Employer Status Determination

Decision on Reconsideration

American Railroads Corporation

DEC 0 3 2004

This is the decision of the Railroad Retirement Board on the request of American

Railroads Corporation (American Railroads) that the Board reconsider the initial 

determination in Board Coverage Decision 03-56, rendered June 16, 2003, that

American Railroads is an employer covered under the Railroad Retirement and

Railroad Unemployment Insurance Acts. For the reasons set forth below, the

Board determines on reconsideration that American Railroads is an employer

covered by the Railroad Retirement and Railroad Unemployment Insurance

Acts, effective June 1, 1991.

The evidence on reconsideration consists of a combination of public documents

and published material; and of the letters submitted to the Board by officials of

American Railroads and associated railroads, in connection with this decision

and with earlier decisions of the Board regarding the coverage of other entities

affiliated with American Railroads. Considered in roughly chronological order,

this evidence establishes the following:

In a letter dated July 1, 1991, Mr. David Enquist, Vice President - Finance of the

Texas North Orient Corporation, reported that Texas North Orient began

operating a 161 mile line of track between Maryneal and Chillicothe, Texas,

which was owned by Texas and Oklahoma Railroad. Based on this information,

the Texas and North Orient was determined to be a rail carrier employer

covered by the Acts effective June 1, 1991. See: Texas and North Orient

Corporation, Coverage Notice No. 91-76. That decision remains in effect to

date. Flowever, while records of the Board show that Texas and North Orient

reported employees through 2002, the report filed in 2004 showed no employees

for 2003.

On March 16, 1992, Richard McClure, Robert J. Geib, and Michael Minton as

majority shareholders, incorporated the Gulf, Colorado & San Saba Railway 

(GC&SS Railway) in the state of Texas to acquire and operate approximately 67

miles of track between the towns of Lometa and Brady in that state. See: Gulf,

Colorado & San Saba Railway Corporation—Acquisition and Operation

Exemption—Atchison, Topeka and Santa Fe Railway Company, Interstate 

Commerce Commission Finance Docket No. 32216, 57 Fed. Rea. 61921

(December 29, 1992). On August 16, 1993, the Board determined GC&SS

Railway to be a covered rail carrier employer under the Acts. See: B.C.D. 93-52,

Gulf, Colorado & San Saba Railway Corporation. The Board found coverage

BA#9635
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began May 11, 1993, the date on which correspondence from GC& SS Railway 

stated that operations began. A national railroad industry directory currently

identifies Mr. Richard McClure as President and Chief Executive Officer of GC&

SS Railway. See: Commonwealth Business Media, The Pocket List of Railroad 

Officials, 4th Quarter 2004, at C-30.

On July 21, 1994, GC&SS Railway incorporated Sweetwater Central Switching 

Company (Sweetwater Switching) as a wholly owned subsidiary to provide rail

switching service connecting with the Burlington Northern Santa Fe Railway in

Sweetwater, Texas. The Board determined Sweetwater Switching to be covered

as a rail carrier employer under the Acts effective July 21, 1994. See: B.C.D. 03­

47 Sweetwater Central Switching Company. Though Sweetwater Switching 

evidently operates in its own name, its employees evidently are reported to the

Board as employees of GC&SS Railway.

Sometime in 2002, American Railroads incorporated Missouri & Valley Park

Railroad Company (Mo&VP RR) as a wholly owned subsidiary to lease and

operate approximately 2 miles of rail in the vicinity of West Valley Park, Missouri.

See: Missouri & Valiev Park Railroad Corporation—Lease Exemption—The

Burlington Northern and Santa Fe Railway Company, Surface Transportation 

Board Finance Docket No. 34231, 67 Fed. Rea. 50751 (August 5, 2002). Based on

information furnished by Richard McClure as President and Chief Executive

Officer, the Board on June 10, 2003, determined Mo&VP RR to be a covered rail

carrier employer under the Acts effective July 4, 2002. See: B.C.D. 03-48, Missouri

& Valley Park Railroad Company. The Pocket List of Railroad Officials reports

that Richard McClure currently remains in both positions, jci at C-38.

