O'CONNOR v. UNITED STATES

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Argument of Carter G. Phillips

Chief Justice Rehnquist: We'll hear argument first today in: No. 85-558, Robert E. O'Connor versus the United States; No. 85-559, Paul H. Coplin versus the United States; No. 85-560, Jack Maddox versus the United States.

Mr. Phillips, you may proceed when you're ready.

Mr. Phillips: Thank you, Mr. Chief Justice, and may it please the Court:

The issue in this case is whether Article 15 of the agreement in implementation of Article 3 of the Panama Canal Treaty exempts from United States taxation income received by U.S. citizens for work performed for the Panama Canal Commission.

Petitioners are United States employees of the Commission who seek refunds of income taxes paid for various years since 1979.

The Claims Court, in a thorough and thoughtful opinion by Chief Judge Koninski, held the Petitioners are entitled to a tax exemption.

The Federal Circuit, relying in some measure upon a diplomatic note from Panama, then recently supplied by the Government at the Circuit Court level, reversed.

Petitioners submit that the Claims Court correctly interpreted the implementing agreement on the basis of its plain language, its structure, and the negotiating history, and therefore we seek reversal of the judgment below.

Analysis of the implementing agreement obviously must begin with the plain language used by the signatories, as that language is understood in context.

The language, we submit, is strikingly favorable to Petitioners, and provides in relevant part:

"United States employees shall be exempt from any taxes, fees, or other charges on income received as a result of their work for the Commission. "

No reference appears in that language to Panamanian taxes, and it stands is stark contrast to the other two paragraphs of Article 15.

This language also differs significantly from parallel language in Article 16 of the agreement in implementation of Article 4 of the Panama Canal Treaty, which concerns members of the military.

That provision, which the Government has acknowledged was the model for this one, contains a specific reference to Panamanian law.

That reference was deleted, for reasons that are not altogether clear.

But the inference to be drawn from that has been made clear by this Court's decisions both in Air France and in Santo Vicenzo that the deletion of language, of parallel language, has meaning.

And the meaning in this instance we submit was to exempt United States citizens from taxation.

Based on that plain meaning argument, the natural question that will necessarily arise is, why would United States negotiators agree to exempt United States employees from the taxes.

I think in order to understand that you have to go back to the political climate in 1977 and the circumstances surrounding these negotiations.

The Carter Administration was deeply committed to an agreement.

The question of giving up the canal was no longer a matter of internal debate.

The only thing left were the circumstances under which that canal would be transferred back to Panama.

The basic question was under what circumstances Panama would receive back the Panama, and Panama would not receive back that canal, which is made clear through the negotiating history, except on terms that demonstrated clearly Panamanian sovereignty over the Canal Zone.

Unfortunately, we do not have the exact exchanges that led up to the final agreement of Article 15, paragraph 2.

Nevertheless, it is quite clear from the exchanges among the various ministers with the United States negotiators that Panama would not lightly recede from its position that it should be allowed to tax United States citizens who were working for the Commission.

The reason it sought to tax United States citizens who were working for the Commission... excuse me, in the Commission... was that that was a reflection of its sovereignty.

The United States, on the other hand, never viewed the issue as a matter of tax policy, but merely as a political problem to be solved.

The United States could not allow Panama to tax United States citizen employees of the United States.

It would create an untoward precedent, which would in turn adversely affect the negotiating posture of the United States in the future.

In addition, the internal memoranda of the Government make it abundantly clear that there was fear by the negotiators that if they acceded to the Panamanian request to tax these corrects, that the consequences in Congress would be rather significant.

The opposition was going to be quite clear.

Unknown Speaker: Mr. Phillips, could I ask you about the language of the implementation agreement itself, which I suppose is where we need to start.

Mr. Phillips: Yes, ma'am.

Unknown Speaker: Under your view of it, U.S. employees are exempt from taxes by any government on income received from their work for the Commission.

Mr. Phillips: That's correct.

Unknown Speaker: And likewise from payment of taxes on income derived from sources outside Panama.

Mr. Phillips: That's correct.

Unknown Speaker: But I gather under your view, if there were outside income from sources within Panama there is no exemption and both governments can tax?

Mr. Phillips: Well, our view is that the way to read the second sentence is to incorporate by the language "similarly", which is what precedes... which is what initiates the second sentence.

It says, "Similarly", that these things are taxed.

And that is derived... what that refers to, excuse me, is Commission-related income, that is from outside--

Unknown Speaker: So I gather if there were income earned within Panama that wasn't earned from the Commission work--

Mr. Phillips: --Right.

Unknown Speaker: --both governments could tax that, I suppose?

Mr. Phillips: I supposed they could, although I don't know that they would.

Unknown Speaker: And that's a little bizarre, isn't it?

Mr. Phillips: Well, not terribly bizarre, Your Honor.

The primary concerns of the negotiators were the sovereignty over the Commission, and so the bilateral agreement not to tax any income either directly or indirectly arising out of work for the Commission was the primary purpose of the agreement and the compromise.

The fact that they may have left open one potential for U.S. citizen employees... and this is clearly going to be a very small subset of people who are U.S. citizen employees--

Unknown Speaker: Perhaps.

Mr. Phillips: --of the Commission.

Unknown Speaker: But it is an odd result.

May I also inquire, now, there is similar language in a treaty pertaining to taxation of military personnel of the United States stationed in Panama?

Mr. Phillips: Significantly different language with respect to military personnel.

Unknown Speaker: Well, remarkably similar, wouldn't you say?

Mr. Phillips: Except for the--

Unknown Speaker: What is your position there?

Is the income of military personnel stationed in Panama subject to U.S. taxation?

Mr. Phillips: --Well, it's not easy for me to give a definitive answer on that, because I don't know about the negotiating history that would have led up to that part of the agreement.

Based on the language, however, there is clearly a significant difference between Article 15 implementing Article 3 and Article 16 implementing Article 4.

The second sentence--

Unknown Speaker: Well, but the first sentence says:

"Members of the forces and dependents. "

and so forth,

"shall be exempt from any taxes, fees, or other charges on income received as a result of their work for the United States forces. "

Now, that's very similar to the language you're relying on in your case.

