Fang Ai v. United States , 809 F.3d 503 ( 2015 )

FILED
FOR PUBLICATION DEC 17 2015
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
FANG LIN AI and DOES 1-1000, No. 13-17491
Plaintiffs - Appellants, D.C. No. 1:11-cv-00014
CONCORDE GARMENT
MANUFACTURING CORPORATION, OPINION
Plaintiff-counter-defendant -
Appellant,
v.
UNITED STATES OF AMERICA,
Defendant-counter-claimant -
Appellee.
Appeal from the United States District Court
for the District of the Northern Mariana Islands
Ramona V. Manglona, Chief District Judge, Presiding
Argued and Submitted June 10, 2015
Honolulu, Hawaii
Before: WARDLAW, BERZON, and OWENS, Circuit Judges.
Opinion by Judge WARDLAW, Circuit Judge:
Concorde Garment Manufacturing Corporation, and more than 4,000
temporary, nonresident former employees of Concorde, appeal from the district
court’s entry of judgment on the pleadings in favor of the United States.1 The
district court held that temporary foreign workers in the Commonwealth of the
Northern Mariana Islands (“CNMI”) and their employers are required to pay
Federal Insurance Contributions Act (“FICA”) taxes, which fund Social Security
and Medicare. Section 606(b) of the Covenant governing U.S.-CNMI relations
provides that U.S. laws that impose excise taxes to support the Social Security
system apply to the CNMI as they apply to Guam.2 Because FICA is a law that
imposes an excise tax to support the Social Security system, it applies to the CNMI
as it applies to Guam. In turn, FICA applies to all workers and their employers in
Guam, regardless of their citizenship. Therefore, FICA also applies to all workers
and their employers in the CNMI, including Appellants, regardless of their
citizenship. We therefore affirm the district court.
1
The district court also entered summary judgment in favor of the United
States on Appellants’ claim for illegal levy. Appellants do not appeal this decision.
2
The Covenant to Establish a Commonwealth of the Northern Mariana
Islands in Political Union with the United States of America (“Covenant”) was
entered into U.S. law pursuant to Pub. L. No. 94-241, 90 Stat. 263 (1976), and is
codified as a note following 48 U.S.C. § 1801. Several of our opinions have
detailed the history of the Covenant and U.S.-CNMI relations. See, e.g., N.
Mariana Islands v. United States, 399 F.3d 1057, 1058–60 (9th Cir. 2005); Saipan
Stevedore Co. v. Dir., Office of Workers’ Comp. Programs, 133 F.3d 717, 720–21
(9th Cir. 1998).
2
I. Background
Appellants Concorde Garment Manufacturing Corporation (“Concorde”)
and the Chinese national, nonresident workers formerly employed at Concorde’s
facilities in the CNMI (“Employees”) paid FICA taxes from the years 2004 to
2007. In 2008, Appellants filed refund claims for those payments. The Internal
Revenue Service (“IRS”) refunded Concorde’s 2006 FICA taxes but otherwise
took no action on Appellants’ claims. Thereafter, Appellants sued the United
States in the U.S. District Court for the Northern Mariana Islands to recover the
remainder of the FICA taxes they had paid. The United States counter-claimed to
recover the refund of Concorde’s 2006 FICA taxes, which it argued was
erroneously issued. The district court ruled that all workers and their employers in
the CNMI are subject to FICA, regardless of the citizenship of either.
Appellants timely filed this appeal, arguing that (1) the Covenant was
intended to subject only CNMI citizens, not temporary nonresident foreign
workers, to FICA taxes; (2) even if FICA generally applies to all workers and their
employers in the CNMI, Employees are entitled to the FICA tax exemption for
temporary nonresident Filipino workers in Guam; (3) even if the first two
arguments are rejected, the employee portion of FICA does not apply because it is
an income tax, and only excise and self-employment taxes that support Social
3
Security apply to the CNMI; and (4) the statutory basis for applying FICA to
Appellants is unconstitutionally vague.3
II. Standard of Review
We review de novo an order granting judgment on the pleadings, accepting
facts alleged by the nonmoving party as true and drawing all inferences in its favor.
