Com. of Puerto Rico v. Blumenthal

• Decision Date: 18 May 1981
• Docket Number: Nos. 79-1020,79-1021,s. 79-1020
• Parties: , 81-1 USTC P 16,363 COMMONWEALTH OF PUERTO RICO v. W. Michael BLUMENTHAL, Secretary, Department of the Treasury, Appellant. VIRGIN ISLANDS v. W. Michael BLUMENTHAL, Secretary, Department of the Treasury, Appellant. COMMONWEALTH OF PUERTO RICO, Appellant, v. W. Michael BLUMENTHAL, Secretary, Department of the Treasury. * and 79-1024.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 622

642 F.2d 622

206 U.S.App.D.C. 217, 81-1 USTC P 16,363

COMMONWEALTH OF PUERTO RICO v. W. Michael BLUMENTHAL, Secretary, Department of the

Treasury, Appellant.

VIRGIN ISLANDS v. W. Michael BLUMENTHAL, Secretary, Department of the

Treasury, Appellant.

COMMONWEALTH OF PUERTO RICO, Appellant, v. W. Michael BLUMENTHAL, Secretary, Department of the Treasury.

Nos. 79-1020, 79-1021 ^* and 79-1024.

United States Court of Appeals District of Columbia Circuit.

Argued Nov. 16, 1979.

Decided Oct. 17, 1980.

Rehearing Denied Dec. 18, 1980.

Certiorari Denied May 18, 1981.

See 101 S.Ct. 2315.

Ernest J. Brown, Atty., Dept. of Justice, Washington, D. C., with whom M. Carr Ferguson, Asst. Atty. Gen., and David English Carmack, Atty., Dept. of Justice, Washington, D. C., were on brief for the Secretary of the Treasury as appellant.

Michael J. Henke, Washington, D. C., with whom Charles D. Tetrault, Washington, D. C., was on brief for the Commonwealth of Puerto Rico as appellee and cross-appellant.

Milton Eisenberg, Washington, D. C., with whom Theodore C. Hirt, Washington D. C., and Ive Arlington Swan, Charlotte Amalie, V. I., were on brief for the Virgin Islands as appellee in case No. 79-1021.

Myron C. Baum, Washington, D. C., also entered an appearance for the Department of Justice.

Before McGOWAN and WALD, Circuit Judges, and JOHN PRATT, ^** United States District Judge for the District of Columbia.

Opinion for the court filed by Circuit Judge McGOWAN.

McGOWAN, Circuit Judge:

These consolidated appeals present a substantial controversy between the United States, on the one hand, and Puerto Rico and the Virgin Islands, on the other, with respect to the proper disposition of revenues derived from a tax of 4 cents per gallon imposed by the United States on the initial sale of gasoline in the United States by a producer or importer. 26 U.S.C. § 4081(a) (1976). Each of the island governments asserts that Congress has directed that such revenues in respect of gasoline manufactured in the islands and transported to the United States should be paid over to them. The District Court upheld that contention. We reverse.

I

In 1898, the United States acquired Puerto Rico from the government of Spain pursuant to the Treaty of Paris, which ended the Spanish-American War. Treaty of Paris, Apr. 11, 1899, United States-Spain, 30 Stat. 1754. Soon after, Congress enacted the Foraker Act, also called the First Organic Act, 31 Stat. 77 (1900), which set up a provisional domestic government in Puerto Rico and provided revenues for the island's support. H.R.Rep. No. 249, 56th Cong., 1st Sess. 1-16 (1900). In order to aid the growth of Puerto Rican industries and professions, Congress provided in section 14 of the Foraker Act that "the internal revenue laws ... in view of the provisions of section three, shall not have force and effect in Porto Rico." Foraker Act, § 14, 31 Stat. 77, 80 (1900). In section 3, however, Congress limited this exemption by subjecting articles manufactured in Puerto Rico and shipped to the United States to a permanent tax "equal to the internal revenue tax imposed in the United States upon the like articles of merchandise of domestic manufacture." Foraker Act, § 3, 31 Stat. 77 (1900). The Act did not mandate any special treatment of these tax revenues, and all were retained by the United States Treasury.

In 1917, Congress passed the Second Organic Act eo nomine the Jones Act, 39 Stat. 951 (1917), which provided, inter alia, "(t)hat hereafter all taxes collected under the internal revenue laws of the United States on articles produced in Porto Rico and transported to the United States, or consumed in the island shall be covered into the treasury of Porto Rico." Jones Act, § 9, 39 Stat. 951 (current version at 26 U.S.C. § 7652(a)(3) (1976)) (emphasis added). ¹ This cover over provision was enacted as part of the Puerto Rican Federal Relations Act of 1950, Pub.L.No. 600, 64 Stat. 319 (48 U.S.C. § 734), and is also codified at 26 U.S.C. § 7652(a)(3) (1976), the tax statute upon which Puerto Rico bases its claim.

Since the passage of the Jones Act, the United States Treasury has consistently covered over into the treasury of Puerto Rico revenues from manufacturer's excise taxes on liquor and tobacco produced in Puerto Rico and transported to the United States. During 1977 alone the revenues covered over totaled approximately $9 million in tobacco tax revenues and $134 million in liquor tax revenues (App. 297-98).