The investigation into the status of American Railroads began when Mr. Richard

McClure responded in a letter dated May 21, 2001, to an inquiry from the

Board’s Chief of Audit and Compliance regarding the Southern California

Railroad, by describing American Railroads as “A shortline holding company

and consulting group with several switching and shortline companies. * * *

American Railroads Corporation is the executive branch of the South California

Railroad, which is the operations revenue building railroad switching devison 

(sic).” Mr. McClure further stated that American Railroads “owns 100%" of

Sweetwater Central Switching, Texas North Orient Corporation, GC&SS Railway,

and Southern California Railroad, and that these companies "all create

revenues through American Railroads Corporation". In a subsequent letter

dated June 25, 2001, Ms. Christine Olson, Controller for the Southern California

Railroad, stated that the following officials held the same positions in both Texas

North Orient and GC&SS Railway: Richard McClure, President, Treasurer and

CEO; Robert Geib, Secretary and Director; and Michael Minton, Director.
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The Board determined on the basis of information furnished by Mr. McClure that

Southern California Railroad was not a rail carrier employer covered by the Acts

because it served only one shipper. See: B.C.D. 01-75, Southern California

Railroad Company. However, in view of Mr. McClure's description of American

Railroads in connection with the Southern California Railroad decision, the

Board's Chief of Audit and Compliance by letter dated August 16, 2001, posed 

to Mr. McClure several questions regarding the business operations of American

Railroads in order that its status as a covered employer under the Acts might be

resolved. Mr. McClure did not respond to that letter, nor to further inquiries by

the Chief of Audit and Compliance on October 4, 2001, November 5, 2001, or

January 8, 2002. On May 15, 2002, the Chief of Audit and Compliance then

issued an administrative subpoena to Mr. McClure, which required that he

furnish the information. When Mr. McClure failed to respond to the 

administrative subpoena, the Board's Office of General Counsel warned by 

letter of June 27, 2002, that in the case of contumacy, section 12(b) of the 

Railroad Unemployment Insurance Act empowered the Board to invoke

enforcement in United States District Court. Receiving no reply, the United

States Attorney for the Northern District of Illinois on March 26, 2003 filed a

petition on the Board's behalf for summary enforcement in the United States

District Court. By agreement with the United States Attorney, Mr. McClure then

responded to the Chief of Audit and Compliance by letter dated April 2, 2003,

further supplemented by a letter dated April 28, 2003 by counsel for American

Railroads. The enforcement action was then voluntarily dismissed. See: United

States Railroad Retirement Board v. American Railroads Corporation. U.S.D.C.,

N.D. ILL., No. 03C 2156 (May 7, 2003).

The evidence supplied by Mr. McClure and counsel in April 2003 as a result of

the District Court action is that American Railroads was incorporated as a

privately held corporation by Mr. McClure, Mr. Geib, and Mr. Minton on October

15, 1990, and first compensated employees in November 1990. Mr. McClure 

stated approximately 40 percent of American Railroads revenue derived “from

the GC &SS Railway in 2002" and 5 percent from "3rd party switching

companies"; but counsel for American Railroads subsequently stated in

clarification that American Railroads "provides services and generates its

revenues" from Mo&VP RR, GC&SS Railway, and Sweetwater Switching. The

services are described as: sales assistance and procurement of new customers;

tax accounting, including preparing data for outside public accountants; final

billings; maintenance of accounting records; preparation of periodic payrolls for
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these companies and payroll record keeping; negotiation and procurement of

liability and health insurance and administration of insurance claims under these

policies; procuring permits, licenses, and legal services; and negotiation on 

behalf of the rail carriers with the Burlington Northern Santa Fe, the Union Pacific 

Railroad, and with customers of the rail carriers. In furnishing these services,

American Railroads officials occasionally visit the railroad's offices.

On June 16, 2003, the Board1 in B.C.D. 03-56 determined on the basis of the

foregoing evidence that American Railroads was a covered employer under

the Acts by reason of being under common control with a rail carrier employer,

and performing services in connection with transportation of property by rail.

Pursuant to section 259.3 of the Board's regulations (20 CFR 259.3), American

Railroads made a timely request for reconsideration of the June 2003 decision 

on June 8, 2004.

Section 1(a)(1) of the Railroad Retirement Act (45 U.S.C.§ 231(a)(1)), insofar as

relevant here, defines a covered employer as:

(i) any carrier by railroad subject to the jurisdiction of the

Surface Transportation Board under Part A of subtitle IV of title 49,

United States Code;

(ii) any company which is directly or indirectly owned or

controlled by, or under common control with, one or more

employers as defined in paragraph (i) of this subdivision, 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 * * *.