Mr. Phillips: --That's true, Justice O'Connor, but if you read the next sentence, which is the sentence that grounds Article 16 into Panamanian law,

"Similarly, as provided by Panamanian law. "

and then it goes on, that language which grounds the second paragraph of Article 16 to Panama has been deleted from Article 15, thereby taking it away from concern specifically with respect to Panama.

Unknown Speaker: But do you take the position, if pressed, that military personnel income is taxable by the United States?

Mr. Phillips: My basic position would be that it is clearly a much stronger case for U.S. taxation of the military.

I would not concede that it has to be that way, because again, even if that language might support no tax exemption, you'd have to go to the negotiating history, and that we don't have before us.

In fact, we're not sure that the Government has ever made the history surrounding Article 16 available.

Unknown Speaker: Is there any other place in the world to your knowledge where the United States has agreed to make income received by United States citizen or military personnel not taxable by the United States?

Mr. Phillips: Well, the United States has entered into agreements, none of which have been ultimately ratified by the Senate, that would provide for some bilateral exemptions.

But I think the more important joint is, I don't think there is anywhere in the world that is like Panama.

The Panama Canal Commission creates its own income.

This income does not come from the United States Treasury; it comes from the Panama Canal Commission's tolls, and it is then paid over to United States employees.

The whole point of the negotiations and the compromise during those negotiations was that that kind of income ought to be taxed by the Panamanians, and the United States and Panama compromised on that issue.

Unknown Speaker: But it isn't just that income that your position addresses.

You've said that you go all the way with the logic of your position and say that the second sentence means that the United States cannot tax these corrects on any income.

Mr. Phillips: Well, I don't believe we have to read the second sentence that broadly.

Unknown Speaker: I thought you just did in your response to Justice O'Connor.

Mr. Phillips: I thought in my response to Justice O'Connor, Justice Scalia, I had indicated that I thought you could incorporate into the second sentence the word "similarly" a limitation on the scope of the second sentence referring to income derived from Commission-related work, but from outside sources; and that that's a much narrower and clearly less important provision.

Unknown Speaker: That's the weight you're putting on the word "similarly"?

Mr. Phillips: Well, I think it follows.

It's a reasonable interpretation of the word "similarly".

Unknown Speaker: Well, but Mr. Phillips, if that's the interpretation, then Panama could tax one of these employees' income from dividends bonds in the United States.

Do you think that's right?

Panama could do that if you read that sentence that way.

Mr. Phillips: Except that there's no indication that... whine it may be able to as a matter of the treaty, I don't know that Panama has ever attempted to do that.

Unknown Speaker: Mr. Phillips--

Mr. Phillips: And I don't know that it was a concern to the United States and the Panamanian negotiators.

Unknown Speaker: --I imagine it would be a concern to one of these employees, though.

Mr. Phillips, how much income do you suppose there would be that would be covered by your interpretation of the second sentence of paragraph 2 of Article 15?

It's income derived from their work for the Commission, but derived outside the Republic of Panama.

Mr. Phillips: Well, I think the best example of it would be the annuitants who had worked on the canal prior to the treaty, who were then rehired after the treaty, because their income for work on the canal that they receive as annuitants would be from sources outside.

It comes from the United States, but that would then be exempt from taxation.

It also makes good policy sense, because usually those are individuals who are very highly skilled technicians in terms of working at the canal and would have been heavily sought after.

So I think that there is a body of people who fall within that category, and it would have been quite reasonable to try to exempt them.

Unknown Speaker: But do you maintain that, even if the construction that you say should be attached to the word "similarly" in that sentence would not be adopted, nonetheless it makes some sense to say that these people, if they're earning income from bank deposits in the United States, nonetheless should be not taxable on them?

Mr. Phillips: By whom?

Unknown Speaker: By the United States.

Mr. Phillips: As I would understand it, the United States could tax that income, under my interpretation.

Now, if you reject my interpretation and say that they are not taxable, that the limitation of "similarly" permits the United States to tax and is only a limitation on Panama, then obviously it is a little skewed.

That means that income outside the United States would be taxable.

Unknown Speaker: You say that the United States, under your preferred theory, the United States could tax and Panama could tax income outside, from outside Panama?

Mr. Phillips: Under my preferred theory?

Unknown Speaker: Yes.

Mr. Phillips: Yes, that that was not a serious concern to the Government.

Unknown Speaker: Why wouldn't that be a serious concern to the Government?

Here you have the United States, that had Zonians who previously had been entirely exempt from Panama taxes, and you're saying that what we negotiated for was above all things to make sure that they couldn't be taxed on their income from the canal, but we didn't care whether they could thereafter be taxed by Panama on income from elsewhere.

It seems to me that would have it absolutely upside-down.

It's much more natural to allow them to be taxed for their income from the canal than to allow Panama to tax them on income from elsewhere.

That seems to me much more an assertion of--

Mr. Phillips: But Justice Scalia, the problem with the alternative interpretation is that then you have to go back and say, well, what does the first sentence mean?

And it is the first sentence that was clearly uppermost in the minds of the negotiators in 1977.

And under the alternative, any other alternative interpretation of the second sentence that forces the United States... that allows the United Statesm to tax this income, you have to assume that the negotiators for Panama receded, they gave up, they caved, even though it had been described to the United States as essentially a treaty-buster if the sovereignty of Panama was not recognized.

The debates leading up to the final agreement consistently... and most of them come from Minister Royo... indicate that they would not be able to reach an agreement unless the sovereign concerns of Panama were taken into account.

So that any other interpretation of Article 1 means that somewhere between the last messages we have on the subject and the final agreement, without any indication that Panama would give it up, had completely abandoned its interest in this.

It makes much more sense to assume that a compromise was reached, that the concerns of the negotiators for the United States were not based on tax policy; they were based on diplomatic and political concerns.

Those negotiators, who are diplomats and not tax lawyers, had one uppermost, or two uppermost considerations.

The first one was that they be able to get this treaty through the Congress, which they could not do if Panama was allowed to tax these citizens; and two, that they not be in a position where this would cause a precedent for future negotiations with respect to the issue of taxation.

Unknown Speaker: --Mr. Phillips, before you leave the "similarly" sentence, refresh my recollection.