LeGras v. AETNA Life Ins. Co., 786 F.3d 1233, 1236 (9th Cir. 2015). We also
review de novo underlying issues of statutory interpretation and constitutionality.
Fournier v. Sebelius, 718 F.3d 1110, 1117–18 (9th Cir. 2013), cert. denied, 134 S.
Ct. 1501 (2014).
We have held that “taxing statute[s] must be construed most strongly in
favor of the taxpayer and against the government.” Greyhound Corp. v. United
States, 495 F.2d 863, 869 (9th Cir. 1974). However, “[w]e are not impressed by
the argument that [any doubtful question] should be resolved in favor of the
taxpayer.” White v. United States, 305 U.S. 281, 292 (1938). Thus, “where the
rights of suitors turn on the construction of a [tax] statute . . . it is our duty to
decide what that construction fairly should be,” and “doubts which may arise upon
3
Appellants adopted the arguments made in American Pacific Textile, Inc. v.
United States, No. 13-16348. We therefore address those arguments here and
resolve issues specific to the American Pacific appeal in a concurrently filed
memorandum disposition.
4
a cursory examination of [tax statutes may] disappear when they are read, as they
must be, with every other material part of the statute, and in the light of their
legislative history.” Id. (citation omitted); see also Irwin v. Gavit, 268 U.S. 161,
168 (1925) (“It is said that the tax laws should be construed favorably for the
taxpayers. But that is not a reason for creating a doubt or for exaggerating one
when it is no greater than we can bring ourselves to feel in this case.”).
Therefore, while tax statutes “are not to be extended by implication beyond
the clear import of the language used,” United States v. Merriam, 263 U.S. 179,
187–88 (1923), we do not mechanically resolve doubts in favor of the taxpayer but
instead resort to the ordinary tools of statutory interpretation. Ultimately, “the
literal meaning of the words employed is most important.”4 Id.; see also United
States v. Fei Ye, 436 F.3d 1117, 1120 (9th Cir. 2006) (“If the plain language of a
statute renders its meaning reasonably clear, [we] will not investigate further unless
4
Appellants view the Covenant as a statute. At the same time, Appellants
adopt arguments made by the American Pacific appellants that depend, somewhat
contradictorily, on interpreting the Covenant not as a statute but instead as a treaty-
like agreement. Appellants therefore urge us to look more liberally to the
Covenant’s drafting history than we might in construing a statute. See Minnesota
v. Mille Lacs Band of Chippewa Indians, 526 U.S. 172, 202 (1999) (“[R]eview of
the history and the negotiations of the agreements is central to the interpretation of
treaties.”). We believe that the Covenant is best viewed as “a congressionally
approved compact [that] is both a contract and a statute . . . . [such that] resort to
extrinsic evidence of the [Covenant’s] negotiations . . . is entirely appropriate.”
Oklahoma v. New Mexico, 501 U.S. 221, 235 n.5 (1991).
5
its application leads to unreasonable or impracticable results.”) (internal quotation
marks and citation omitted); N. Mariana Islands v. United States, 279 F.3d 1070,
1074 n.5 (9th Cir. 2002) (“We would be undermining congressional intent if we
were to decline to give effect to what section 502(a)(2) of the Covenant by its
terms requires . . . .”).
We note that the Federal Circuit has ruled in favor of the government and
against the taxpayers in a materially indistinguishable case, a decision which is
persuasive, though not dispositive. See Zhang v. United States, 640 F.3d 1358
(Fed. Cir. 2011) (Zhang II), cert. denied, 132 S. Ct. 2375 (2012).5 We have
recognized, however, that “‘[u]niformity among Circuits is especially important in
tax cases to ensure equal and certain administration of the tax system.’” Hill v.
Comm’r, 204 F.3d 1214, 1217 (9th Cir. 2000) (quoting Pac. First Fed. Sav. Bank
v. Comm’r, 961 F.2d 800, 803 (9th Cir. 1992)). That is particularly true where, as
here, a circuit split would create two mutually exclusive rules applicable to the
CNMI, leading to uncertainty and obvious forum shopping opportunities.