Sections 1 (a) and 1 (b) of the Railroad Unemployment Insurance Act (45 U.S.C

§§ 351(a) and (b)) contain substantially similar definitions, as does section 3231

of the Railroad Retirement Tax Act (26 U.S.C. § 3231), which is administered by

the Internal Revenue Service of the Department of Treasury.

On reconsideration, American Railroads contends that it meets neither of the 

two elements necessary for it to be covered as a rail carrier affiliate under

section 1 (a)(l)(ii) above. The Board disagrees with American Railroad's 

contentions in both respects.

1 B.C.D. 03-56 was rendered by two Board members due to the temporary vacancy of the

position of Chairman
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I. Common Control.

American Railroads' submission on reconsideration does not dispute that

Richard McClure, Robert J. Geib, and Michael Minton are majority shareholders

of both GC & SS Railway and American Railroads. Rather, American Railroads

points to a provision of Texas law which requires in pertinent part that “All the 

corporate powers of every railroad corporation shall be vested in and be

exercised by the legally constituted board of directors. * * *A majority of said

directors shall be resident citizens during their continuance as such directors." 

Vernon's Ann. Civil Statutes Article 6288. Without stating the total number of

directors of American Railroads and of GC & SS Railway, the request for

reconsideration contends that Mr. McClure, Mr. Geib and Mr. Minton pursuant 

to VACS Article 6288 do not constitute the majority of directors of GC & SS

Railway, and consequently do not control both companies under Texas law.

Without control of both companies as defined by Texas law, it is argued that GC 

& SS Railway cannot be under common control.

The question is not, however, whether control is exercised under Texas law, but

under the Railroad Retirement and Railroad Unemployment Insurance Acts. It is

not unusual for Federal statues and regulations to establish standards for

determining corporate ownership and control in place of considerations under

State corporations law. See, e.g., section 1563 of the Internal Revenue Code (26

U.S.C. § 1563) and regulations promulgated thereunder at 26 CFR 1.1563-1

(defining controlled group and rules for determining stock ownership); and 49

U.S.C. § 10102(3) and 49 CFR Part 1185 (pertaining to Surface Transportation

Board regulation of companies with interlocking directorates). Pursuant to its

authority under section 7(b)(5) of the Railroad Retirement Act, the Board has

also promulgated regulations2 defining "control";

2 The Board notes that its regulations defining control and common control have remained

virtually unchanged for over 60 years (see 4 Fed. Rea. 1477, April 7, 1939) and thus represent the

Board's "longstanding" interpretation of the coverage provisions. Barnhart v. Walton. 535 U.S.

212, (2002) at 219
202.4 Control.

A company or person is controlled by one or more carriers, whenever

there exists in one or more such carriers the right or power by any means, 

method or circumstance, irrespective of stock ownership to direct, either

directly or indirectly, the policies and business of such a company or

person and in any case in which a carrier is in fact exercising direction of

the policies and business of such a company or person.

The Board's regulations promulgated under section 12(1) of the Railroad

Unemployment Insurance Act adopt this definition for purposes of determining

employers subject to that Act as well. See 20 CFR 301.4. Moreover, regulations

of the Internal Revenue Service promulgated under the Railroad Retirement Tax

Act contain a similar definition of control at 26 CFR 3231 (a)-l:

* * * the term “controlled" includes direct or indirect control, whether

legally enforceable and however exercisable or exercised. The control

may be by means of stock ownership, or by agreements, licenses, or any

other devices which insure that the operation of the company is in the

interest of one or more carriers. It is the reality of control, however, which

is decisive, not its form nor the mode of its exercise.

Court decisions under the Railroad Retirement and Unemployment Insurance 

Acts have found common control to exist where controlling stock ownership of a

car and locomotive repair company and a rail carrier lay in the hands of the 

same individual, Livingston Rebuild Center v. Railroad Retirement Board, 970 F.

