Opinion ID: 214076
Heading Depth: 2
Heading Rank: 2

Heading: Whether FICA Applies to the Zhang Plaintiffs and to Hyunjin

Text: Having concluded that FICA applies generally to the CNMI, we turn to the question whether FICA taxes are owed by Appellants. Appellants here consist of a CNMI employer (Hyunjin) and several of its nonimmigrant alien contract employees (the Zhang plaintiffs). FICA provides for an employer tax and an employee tax, and we must determine whether these FICA provisions apply to Appellants. As we shall explain, we conclude that the FICA taxation scheme applies to both Hyunjin and to the Zhang plaintiffs, and that, as a result, Appellants are not entitled to a refund of their FICA taxes.
We first consider the employees, the Zhang plaintiffs. Our analysis starts with Covenant § 606(b), which, according to the decision of the Court of Federal Claims, applies the FICA tax on employee wages to employees working in the CNMI. Op. at 281. As noted above, § 606(b) applies to the CNMI [t]hose laws of the United States which impose excise and self-employment taxes to support or which provide benefits from the United States Social Security System. Covenant § 606(b) (emphasis added). The term self-employment taxes in § 606(b) refers to the SECA tax. Op. at 271. The dispute here centers on the meaning of excise . . . taxes. The government presents alternative arguments as to why § 606(b) includes the employee FICA tax. Before the Court of Federal Claims, the government argued that even though excise in Covenant § 606(b) refers explicitly only to the FICA employer tax, § 606(b) should be construed to encompass, albeit implicitly, the FICA employee tax as well. The Court of Federal Claims agreed with the government on this point. Op. at 271 (On its face, section 606(b) seems to apply only the FICA excise tax on employers (I.R.C. § 3111) and the [SECA tax] and omits the FICA tax on employees (I.R.C. § 3101).). The government maintained this position in its appellate brief. Appellee Br. at 37-50. At oral argument before this court, however, the government asserted that the term excise in § 606(b) refers broadly to both the employer and employee FICA taxes. While we often treat untimely arguments as waived, e.g., United States v. Ford Motor Co., 463 F.3d 1267, 1276-77 (Fed.Cir.2006), we retain case-by-case discretion over whether to apply waiver, Harris Corp. v. Ericsson Inc., 417 F.3d 1241, 1251 (Fed.Cir.2005). [11] We exercise our discretion in this case to consider the government's argument. We find it reasonable to conclude that excise in Covenant § 606(b) refers to both the employee and employer FICA taxes. Because the Internal Revenue Code does not define the term excise, we assume that the term has its ordinary meaning, for which we may consult dictionaries. See Info. Tech. & Applications Corp. v. United States, 316 F.3d 1312, 1320 (Fed.Cir.2003). The dictionary definition of excise supports a broad construction. The fifth edition of Black's the most recent edition available when the entire Covenant, including § 606, became effectivedefines excise as [a] tax imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. Black's Law Dictionary 506 (5th ed. 1979) (emphasis added). This edition of Black's further clarified: In current usage the term has been extended to include various license fees and practically every internal revenue tax except the income tax. Id. (emphasis added). The FICA tax, a tax on employment, fits this definition. [12] [13] In addition, courts have used the term excise broadly to encompass both the employee and employer FICA taxes. For example, in United States v. Fior D'Italia, Inc., the Supreme Court explained that [t]he tax law imposes, not only on employees, but also `on every employer,' an `excise tax,' i.e., a FICA tax. 536 U.S. 238, 240, 122 S.Ct. 2117, 153 L.Ed.2d 280 (2002) (quoting I.R.C. § 3111); see also Cleveland Indians Baseball, 532 U.S. at 204, 121 S.Ct. 1433 (The Federal Insurance Contributions Act (FICA) . . . impose[s] excise taxes on employee wages. . . .). Circuit courts, including this court, have also characterized the FICA employee tax as an excise tax. In Chicago Milwaukee Corp. v. United States, a case involving the Railroad Retirement Tax Act (RRTA), we stated, RRTA tax is similar to the tax imposed by [FICA]. RRTA tax is an employment excise tax on the employer and the employee. 