Payne v. US

• Decision Date: 21 November 1991
• Docket Number: No. 89-110.,89-110.
• Citation: 778 F. Supp. 804
• Parties: A. Joyce PAYNE v. UNITED STATES of America. UNITED STATES of America v. A. Joyce PAYNE.
• Court: U.S. District Court — District of Vermont

778 F. Supp. 804

A. Joyce PAYNE v. UNITED STATES of America.

UNITED STATES of America v. A. Joyce PAYNE.

No. 89-110.

United States District Court, D. Vermont.

November 21, 1991.

Robert A. Gensburg, Gensburg Axelrod & Adler, St. Johnsbury, Vt., for plaintiff.

Scott Harris, Tax Div., U.S. Dept. of Justice and Christopher B. Baril, Asst. U.S. Atty., Rutland, Vt., for defendant.

COFFRIN, Senior District Judge.

In 1986, the Internal Revenue Service levied on Payne's bank accounts in partial satisfaction of unpaid 1982 federal income taxes. Payne commenced this action to recover the seized funds, and the Internal Revenue Service counterclaimed to reduce the assessment to judgment and moved for summary judgment. We find Payne's 1982 income was not exempt from federal income taxation and grant the government's summary judgment motion.

BACKGROUND

In 1982, taxpayer Payne's late husband earned $75,780.00 while working for the Panama Canal Commission ("PCC") in the Republic of Panama. The Paynes reported these wages as gross income on their 1982 federal tax return but excluded the entire amount from their taxable income, claiming the Panama Canal Treaty of 1977 exempted it from taxation. The Internal Revenue Service ("IRS") processed the return and issued a refund.

On March 10, 1986, the IRS made a $106,672.88 assessment against the Paynes for unpaid 1981 and 1982 taxes. Of this amount, $24,457.00 in back taxes and $9,477.90 in interest related to the 1982 tax year. When Payne did not pay the assessment, the IRS, on February 19, 1987, levied on Payne's bank account and received $32,630.49 which partially satisfied the total Payne allegedly owed.

In 1987, Payne brought suit in this court to recover the funds. She maintained the wages her husband had earned with the PCC were tax-exempt and also attacked the procedure the IRS had used to levy on her bank accounts for the 1981 taxes. The IRS conceded it had acted improperly with respect to the 1981 taxes and we granted summary judgment in Payne's favor on that portion of her claim. Since we based our decision on the IRS' failure to follow proper procedure, we did not, at that time, resolve the question of whether Mr. Payne's PCC wages were exempt from taxation. Later, we dismissed Payne's 1982 tax year claim without prejudice because she had not initially sought a refund from the IRS, as required.

Having exhausted her administrative remedies, Payne filed this action in April 1989. She maintains her late husband's 1982 wages were exempt from federal income taxation and seeks a refund of the levied funds, plus interest. The United States counterclaimed to reduce the assessment to judgment and moved for summary judgment. This summary judgment motion is now before the court.

DISCUSSION

I. Jurisdiction

This is a civil action against the United States for the recovery of an internal revenue tax alleged to have been erroneously or illegally assessed or collected. We have original jurisdiction over such matters under 28 U.S.C. Section 1346(a)(1).

II. Issues

Since 1987, when Payne first brought suit in this court, she has raised three different arguments to support her claim that she is not liable for any taxes on her husband's 1982 wages. First, she argued the Panama Canal Treaty of 1977 exempted the earnings from federal income taxes. Second, she argued she did not sign the 1982 federal income tax return and is therefore not liable for taxes due, if any. Finally, she argued 26 U.S.C. Section 911 exempted her husband's wages from federal income taxes.

Following the Supreme Court's decision in O'Connor v. United States, 479 U.S. 27, 107 S.Ct. 347, 93 L.Ed.2d 206 (1986), it is clear the Panama Canal Treaty does not exempt from federal income taxation wages paid to PCC employees who are United States citizens. At oral argument in this matter Payne conceded the applicability of O'Connor to the facts of her case. In her papers, Payne has also admitted she signed the joint 1982 return and is therefore liable for any taxes due. Plaintiff's Memorandum of Law in Opposition to Government's Motion for Summary Judgment at 1. Thus, Payne's sole remaining argument is that 26 U.S.C. Section 911 exempted Mr. Payne's 1982 wages from federal income taxation.

III. Standard of Review

The United States, as the moving party, is entitled to summary judgment if no genuine issues of material fact exist and it is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The United States has the burden of demonstrating the absence of a material, factual dispute and we, in determining whether the United States has met this burden, must draw all reasonable inferences and resolve all ambiguities in Payne's favor. Dister v. Continental Group, Inc., 859 F.2d 1108, 1114 (2d Cir. 1988). However, we will enter judgment against Payne if she fails to set forth sufficient facts to establish she is entitled to an exemption. See Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).

