incidents to their business, and such as are practiced and engaged in by other lines of transportation. Having arrived at this conclusion, it is a simple matter to apply the law. The Act of Congress is simple in language and should be easily and readily understood. The meaning of the word ‘employer’, as the word is used in the act, is defined, and this word pertains only in connection with the transportation of passengers or property by railroad, within the meaning of Section 1(a) of the Carriers' Taxing Act of 1937.'

The trial court in the instant case correctly held that the Pacific Electric Railway Company is not an ‘employer’ of the individuals who work for Los Angeles Motor Coach Lines, within the definition of the term in the Pailroad Unemployment Insurance Act.

Under the State Act, as amended by Stats.1937, chap. 739, p. 2053, sec. 8.5, an ‘employing unit’ means ‘any individual or type of organization, including any partnership, association, trust, estate, joint stock company, insurance company or corporation,’ etc. Defendants insist that the motor coach company is a partnership. Plaintiffs insist that it is a mere agency, but their argument upon that point is identified with their contention that the motor coach lines are operated as a part of their railroad operation. The language of the California Act was intended to be broad enough, we think to include all groups of individuals who operate as a unit, whether as a partnership, association, or any other type of organization. The motor coach operation is under the general control of the presidents of the plaintiff corporations and the direct management of a manager, assistant manager, and subordinate officers and employees, but except for the fact that the management is headed by officers of the two plaintiffs and the further fact that it makes use of some of the facilities of the plaintiffs, such as their auditing and purchasing departments, its business operations do not differ from what they would be if the lines were owned by others than plaintiffs. The joint operation possesses the characteristics of a partnership, in that it is one in which the profits and losses are to be equally shared, but it is not necessary to determine whether it is a partnership, in view of the broad language of the statute, which includes associations and other types of organizations. It is clearly an employer under the State Act.

Plaintiffs advance the further contention that defendants are estopped to exact payment of sums which accrued between July 1, 1939, and the date when defendants first demanded additional payments, namely, in June, 1942. The conduct upon which the claim of estoppel is rested consists not of any affirmative rulings or action taken by defendants, but of their mere inactivity to assert the rights of the State in opposition to those of the Federal Government. We note from the exhibits that the Federal agencies were concerned with the status of the employees of the motor coach company from a time shortly after the Railroad Unemployment Insurance Act took effect. It is said that Pacific Electric at all times complied with the rulings of the Federal agencies, and it is to be presumed that in doing so it accepted the construction of the Acts held by the Federal administrators. As early as October, 1940, the general counsel of the Railroad Retirement Board ruled that the employees of the motor coach company came within the Railroad Retirement and the Railroad Unemployment Insurance Acts, and within the following month the president of the Pacific Electric Railway was advised of this fact. Plaintiffs appear to have relied upon their own judgments and the affirmative actions of the Federal agencies rather than the inaction of the State Commission. The most that can be said in favor of the claim of estoppel is that for a period of three years a mistaken view of the law was entertained by the plaintiffs and both the Federal and the State administrative agencies. It does not appear that responsibility for the mistake rests solely upon the administrators of the State law, or that they led the others, any more than they were led, into the error. It would be difficult to believe that a construction of the Federal Act which operated to the disadvantage of the State originated with State officers or agents.

The doctrine of equitable estoppel may not be invoked to defeat a just claim where each of the parties has acted in good faith and in the exercise of his own independent judgment. This is a sufficient reason for denying the claim of estoppel without pursuing the subject further.

The judgment is affirmed.

SHINN, Justice.

DESMOND, P. J., and WOOD, J., concur.