During fiscal year 1956-57 Puerto Rican manufacturers began to refine and ship gasoline to the United States. Upon sale, this gasoline was subject to a tax that has been levied since 1932 on all gasoline "sold by a producer or importer" in the United States. Revenue Act of 1932, § 617, 47 Stat. 169 (1932) (current version at 26 U.S.C. § 4081(a) (1976)). None of the revenues derived from gasoline manufactured in Puerto Rico and shipped to the United States have ever been covered over to Puerto Rico. The Secretary of the Treasury estimates that approximately $350,000,000 in tax revenues have been collected on Puerto Rican gasoline since 1956 (App. 213).

On September 13, 1974, the Governor of Puerto Rico wrote to the Secretary of the Treasury, requesting that both past and future tax revenues on gasoline produced in Puerto Rico and transported to the United States be covered over into the treasury of Puerto Rico (App. 15). After exchanging letters and legal memoranda regarding the cover over provision, the parties could not agree, and the Secretary formally rejected Puerto Rico's claim on June 10, 1975 (App. 59).

Puerto Rico brought suit in the District Court, seeking declaratory relief, mandamus, an injunction against future retention of the gasoline tax revenues, and an accounting of all sums unlawfully withheld in the past. Commonwealth of Puerto Rico v. Blumenthal, No. 75-1035 (D.D.C. Oct. 10, 1978). On October 10, 1978, the District Court granted partial summary judgment. The court held that Puerto Rico is entitled to all tax revenues henceforth collected on gasoline manufactured in Puerto Rico and transported to the United States, but limited Puerto Rico's recovery of the past tax revenues to those collected after September 13, 1974, when Puerto Rico first informed the Secretary of the Treasury of its claim. Id. at 15-18. The court reasoned that Puerto Rico had "slept on its rights" and therefore was barred from full recovery by the equitable doctrine of laches. ²

The facts of the Virgin Islands case are essentially the same. The Virgin Islands were acquired from Denmark pursuant to the Treaty of August 4, 1916, United States-Denmark, 39 Stat. 1706. On March 3, 1917, Congress passed an act providing for government of the Virgin Islands. Act of March 3, 1917, 39 Stat. 1132 (1917). Included was a tax provision analogous to section 3 of the Foraker Act. In its current form, the Virgin Islands equalization tax statute provides in pertinent part:

Taxes imposed in the United States.-Except as provided in section 5314, there shall be imposed in the United States, upon articles coming into the United States from the Virgin Islands, a tax equal to the internal revenue tax imposed in the United States upon like articles of domestic manufacture.

26 U.S.C. § 7652(b)(1) (1976). The Internal Revenue code now provides for cover over of a certain percentage of

all taxes imposed by, and collected during the fiscal year under, the internal revenue laws of the United States on articles produced in the Virgin Islands and transported to the United States.

26 U.S.C. § 7652(b)(3) (1976).

In 1966, the Virgin Islands began to refine gasoline for sale in the United States. All such gasoline sold in the United States was taxed pursuant to the same gasoline tax, 26 U.S.C. § 4081(a) (1976), at issue in the Puerto Rico case. The United States Treasury neither covered over these funds nor set up a special fund for the benefit of the Virgin Islands. The Virgin Islands sued seeking, among other relief, (1) a declaratory judgment that the gasoline excise tax revenues collected by the Treasury since 1966 should be covered into the treasury of the Virgin Islands, and (2) payment of all future taxes and all past taxes wrongfully withheld. Virgin Islands v. Blumenthal No. 76-0916 (D.D.C. Oct. 11, 1978). The District Court granted the Virgin Islands' motion for summary judgment.

Four appeals in all were consolidated for hearing and disposition. Nos. 79-1020 & 1024 are the cross-appeals involving the gasoline tax issue with respect to Puerto Rico. Nos. 79-1021 & 1022 are the cross-appeals involving both the gasoline tax and customs duties issues with respect to the Virgin Islands.

This opinion deals with the gasoline tax questions as to both Puerto Rico and the Virgin Islands. A companion opinion issued simultaneously herewith disposes of the customs duties problems which are confined to the Virgin Islands. We consider the gasoline tax questions together because the cover over statute upon which the Virgin Islands rely is in all essential aspects identical to that of Puerto Rico, and almost certainly was consciously patterned after the Puerto Rico provision. See S.Rep. No. 1271, 83rd Cong., 2d Sess. 4 (1954); S.Rep. No. 476, 80th Cong., 1st Sess. 2-3 (1947). The District Court as well as the parties themselves, focused on the Puerto Rico cover over provision throughout the litigation and assumed that an interpretation of the meaning of the Puerto Rico cover over provision determines the meaning of the other provision as well. Virgin Islands v. Blumenthal, No. 76-0916 (D.D.C. Oct. 11, 1978), slip op. at 2. We adopt this approach, and assume that an interpretation of the Puerto Rico statute is applicable to the Virgin Islands statute as well.

II

The District Court held that the cover over provision by its terms is all-inclusive and should be interpreted broadly, not limited only to Foraker Act taxes. The court read the...