Is the interpretation of that sentence which you've advanced in argument today found anywhere in the blue brief?

Mr. Phillips: In the--

Unknown Speaker: In the blue briefs, the Appellee's brief?

Mr. Phillips: --No, Justice Stevens, it doesn't appear in the blue brief.

It does, however, appear in the yellow brief.

Unknown Speaker: It's in your reply brief?

Mr. Phillips: Yes, sir.

Based on the negotiating history and the compromise that was reached, the language of Article 15, sentence one... paragraph 2, sentence one, becomes quite clear.

It was clearly chosen to provide a bilateral exemption.

And the language deleted from the second sentence, which would have made it refer to Panamanian law, was deleted; and that deletion was significant, and from that we can immediately support that basic plain meaning argument, that a bilateral tax exemption was supplied here.

To demonstrate the merit of that interpretation, based on the traditional standards of interpretation, one need only look at what the Government relies upon for its position in this case.

Interestingly, it never even cites the Restatement Second of Foreign Relations Law, which provides a set of traditional criteria ordinarily employed in order to reach an understanding as to what the parties objectively had intended.

Instead, it relies largely on extra-treaty and extra-record materials, which we submit cannot overcome the plain language of the provision, which is designed to provide this tax exemption.

Unknown Speaker: Mr. Phillips, may I ask also whether you concede that the most recently filed document from Panama's minister of foreign relations is authentic?

Mr. Phillips: The most recently filed document--

Unknown Speaker: Yes.

Mr. Phillips: --from the official.

Unknown Speaker: Yes.

Mr. Phillips: Well, we have never received a copy of it, so it's difficult to make that concession.

We also sought to find it published in the TIAS and have not been able to find it there, either.

So it's difficult for us to know, to concede that point.

It would have been easier, obviously, if it had been supplied to the Claims Court so that at the trial level those matters could have been resolved.

Unknown Speaker: But you take the position that there is some reason to question its authenticity, do you?

Mr. Phillips: Well, I hesitate to say that, because what you have to do is assume that the Government may have been acting to a certain extent in bad faith and I can't do that.

And the whole point of the problem with respect to that note is that the Government never brought it to the Claims Court's attention through the ordinary rules of litigation, which is Rule 60(b), so that its authenticity could have been established.

Unknown Speaker: Well, I grant you that that's frustrating, but it would be helpful to know whether we have to be concerned with its authenticity in your view.

Mr. Phillips: Well, in this instance you're saved the burden of having to worry about that, because even the note under any circumstances, that note cannot serve as a legitimate basis for interpreting the treaty.

In the first place, the most that you can derive from the note is that what it says Panama believes the treaty means now, which is eight years after the fact and is therefore very little evidence of what the parties intended in 1977.

Second, the circumstances underlying the note, the letters themselves which purport to serve as the basis for the interpretation, are particularly suspicious, given that three letters come from the individuals who did not directly negotiate Article 15, and that the two negotiators of Article 15 were not... one was not solicited, his views were not solicited.

The other one, his views were solicited, according to the foreign minister, and he was not... and no letter was forthcoming from him.

Unknown Speaker: Well, I guess what I'm getting at is, can we safely assume that right now both parties to the treaty, the United States and Panama, agree that Article 15 does not exempt this income from U.S. taxation?

Mr. Phillips: If you take the note at face value, that would seem to be the inference you would draw.

But the problem, of course, is that what the United States and Panama agree today is of little effect as to what they reached an agreement about in 1977.

If the United States and Panama aren't in agreement as to how this matter ought to be resolved today, in light of the new administration in Panama, the solution to that problem is for the United States and Panama to reach a new agreement that clarifies this issue, not simply to send back and forth a diplomatic note that is, on its face at least, intended to amend an agreement reached eight years previously.

Unknown Speaker: I don't know what you mean by

"if you take the note at face value. "

Is there any reason not to take the note at face value?

Mr. Phillips: Well, it's just that when a note... no, not any particular reason, other than the circumstances surrounding the note are suspicious.

I mean, in terms of its authenticity, there's no question.

Unknown Speaker: I don't know what you mean.

Do they indicate that the note is a forgery?

Mr. Phillips: No, no, I don't mean to indicate that.

Unknown Speaker: Suspicious--

Mr. Phillips: It is an authentic note.

What it is designed to achieve is not-at all clear.

Unknown Speaker: --Well, it sets forth the Panamanian position.

What you think is suspicious is that maybe that was not originally the Panamanian position, is that what--

Mr. Phillips: Yes, I think it's absolutely clear that that was not that position.

Unknown Speaker: --But you have no doubt that that's the current Panamanian position?

Mr. Phillips: As of today, I have no doubt of that.

Whether the Panamanian Government might supply a new note in the future is open to guess.

And what we have to say about the note, at least as a litigating matter, aside from just the general invalidity of notes such as this to be used as a basis for overcoming the plain meaning, in that in the Claims Court Judge Kozinski asked the Department of Justice attorneys twice if they were going to provide a note.

Indeed, he asked, are you in the process of negotiating a note, are you negotiating a note, or will you negotiate a note?

And the Government consistently said: No, that note would not be relevant to anything in this case, and you should decide the case on the basis of the evidence of record as of March 8th, 1984.

In the context of those statements--

Unknown Speaker: Well, what if the Government had answered different, had said, yes, we are trying to get a note, and Judge Kozinski said, well, let me know when you get it, and the United States came up with precisely this same note?

Under your position, it would be irrelevant anyway.

Mr. Phillips: --It would be largely irrelevant.

Unknown Speaker: Largely?

Well, it's completely irrelevant.

Mr. Phillips: Well, it is difficult for me to say completely irrelevant.

Under Sumitomo--

Unknown Speaker: Well then, this note we have now is not... is somewhat relevant?

Mr. Phillips: --Only in a circumstance where the note clearly supports both the plain meaning of the agreement and the understanding of the United States, as it did in Sumitomo.

When the note is being used to impeach the understanding of the parties--

Unknown Speaker: Then you don't need a note.

I don't understand that.

What use is a note if you have the plain meaning of the agreement?

We resort to a note to clarify.

