Gumataotao v. Dir. of Dept. of Revenue & Taxation

• Decision Date: 10 January 2001
• Docket Number: No. 99-15997,99-15997
• Citation: 236 F.3d 1077
• Parties: (9th Cir. 2001) ANTONIO GUMATAOTAO, Plaintiff-Appellant, v. DIRECTOR OF DEPARTMENT OF REVENUE AND TAXATION, Defendant-Appellee
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1077

236 F.3d 1077 (9th Cir. 2001)

ANTONIO GUMATAOTAO, Plaintiff-Appellant, v. DIRECTOR OF DEPARTMENT OF REVENUE AND TAXATION, Defendant-Appellee.

No. 99-15997

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted November 17, 2000

Filed January 10, 2001

Robert J. Torres, Jr., Law Office of Robert J. Torres, Jr., Hagatna, Guam, for the plaintiff-appellant.

Stephen A. Cohen, Department of Revenue and Taxation, Government of Guam, GMF, Guam, for the defendant appellee.

Appeal from the United States District Court for the District of Guam John S. Unpingco, District Judge, Presiding. D.C. No.CV-98-00007-JSU

Before: Procter Hug, Jr., Chief Judge, Stephen S. Trott, and Kim McLane Wardlaw, Circuit Judges

TROTT, Circuit Judge

Antonio Gumataotao filed a petition in the United States District Court for the District of Guam seeking a redetermination of his territorial tax liability for the years 1992-1994. Specifically, he sought a ruling that Guam could not tax Guam residents on interest earned from United States bonds. Contrary to Gumataotao's main contention, the district court concluded that the government of Guam could indeed tax its residents on interest earned from U.S. bonds, and accordingly dismissed Gumataotao's petition for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) ("Rule 12(b)(6)"). Gumataotao appeals the district court's ruling.

Gumataotao first argues that, as a matter of proper statutory construction of the Guam Territorial Income Tax ("G.T.I.T."), the interest earned by Guam residents from U.S. bonds is tax exempt. Next, he contends that Guam, as a possession of the United States, is constitutionally and statutorily precluded from levying a tax against a bond issued by the federal government. Finally, Gumataotao maintains that the district court committed reversible error by failing to consider evidence extrinsic to the complaint in making its decision under Rule 12(b)(6).

We have jurisdiction pursuant to 28 U.S.C. 1291 and AFFIRM the district court.

I Factual Background

Antonio Gumataotao, a Guam resident, owns U.S. bonds. He received over $350,000 in interest from those bonds during the tax years 1992-1994. When filing his territorial income tax returns, Gumataotao reported the interest from his U.S. bonds as non-taxable. Thus, he did not pay taxes on the interest he received.

Guam's Director of Revenue and Taxation (the "Director") issued a deficiency notice to Gumataotao in 1997, expressing his view that Guam could tax the interest from U.S. bonds paid to Guam residents. Because Gumataotao had not paid taxes on such interest between 1992 and 1994, the Director ordered him to pay the deficiencies and imposed a penalty.

Gumataotao filed a petition in the district court of Guam seeking a redetermination of his tax liability. The Director moved to dismiss the petition under Rule 12(b)(6). After entertaining oral arguments, the district court agreed with the Director and dismissed Gumataotao's petition.

II Discussion

A. Standard of Review

The district court's statutory and constitutional determinations are conclusions of law reviewed de novo . Boeing Co. v. Cascase Corp., 207 F.3d 1177, 1182 (9th Cir. 2000); Free Speech Coalition v. Reno, 198 F.3d 1083, 1090 (9th Cir. 1999); Cigna Prop. & Cas. Ins. Co. v. Polaris Pictures Corp., 159 F.3d 412, 418 (9th Cir. 1998). Whether the district court erred by dismissing Gumataotao's complaint for failure to state a claim is also reviewed de novo, Two Rivers v. Lewis, 174 F.3d 987, 991 (9th Cir. 1999), but our review, like the district court's, is generally limited to the contents of the complaint. Enesco Corp. v. Price/Costco, Inc., 146 F.3d 1083, 1085 (9th Cir. 1998).

B. Guam May Tax Guam Residents on the Interest From U.S. Bonds

Gumataotao's contention that Guam may not tax a Guam resident on interest earned from U.S. bonds breaks down into four parts:

1) A properly construed G.T.I.T. 103(a) exempts from taxation the interest paid to Guam resi dents on U.S. bonds.

2) As a possession of the United States, Guam can not constitutionally tax a U.S. bond because the federal government has not "explicitly consent ed" to such a tax.

3) Title 31 U.S.C. 3124(a), which precludes states from taxing the interest on federal bonds, prevents Guam from taxing U.S. bonds.

4) Allowing Guam to tax U.S. bonds is "manifestly inapplicable or incompatible" with Congressional intent.

We address and reject each of Gumataotao's arguments in turn.

1. A Properly Construed G.T.I.T. 103(a) Does Not Exempt the Interest Paid to Guam Residents from U.S. Bonds

a. Background

Congress organized Guam as an unincorporated possession of the United States through the 1950 Organic Act of Guam ("the Organic Act"). 48 U.S.C. 1421 et. seq.. Congress also provided an income tax scheme for Guam in 48 U.S.C. 1421i (the "Income Tax Section").