40 F.3d 373, 374 (Fed.Cir. 1994). The Tenth Circuit summarized the FICA tax scheme as follows: The federal Social Security and Medicare systems are funded by excise taxes, separate and distinct from federal income taxes, imposed on employees, employers, and self-employed individuals. See 26 U.S.C. §§ 1401, 3101, 3111. In the case of employees and employers, FICA imposes the excise tax on the wages paid by an employer to an employee with respect to employment. See 26 U.S.C. § 3101(a)-(b), § 3111(a)-(b). FICA taxes are paid in equal shares by employer and employee. See id. Pub. Emps. Ret. Bd. v. Shalala, 153 F.3d 1160, 1161 (10th Cir.1998). The Second Circuit has also characterized both the employee and employer FICA taxes as excise taxes: [The plaintiff] is an employer which is obligated under the FICA statutory scheme to pay an excise tax on the wages it pays its employees and to withhold from those wages and pay to the Government an excise tax imposed on its employees. Atl. Dept. Stores, Inc. v. United States, 557 F.2d 957, 958 (2d Cir. 1977). Accordingly, based on the plain meaning of the term excise, as well as various judicial interpretations affording the term a broad scope vis-à-vis the FICA taxation scheme, and in light of the absence of a specific definition for excise in the Internal Revenue Code, we agree with the government that it is reasonable to interpret the term excise . . . taxes, as used in Covenant § 606(b), to include both the employee and employer FICA taxes under 26 U.S.C. §§ 3101 and 3111. That is not to say, however, that a narrower reading of excise is necessarily unreasonable. Section 3111 of the Internal Revenue code refers to the employer FICA tax as an excise tax, whereas § 3101 does not use this descriptor in referring to the employee tax. Moreover, the Court of Claims has referred, in passing, to the employee FICA tax as an income tax, not an excise tax. In Kirkconnell v. United States, a case in which employers, as plaintiffs, sued for certain tax refunds, the court stated: Only that portion of the FICA taxes, an excise tax paid by plaintiffs, is sought to be refunded. No part of the [employees'] FICA taxes, an income tax, is sought to be refunded here. 347 F.2d 260, 261 (Ct.Cl. 1965). As the nature of the employee FICA tax was not at issue in that case, its notation of that tax as an income tax, not as an excise tax, does not bind us here. Nevertheless, Appellants' interpretation of excise, which limits the excise taxes in § 606(b) to the employer FICA tax, is not unreasonable. Confronted with a textual ambiguity arising from [l]ess-than-meticulous drafting, Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 53, 125 S.Ct. 460, 160 L.Ed.2d 389 (2004), we may refer to legislative history for assistance in resolving the ambiguity, id. at 62, 125 S.Ct. 460; see also Diamond v. Chakrabarty, 447 U.S. 303, 315, 100 S.Ct. 2204, 65 L.Ed.2d 144 (1980) ([O]ur obligation is to take statutes as we find them, guided, if ambiguity appears, by the legislative history and statutory purpose.); Nutrition 21 v. United States, 930 F.2d 862, 865 (Fed.Cir.1991) (Where . . . the words of a statute are not expressly defined, and do not fairly admit of a plain, non-ambiguous meaning, resort to the legislative history for clarification is justified.). Here, with two plausible, yet conflicting, interpretations of Covenant § 606(b), we turn to the relevant legislative history for clarification. Several extrinsic sources shed light on the meaning of the Covenant. The House and Senate Reports prepared in connection with Congress's approval of the Covenant both state: Subsection (b) [of Covenant § 606] assures that the laws of the United States which impose taxes to support. . . the United States Social Security System will become applicable to the Northern Marianas as they are applicable to Guam upon termination of the Trusteeship [Agreement]. . . . H.R.Rep. No. 94-364, at 11 (1975); S.Rep. No. 94-433, at 83 (1975). Also informative is the Section by Section Analysis of the Covenant To Establish a Commonwealth of the Northern Mariana Islands (hereinafter, Section-by-Section Analysis), which was published by the Marianas Political Status Commission, the drafters of the Covenant. Op. at 273. The portion of the Section-by-Section Analysis describing Covenant § 606(b) states: Subsection (b) [of § 606] assures that the laws of the United States which impose taxes to support or which provide benefits from the United States Social Security System will become applicable to the Northern Marianas as they are applicable to Guam upon termination of the Trusteeship Agreement.. . . At this time as well, those laws of the United States which impose taxes to support the United States Social Security System will become applicable. The reason that the Covenant is structured in a way which does not make the United States social security laws applicable immediately is that the taxes which are imposed to support the social security system are very burdensome as compared to the taxes which are paid by the people of the