Mr. Phillips: --Well, as I read the opinion in Sumitomo, the Court said that, even with the understanding of the United States and Japan and the plain meaning, that still didn't end the inquiry in that case, and the Court went on to examine whether or not there was some additional evidence that might justify a different interpretation of the agreement.

I would be inclined to agree with you that that would certainly be strong evidence, Justice Scalia.

The Court in Sumitomo didn't stop at that point.

It continued on in its analysis of the traditional criteria for interpreting any international agreement.

Unknown Speaker: Do you... well, what is your position as to whether Panama could have had one interpretation originally and then changed its mind about what the agreement meant?

Can Panama do that?

Suppose initially Panama looked at that language and said, it means X, but later on its foreign ministry had second thoughts and said it means Y.

Can Panama do that?

Mr. Phillips: It can do that, but it's not binding on this Court.

This Court's judicial function is to interpret the agreement and the understanding reached by the parties in 1977.

Unknown Speaker: Would the second position have any force as far as the deliberations of this Court are concerned?

Mr. Phillips: I would think not, not if it's clear that the original understanding of the parties was X.

If one of the parties now believes Y--

Unknown Speaker: Let's assume it's ambiguous.

Let's assume it's ambiguous.

Mr. Phillips: --Well, this Court has said in a number of instances that simply because on party to the agreement has abandoned the agreement, okay... in Santo Vincenzo, Italy stopped believing that citizens should be extradictable and the United States continued to believe that citizens should be extradictable.

The Court rejected the fact that Italy had changed its position as obviating the Government from fulfilling its obligations under the treaty, as understood by this Court based on the traditional criteria.

So my view would be no, that's not a basis for this Court to disregard the understanding reached in 1977.

Unknown Speaker: Well, Mr. Phillips, suppose the negotiating history that you rely on here was just to the contrary, that it indicated rather clearly that Panama said: Okay, if you insist we won't tax, but you can.

And then they came cut with this precise language.

What would you say then?

Mr. Phillips: I would say I would be in a lot more trouble than I am anyway.

Unknown Speaker: You mean with that negotiating history, but this language, that you could say this language is ambiguous?

Mr. Phillips: No, it's not that it's ambiguous.

Unknown Speaker: Well, what would you say?

Mr. Phillips: It is that the plain meaning of the language in treaty interpretation is never controlling.

It's not like a contract, Justice White.

Unknown Speaker: Right, right, right.

All right, so that your plain language argument is only good insofar as the negotiating history supports it?

Mr. Phillips: Well, I would put it slightly differently.

It is good enough to create a presumption that the other... that can only be rebutted by reference to other types of interpretative aids, such as the negotiating history.

Unknown Speaker: But you would think if the negotiating history supported the views of your opponent and yet they used this language to express their agreement, you would almost think that in between the last meeting and the writing there had been some... something you don't know about.

Mr. Phillips: Well, what I would have assumed--

Unknown Speaker: In your position.

Mr. Phillips: --What I would have assumed--

Unknown Speaker: According to your position, this language really means what it says.

And yet, if the negotiating history were to the contrary, something must have happened.

Mr. Phillips: --Well, it would have been possible, even if I don't know why, that the Panamanian Government simply decided to recede.

Unknown Speaker: That may have happened here, too.

Mr. Phillips: But we have no evidence to that effect, and there is no reason at all to believe it.

And in the face of such strong statements in favor of Panamanian sovereignty on this case, it is very difficult to draw an inference that they would have simply caved, as the Government's interpretation requires the Court to assume.

Unknown Speaker: But in any event, this language is subject to some interpretation.

You say these international agreements are really subject to some interpretation from us?

Mr. Phillips: Yes, Justice White.

It is not sufficient that the plain language supports us.

We must also demonstrate that the structure and the history support us, and that I suggest we have done.

If there are no further questions, I'll reserve the balance of my time.

Argument of Jerrold J. Ganzfried

Chief Justice Rehnquist: Thank you, Mr. Phillips.

We'll hear now from you, Mr. Ganzfried.

Mr. Ganzfried: Thank you, Mr. Chief Justice, and may it please the Court:

The question in this case is simply whether Petitioners have to pay federal income taxes, just like all the rest of us, or whether they alone among all the citizens employed by the United States Government and its agencies at home and abroad, they alone are exempt from United States taxation.

Now, when we clear away the smoke and we put away the mirrors of Petitioners' argument, several simple points remain and they are dispositive of this case.

The first is that when the language of the agreement is read in context Petitioners' construction is implausible.

Second, the consistent and uniform construction of the executive branch is that there is no exemption from United States taxes.

Third, the executive branch's view was authoritatively communicated to the Senate at the time of ratification on behalf of the offices of the State and Defense Departments that were responsible for negotiating and drafting the treaty.

The same position was adopted and restated in the Senate report, and the consistent administrative practice of every affected executive branch department... the State Department, the Department of Treasury, and the Internal Revenue Service... also reflects that same interpretation, namely no exemption from U.S. taxes.

In addition to that, both governments that signed the treaty and its implementing agreements concur in the interpretation that we present.

And finally, the 1976 tax reform bill now awaiting the President's signature restates and reconfirms that Petitioners are not exempt from United States taxes.

In short, the correct result in this case could scarcely be clearer.

And so, in discharging its sole responsibility in this area, to give effect to the intent of the parties, this Court should reject Petitioners' efforts to create for themselves a private tax haven.

Unknown Speaker: Well, the language does say "from any taxes", doesn't it?

Mr. Ganzfried: The first sentence says "from any taxes".

I point out it doesn't say "from United States taxes".

Unknown Speaker: No.

Mr. Ganzfried: And it doesn't say

"from any taxes by any government. "

Unknown Speaker: No, exactly.

Mr. Ganzfried: It says "from any taxes", language which was derived... well, which the negotiating history makes clear the only taxes that were discussed were Panamanian taxes.

But that language--

Unknown Speaker: Well, do you say the negotiating history just isn't subject to the interpretation that your opponent puts on it?

Mr. Ganzfried: --Oh, absolutely not.

This discussion about a compromise where neither country would tax is pure fiction.

It has no support in the negotiating history.

Incidentally, the first sentence, which is the one they're relying on in this case, is in its operative portion identical to the first sentence in the military agreement, Article 16 of the agreement in implementation of Article 4.