5
In Zhang II, the Federal Circuit reviewed and ultimately affirmed a
thorough opinion by the Court of Federal Claims addressing the same issue. See
Zhang v. United States, 89 Fed. Cl. 263 (2009) (Zhang I).
6
III. Discussion
A. The CNMI Is “Within the United States” for Purposes of FICA.
1. Covenant § 606(b)
FICA imposes an employer and an employee tax on wages “with respect to
employment.” See 26 U.S.C. §§ 3101(a) (“employee tax”), 3111(a) (“employer
tax”). FICA applies to wages related to work performed “within the United
States,” “irrespective of the citizenship or residence of either” the employee or
employer, id. § 3121(b), and to wages related to work performed “outside the
United States” by a U.S. citizen or resident “as an employee for an American
employer,” id. Section 3121(e)(2) defines the term “United States” when it is used
in a geographical sense to include the Commonwealth of Puerto Rico, the Virgin
Islands, Guam, and American Samoa.6 Thus, wages for services performed in
Guam are subject to both the employee and employer provisions of FICA,
“irrespective of the citizenship or residence of either” the employee or the
employer. Id. § 3121(b).
Section 606(b) of the Covenant, in turn, provides:
6
“United States” is used in a geographical sense in 26 U.S.C. § 3121(b).
This is evident from the section’s juxtaposition of “within the United States,” id.
(emphasis added), and “outside the United States,” id. (emphasis added).
Accordingly, it is undisputed that Guam is “within the United States” for purposes
of FICA. See Zhang II, 640 F.3d at 1367.
7
Those 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 will upon termination of the Trusteeship
Agreement or such earlier date as may be agreed to by the Government
of the Northern Mariana Islands and the Government of the United
States become applicable to the Northern Mariana Islands as they apply
to Guam.
Just as in Guam, then, wages for services performed in the CNMI are subject to
FICA taxes, irrespective of citizenship or residence. See id.; 26 U.S.C. § 3121(b).
We hold that the district court correctly held that Appellants, who paid and
received wages for services performed in the CNMI, are required to pay FICA
taxes on those wages, even though Employees were temporary nonresident
Chinese nationals.7
2. Covenant § 606(b) is not limited to citizens or residents of Guam or the
CNMI.
Appellants attempt to steer us away from this straightforward conclusion,
which flows directly from the plain language of Covenant § 606(b), by advocating
a citizenship-based application of FICA to the CNMI. They argue that the phrase
in Covenant § 606(b) “as they apply to Guam” is ambiguous, and that the term
“Guam” does not mean “Guam,” but actually means “the people who reside in or
7
We discuss whether the FICA tax on employee wages is “a law[] of the
United States which impose[s] excise and self-employment taxes to support . . . the
United States Social Security System” in Section III.C.
8
who are citizens of [that] geographic area[].”8 From this manufactured ambiguity,
Appellants assert that § 606(b)’s reference to the CNMI is also ambiguous and
could refer to persons in the CNMI, rather than to the geographic area itself.
Appellants then argue that § 606(b) does not refer to all the people in the CNMI,
but instead refers only to citizens of the CNMI. Under this tortured reading of the
Covenant, Appellants conclude that § 606(b) subjects only CNMI citizens and their
employers to FICA taxes.
There is no plausible method by which to arrive at Appellants’ conclusion
from the plain language of the Covenant and, were § 606(b) amenable to a
citizenship-based application, we would decline to adopt that construction because
FICA is incompatible with such an application.
To begin with, § 606(b) does not mention citizenship or people, and we see
no reason to read those words into the Covenant. Moreover, even if we were to
read references to geographic areas as references to people in those geographic
areas, our reading would not be limited to citizens. The very extrinsic drafting
material Appellants rely upon actually suggests the contrary conclusion. It
8
See Hearing Before the Subcomm. on Territorial and Insular Affairs of the
H. Comm. on Interior and Insular Affairs on H.J. Res. 549, 550, and 547 to
Approve the “Covenant to Establish a Commonwealth of the Northern Mariana
Islands in Political Union with the United States of America,” 94th Cong. 376
(1975).
