October 9, 1975
Page 32827
By Mr. MUSKIE (for himself and Mr. HATHAWAY):
S. 2518. A bill to amend the Internal Revenue Code of 1954 to treat the non-cash remuneration paid to certain workers on fishing boats as self-employment income for purposes of the Federal Insurance Contributions Act, and for purposes of Federal income tax withholding requirements. Referred to the Committee on Finance.
AN ACT TO EXCLUDE STERNMEN WITHHOLDING TAX REQUIREMENTS
Mr. MUSKIE. Mr. President, I introduce, for myself and Senator HATHAWAY, legislation designed to permit the continuation of a traditional working arrangement in the lobster fishing industry which is threatened by recent IRS rulings.
Maine lobstermen informally cooperate from time to time with each other or a helper to overcome hardships resulting from bad weather or other unusual work demands. For example, a lobster boat captain might ask a colleague or clam digger to join him in his rounds and assist him in handling traps during inclement weather. These helpers are called sternmen because their duties — handling traps and gear — are performed in the rear of the boat. According to the traditional, informal agreements, the sternmen receive a share of the lobster catch for the day in return for their assistance.
The boat owner makes no guarantee as to how much the sternman will earn. In the case of an unsuccessful trip, the sternman might not receive anything.
There is generally little formality or continuity to these arrangements. There are no written contracts and the sternman usually works with a boat owner for only brief periods. He may own his own boat and join another captain while his own vessel is under repair or he may be a clam digger working on fishing boats while flats are closed or inaccessible.
Until recent IRS rulings altered the practice, both the boat owner and the sternman considered themselves as self-employed and reported their income from the fishing venture on their own return with no withholding required. These arrangements were convenient and logical since each was otherwise filing a return as a self-employed person and because of the occasional nature of the sternman's work. Maine fishermen have always filed returns in this manner and it was accepted by the Internal Revenue Service until they began to apply Revenue Ruling 385 to demand that taxes be withheld.
I believe the IRS erred in deciding to extend withholding provisions to the sternman. Neither the court decisions nor the revenue rulings related to this matter directly cover the status of a boat owner who uses a single sternman. The determination to apply withholding provisions to these individuals is apparently part of a recent broad effort to enforce payroll withholding requirements. I have requested IRS officials to limit their application but have not succeeded in persuading them that sternmen are an inappropriate target for this crackdown. The IRS has persisted in applying Revenue Ruling 72-385 to treat sternmen as employees whose taxes must be withheld.
The change has been dramatic for Maine fishermen with the application of this revenue ruling and the beginning of a massive IRS audit of lobstermen under the "Lobster Project." In some cases, boat owners were required to pay withholding taxes retroactively despite payment of taxes on the same wages as self-employment income by the sternmen. The apparent inequities involved have offended all those familiar with the audits and have discouraged cooperation between lobstermen and IRS.
The frustration and expense related to keeping records and withholding taxes for sternmen have discouraged these cooperative arrangements and threaten to adversely affect lobstering efforts in areas of rough seas or during bad weather. I find the economic consequence for the individuals and communities involved an unacceptable cost for the minimal convenience afforded the IRS under this ruling, and am introducing this legislation to correct the situation by requiring that sternmen be treated as self-employed under the Federal Insurance Contribution Act and withholding provisionsof the Federal income tax. A recent article by Peter B. Sang, Esq., on the "Tax Status of Sternmen on Fishing Boats," published in the Maine Bar Bulletin, July 1975, supports this action. To quote from Mr. Sang's conclusion:
The real answer is Congressional relief in the form of an amendment to the law.
The legislation amends the Internal Revenue Code by specifically excluding the services performed by sternmen fromthe definition of employment under the Federal Insurance Contribution Act, by excluding wages paid for sternmen's services from the definition of wages under the withholding provisions of the Federal income tax, and by excluding sternman services from the Social Security Act definition of employment and including those services in the definitionof self-employment income.
The amendments will allow sternmen to continue to enjoy the benefits of the Social Security Act as participating self-employed individuals and sternmen will continue to be eligible to recover under the Jones Act for personal injury suffered while working.
I ask unanimous consent that the article by Mr. Sang and the text of this legislation be printed in the RECORD.
There being no objection, the article and bill were ordered to be printed in the RECORD, as follows:
TAX STATUS OF STERNMEN ON FISHING BOATS
(By Peter B. Sang, Esq.)