And that is language that even the Claims Court recognized at pages 45A and 46A of the petition's appendix, acknowledged did not create an exemption from United States taxes.

And the comments by the Panamanian negotiators during the negotiating sessions recognized that, as far as the military was concerned, there was no exemption from U.S. taxes.

Unknown Speaker: Well, what if we interpreted the negotiating history contrary with your view of it and consistent with your opponent's?

Then what?

Mr. Ganzfried: Well, my first answer would be to disagree with that conclusion.

But assuming that premise, if there had been a discussion in the negotiating history, we have to recognize that the immediate, quite open and clear position of the United States was that there was no exemption from United States taxes created.

It was stated openly to the Senate.

It was--

Unknown Speaker: Well, yes, but stick to the question.

Mr. Ganzfried: --And Panama has never disagreed with that.

Unknown Speaker: Just stick to the question.

What if the negotiating history should be interpreted as your opponent says?

Then would you still insist that this language be interpreted the way you insist that it should be?

Mr. Ganzfried: Well, I would still insist that the language be interpreted that way, because in fact even if--

Unknown Speaker: And say, well, put the negotiating history aside, here is--

Mr. Ganzfried: --Well, I wouldn't say put it aside, but we would then have an additional factor, namely the consistent position of the United States, the administrative practice in the years since the treaty was ratified, and the absence of any objection from Panama.

And we're withholding taxes on U.S. employees who are residing in Panama.

Unknown Speaker: --Just as a practical matter, that's just the way the treaty has operated from the beginning.

Mr. Ganzfried: It would be the interpretation.

In fact, there is an example of that in the Ross case that we cite in our brief.

Unknown Speaker: You've always withheld, ever since the treaty was signed?

Mr. Ganzfried: That's correct, and--

Unknown Speaker: No objection from Panamanians?

Mr. Ganzfried: --No objection from Panama whatsoever.

In fact, the only indications from Panama relating to this subject indicate that Panama well knew that the United States was withholding and collecting taxes from its citizens employed by the Commission.

Now, our--

Unknown Speaker: Mr. Ganzfried, as long as you're interrupted, as I understand it the United States Government in the proceedings below took the position that the Court need not consider the official view of Panama on the question, and indeed that it would be inappropriate to do so.

Mr. Ganzfried: --Well, the position in the Claims Court, which was prior to the time that the Panamanian Government had expressed its views, was that the United States saw no need to go to Panama.

Unknown Speaker: And that it would be inappropriate to do so.

Mr. Ganzfried: It would certainly be inappropriate for the Claims Court--

Unknown Speaker: That was the position the Government took?

Mr. Ganzfried: --It would be inappropriate for the Claims Court to direct the Government to go there or to rule in this case contrary to the Government's position.

Unknown Speaker: Well, as I understood the argument, also inappropriate to even consider the Panamanian view.

Mr. Ganzfried: Basically--

Unknown Speaker: And now all of a sudden--

Mr. Ganzfried: --Basically, that there was no need to consider the Panamanian view.

Unknown Speaker: --the Government presents this last minute Panamanian view.

Is it now appropriate that we consider it?

Mr. Ganzfried: Well, it is appropriate that you consider it because it is the official view of the Panamanian Government.

It simply didn't exist before it existed.

Unknown Speaker: Why all of a sudden does it exist?

Mr. Ganzfried: Excuse me?

Unknown Speaker: Why does it exist all of a sudden?

Certainly, the government solicited the note, did it not?

Mr. Ganzfried: The State Department has advised us that the United States did not request a note from the Panamanian Government.

Unknown Speaker: Well, of course, the opposition is suspicious to the contrary.

Mr. Ganzfried: The opposition is suspicious.

Unknown Speaker: And feels, I suppose, that it's a quid for a quo--

Mr. Ganzfried: There is no basis--

Unknown Speaker: --actually, to wit the grant in aid.

Mr. Ganzfried: --Well, that's nonsense.

If what their position is that courts of the United States should be suspicious whenever a government with whom we're on amiable terms states a position, then their position suggests great dangers for the conduct of our foreign policy.

Unknown Speaker: All I'm suggesting is that there's a little bit of stickiness in the case when representations were made to the Claims Court, Judge Kozinski, and then all of a sudden the Government turns over and produces a note.

Mr. Ganzfried: The note had... the note simply didn't exist when?

The case was before Judge Kozinski.

Unknown Speaker: What I'm saying is I think the case isn't as clear as you would make it out to be.

Mr. Ganzfried: Well, I think it is.

In fact, what were we to do when the note arrived?

Were we to sit back and say, well, it's not in the record in the Claims Court, we can't present it?

And what if... and I will assume a hypothetical quite contrary to fact... what if the Panamanian note had come in and it had agreed with the Petitioners?

We could scarcely have sat back and said, well, we have the official Panamanian view, but it's not part of the record, so let's disregard it.

We couldn't have done that.

No one would have stood for that for a minute.

Unknown Speaker: It's your view that it's always been the view of the Panamanian Government.

That's what I get from what you've said--

Mr. Ganzfried: The Panamanian Government has never said anything to the contrary.

Unknown Speaker: --from the outset, that's what the parties understood this treaty to mean, and they didn't object to your withholding taxes.

Mr. Ganzfried: They didn't object to our withholding taxes.

Unknown Speaker: And that this note represents exactly what the Panamanians have thought all along.

Mr. Ganzfried: Precisely.

The Panamanians... this case--

Unknown Speaker: I don't know why you didn't say in the Claims Court: Well, this is also the view of the Panamanian Government.

Mr. Ganzfried: --Well, we didn't have an official statement from the Panamanian Government to that effect.

We simply had the absence of any objection by the Panamanian Government.

Unknown Speaker: Well, I would have thought you'd have said, well, we know what their view is and it's consistent with ours, why don't we ask them.

Mr. Ganzfried: Well, I think I should get back to one of the premises here, and that is that the issue of United States taxation or exemption from United States taxation was never a part of the discussions leading up to the treaty and the implementation agreements.

As a result, the Claims Court essentially required the Government to prove a negative, namely to point to a place in the negotiating history where somebody would say, we are not discussing the following subject.