9
suggests that references to Guam or to the CNMI could refer either to the
geographic areas or “to the people who reside in or who are citizens of” those
geographic areas. See 94th Cong. 376. (emphasis added). Thus, there is no
plausible way to limit the applicability of § 606(b)’s cross-reference exclusively to
the citizens as opposed to the residents of the CNMI.9
Further, to the extent that any ambiguity exists as to whether the cross-
reference to Guam refers to people as opposed to geography, the plain language of
FICA compels us to adopt the geographic application. By its terms, FICA never
applies solely based upon a worker’s citizenship. Rather, FICA applies in two
instances: (1) when work is performed within the United States, and (2) when work
is performed by a U.S. citizen for an American employer. See 26 U.S.C.
§ 3121(b). Therefore, unless we construe § 606(b) to include the CNMI within the
United States geographically, FICA would not require CNMI citizens to pay FICA
taxes unless they were working for an American employer. See id. There is no
indication that FICA was intended to have such a limited effect within the CNMI.
Indeed, because CNMI citizens became U.S. citizens under the
9
And FICA, in turn, applies to the CNMI as it applies to Guam—where
nonresident workers are subject to the FICA tax on employee wages because they
performed work “within the United States,” 26 U.S.C. § 3121(b), regardless of
whether they were temporary nonresident workers.
10
Covenant—meaning they already must pay FICA taxes when working for an
American employer—such an outcome would render § 606(b) meaningless. See
Covenant § 303; 26 U.S.C. § 3121(b).10 We avoid this result and afford § 606(b)
meaning by concluding that, through operation of the cross-reference to Guam, the
CNMI is brought within the geographical territory of the United States for
purposes of FICA.
3. Intervening legislation does not preclude § 606(b)’s applicability.
Appellants assert that even if they were subject to FICA pursuant to
Covenant § 606(b) as originally drafted, two statutes enacted after the Covenant
was approved, but before § 606(b) became effective in 1986, preclude application
of FICA to Appellants. We disagree.
First, Appellants look to a 1981 amendment to 42 U.S.C. § 1301, which
altered the definition of the term “State” in the Social Security Act. In doing so,
the amendment extended the application of certain benefit provisions to the CNMI.
Critically, from Appellants’ perspective, although the amendment expressly
10
There is a third possibility—that § 606(b) somehow expanded the
definition of “American employer.” Appellants actually raise this argument,
claiming that “CNMI employers—like those of Guam—would be considered
‘American employers’” for purposes of applying 26 U.S.C. § 3121(b). The notion
that § 606(b)—which applies FICA to the CNMI as it applies to Guam—is
somehow intended narrowly to expand the definition of American employer is
nonsensical, and we need not elaborate on this conclusion.
11
mentioned both the CNMI and Guam, a different menu of benefits was extended to
each. See 42 U.S.C. § 1301(a)(1) (1982). Appellants assert that this amendment
demonstrates Congress’s intent to treat Guam and the CNMI differently, and that it
is therefore improper to mechanically substitute the CNMI for Guam in Covenant
§ 606(b).
This argument is without merit, and like the Federal Circuit, we reject it.
See Zhang II, 640 F.3d at 1368 (“Contrary to Appellants’ arguments, Congress did
not subsequently abandon the substitution of Guam for the CNMI by enacting 42
U.S.C. § 1301.”); see also Zhang I, 89 Fed. Cl. at 281–82. Before the amendment
to § 1301, Social Security benefits in the CNMI were linked to benefits in Guam
pursuant to Covenant § 606(b). The amendment operated to eliminate the benefit
parity between the two territories. But there is no indication that Congress
intended its amendment to Social Security benefits to extend to FICA taxes.
Indeed, far from supporting Appellants’ conclusion, that Congress did not amend
any taxation provisions when it amended the benefits provisions confirms
Congress’s intent that FICA taxes remain applicable to the CNMI as to Guam.
Thus, the CNMI’s FICA tax treatment remains linked to Guam’s pursuant to
Covenant § 606(b).
12
Second, Appellants direct us to Section 19 of the Act of 1983, Pub. L. No.