2d 295, (7th Cir., 1992); and where a rail carrier funded a revocable trust to

purchase and hold stock of a freight forwarding company, Universal Carloadina

& Distributing Co. v. Railroad Retirement Board. 172 F. 2d 22 (D.C. Cir., 1948). In

this case, American Railroads and GC & SS Railway are closely held 

corporations with the majority of stock held by the same three individuals. The

Board finds this constitutes control within the meaning of section 1 (a) (1)(ii) of the

Railroad Retirement Act, section 1 (a) of the Railroad Unemployment Insurance 

Act, and the regulations promulgated thereunder. Moreover, though American

Railroads never responded to the Board’s inquiry of August 16 as to the name

and position of any individuals jointly holding positions as officers of American

Railroads and any rail carriers, it is at least clear that Mr. McClure is President and

CEO of both corporations. Further, in his May 21, 2001 response as President and

CEO of the private carrier Southern California Railroad, Mr. McClure stated
American Railroads “owns 100%" of the GC&SS Railway, Sweetwater Switching, 

and Texas North Orient. Even if inaccurate, this statement indicates that Mr.

McClure viewed all four companies as one operation. The Board therefore finds

that on these facts, control of American Railroads is in the same persons as that

by which GC&SS Railway is controlled. See regulations of the Board at 20 CFR

202.5. For the same reasons, American Railroads is under common control with

the Texas and North Orient Corporation, which operated as a rail carrier at least

through sometime in 2002 and evidently remains in existence at this time.

American Railroads independently argues that the United States Court of

Appeals for the Federal Circuit holding in Union Pacific Corporation v. United

States, 5 F.3d 523 (Fed Cir. 1993), as previously applied by the Board, dictates

that it is not under common control with its wholly owned subsidiary Mo&VP RR.

The Union Pacific Corporation decision concerned a parent company which

performed services for its wholly owned subsidiary. The Federal Circuit held that

as common control meant “mutual subordinance to a controlling principal”! 5 F.

3d at 525), a parent corporation is not under common control with its subsidiary

within the meaning of section 3231 of the Railroad Retirement Tax Act.

However, it has been held under the Tax Act that where the parent company of

the rail carrier is itself controlled by another entity, the holding in Union Pacific

Corporation does not apply. Thus, in Carland, Inc, and Southern Group, Inc, v.

United States. No. 93-0277-CV-W-2, 1995 U.S. Dist. LEXIS 2350, (W. Dist. Mo.,

February 14, 1995), parent company Kansas City Southern Industries owned

subsidiaries Kansas City Southern Railway and Southern Group, Inc. Southern

Group in turn was parent to Carland, Inc. The District Court found that although

Southern Group was not parent to KCS Railway, KCS Industries was parent to

both, and therefore controlled Carland through its ownership of Southern Group

just as it controlled its direct subsidiary KCS Railway. Earlier this year, another

District Court reached the same conclusion in a case tried solely on the issue of

common control under the Railroad Retirement Tax Act. See: Trans-Serve Inc, v.

United States. No. 00-1017, 2004 U.S. Dist. LEXIS 7784, (W.D. La., March, 31, 2004).

The facts were essentially the same as in Carland. Kansas City Southern

Industries, direct parent corporation of KCS Railway, also owned subsidiary

Southern Industrial Services, Inc. Southern Industrial in turn was parent to TransServe, Inc. Here, plaintiff Trans-Serve expressly argued Union Pacific Corporation

required the corporate affiliate to be in a parallel corporate position to the rail

carrier. Relying on sections 202.4 and 202.5 of the Board's regulations and

Universal Carloadina, supra, the District Court noted the fact that "if the parent

company becomes displeased with a director or officer, as the sole shareholder,

the company could remove the individual through a shareholder vote." The

District Court concluded "That is the essence of control.”
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In light of the District Court decision in Trans-Serve, and in co-ordination with the

interpretation of the analogous provision of the Railroad Retirement Tax Act by 

the Internal Revenue Service, approved by the District Courts in Trans-Serve and

in the Carland case, the Board concludes that the holding in Union Pacific 

Corporation does not pertain where the parent company in question is itself

subject to control through stock ownership by another corporation. Moreover, 

because section 202.5 of the Board’s regulations defines common control to

include wherever control lies “in the same person, persons, or company", the

controlling stock ownership may also lie in individual hands rather than in

another corporation. See B.C.D. 96-20, Escanaba Services, Inc., and B.C.D. 96­

25, Rail Investments, Inc., (holding Union Pacific Corporation did not prevent a

finding of common control where the sole shareholder of the non-carrier was

also one of three individual shareholders who controlled a rail carrier through a

voting trust, and were officers of the rail carrier and the affiliate). In this case,