That was an impossible situation.

Inasmuch as the question of an exemption from United States taxation was not a part of the discussion, we could not say to the Claims Court that it was a subject on which the Panamaian Government had ever expressed a view to us in any formal sense.

But what we did know was that the agreement had never incorporated any agreement to exempt anyone from United States taxation, certainly not U.S. citizens employed by the Commission.

Unknown Speaker: May I ask this.

Would a contrary view of the Panamanian Government affect the Government's, affect the United States' position?

Mr. Ganzfried: Would a contrary view?

Unknown Speaker: Yes.

Mr. Ganzfried: The answer to that is no.

What we're dealing with here is a question of domestic law, and if Panama were to take a different view and there might be some international disagreement as between the United States and Panama, that would be a different matter for different proceedings.

As far as this case is concerned, it's a domestic law issue.

Unknown Speaker: Of what use is the note?

Of what use is the note?

Mr. Ganzfried: The note?

Unknown Speaker: If it went the wrong way, it would have been no good at all.

What interest does Panama have in the United States' relationship with its citizens?

Mr. Ganzfried: In this case the answer is it has no... the view of the Panamanian Government is not dispositive of this case.

Unknown Speaker: You don't need it?

Mr. Ganzfried: We don't need it because we didn't discuss this issue--

Unknown Speaker: Well, why did you go get it?

Mr. Ganzfried: --We didn't go get it.

It arrived.

The context of this was that when this case was--

[Laughter]

Unknown Speaker: I really wish the State Department has asked for it, Mr. Ganzfried.

I find that impossible to believe.

This things just... somebody found it under the door?

[Laughter]

Mr. Ganzfried: It was delivered to the U.S. Ambassador in Panama.

There was no request for it.

The situation was, when the case was pending in the Claims Court that Panama had... that this issue had been litigated in eleven courts previously.

All of those courts had held for the Government.

The Government's position, the United States Government's position, was stated openly in the ratification hearings, which were very carefully monitored in Panama.

Unknown Speaker: Somebody in Panama was following this litigation and just thought they should come to the aid of the United States?

Mr. Ganzfried: I don't know whether... but the case had been... the issue had been resolved in favor of the Government in eleven courts.

And then, when the issue was resolved in another way, which was contrary to what the understanding of the parties to the agreement were, then Panama saw fit to express its views, particularly when the Claims Court had relied so much of what it thought was Panama's position.

Unknown Speaker: The State Department didn't ask for it.

You don't know for sure that no other agency of the Government asked for it?

Mr. Ganzfried: I am advised by the State Department that they didn't and, as I understand it, the State Department would be the appropriate Department to engage in negotiations and discussions with Panama.

Unknown Speaker: Of course, requests come in many forms.

You may not have asked for it, but somebody could have said: Gee, it might help your position in other positions if you wrote this letter.

Mr. Ganzfried: Someone from Panama--

Unknown Speaker: I'm not asking you to do it, but--

Mr. Ganzfried: --Someone from Panama might have called and said: We hear about this case.

There is in the appendix, the Court of Appeals appendix, a letter from the general counsel of the Panama Canal Commission in which he indicates that whenever there was even a rumor among Commission employees that one of them had won one of these cases there was a flood of employees changing their withholding forms to claim an exemption, and then they had a lot of difficulty when they discovered that the rumors were untrue and people had to go back and make changes.

So it was clearly activity in Panama, and there was clearly an understanding that the United States was collecting taxes.

Despite all of that, Panama remained silent.

All of the affidavits that the Petitioners have submitted at various stages, attached to various briefs and lodgings in the courts in which this case has been litigated, are statements by former officials of been Panamanian Government, who incidentally never say that the subject of an exemption from U.S. taxation was ever discussed during the negotiations.

And they then state their own personal views on a subject on which none of them ever expressed that view as an official of the Panamanian Government.

No one ever came... when they were in their various positions, no one ever came to the United States Government and said: You're taxing your people and we have a treaty that says you can't.

And in fact, quite to the contrary.

When the most recent such affidavit arrived from Mister... submitted by Mr. Royo last week that the Petitioners have filed, it seemed so curious because he had never stated that position that's contained in that affidavit when he was an official of the Panamaian Government, that it became a subject of considerable curiosity.

And consequently, we did some checking on those views and we found that when he was the President of Panama he wrote a letter to President Carter that's contained in the... that's printed in the Congressional Record, in which it's quite clear that Mr. Royo as the President of Panama understood that the United States was going to--

Unknown Speaker: --Is that in the record?

Mr. Ganzfried: --It's in the Congressional Record.

It has not been presented previously in this case.

Unknown Speaker: Could we try to stay in the record in this case?

We're far enough outside of it.

Let's not go any further outside the record.

I'm only speaking for myself.

Mr. Ganzfried: Okay, I understand.

Unknown Speaker: But I think the Government went outside the record and negotiated it while the case was pending.

Mr. Ganzfried: Well, the fact is that this Court and, taking lead from this Court, other courts have traditionally considered statements from foreign governments, even if they have come in during the course of litigation.

And as I said before, when it arrived it was scarcely something that we could say, sorry, it's too late, or we're not going to pay attention to.

In fact, if instead of putting ribbons on that note and delivering it to the U.S. Ambassador in Panama, the Panamanian Government had put a cover on it and filed it as an amicus brief in the Federal Circuit or in the Eleventh Circuit, it clearly would have been an appropriate submission, even if they had taken exactly the words that they wrote in the note and filed it as an amicus brief.

And surely this Court and all other courts in the country will accept amicus briefs.

Unknown Speaker: What's the sense of having a record if anybody can go outside of it?

Mr. Ganzfried: Because the issue--

Unknown Speaker: Or to put it as this case, the Government can go outside of it?

Mr. Ganzfried: --The issue in this case is not... we're not talking about the adjudication of a fact on which you would make your presentation and you then are left with the record that you presented to the lower court.

Determining the meaning of a treaty or the implementing agreement in this case is similar, in terms of the task that's called upon for judges to perform, as reading a statute, and it's simply appropriate--

Unknown Speaker: And it's like taking judicial notice?