98-213, 97 Stat. 1459. U.S.-CNMI relations were governed by a Trusteeship
Agreement following World War II. During the unexpectedly delayed transition
from the Trusteeship Agreement to the Covenant, CNMI citizens did not meet the
U.S. citizenship requirement included in many statutory benefit provisions.11 As
the Federal Circuit has explained, § 19’s purpose was “to accelerate CNMI
citizens’ receipt of certain statutory benefits to which they otherwise would not
have been entitled until termination of the Trusteeship Agreement.” Zhang II, 640
F.3d at 1368. The Act accomplished this purpose by waiving the U.S. citizenship
requirement for certain benefits. Section 19 of the Act provides:
(a) The President may . . . provide that the requirement of United States
citizenship or nationality provided for in any of the statutes listed on
pages 63–74 of the Interim Report . . . shall not be applicable to the
citizens of the Northern Mariana Islands. . . .
11
Covenant § 504 created a Commission on Federal Laws. The Commission
was tasked with making recommendations to Congress about the application of
certain U.S. laws to the CNMI during the interim period before termination of the
Trusteeship Agreement. In the Commission’s First Interim Report, it observed that
“[m]any federal laws require United States citizenship as a prerequisite to
enjoyment of rights and privileges conferred by those laws.” Interim Report of the
N. Mariana Islands Comm’n on Fed. Laws to the Congress of the United States,
4–6 (1982) (“Interim Report”). The Commission concluded that CNMI citizens
should enjoy these rights and privileges during the possibly prolonged period
before the termination of the Trusteeship Agreement, and it therefore proposed
legislation that would treat CNMI citizens as United States citizens for purposes of
certain federal statutes already applicable to the CNMI. Id. at 6.
13
(b) A statute which denies a benefit or imposes a burden or a disability
on an alien, his dependents, or his survivors shall, for the purposes of
this Act, be considered to impose a requirement of United States
citizenship or nationality.
Reading the two subsections together, § 19(b) clarifies which of the statutes listed
in the Interim Report referenced in § 19(a) contains a “requirement of United
States citizenship.” Thus, § 19(b) defines the type of statutory provision for which
the President may waive a requirement of United States citizenship pursuant to the
authority granted in § 19(a).
Appellants read § 19(b) out of context when they contend that it actually
reads a U.S. citizenship requirement into all U.S. statutes that “den[y] a benefit or
impose[] a burden or a disability on an alien.” It turns the Act of 1983 on its head
to conclude that § 19(b) excludes aliens from both the benefits and the burdens of a
wide range of laws. The very purpose of the 1983 Act was to include CNMI
citizens, who remained “aliens” until the official termination of the Trusteeship
Agreement in 1986, within benefits programs that explicitly required U.S.
citizenship. We therefore join the Federal Circuit in holding that § 19 of the Act of
1983 has no effect on the applicability of FICA to nonresident workers in the
CNMI. See Zhang II, 640 F.3d at 1368–70.
14
B. The FICA Exemption for Nonresident Filipino Workers in Guam Does Not
Extend to Nonresident Chinese Workers in the CNMI.
Appellants next argue that even if FICA applies to nonresident workers and
their employers in the CNMI generally, Appellants fit within an exemption to
FICA taxation that Congress created for certain nonresident workers in Guam. The
exemption on which Appellants rely, however, is expressly limited to Filipino
citizens admitted to Guam under H-2 visas. See 26 U.S.C. § 3121(b)(18).12
Pursuant to Covenant § 606(b), then, Filipinos admitted to the CNMI under H-2
visas arguably would be exempt from FICA. However, even if we overlooked the
fact that Employees were not admitted to the CNMI pursuant to H-2 visas, the
exemption remains plainly inapplicable because Employees are Chinese
nationals.13
12
This section of FICA exempts from the definition of employment any
“service performed in Guam by a resident of the Republic of the Philippines while
in Guam on a temporary basis as a nonimmigrant alien admitted to Guam pursuant
to section 101(a)(15)(H)(ii) of the Immigration and Nationality Act.” 26 U.S.C.
§ 3121(b)(18).
