O'Connor v. United States
479 U.S. 27

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U.S. Supreme Court

O'Connor v. United States, 479 U.S. 27 (1986)

O'Connor v. United States

No. 85-558

Argued Oct. 14, 1986

Decided Nov. 4, 1986*

479 U.S. 27


Section 1 of Article XV of the Agreement in Implementation of Article III of the Panama Canal Treaty provides that the Panama Canal Commission and its contractors "are exempt from payment in the Republic of Panama of all taxes . . . on their activities or property." The first sentence of § 2 of Article XV provides that "United States citizen employees . . . shall be exempt from any taxes . . . on income received as a result of their work for the Commission," and the second sentence exempts such employees "from payment of taxes . . . on income derived from sources outside the Republic of Panama." Section 3 provides that such employees

"shall be exempt from taxes . . . on gifts or inheritance or on personal property, the presence of which within the territory of the Republic of Panama is due solely to the stay therein of such persons on account of their . . . work with the Commission."

Petitioners, United States citizen employees of the Panama Canal Commission and their spouses, sought refunds of United States income taxes collected on salaries paid by the Commission for certain years, contending that § 2 of Article XV constitutes an express exemption of those salaries from both Panamanian and United States taxation. The Claims Court agreed, but the Court of Appeals reversed.

Held: Article XV applies only to Panamanian taxes, and hence petitioners are not entitled to refunds of United States income taxes paid. Section 1 of Article XV establishes the context for the discussion of tax exemption in the entire Article, so that when §§ 2 and 3 state that "United States citizen employees . . . shall be exempt" from taxes they are understood to be dealing only with taxes payable in Panama. If the first sentence of § 2 were interpreted to refer to United States as well as Panamanian taxes, then the second sentence and § 3 would also do so, with the implausible consequence that United States citizen employees would be exempt not only from United States income taxes on their earnings from the Commission but also from such taxes on income from sources outside Panama and from all United States gift and inheritance taxes.

Page 479 U. S. 28

761 F.2d 688, affirmed.

SCALIA, J., delivered the opinion for a unanimous Court.

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