Rev. Rul. 72-385

The purpose of this Revenue Ruling is to update and restate, under current statute and regulations, the position set forth in S.S.T. 387, C.B. 1940-1, 192.

The questions presented are whether fishermen performing services on fishing schooners owned by a company are employees of the company or the captains and whether the remuneration, including the value of meals and lodging, paid to the fishermen is includible in their gross income and "wages" for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).

The company owns several fishing schooners and operates them on a "lay" (sharing of the profit) basis. It engages an individual with proper qualifications as captain or master of each boat. The captain in turn engages a crew to operate the vessel. The members of the crew sign no agreements but the company and the captain sign an agreement with a fishermen's union which recognizes the "lay" basis upon which the voyage is conducted and places certain restrictions upon the conduct of the company-owner and captain in reference to the crew. The company exercises no control over who shall be engaged as members of the crew, this matter and other details being left to the captain.

With the exception of the captain, engineer, and purser, the members of the crew are compensated on a straight share basis and receive no other remuneration for their services. The engineer receives a set fee each trip regardless of the financial outcome of the voyage, and the purser receives a "bonus" for each trip, which amount is contributed by the other members of the crew from their shares. The fishing trips normally last from one to several days. The captain receives a commission, in addition to his share of the catch, based upon the company's share of the income from the voyage. The captain and members of the crew (other than the engineer) are jointly liable for any losses resulting from a voyage. In such case it is customary for the loss to be deducted from the crew members' shares of the profits of the next voyage.

The catch of fish from a particular voyage is usually sold through a fish exchange and after certain fees are deducted by the exchange, the captain receives the net proceeds or the "net stock." From the "net stock" are deducted certain specified expenses such as fuel, oil, lights, etc. One-fourth of the amount remaining after such expenses are deducted is turned over to the company as its share, less 5 percent of such amount, which constitutes the captain's commission. From the remaining three-fourths of the proceeds of the voyage, the expenses of food, bait, etc., are deducted. The remainder is then divided equally among the members of the crew, including the captain.

Every individual is an employee, for Federal employment tax purposes, if under the usual common law rules the relationship between him and the person for whom he performs services is the legal relationship of employer and employee. Guides for determining the employer-employee relationship are found in three substantially similar sections of the Employment Tax Regulations; namely, sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1. As stated in the regulations, generally the relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done.

The regulations generally identifying who are employers speak of them as persons who employ employees (section 31.3121(d)-2 and 31.3306(a)-1 of the regulations) and as any person for whom services are performed as an employee (section 31.3401(d)-1 of the regulations).

Sections 3121(b) and 3306(c) of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, respectively, provide in part that the term "employment" means any service of whatever nature, performed after 1954 either (A) by an employee for the person employing him, irrespective of the citizenship or residence of either, (i) within the United States, or (ii) on or in connection with an American vessel under a contract of service which is entered into within the United States or during the performance of which and while the employee is employed on the vessel it touches at a port in the United States, if the employee is employed on and in connection with such vessel when outside the United States. In addition, section 3306(c)(17) further provides that for purposes of the Federal Unemployment Tax Act, there shall be excepted from the definition of "employment" services performed by an individual in (or as an officer or member of the crew of a vessel while it is engaged in) the catching, taking, harvesting, cultivating, or farming of any kind of fish, shellfish, crustacea, sponges seaweeds, or other aquatic forms of animal and vegetable life (including service performed by an individual as an ordinary incident to any such activity), except (A) service performed in connection with the catching or taking of salmon or halibut, for commercial purposes, and (B) services performed on or in connection with a vessel of more than 10 net tons (determined in the manner provided for determining the register tonnage of merchant vessels under the laws of the United States).

The vessels operated by the company are "American vessels" within the meaning of sections 3121(b) and 3306(c), and are more than 10 net tons each. The contracts for the services of the fishermen operating the company's vessels were entered into within the United States.

In United States v. W. M. Webb, Inc., et al., 397 U.S. 179 (1970) Ct. D. 1935, C.B. 1970-1, 194, the United States Supreme Court held that standards of maritime law were applicable in determining whether captains and crewmen of fishing boats were "employees" of owners within the provisions of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. Referring to section 31.3121(d)-1(c)(2) of the regulations the Court stated:

. . . the regulation provides a summary of the principles of the common law, intended as an initial guide for the determination, required by the first sentence of the regulation, whether a relationship 'is the legal relationship of employer and employee.' The thrust of both statute and regulation is that the standards that are to govern in any field are those which the courts customarily apply to define this 'legal relationship.'

