Source: https://supreme.justia.com/cases/federal/us/479/27/
Timestamp: 2019-04-20 02:19:17+00:00

Document:
United States citizen employees of the Panama Canal Commission and their spouses are not exempt from United States income taxes collected by the Panama Canal Commission even though the Panama Canal Treaty provides that "United States citizen employees . . . shall be exempt from any taxes . . . on income received as a result of their work for the Commission." The context of Article XV of the Agreement in Implementation of Article III of the Panama Canal Treaty is taxes payable in Panama, so the exemption applies only to Panamanian taxes.
"shall be exempt from taxes . . . on gifts or inheritance or on personal property, the presence of which within the territory of the Republic of Panama is due solely to the stay therein of such persons on account of their . . . work with the Commission."
Petitioners, United States citizen employees of the Panama Canal Commission and their spouses, sought refunds of United States income taxes collected on salaries paid by the Commission for certain years, contending that § 2 of Article XV constitutes an express exemption of those salaries from both Panamanian and United States taxation. The Claims Court agreed, but the Court of Appeals reversed.
Held: Article XV applies only to Panamanian taxes, and hence petitioners are not entitled to refunds of United States income taxes paid. Section 1 of Article XV establishes the context for the discussion of tax exemption in the entire Article, so that when §§ 2 and 3 state that "United States citizen employees . . . shall be exempt" from taxes they are understood to be dealing only with taxes payable in Panama. If the first sentence of § 2 were interpreted to refer to United States as well as Panamanian taxes, then the second sentence and § 3 would also do so, with the implausible consequence that United States citizen employees would be exempt not only from United States income taxes on their earnings from the Commission but also from such taxes on income from sources outside Panama and from all United States gift and inheritance taxes.
The petitioners, United States citizen employees of the Panama Canal Commission and their spouses, seek refunds of income taxes collected on salaries paid by the Commission between 1979 and 1981. We granted certiorari to resolve conflicting appellate interpretations of an international agreement. 474 U. S. 1050 (1986).
"1. By virtue of this Agreement, the Commission, its contractors and subcontractors are exempt from payment in the Republic of Panama of all taxes, fees or other charges on their activities or property."
"2. United States citizen employees and dependents shall be exempt from any taxes, fees or other charges on income received as a result of their work for the Commission. Similarly, they shall be exempt from payment of taxes, fees or other charges on income derived from sources outside the Republic of Panama."
"3. United States citizen employees and dependents shall be exempt from taxes, fees or other charges on gifts or inheritance or on personal property, the presence of which within the territory of the Republic of Panama is due solely to the stay therein of such persons on account of their or their sponsor's work with the Commission."
"4. The Coordinating Committee may establish such regulations as may be appropriate for the implementation of this Article."
We agree with the Federal Circuit. The first section of Article XV, which confers upon the Commission and its contractors an exemption "from payment in the Republic of Panama of all taxes" (emphasis added), establishes the context for the discussion of tax exemptions in the entire Article -- so that, when § § 2 and 3 state that "United States citizen employees . . . shall be exempt" from taxes, they are understood to be dealing only with taxes payable in Panama. In that regard, the structure of Article XV is similar to that of Article XVI, which in most of its sections speaks generally of import duties, but is understood to refer only to Panamanian import duties, principally because § 1 sets the stage in that fashion by referring to "the customs laws and regulations of the Republic of Panama." Agreement, Art. XVI, § 1 (emphasis added).
within the territory of the Republic of Panama, whose presence there," etc.), rather than being referred to incidentally in the modifying clause ("personal property, whose presence within the territory of the Republic of Panama," etc.). And the assumption that only personal property within Panama is at issue in turn reflects the more fundamental assumption that only Panamanian personal property taxes are being addressed.