Northern Marianas today. . . . [T]hese laws will become effective in the Northern Marianas no later than termination of the Trusteeship, at which time the entire Covenant will be effective. Section-by-Section Analysis, supra, at 80-81. Finally, the Second Interim Report contains the perspective of the Commission on Federal Laws. Op. at 280 n. 12. The summary section of the Report states: Employers and employees in the Northern Mariana Islands are made subject to taxes imposed by the Federal Insurance Contributions Act to support the federal social security system at the time the social security systems of the Northern Mariana Islands and the United States are merged. . . . Second Interim Report, supra, at 415 (emphasis added). In the section of the Report titled Employment Taxes, under the heading The Federal Insurance Contributions Act, the Report describes the FICA taxation scheme as impos[ing] wage-based taxes on employers and employees to support . . . social security. Id. at 465 (emphasis added). The Report then explains that, under FICA, [t]he employer and employee are each required to pay taxes. Id. (emphasis added). The Report states that [s]elf-employed persons are also obliged to contribute to the social security system through a tax on self-employment income. Id. at 466 (emphasis added). The FICA section of the Report concludes: At the time these taxes become effective, the social security system of the Northern Mariana Islands is merged into the federal system, and persons in the Northern Mariana Islands become eligible for federal social security benefits based on their contributions into either the Northern Mariana Islands or the federal system. Id. (emphasis added). Appellants concede that the Senate Report does make clear that Congress anticipated that social security benefits and FICA taxes would be applied in some form and to some extent in the CNMI. Appellants' Opening Br. at 33. However, Appellants contend that the manner and extent to which FICA would apply to the CNMI was unsettled as of the date the Covenant was approved. Appellants also take issue with the court's consideration of the Section-by-Section Analysis and the Second Interim Report, which Appellants contend are improper sources of legislative history. [14] The government argues in response that the legislative history confirms that Congress intended for the FICA tax provisions to apply to CNMI employees. The government notes that the reports draw no distinction among the types of FICA taxes. According to the government, that indicates that all entities with relevant roles in the legislative process appear to have believed that the Covenant's terms were meant to impose FICA taxes on CNMI employees, and did so. Appellee Br. at 47. We conclude that the relevant legislative history demonstrates that Congress intended to apply both the employee and employer FICA taxes to the CNMI through Covenant § 606(b). The House and Senate Reports accompanying the Covenant state that § 606(b) applies the laws that impose taxes to support the social security system to the CNMI. H.R.Rep. No. 94-364, at 11; S.Rep. No. 94-433, at 83. The reports do not distinguish the employer FICA tax from the employee FICA tax, nor do they suggest that one tax applies but the other does not. This is wholly consistent with the view that excise . . . taxes in § 606(b) is used broadly to encompass both types of FICA taxes. These documents are also consistent with the government's assertion (unchallenged by Appellants) that Congress has never selectively applied certain components of the FICA scheme without applying others. Appellee Br. at 24. Based on the House and Senate Reports, we conclude that Congress did not intend for § 606(b) to exempt CNMI employees from FICA taxation, and therefore intended for the term excise . . . taxes to include taxation under both I.R.C. §§ 3101 and 3111. Our conclusion is confirmed by the other documents reviewed by the Court of Federal Claims. The Section-by-Section Analysis of the Marianas Political Status Commission similarly refers to application of the laws that support the social security system, without suggesting any intent to except the employee FICA tax. That is not without significance. Congress considered the Section-by-Section Analysis prior to approving the Covenant. See S.Rep. No. 94-433, at 65-94. Moreover, the United States Court of Appeals for the Ninth Circuit looks to the Section-by-Section Analysis to discern the meaning of the Covenant in cases involving the CNMI (over which the Ninth Circuit has jurisdiction). N. Mar. I. v. United States, 399 F.3d 1057, 1065 (9th Cir.2005) (We have relied in previous opinions on the Marianas Political Status Commission's authoritative