13
We need not decide whether the exemption would apply to Filipinos in the
CNMI who were not admitted pursuant to H-2 visas but were instead admitted
pursuant to the CNMI’s local immigration law. This is a close question. During
the relevant time period—2004 to 2007—the CNMI was not subject to the
Immigration and Naturalization Act, and instead maintained the authority to create
its own immigration laws. Accordingly, from 2004 to 2007, temporary workers
entered the CNMI pursuant to the CNMI’s Nonresident Workers Act. See 3 N.
(continued...)
15
Moreover, as Appellants concede, Filipinos were not the only temporary
nonresident workers in Guam when the exemption was created. See U.S. House of
Rep., Comm. on the Judiciary, Subcomm. on Immigration, Citizenship, and Int’l
Law, The Use of Temporary Alien Labor on Guam 3–4 (1975). In light of this
demographic reality, Congress’s decision to expressly limit the exemption to
Filipinos, in part because of our nation’s unique political ties with the Philippines,
suggests that the exemption was not meant to cover all nonresident workers in
Guam. In sum, Congress singled out Filipinos for preferential treatment. Because
it is undisputed that Employees are not Filipinos, the exemption does not apply to
them.
C. FICA and SECA Apply in Their Entirety to the CNMI as They Apply to Guam.
Section 606(b) states that “[t]hose laws of the United States which impose
excise and self-employment taxes to support . . . the United States Social Security
system will . . . become applicable to the [CNMI] as they apply to Guam.”
Covenant § 606(b). Appellants contend that even if FICA generally applies to the
CNMI, the employee portion does not apply because it is an income tax, not an
13
(...continued)
Mar. I. Code § 4411, et seq. Thus, although temporary nonresident Filipinos in the
CNMI are the exact type of worker Congress sought to exempt from FICA, these
workers do not technically satisfy all statutory elements of the exemption.
16
excise or self-employment tax. See 26 U.S.C. § 3101(a) (imposing “on the income
of every individual a tax”). In other words, Appellants read § 606(b) as if it
contains an additional limitation: “Those laws of the United States which impose
only excise taxes and only self-employment taxes to support . . . the United States
Social Security system will . . . become applicable to the [CNMI] as they apply to
Guam.” Appellants misread the provision.
Section 606(b) does not contain the limitation suggested by Appellants, nor
does it state that excise taxes apply in the CNMI as in Guam. Instead, § 606(b)
provides that those laws which impose such taxes apply in the CNMI as in Guam.
The difference is subtle but crucial: Laws imposing excise taxes, and not simply
the excise taxes themselves, apply in the CNMI as in Guam. In short, if a law
imposes an excise tax to support Social Security, the law—not just that part of the
law imposing an excise tax—applies in the CNMI as in Guam.14 Because FICA
imposes an excise tax, it applies in the CNMI as in Guam. And because FICA
14
Although it might be possible to treat 26 U.S.C. § 3111, the employer
portion of FICA, as a separate law from § 3101, the employee portion, such
treatment is untenable. Both § 3101 and § 3111 rely on § 3121, among other
provisions. Thus, § 3111 is incomplete without the remainder of FICA. Because
§ 3111 cannot be viewed as a “law” in isolation from the overarching statute, the
law at issue in Covenant § 606(b) is not merely the employer portion of FICA.
The law is instead FICA as a whole, which necessarily includes the employee
portion.
17
subjects employees in Guam to taxation, it subjects employees in the CNMI to
FICA taxes as well.
This plain reading of § 606(b) is reinforced by the section’s additional
reference to laws imposing self-employment taxes. While the reference to laws
imposing excise taxes is sufficient to capture FICA in its entirety, self-employment
taxes that support Social Security are not included in FICA. Instead, they are
found in the Self-Employment Contributions Act (“SECA”). See 26 U.S.C.
§§ 1401–03. Therefore, while there are three general taxes that support the Social
Security system—the employee FICA tax, the employer FICA tax, and SECA
taxes—there are only two laws imposing those taxes—FICA and SECA. And
Covenant § 606(b)’s language is designed to render both laws applicable to the
CNMI as they apply to Guam.