IV. Section 911 Claim

Section 911¹ permits United States citizens who are bona fide residents of a foreign country to elect to exclude from federal income taxation that portion of their income they earn abroad. This exemption is subject to several exceptions and conditions, the most significant of which, for purposes of this matter, makes it inapplicable to wages paid by the United States or an agency thereof to an employee of the United States or an agency thereof. 26 U.S.C. § 911(b)(1)(B)(ii). Therefore, if we determine the PCC is a United States agency for purposes of Section 911 then Mr. Payne's wages were not exempt from taxation, and we will grant the United States' motion for summary judgment.

The United States argues the Supreme Court's decision in O'Connor, 479 U.S. 27, 107 S.Ct. 347, forecloses Payne from bringing her Section 911 claim.² The United States reasons that in interpreting the Panama Canal Treaty so as to hold PCC wages subject to federal income taxation, the O'Connor court impliedly swept aside all other arguments in favor of exempting PCC wages, whether analyzed in the opinion or not.

A question not raised by counsel or discussed in the opinion of the court has not been decided merely because it existed in the record and might have been raised and considered. United States v. Mitchell, 271 U.S. 9, 14, 46 S.Ct. 418, 419-20, 70 L.Ed. 799 (1926); Gardella v. Chandler, 172 F.2d 402, 411 (2d Cir.1949). In O'Connor, the Supreme Court focused solely on 26 U.S.C. Section 894, which involves the interaction of the Internal Revenue Code with government treaty obligations. The Court did not analyze the applicability of Section 911, even though it would have been dispositive of the case had the Court adopted the interpretation favored by Ms. Payne.³ Therefore, Payne remains free to pursue her Section 911 claim.

As we stated earlier, if we find the PCC is an agency of the United States for purposes of Section 911 we need to go no further and will grant the United State's summary judgment motion. The question of whether the PCC is an agency of the United States is a question of federal law to be decided by the court. See Standard Oil Co. v. Johnson, 316 U.S. 481, 483, 62 S.Ct. 1168, 1169, 86 L.Ed. 1611 (1942). We have a sufficient understanding of the relevant standards and the PCC's operations to make this determination without taking further evidence.

Although the term is not defined, there is little question the PCC is an agency of the United States. The legislation establishing the PCC identifies the body as an agency in the executive branch of the United States government. 22 U.S.C. § 3611. The PCC is at least partially protected from suit by the doctrine of sovereign immunity and many claimants are restricted to administrative remedies. See McClain v. Panama Canal Com., 834 F.2d 452 (5th Cir.1987); Golden Panagia S.S. Inc. v. Panama Canal Com., 791 F.2d 1191 (5th Cir.1986). Before changing the toll it charges for passage through the Canal the PCC is required to provide notice in the Federal Register and an opportunity for comment. 22 U.S.C. § 3794. Other courts have had little trouble categorizing the PCC as a federal agency. For instance, the Tax Court, in McCain v. Commissioner, 81 T.C. 918 (1983), faced the exact issue of whether the PCC is an agency for purposes of Section 911 and concluded it is. In O'Connor itself, Justice Scalia referred to the PCC as a "United States Government agency." O'Connor, 479 U.S. at 28, 107 S.Ct. at 349.

Although it seems clear that the PCC is an agency of the United States and that the Section 911(b)(1)(B)(ii) exclusion applies to all such agencies, Payne argues that not all agencies are agencies for purposes of Section 911 and that not all compensation paid by such agencies is paid by an agency of the United States.

As a general rule, we will not imply an exemption, but instead, will require the taxpayer to prove it unambiguously. United States v. Wells Fargo Bank, 485 U.S. 351, 108 S.Ct. 1179, 1182, 99 L.Ed.2d 368 (1988). In determining the meaning of agency of the United States for purposes of Section 911(b)(1)(B)(ii), this rule of strict construction means we must interpret the word "agency" broadly. Groves v. United States, 533 F.2d 1376, 1383 (5th Cir.1976), cert. denied, 429 U.S. 1000, 97 S.Ct. 529, 50 L.Ed.2d 611 (1976).

Most courts faced with the issue of whether an agency's wages are exempt from federal income taxation have looked to the degree of control the government exercises over the entity. See Kalinski v. Commissioner, 528 F.2d 969 (1st Cir.1976). The power to initiate and to terminate, the effectuation of government purposes paramount over those of organizers and members, the exclusion of private profit, and the limitation of membership to government connected persons all serve to identify an agency. Id. at 973 (quoting Morse v. United States, 443 F.2d 1185, 1188, 195 Ct.Cl. 1 (1971), cert. denied, 405 U.S. 989...