Mr. Ganzfried: --It's a guide to interpretation, and it's certainly an appropriate subject of judicial notice.

In fact, though, rather than spend much more time on the Panamanian note, our position doesn't depend on the Panamanian note, because our position is even if you look simply at the language of the implementing agreement in context, the Petitioner's position is implausible, particularly when you realize that what we're talking about is a tax exemption and this Court has said on many occasions that provisions granting special tax exemptions are to be strictly construed.

Now, their argument flows from the notion that fragments of the agreement can be isolated and interpreted without regard to their surroundings.

Now, let's recognize that this was not first and foremost a tax treaty.

The overall effect and the principal purpose of the package of treaties and agreements signed on September 7th, 1977, was to reduce the United States' presence in the area of Panama known as the Canal Zone.

To that effect, the treaty restored to Panama territorial sovereignty over the Canal Zone, ending the period when the United States had exercised the rights, power, and authority it would have if it were the sovereign.

The treaty gave to the United States the rights to manage, operate, and maintain the canal.

But it recognized in Article 1, paragraph 3, that the Republic of Panama shall participate increasingly in the management and protection and the defense of the canal.

To carry out that goal, the goal of increased Panamanian participation, Article 10 of the treaty requires that a preference be given to Panamanian applicants for employment, that within five years from the effective date the number of carry-over U.S. citizens employed by the Commission be reduced by 20 percent, that subsequently hired United States citizen employees be rotated out of Panama at least every five years, and that an early retirement program be set up for U.S. citizen employees to encourage early retirement by making liberal annuities available to them.

Now, with the restoration of sovereignty to Panama, one of the issues that had to be resolved was how the new sovereign would treat our employees, that is U.S. Government employees, keeping in mind that the treaty itself recognizes that the Panama Canal Commission is an agency of the United States Government.

So all of the suggestions by Petitioner and in the Claims Court opinion that somehow this is a peculiar kind of organization--

Unknown Speaker: Well, the agency is--

Mr. Ganzfried: --It's definer as a U.S. Government agency.

Unknown Speaker: --The Commission is a U.S. Government agency.

What has been the Ccmmission's position on this issue?

Mr. Ganzfried: The Commission, its practical position on this issue is that it has been withholding taxes from employees.

Unknown Speaker: But has it ever expressed a position contrary to this, that really the treaty exempts its employees from U.S. taxes?

Mr. Ganzfried: It's never taken that position.

The letter from the general counsel of the Commission that's contained in the record indicates that treaty interpretation is a subject on which the Commission felt that it did not have the expertise to opine and left that to the State Department and the executive branch; and on the consequences for U.S. tax law, that that was a subject on which it would defer to other agencies, and specifically refer to the opinion of the Office of Legal Counsel of the Department of Justice, that is consistent with the proposition that there is no exemption from U.S. taxation.

In agreeing to shift the U.S. Government's exercise of powers from a territorial-based position to one that was functionally related to the particular functions that the United States was permitted under the treaty, one of the issues was how U.S. citizens were going to be treated insofar as taxes.

And as we explain in our brief, the implementation agreement in which the tax provision is contained was intended to define the rights of United States citizens with respect to Panama.

Relations between the United States Government and its own citizens and employees underwent no change.

That is, before the treaty these were U.S. citizens employed by the U.S. Government agency.

After the treaty they continued to be U.S. citizens employed by a U.S. Government agency.

Now, if we turn to the treaty in implementation of Article 3, the basic themes of the underlying treaty itself are restated.

So Articles 9 and 11 establish a preference for Panamanian sources to furnish supplies and services for the Commission.

And in Article 15 we have the question of taxation.

At the time... up to the time that the treaty was in effect, the income tax situation was this: United States citizen employed by the then.

Panama Canal Company, like all other U.S. citizens employed by a U.S. Government agency, paid U.S. income taxes.

But because they lived and worked in an area over which the United States exercised rights it would have as sovereignty, they paid no income taxes to Panama.

The treaty, as we've indicated, affected only the relationship between the employees and Panama.

So Article 15 makes no reference to United States taxation.

It creates no express or implied exemption from U.S. taxation.

Rather, that article preserves the status quo of no income tax by Panama in a way that's consistent with the position the United States maintains for its citizen employees in all foreign nations around the world.

Now, while there was, as the contemporaneous negotiating history shows, considerable debate on Panama's expressed desire to tax those U.S. citizens, there is no doubt that that issue was resolved by Panama's agreement that there would be an exemption from Panamanian taxation.

But there is no suggestion in the negotiating history that the subject of a total exemption from United States taxes was ever considered or discussed.

We needn't go very far from the words of the first sentence of Article 15, paragraph 2, to see that the context supports the Government's position.

In fact, as mentioned earlier, we don't need to leave those words at all because the words in the first sentence are identical to the words in Article 16 of the military agreement, and the Claims Court and the Panamanian minister at page 141 of the Court of Appeals appendix recognized that military people would pay taxes to the United States, U.S. citizen military people.

Unknown Speaker: Mr. Ganzfried, how much by way of dollars are we talking about?

Mr. Ganzfried: I've been advised by the Panama Canal Commission that from October 1, 1979, the date that the treaty went into effect, until September 22nd, 1986, the amount of taxes withheld from salaries of Commission employees was slightly in excess of $100 million.

Our point on the meaning of the first sentence of paragraph 2 is that... is made even clearer if you just go to the next sentence in paragraph 2.

If the Petitioners are correct as to the meaning of the first sentence, then presumably the second sentence would mean that U.S. citizens employed by the Commission are exempt from U.S. taxes on everything that they might earn in the United States, whether it be interest on bank accounts, dividends on stocks, or income from rental property.

Now, in their reply brief they've proposed a new interpretation of this second sentence.

It's basically nonsense, because on the face of it it doesn't make any sense.

What they have done is suggested that the first sentence is subject to no limitations, it means any taxes.

But when they get to the second sentence they say, well, the second sentence must mean only taxes, only on income from the Commission outside of Panama.

Never mind that the agreement itself defines a U.S. citizen employee as someone working for the Commission in Panama.

But since the second sentence refers only to Commission income outside of Panama, therefore the first sentence must refer to Commission income inside of Panama.