Richard McClure, Robert J. Geib, and Michael Minton as majority shareholders

of both GC & SS Railway and American Railroads stand in the same place with 

respect to Mo&VP RR as Kansas City Southern Industries did as owner of Southern

Industries and KCS Railway with respect to Trans-Serve. Accordingly, the Board

finds on these facts that American Railroads is under common control with 

Mo&VP RR as well.3 For the same reason, American Railroads is also under

common control with GC & SS Railway subsidiary rail carrier Sweetwater

Switching.

II. Service in connection with railroad transportation.

Aside from whether common control exists, American Railroads argues that it

does not perform services in connection with railroad transportation. It contends

that the services it performs are not "specific services in connection with the

physical operation of the railroad". However, section 202.7 of the Board's

regulations defines a service as "in connection with railroad transportation * * * if

such service or operation is reasonably directly related, functionally or

economically, to the performance of obligations which a company or person

* * * have undertaken as a common carrier by railroad * * * ." See 20 CFR 202.7.

The Court of Appeals for the Eighth Circuit found operation of an office building 

which housed administrative offices of the rail carrier to be "a service

connected with and supportive of railroad transportation." Southern

Development Co. v. Railroad Retirement Board, 243 F. 2d 351, (8,h Cir., 1957) at

3 The coverage decision in B.C.D. 95-23, Pioneer Railcorp. cited by American Railroads in the

reconsideration request, does not require a different result, since there is no indication in that

decision that the parent company was itself controlled by another entity or group.
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355. If such an indirect activity as maintaining space for office employees

constitutes a service with the meaning of the Acts, the Board is then convinced

that the actual activities of those office employees, such as the sales, payroll,

insurance, and record keeping functions and other activities listed above which

American Railroads conducts for the affiliated rail carriers, must be services in

connection with the rail transportation of GC &SS Railway, Mo&VR RR and

Sweetwater Switching as well. See B.C.D. 03-76, Canadian National Railway

Properties, Inc. (affiliate company which acquired, managed and disposed of

real estate and personal property performed a service in connection with the

railroad transportation conducted by the associated rail carrier.)

In his May 21, 2001 letter noted above, Mr. McClure stated these railroads, plus

the Texas North Orient, “all create revenues through American Railroads

Corporation". Later, in the first response dated April 2, 2003 to the contumacy

action in District Court, Mr. McClure as Chairman, President and CEO of

American Railroads, stated that 40 percent of American Railroads revenue

derives from the GC&SS Railway, and 5 percent from “3rd party switching

companies". In the second response to the contumacy action dated April 28,

2003, counsel for American Railroads clarified that “American Railroads

Corporation (ARC) provides services and generates its revenues from these

[above named] affiliated and owned companies.” Based on the foregoing, the

Board therefore finds that American Railroads provides a service in connection

with the transportation of property by rail which is not casual in nature. See

regulations of the Board at 20 CFR 202.6.

Accordingly, on reconsideration, the Board concludes that American Railroads

Corporation is an employer covered by the Railroad Retirement and Railroad

Unemployment Insurance Acts, and is required to file returns of service and

make such contributions as are required of employers under the Acts. In that

respect, the last question remaining is the effective date of coverage. We

determined in B.C.D. 03-56 that because GC&SS Railway became a covered

employer May 11, 1993, American Railroads first came under common control

and began to perform services in connection with the rail transportation

conducted by an affiliated rail carrier on that date. On further review, however,

the evidence is that American Railroads was formed in 1990, and shareholders 

McClure, Geib and Minton formed Texas North Orient Corporation in 1991,

placing American Railroads under common control with a rail carrier for which it

performed services in 1991 rather than in 1993 when GC&SS Railway later began

operations. The Board therefore finds on reconsideration that the correct
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effective date of coverage under the Acts is June 1, 1991, the date Texas North

Orient Corporation began operations as a rail carrier employer. As we noted in

our initial decision in B.C.D. 03-56, service and compensation may be credited

to American Railroads employees from the earlier date to the extent permitted

by section 9 of the Railroad Retirement Act and regulations of the Board at

20 CFR 211.16.

Michael S. Schwartz