In the past few years, thousands of Maine fishermen have become aware of what has been for over three decades a relatively obscure issue in the tax law. The issue concerns the tax status of fishing partners (generally called "sternmen") of boat owners and whether the boat owner is considered to be the "employer" of the sternman so that Social Security and income taxes must be withheld and federal and state unemployment taxes paid.
The frustrations of Maine fishermen became apparent when the foregoing issue became part of the well-publicized "Lobster Operation" involving the audits of dozens of tax returns of lobster fishermen during the period 1971–1974. Yet the sternman problem affects any taxpayer operating a boat with the assistance of one or more crew members. The problem is also national in scope as evidenced by two television programs shown earlier this year featuring the activities of the Internal Revenue Service. One program dealt with this issue as it affected a Gulf Coast shrimper in Louisiana and the other program focused upon the problems of Chesapeake Bay oyster fishermen.
The purpose of this article is to focus on why the Service has decided that the boat owner- operator is the employer of the sternmen for tax purposes; whether there can be a legal partnership between the parties; and the developments in the case law and administrative positions within the Service that have brought about much monumental confusion.
NATURE OF PROBLEM AND OPERATION OF FISHING VENTURE
The question of whether a fisherman performing services on a boat is to be considered an "employee" of the boat owner, is really an old problem. Back in 1940, the Service published a ruling to the effect that fishermen performing services on fishing schooners owned by a company are employers of the company or the captains and that the remuneration paid, including the value of meals and lodging, to the fishermen were "wages" for purposes of payroll withholding. It must be remembered that in 1940 the maximum amount payable annually under Social Security was in the neighborhood of $40. For whatever reasons, the Service administratively seems not to have tried to enforce the position set forth in 1940 to any great degree for the next twenty-odd years.
It may be helpful, at this point, to set forth some information about the typical working relationship of a boat owner and his sternmen. Virtually all of the fact patterns involve the "60– 40 lay" basis of dividing profits in accordance with the longstanding custom in the fishing industry. Under that system, a settlement is made between the owner and the sternman after each trip. From the total proceeds received from the sale of the catch brought in, there are first deducted certain expenses relating to the boat,and the balance, known as "gross stock," is then divided into two shares, 60% to the crew and 40% to the owner. From the crews' share are deducted the operating expenses of the trip, which include the cost of groceries, fuel, lubricants, ice, the cook's bonus (if a cook is on board), the tallyman's fee, the "lumpers" wages (fish unloaders) and in some cases, the fee of a shore captain.
In the cases where the boat owner is also a fisherman, he shares in the 60% (after deduction of the aforementioned operating expenses) as an "equal partner." Variations of the 60 – 40 lay are common to fit particular cases, but the basic idea is the same. Variations do exist in connection with the actual mechanics of selling the catch. Generally the boat owner handles the sale and the sternman receives his share in cash. At times, the sternman receives his share in kind.
The boat owner makes no guaranty as to how much the sternman will earn. The boat owner in the case of an unsuccessful trip would not have to pay the sternman anything.
The boat owner equips and maintains the boat and furnishes the gear used in the fishing operation. The sternman provides his own clothing, bedding and personal equipment, such as boots and oilskins. There are no written contracts with the sternman and generally the sternman works with the boat owner for a short duration. It is quite common for the sternman himself to own a boat. If his boat is in for repairs or is not being operated, he joins another boat owner in a fishing venture.
Generally, there is no discussion between the boat owner and the sternman as to how the latter is to perform his job. The boat owner might discuss where to go to fish, but since both have a stake in the success of the venture, there is usually a mutual understanding on these matters or a rather quick termination of the venture.
While in port, the sternman does as he sees fit. The boat owner would take care of any repair work. The sternman would participate generally in some work aboard the boat such as removal of nets, minor repairs to the nets and rigging and some cleaning.
The boat owner carries and pays for all insurance, including protection and indemnity insurance, necessary for the protection of his boat and those aboard. This insurance protects the boat owner against suits by anyone injured while on his boat.
DISCUSSION OF CASE LAW
In order for withholding of employment taxes to be required, there must be a payment of "wages" by an "employer" to an "employee." It is clear that no single factor is controlling in determining the existence of an "employer-employee relationship."