Well, they've now put back into the first sentence the very qualifier which in paragraphs 1 and 3 they recognize means that only Panamanian taxes are affected.

And you also end up with the silly result that any other income they have in the United States can be taxed by Panama, any other income they have in Panama could be taxed by the United States.

It just doesn't work.

And to suggest that the second sentence would mean that there would be an exemption for anything else they earned in the United States would create the kind of incentive for them to remain on the job indefinitely that is contrary to the position that Panama took in the negotiations and all the provisions designed to reduce the U.S. role in the operations of the canal.

So if we had only the language of the treaty, it's our position that the Government should prevail.

And of course we have more than that.

We have the position the United States consistently took in the negotiating history, namely that we were discussing only an exemption from Panamanian taxation.

In fact, the backup position that the Panamanians proposed, namely, well, let us tax but you give them a credit, that presupposes that the United States is going to be taxing its citizens employed by the Commission.

There's no need for a credit if there's an exemption from United States taxation.

And I think that maybe nothing makes the point more clearly that only the subject of Panamanian taxation was under discussion than the statement made by Ambassador Bunker at page 146 of the appendix in the Court of Appeals, at which he said that:

"U.S. Government employees do not pay income tax anywhere in the world. "

Now, what could more clearly show that they were talking about countries other than the United States?

The consistency of the Government's position is maintained following the signing of the treaty and its implementing agreements, and we've adhered vigorously to that interpretation without wavering.

That is, that Article 15 creates no exemption.

The section by section analysis, which is an authoritative statement by the State and Defense Departments, takes that position.

The legal advisor to the State Department in questions before the Senate took that position.

And much has been made of Senator Stone's... in the briefs, of Senator Stone's comments.

But if we read everything that Senator Stone had to say, he simply... he never expressed any disagreement with the State Department's position.

He simply inquired whether... he just said he was trying, he was only trying to avoid lawsuits such as this one, which he agreed

"would not really be much of a lawsuit. "

Now, the Senate report adopted that interpretation, and the consistent administrative practice, as I've indicated, has been taxes are withheld and any claims for exemption based on this treaty are denied by the IRS.

That's been the consistent position of the Department of Justice, the Department of State, Department of Defense, Department of the Treasury.

And of course, the latest legislative action on the subject is the Tax Reform Act of 1986, which reconfirms and restates with all the precision and clarity that anyone could ask for that the treaty has never made Petitioners exempt from U.S. taxes.

So on the basis of all this clear history, there really isn't any serious doubt that as a matter of domestic law there is no exemption from U.S. taxation, none was intended, and none was created.

So our position is that the judgment of the Federal Circuit should be affirmed, even if the Panamanian Government had remained silent, as we know it didn't.

As of this date, both governments are in concurrence as to what the treaty means, and in those circumstances the judgment should be affirmed and Petitioners should have to pay U.S. income taxes just like the rest of us do.

Thank you.

Rebuttal of Carter G. Phillips

Chief Justice Rehnquist: Thank you, Mr. Ganzfried.

Do you have anything more, Mr. Phillips?

You have three minutes.

Mr. Phillips: Yes, Mr. Chief Justice, just a couple points.

First, Mr. Ganzfried consistently tells the Court that the negotiating history preceding this agreement contains no discussion of United States domestic taxation.

But at the very end of his comments he discusses the tax credit issue.

When the United States responded to a proposal for a domestic tax credit, the United States negotiators didn't say: We don't negotiate about domestic income taxes with foreign governments.

They said: That's a matter of money, that's a financial issue.

That's fully consistent with our view that the sovereignty concerns that were paramount among the State diplomats were protected in order to... by conceding away the tax concerns.

As Mr. Ganzfried said, this was not a tax proposal.

These were not tax lawyers who negotiated this treaty.

Second, with respect to Justice White's question concerning who has... to whom is deference owed with respect to the operation of the treaty, there is evidence from the Panama Canal Commission supervisory board that it did understand this treaty to provide a bilateral tax exemption.

That board denied a cost of living increase to all of these employees in part, by the foreign minister who presented this note to the United States, for reasons that he said clearly; that there's an exemption already for U.S. taxes; they are not entitled to any additional allowances, they don't need that; they've gotten all of the protection they have.

And that cost of living adjustment was denied, largely on the basis of that.

So the only agency that really does implement this particular agreement has reached that conclusion.

Unknown Speaker: They have been withholding U.S. taxes, though, haven't they?

Mr. Phillips: I think on the instructions of the United States Government, yes, they have been.

But then of course, there's a method for finally resolving that, and that's in this forum.

There is nothing to indicate that that was based on their understanding of what the treaty meant.

Unknown Speaker: But the general counsel has never issued any... has never taken the position that the treaty means what you say it does?

Mr. Phillips: Well, except to the extent... the general counsel hasn't, but the supervisory board acted pursuant to that understanding of what the implementing agreement--

Unknown Speaker: What's the supervisory board?

Mr. Phillips: --That's the nine-member board that administers the Panama Canal Commission, the five United States, four Panamanians.

And it does have day to day responsibility, and it did understand this treaty to provide--

Unknown Speaker: But there would be another forum if the treaty means what you say it means.

That is, the other forum would be to protest, a protest by the Government of Panama.

Mr. Phillips: --Well, certainly that would be true, but my clients are not in a position to obtain a protest from the Government of Panama.

The only method by which they can seek to resolve this issue is through the courts, and that's what they've done.

Until it's finally resolved, I'm not sure why Panama would necessarily protest.

There's no reason to protest until the final decision is made as to what will happen here.

Unknown Speaker: Do you in your brief identify specifically the material in the negotiating history, page by page, in the record that you think best supports your position?

Mr. Phillips: Yes, Justice White.

And specifically in the O'Connor brief, we go through the materials--

Unknown Speaker: In the what?

Mr. Phillips: --In the O'Connor brief.

There is an extensive discussion, with very clear quotations from Minister Royo setting out specifically the sovereign issues that were of central concern and why this was in fact.

Unknown Speaker: Does it specifically mention United States taxes?

No.

Mr. Phillips: Specifically mentioning a tax credit as one of the specific proposals, yes.

Chief Justice Rehnquist: Your time is expired.

The case is submitted.