More persuasive than the textual evidence, and in our view overwhelmingly convincing, is the contextual case for limiting Article XV to Panamanian taxes. Unless one posits the ellipsis of failing to repeat, in each section, § 1's limitation to taxes "in the Republic of Panama," the Article takes on a meaning that is utterly implausible and has no foundation in the negotiations leading to the Agreement. For if the first sentence of § 2 refers to United States as well as Panamanian taxes, then the second sentence of § 2, and the totality of § 3, must do so as well -- with the consequence that United States citizen employees and their dependents would be exempt not only from United States income tax on their earnings from the Commission, but also from United States income tax on all income from sources outside Panama (e.g., United States bank accounts), and from all United States gift and inheritance taxes. While, as the petitioners assert, there might have been some reason why Panama would insist that its inability to tax United States citizen Commission employees upon their earnings in Panama be matched by a detraction from the United States' sovereign power to tax those same earnings, there is no conceivable reason why this hypothetical "your-sovereignty-for-mine" negotiating strategy would escalate into a demand that the United States yield more sovereign prerogatives than it was asking Panama to forgo -- and no imaginable reason why the United States would accept such an escalation, producing tax immunity of unprecedented scope.
taxes alone are at issue. In sum, we find the verbal distortions necessary to give plausible content, under the petitioners' theory, to the second sentence of § 2 and § 3 far less tolerable than the acknowledgment of ellipsis which forms the basis of the Government's interpretation.
"Agreement. Similarly, as is provided by Panamanian law, they shall be exempt from payment of taxes, fees or other charges on income derived from sources outside the Republic of Panama."
Panama Canal Treaty: Implementation of Article IV, Sept. 7, 1977, Art. XVI, § 2, T.I.A.S. No. 10032 (emphasis added).
drafts, id. at 77, 81.) The petitioners assert that this occurred as a consequence of the American side's knowledge that Panama would not accept a unilateral tax exemption provision and would accept a bilateral one -- but they point to no Panamanian negotiating proposal supporting that speculation, which seems to us not inordinately credible on its face.
We find the petitioners' attempted reliance upon other elements of the negotiating history unavailing. While the Claims Court may have been correct that the negotiating history does not favor the Government's position sufficiently to overcome what that court regarded as a plain textual meaning in favor of the taxpayers, it certainly does not favor the taxpayers' position sufficiently to affect our view of the text. It contains, we may note, only a single (unhelpful) reference to United States income taxation -- a silence that can perhaps be reconciled with the petitioners' position, but can hardly be said affirmatively to support it.
Finally, we find no significance in the fact, urged so strongly by the petitioners, that Article XV is entitled "Taxation," rather than "Panamanian Taxation." Of the 21 Articles of the Agreement, only 2 -- Articles V and IX -- are limited by title to Panamanian subject matter, though it is plain that most are so limited in their application. See, e.g., Article VII ("Water Rights"); Article XII ("Entry and Departure"); Article XVI ("Import Duties").
* Together with No. 85-559, Coplin et ux. v. United States, and No. 85-560, Mattox et ux. v. United States, also on certiorari to the same court.
"all taxable years whether beginning before, on, or after the date of the enactment of this Act (or in the case of any tax not imposed with respect to a taxable year, [for] taxable events after the date of enactment of this Act),"
"shall be construed as exempting (in whole or in part) any citizen or resident of the United States from any tax under the Internal Revenue Code of 1954 or 1986."
Because we find that the Agreement, properly interpreted, provides for the same result, we do not rely upon the statute, and thus avoid confronting the constitutional questions posed by retroactive income taxation. See United States v. Darusmont, 449 U. S. 292, 449 U. S. 296-301 (1981); Welch v. Henry, 305 U. S. 134, 305 U. S. 146-151 (1938).
The Government has contended, here and before the Court of Appeals, that the answer to the current question is illumined, if not conclusively determined, by a February 22, 1985, diplomatic note from the Government of Panama, indicating that it shares the United States' view that Article XV pertains only to Panamanian taxation. The petitioners assert that mutual agreement between the contracting parties on interpretation cannot be dispositive of third-party rights, and that the note is in any event inadmissible on various grounds. Since we would sustain the Government's position without reference to the note, we need not resolve these disputes.

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