Any doubt that this reading is correct is dispelled when § 606(b) is
considered in the context of the Covenant as a whole. Another of the Covenant’s
provisions, Section 601(a), provides that “[t]he income tax laws in force in the
United States” apply in the CNMI “in the same manner as those laws are in force
in Guam.” Covenant § 601(a) (emphasis added). The reason for the omission of
any specific reference to income taxes in § 606(b) is therefore apparent: Section
601(a) already makes clear that such taxes are applicable in the CNMI. Section
18
601(a) thus clarifies that “[t]hose laws of the United States which impose excise
and self-employment taxes to support . . . the United States Social Security
System” do indeed include the employee portion of FICA.
To the extent that the phrase “those laws” is ambiguous, in that the laws
could be broken down further to include only 26 U.S.C. § 3111(a) (the portion of
FICA imposing an excise tax), rather than all of FICA, we may look to extrinsic
drafting sources to resolve this ambiguity. See Diamond v. Chakrabarty, 447 U.S.
303, 315 (1980) (“[O]ur obligation is to take statutes as we find them, guided, if
ambiguity appears, by the legislative history and statutory purpose.”). The
available extrinsic evidence overwhelmingly suggests that the drafters intended
that all FICA taxes apply.
Both the House and Senate Reports produced in connection with Congress’s
approval of the Covenant provide: “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). As the
Federal Circuit aptly observed, “[t]he reports do not distinguish the employer
19
FICA tax from the employee FICA tax, nor do they suggest that one tax applies but
the other does not.” Zhang II, 640 F.3d at 1374.
The Section–by–Section Analysis of the Covenant—published by the
Marianas Political Status Commission, which assisted in the Covenant’s
drafting—also does not distinguish between the employer and employee FICA
taxes. See Zhang II, 640 F.3d at 1375 (noting that “Congress considered the
Section–by–Section Analysis prior to approving the Covenant”) (citing S. Rep. No.
94–433, at 65–94); N. Mariana Islands, 399 F.3d at 1065 (“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). Describing
Covenant § 606(b), the Section–by–Section Analysis 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
20
than termination of the Trusteeship, at which time the entire Covenant
will be effective.
Marianas Political Status Comm’n, Section–by–Section Analysis of the Covenant to
Establish a Commonwealth of the Northern Mariana Islands, 80–81 (1975)
(emphasis added).
Likewise, the Commission on Federal Laws, see Covenant § 504, did not
distinguish between the two taxes. In pertinent part, the summary section of the
Commission’s Second Interim Report states: “Employers and employees in the
Northern Mariana Islands are made subject to taxes imposed by [FICA] 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 of the N. Mariana Islands Comm’n on Fed. Laws to the Congress of the
United States 415 (1985). More specifically, the Second Interim Report contains a
section entitled “Employment Taxes,” which explains that under FICA, “[t]he
employer and employee are each required to pay taxes.” Id. at 465.
In light of this legislative history, we resolve any ambiguity in § 606(b) by
concluding that the word “laws” refers to the entire law containing the tax in
question—i.e., FICA and SECA. See also Zhang I, 89 Fed. Cl. at 281 (“The[]
legislative documents are uniform in their treatment of section 606(b),
21
unambiguously demonstrating that all FICA tax provisions were intended to apply
to the CNMI.”).
Moreover, reading § 606(b) to apply the employer portion of FICA without
the employee portion would mean subjecting CNMI employers but not CNMI
employees to FICA taxation, even though many of the exempt CNMI employees
would be able to receive benefits under the system. See Zhang II, 640 F.3d at 1363
(discussing the Court of Federal Claims’ conclusion that Congress clearly intended
to avoid such an absurd result).
Ultimately, the text of § 606(b) provides that FICA—a law imposing an
excise tax—applies to the CNMI as it applies to Guam. In Guam, employees are
subject to FICA, and thus the same is true in the CNMI, regardless of whether that
tax is an excise tax or an income tax. It is the law containing the excise tax that
applies to the CNMI as to Guam, not merely the “excise tax” itself. See Covenant
§ 606(b).15
15
We note that the district court also relied on Covenant § 601(a) and (c) in
concluding that FICA applies in its entirety to the CNMI. However, we may
affirm on any ground supported by the record. See Columbia Pictures Indus., Inc.
v. Fung, 710 F.3d 1020, 1030 (9th Cir. 2013), cert. dismissed, 134 S. Ct. 624
(2013). Because we hold that Covenant § 606(b) renders both employee and
employer FICA taxes applicable to the CNMI, we do not reach the parties’
alternative contentions concerning the applicability of Covenant § 601(a) and (c).