Section-by-Section Analysis of the Covenant to assist us in discerning the meaning of the Covenant. (internal quotation marks omitted)); see also Fleming v. Dep't of Public Safety, 837 F.2d 401, 408 (9th Cir.1988) (referring to the Section-by-Section analysis as persuasive evidence of the meaning of a particular aspect of the Covenant), overruled on other grounds by DeNieva v. Reyes, 966 F.2d 480, 483 (9th Cir.1992). The Second Interim Report is equally clear regarding the scope of § 606(b). As with the other extrinsic sources, the Report does not provide any indication that the Covenant excludes the FICA tax on employee wages. Thus, taken together, the extrinsic evidence confirms that the term excise . . . taxes in § 606(b) should be given its broad meaning as including the FICA tax on employee wages. [15] Because we conclude that the FICA employee wage tax is applied to the CNMI via Covenant § 606(b), we need not reach the government's alternative arguments (which were rejected by the Court of Federal Claims, Op. at 279), that the FICA tax on employee wages applies to the CNMI via Covenant §§ 502(a)(2) or 601(c). In addition, we reject Appellants' argument that the scope of § 606(b) is limited by §§ 606(a) and (c) such that § 606(b) applies only to CNMI citizens or domiciliaries. As the government acknowledges, §§ 606(a) and (c) involve management of contributions to the Trust Territory Social Security Retirement Fund, in which only CNMI citizens and domiciliaries participated. Yet this fact does not compel the strained interpretation of § 606(b) that Appellants urge. Unlike § 606(a) and (c), § 606(b) does not involve the Trust Territory Social Security Retirement Fund. Nothing in the text of § 606(b) limits this subsection to CNMI citizens or domiciliaries. The structure of § 606 is equally unsupportive of Appellants' proposed construction. Appellants suggest that, because § 606(b) is located between two provisions dealing with the Trust Territory Social Security Retirement Fund, § 606(b) must be limited, implicitly, to those individuals who participated in that Fund. On the contrary, the organization of § 606 reflects the sequential timing of the particular subsections: § 606(a) sets forth a procedure for handling the Fund at the time this Covenant is approved but before § 606(b)'s effective date; § 606(b) applies certain federal excise and self-employment taxes to the CNMI following the termination of the Trusteeship Agreement; and § 606(c) directs the transfer of the Northern Mariana Islands Social Security Retirement Fund [a]t such time as the laws described in Subsection (b) become applicable to the Northern Mariana Islands. Neither the text nor the structure of § 606 supports Appellants' argument for excluding the Zhang plaintiffs, as nonimmigrant alien contract workers, from the scope of Covenant § 606(b). Accordingly, the Zhang plaintiffs are not entitled to a refund of their FICA taxes, all of which were paid after § 606(b) went into effect. Op. at 287. The Court of Federal Claims correctly granted the government's motion for judgment on the pleadings as to the Zhang plaintiffs.
We turn finally to Hyunjin, the employer. Appellants' brief does not explain in detail why the FICA tax on employers' wages under I.R.C. § 3111 does not apply to Hyunjin, other than to allege that, because Hyunjin's employees do not owe FICA taxes on their hourly wages, neither does Hyunjin owe FICA taxes on wages paid to its employees. This argument fails because, as we explained above, the Zhang plaintiffs and similarly situated nonimmigrant alien contract workers in the CNMI owe FICA taxes under the Covenant. The parties do not dispute that, as drafted, § 606(b) imposes FICA taxes on employers in the CNMI. Op. at 287. Section 606(b) of the Covenant applies to the CNMI [t]hose laws of the United States which impose excise . . . taxes to support. . . the United States Social Security System. Covenant § 606(b). The FICA employer wage tax unquestionably fits this definition; § 3111 explicitly characterizes the FICA employer tax as an excise tax (consistent with this term's broad definition), and FICA taxes are imposed to support the Social Security system. We concluded above that the CNMI is within the United States for purposes of FICA taxation, and that subsequent legislation by Congress did not alter the scope of FICA taxation under the Covenant. Thus, § 606(b) of the Covenant applies the employer FICA tax to Hyunjin, as a CNMI employer. Accordingly, Hyunjin is not entitled to a refund of its FICA taxes, all of which were paid after § 606(b) came into effect. Op. at 287. The Court of Federal Claims correctly granted the government's motion for judgment on the pleadings as to Hyunjin.