Guam residents do not pay any income tax to the U.S. federal government; instead, they pay a territorial income tax to the government of Guam. 48 U.S.C. 1421i(b). Rather than writing an entirely new tax code for Guam, Congress applied the provisions of the Internal Revenue Code, 26 U.S.C. 1 et seq. ("I.R.C."), to Guam as the Guam Territorial Income Tax. 48 U.S.C. 1421i(a) (2000). Thus, I.R.C. 1 applies to Guam taxpayers as G.T.I.T. 1, and so on. Only those provisions of the I.R.C. that are "manifestly inapplicable or incompatible with the intent of [the Income Tax Section]" do not apply to Guam taxpayers. 48 U.S.C.S 1421i(d); see Sayre & Co. v. Riddell, 395 F.2d 407, 410 (9th Cir. 1968) (en banc) ("Sayre") (G.T.I.T. "mirror[s]" the I.R.C., except where "manifestly inapplicable or incompatible").

Of course, because the I.R.C. was written for U.S. taxpayers, certain word substitutions must be made to the mirrored provisions of the G.T.I.T. in order to make those provisions applicable to Guam taxpayers. The Income Tax Section specifically provides directions on when and how to make these word substitutions:

[E]xcept where it is manifestly otherwise required, the applicable provisions of the [I.R.C.] shall be read so as to substitute "Guam" for "United States," . . . "Governor or his delegate" for "Commissioner of Internal Revenue" . . . and with other changes in nomenclature and other language, including the omission of inapplicable language, where necessary to effect the intent of this section.

48 U.S.C. 1421i(e). Thus, where an I.R.C. section uses the phrase "United States," the mirrored G.T.I.T. section should substitute the word "Guam." This process of substituting the word "Guam" for the phrase "United States " is known as "one-way mirroring" and is explicitly provided for in the statute. See 48 U.S.C. 1421i(e); Vitco, Inc. v. Virgin Islands, 560 F.2d 180, 184 (3d Cir. 1977) ("Vitco").

Two-way mirroring is the opposite substitution -it is the process of substituting the phrase "United States" for the word "Guam." Vitco, 560 F.2d at 185. Although substituting "United States" for "Guam" is not specifically provided for in the statute, see 48 U.S.C. 1421i(e), courts have utilized that particular word substitution in order to effect the intent of the Income Tax Section. See Vitco, 560 F.2d at 184-85. Because the intent of the Income Tax Section was to create uniformity between the tax laws of the United States and of Guam, see Sayre, 395 F.2d at 412, courts will substitute "United States" for "Guam" when failing to do so would lead to "disparate tax treatment" between U.S. taxpayers and Guam taxpayers. See Vitco, 560 F.2d at 184-85 (under a similar scheme, inserting "United States" where the federal provision uses "Virgin Islands" because failing to do so would lead to disparate tax treatment between U.S. taxpayers and Virgin Islands taxpayers).

b. Application

Internal Revenue Code 103(a) provides that a federal taxpayer's "gross income does not include interest on any State or local bond," including bonds of Guam. I.R.C. 103(a), (c)(2). When properly mirrored, G.T.I.T. 103(a) states that a Guam taxpayer's "gross income does not include interest on any [Guam] bond." G.T.I.T.S 103(a), (c)(2).

Gumataotao argues that, under the word substitution rules of 48 U.S.C. 1421i(e), two-way mirroring is applicable to G.T.I.T. 103(a). That is, he contends that the phrase "United States" should be substituted for the word "Guam" to make G.T.I.T. 103(a) provide that a Guam taxpayer's "gross income does not include interest on any [Guam] [United States] bond." Gumataotao urges us to employ two-way mirroring because failing to do so would betray Congress's intent to create and implement a "mirrored" tax code for Guam.

We decline Gumataotao's invitation to substitute "United States" for "Guam" in G.T.I.T.S 103(a). Two-way mirroring is plainly inappropriate in this context because doing so would not avoid disparate tax treatment; in fact, it would create disparity. Under the I.R.C., a U.S. taxpayer must pay taxes on the interest from federal bonds, but need not pay taxes on the interest from Guam bonds. I.R.C SS 61(a)(4), 103(a), 103(c)(2). Under Gumataotao's interpretation (substituting "United States" for "Guam"), the reverse would be true -a Guam taxpayer would not pay taxes on the interest from federal bonds but would pay taxes on the interest from Guam bonds.¹ Therefore, the district court was correct in concluding that G.T.I.T. 103(a) does not make the interest from U.S. bonds non-taxable for Guam residents.

2. It is Not Unconstitutional for Guam to Collect Taxes from Its Residents on the Interest Earned from U.S. Bonds

Gumataotao argues that it is unconstitutional for Guam, a possession of the United States, to tax an instrumentality of the federal government. Because Congress, not the govern-ment of Guam, passed the Income Tax Section, we disagree.

Gumataotao's argument is derived from the principles of three landmark Supreme Court cases: Domenech v. Nat'l City Bank of New York, 294...