22
D. The Applicability of FICA to Appellants Through the Covenant Is Not
Unconstitutionally Vague.
Appellants argue that, because the IRS has not explained consistently why
FICA taxes apply to them, the statutory scheme is unconstitutionally vague. See
Vill. of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 497–99
(1982) (explaining that the void for vagueness doctrine applies to civil statutes).
Contrary to Appellants’ suggestion, however, the question is not whether the
government applied or interpreted FICA consistently. Instead, the question is
whether the scheme that subjects Appellants to FICA taxes is “so vague and
indefinite as really to be no rule or standard at all,” Boutilier v. INS, 387 U.S. 118,
123 (1967), or whether a person of ordinary intelligence could understand that the
scheme requires payment of FICA taxes, see Ass’n des Eleveurs de Canards et
d’Oies du Quebec v. Harris, 729 F.3d 937, 946 (9th Cir. 2013).
FICA’s applicability to Appellants is not unclear, as evidenced most
prominently by Appellants’ payment of FICA taxes from 2004 through 2007. See,
e.g., United States v. Moore, 109 F.3d 1456, 1467 (9th Cir. 1997) (finding Gun
Control Act was not unconstitutionally vague where “[t]he record show[ed] that
both [defendants] understood their respective legal obligations”). Moreover, the
Court of Federal Claims, the Federal Circuit, and the District Court for the
23
Northern Mariana Islands have each reached the same conclusion—that Appellants
are subject to FICA taxes. If anything, that these courts have arrived at this
conclusion by different statutory routes suggests that the relevant statutory scheme
advised Appellants in multiple ways that they must pay FICA taxes.
Appellants themselves, all courts to consider the issue, and the IRS have
consistently read the statutory scheme as requiring Appellants to pay employer and
employee FICA taxes. Appellants’ position was not frivolous, and they were
justified in requesting a refund from the IRS. But having a colorable argument that
FICA taxes do not apply does not render the statute unconstitutionally vague.16
IV. Conclusion
For the foregoing reasons, we AFFIRM the district court’s entry of
judgment on the pleadings in favor of the United States on Appellants’ claims, as
16
Moreover, it does not appear that Appellants face any penalty. They
simply must pay the tax. This is not a situation where a party acted in reliance on
the law (or in ignorance of a law due to lack of clarity) only to be subject to a
penalty or, worse yet, criminal sanctions, because it acted in accordance with a
reasonable understanding of the law. Thus, to the extent that vagueness concerns
apply at all in this case, those concerns are de minimis. See, e.g., Groome
Resources Ltd., L.L.C. v. Par. of Jefferson, 234 F.3d 192 (5th Cir. 2000) (affirming
entry of permanent injunction against Parish, which delayed granting a zoning
accommodation to the developer of an Alzheimer’s care facility, where the delay
would impose financial penalties upon the developer and the Parish argued in part
that statutory vagueness justified the delay).
24
well as the district court’s entry of judgment on the pleadings in favor of the
United States on the United States’ counterclaim.
25
COUNSEL
Craig E. Stewart (argued), Kelsey Israel-Trummel, and Edward Patrick Swan, Jr.,
Jones Day, San Francisco, California; Steven P. Pixley, Saipan, Northern Mariana
Islands, for Plaintiff-Counter-Defendant-Appellant Concorde Garment
Manufacturing.
Colin M. Thompson, Thompson Law Office, LLC, Saipan, Northern Mariana
Islands, for Plaintiffs-Appellants Fang Lin Ai, et al.
Bridget M. Rowan (argued), Tamara W. Ashford, Teresa T. Milton, United States
Department of Justice, Tax Division, Washington, District of Columbia; Alicia
A.G. Limtiaco, United States Attorney, United States Attorney’s Office, Saipan,
Northern Mariana Islands, for Defendant-Counter-Claimant-Appellee.
26