Prior to 1969, the apparent standard to be applied in making the foregoing determination was that of common law. In 1969, the Supreme Court in United States v. Webb, Inc., 397 U.S. 179 (1969) ruled that the standards of maritime law had to be used and that the common-law applicable to land-based activities could not be applied.
As was stated by the Supreme Court in Webb, on page 192:
"Control is probably the most important factor under maritime law, just as it is under the test of land-based employment. It may be true that, in most maritime relationships, the workers enjoy discretion that is unusually broad if measured by land-based standards — a discretion dictated by the sea-faring nature of the activity. However, except where there is nearly total relinquishment of control through a bareboat, or demise charter, the owner may nevertheless be considered under maritime law, to have sufficient control to be charged with the duties of an employer ... (emphasis added)
In one of the first cases following Webb, the Government argued in Anderson Seafood Co. that in the absence of a demise charter, the crew members were employees. The District Court in Anderson Seafood found distinctions in the amount of control exercised by the boat owner and found that the right to control went to the result to be accomplished but not the details and means by which the result is accomplished. The Court specifically found the cases involving the Jones Act not to be controlling as to whether the boat owner was the employer.
On appeal the Fifth Circuit decided that the District Court in fact applied common law and not maritime law principles in determining whether the captains and crewmen were employees of the shipowner. Since therewas no demise charter, the Court found the crew members to be employees, reversing the District Court.
ISSUANCE OF REVENUE RULING 72-385 AND RECENT DEVELOPMENTS
Following the Government's success in October 1971 in Anderson Seafood, Revenue Ruling 72-385, IRB 1972-32, 37 was issued wherein the Service updated S.S.T. 387. Setting forth the facts of Anderson Seafood involving a non-fishing boat owner, a captain and a crew, the Service indicated that the crew members and the captain were "employees" for payroll tax withholding purposes.
It is obvious that the Service and the courts consider the non-fishing boat owner with multiple member crews and a captain as being employers for tax purposes. Not so clear from any cases or the above cited ruling was the status of the boat owner who fished along with a single sternman.
Apparently right up until the issuance of Rev. Rul. 72-385, the Service, through its various offices, indicated orally to taxpayers that if each fisherman (i.e. the boat owner and the sternman) considered himself as self-employed and if each reported his income on a Schedule C, then no withholding was required. Apparently, following this advice, virtually no fisherman with single sternmen withheld on payments.
The result over the last few years has been that certain fishermen have been audited for various reasons. As part of the audit, the question of the status of the sternman has been raised. In some cases, the agents have treated the sternmen as employees for all open back years and assessed deficiencies for the amount of FICA taxes not withheld (employer and employee portions), income taxes not withheld and FUTA taxes. In other cases, the Service has apparently permitted taxpayers to comply with Rev. Rul. 72-385 on a prospective basis. There seems to be no uniform cut-off date and no way any taxpayer can know how the tax law will be applied to him, if in fact it is. It is the author's impression that there has not been voluntary compliance with the Service's position and in many cases, because of the economics involved and trouble with filing payroll returns, the boat owner has simply terminated his relationship with the sternman.
In a recent case, before the Appellate Division, the question was raised as to the status of several sternmen of a shrimpboat operator (each having been the sole sternman for a short period of time). Each sternman in question had his own boat and each had filed a Schedule C. The boat owner had been audited in 1973 and he had been assessed all payroll taxes for the years 1970 – 1973 inclusive. (Because of the nature of the case, no penalties had been proposed). The boat owner had received oral advice from the Portsmouth office of IRS in 1970 that no withholding was required if the sternman reported his share of the profits on his own return. The arrangement with each sternman was the typical 60 – 40 lay split of profits.
At Appellate, the taxpayer/boat owner was successful in establishing that all of the sternmen but one had included the amounts paid by the boat owner in incomes and under Regulations § 31.3402(d)–1 the boat owner was held not liable for failure to withhold income taxes.
The issue of withholding FICA taxes was finally settled "on a hazards of litigation basis" mostly because of the fact that the sternmen each owned their own boats and were independently in the fishing business. The conferee strongly contended that under maritime law (principally the Jones Act) the boat owner was an "employer" and hence was an employer for tax purposes. The taxpayer/ boat owner had to settle for the amount offered as it was not felt that success in litigation was at all assured. After the settlement, refund claims were filed for those years still open in which the sternmen had paid self-employment taxes. Needless to say, the technical procedures involved became quite complicated.