The Court also referred to S.S.T. 387 (which this Revenue Ruling is updating and restating), pointing out the existence of that ruling for nearly 30 years as the Treasury position "confirming the employee status of fishermen such as those involved here." On remand, the Court of Appeals for the Fifth Circuit (424 F.2d 1070, 1970) held that the captain and crew hands were employees of the owners within the meaning of the Federal Employment Tax provisions when their status was judged against the standard of maritime law. To the same effect, see Anderson v. United States, 450 F.2d 567 (5th Cir. 1971).

In the absence of a direct contractual relationship between the owner of the vessel and the crew, the determining element is whether the captain of the ship is the agent of the owners of the vessel or whether he is owner pro hac vice (for this occasion). In the former case, the crew, as well as the captain, would be the employees of the owners; in the latter case, the crew would be the employees of the captain and not of the owner of the vessel. See The Norland, 101 F.2d 967 (1939).

Under the facts in the instant case, the captains of the company's fishing schooners are acting as agents of the company in engaging the crews and conducting the voyages. Consequently, the captains and crews are employees of the company, the owner of the vessels. See Cape Shore Fish Co. v. United States, 330 F.2d 961 (1964).

A common method of compensating a fisherman is to allow him a share in the profits of the voyage and such share or "lay" has been judicially determined to be in the nature of wages. "Lays" of crews have been held by the courts to be in the nature of wages and the agreements under which the crews are engaged under such circumstances have been held to be contracts of hire. See United States v. Laflin, 24 F.2d 683 (1928) and United States v. Peterson, 28 F.2d 29 (1928). Accordingly, it is held that, under the circumstances described above, the officers and members of the crews of the fishing schooners owned by the company are "employees" of the company and that the shares or "lays" received by each officer and crew member, including the captain's commission, the engineer's fee, and the purser's bonus, are considered "wages" for purposes of the taxes imposed by the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages.

Section 3121(a) of the Federal Insurance Contributions Act provides, in part, that the term "wages" means all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash. Section 31.3121(a)-1(f) of the regulations provides that ordinarily, facilities or privileges (such as entertainment, medical services, or so-called "courtesy" discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as remuneration for employment if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, good will, contentment, or efficiency of his employees. The term "facilities or privileges," however, does not ordinarily include the value of meals or lodging furnished, for example, to restaurant or hotel employees, or to seamen or other employees aboard vessels, since generally these items constitute an appreciable part of the total remuneration of such employees. Section 3306(b) of the Federal Unemployment Tax Act and the regulations thereunder contain similar provisions.

However, for purposes of the Collection of Income Tax at Source on Wages, section 31.3401(a)-1(b)(9) of the regulations provides that the value of any meals or lodging furnished to an employee by his employer is not subject to withholding if the value of the meals or lodging is excludable from the gross income of the employee. See section 1.119-1(a) of the Income Tax Regulations that provides, in part, that the value of meals furnished to an employee by his employer shall be excluded from the employee's gross income if two tests are met: (i) The meals are furnished on the business premises of the employer, and (ii) the meals are furnished for the convenience of the employer. The question of whether meals are furnished for the convenience of the employer is one of fact to be determined by analysis of all the facts and circumstances in each case. If the tests described in (i) and (ii) are met, the exclusion shall apply irrespective of whether under an employment contract or a statute fixing the terms of employment such meals are furnished as compensation.

It is further held, that the cash value of meals and lodging furnished the officers and crew members are considered "wages" for purposes of the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. See Rev. Rul. 71-290, C.B. 1971-2, 340. However, because of the unavailability of facilities for the employees who are working on board the vessels to obtain food and lodging, the employer is required to furnish meals and lodging to the employees on board the vessels in order for them to perform their services. Therefore, the value of meals and lodging furnished to the employees while on board the vessels is not incudible in their gross incomes and is not "wages" for purposes of the Collection of Income Tax at Source on Wages.

S.S.T. 387 is superseded, since the position set forth therein is restated under current law in this Revenue Ruling.