REMAINING QUESTIONS
The Service appears to take the position that a partnership between a boat owner and a sternman can exist if there is roughly equal liability for debts; if there is a written partnership agreement and the two men hold themselves out as partners.
The capital investment by the sternman would have to be a substantial amount of the fishing gear involved. (Theoretically, one partner could put up the boat as capital, with the sternman investing solely in the actual fishing gear). A partnership return would then have to be filed instead of a Schedule C for each man. The idea of a formal partnership arrangement does not appeal to the majority of small boat owners.
There appears to be no clear answer to the situation where a fisherman joins another for a very short period of time while his own boat is being repaired. As a practical matter, it appears likely that the Service may administratively choose to ignore certain relationships which technically fall under the rationale of Webb and Anderson because of the tax dollars involved and the difficulty of enforcing what appears to be an inequitable result.
The real answer is Congressional relief in the form of an amendment to the law which would exclude most of the two-man boat operations from the rules pertaining to employers. The recent trend has been to extend along a broad front enforcement of payroll withholding requirements.
This has been the result of the increases in the Social Security withholding rate and the wage base. With future increases scheduled, it is doubtful that the small taxpayers can marshal a united front to have the law changed or even to litigate a test case where the application of the law is in doubt.
The prospects for the many Maine taxpayers affected by this problem are not bright. It would seem that in the process of "clarifying" the tax law, a certain amount of inequity has been created which has to be borne by people not able to afford it for the present time. Each case does stand on its own facts. Hence, it is essential for tax practitioners to be familiar with the variations in the operation of this aspect of the tax law and if possible attempt to create either a partnership between the boat owner and the sternman or a joint venture that will stand up under the tests of Rev. Rul. 72-365.
[Footnotes omitted]
S. 2518
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That (a) section 3121(b) of the Internal Revenue code of 1954 (relating to definition of employment) is amended by striking out "or" at the end of paragraph (18), by striking out the period at the end of paragraph (19) and inserting in lieu thereof "; or", and by adding after paragraph (19) the following new paragraph:
"(20) service performed by an individual on a boat engaged in catching fish or other forms of marine animal life under an arrangement with the owner or operator of such boat pursuant to which—
"(A) such individual does not receive any cash remuneration,
"(B) such individual receives a share of the boat's catch of fish or other forms of marine animal life, and
"(C) the amount of such individual's share depends on the amount of the boat's catch of fish or other forms of marine animal life, but only if such individual performs services on such boat on a substantially intermittent basis (as determined under regulations prescribed by the Secretary or his delegate).".
(b) Section 1402(c) (2) of such Code (relating to definition of trade or business) is amended by striking out "and" at the end of subparagraph (D), by striking out the semicolon at the end of subparagraph (E) and inserting in lieu thereof ", and", and by adding after subparagraph (E) the following new subparagraph:
"(F) service described in section 3121(b)(20));".
(c) Section 3401(a) of such Code (relating to definition of wages for purposes of withholding) is amended by striking out the period at the end of paragraph (16) and inserting in lieu thereof "; or", and by adding after paragraph (16) the following new paragraph:
"(17) for service described in section 3121(b) (20).".
SEC. 2. (a) Section 210 (a) of the Social Security Act is amended by striking out "or" at the end of paragraph (18), by striking out the period at the end of paragraph (19) and inserting in lieu thereof "; or", and by adding after paragraph (19) the following new paragraph:
"(20) service performed by an individual on a boat engaged in catching fish or other forms of marine animal life under an arrangement with the owner or operator of such boat pursuant to which—
"(A) such individual does not receive any cash remuneration,
"(B) such individual receives a share of the boat's catch of fish or other forms of marine animal life, and
"(C) the amount of such individual's share depends on the amount of the boat's catch of fish or other forms of marine animal life, but only if such individual performs services on such.boat on a substantially intermittent basis (as determined under regulations prescribed by the Secretary or his delegate) .".
(b) Section 211(c) (2) of such Act is amended by striking out "and" at the end of subparagraph (D), by striking out the semicolon at the end of subparagraph (E) and inserting in lieu thereof ", and", and by adding after subparagraph (E) the following new paragraph:
"(F) service described in section 210(a) (20) ;".
SEC. 3. The amendments made by the first section of this Act shall apply with respect to services performed after December 31, 1969, in taxable years ending after such date. The amendments made by section 2 of this Act shall apply with respect to services performed after such date.