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.
JUSTICE SCALIA delivered the opinion of the Court.
The petitioners, United States citizen employees of the Panama
Canal Commission and their spouses, seek refunds of income taxes
collected on salaries paid by the Commission between 1979 and 1981.
We granted certiorari to resolve conflicting appellate
interpretations of an international agreement.
474 U.
S. 1050 (1986).
From 1904 to 1979, the United States exercised sovereignty over
the Panama Canal and the surrounding 10-mile-wide Panama Canal Zone
under the Isthmian Canal Convention, 33 Stat. 2234. On September 7,
1977, the United States and Panama signed the Panama Canal Treaty,
T.I.A.S. No. 10030, which was ratified by the Senate on April 17,
1978, and took effect on October 1, 1979. The Treaty transferred to
Panama sovereignty over the Canal and Zone, but gave the United
States the right to operate the Canal until December 31, 1999. The
vehicle for United States administration of the Canal is the Panama
Canal Commission, a United States Government agency supervised by a
Board of nine members, four of whom are Panamanian nationals
proposed by the Government of Panama.
See 22
Page 479 U. S. 29
T.I.A.S. No. 10031 (hereinafter Agreement), contains the
provision that gives rise to the present dispute. Article XV of the
Agreement, entitled "Taxation," provides as follows:
"1. By virtue of this Agreement, the Commission, its contractors
and subcontractors are exempt from payment in the Republic of
Panama of all taxes, fees or other charges on their activities or
property."
"2. United States citizen employees and dependents shall be
exempt from any taxes, fees or other charges on income received as
a result of their work for the Commission. Similarly, they shall be
exempt from payment of taxes, fees or other charges on income
derived from sources outside the Republic of Panama."
"3. United States citizen employees and dependents shall be
exempt from taxes, fees or other charges 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 or their sponsor's work with the
Commission."
"4. The Coordinating Committee may establish such regulations as
may be appropriate for the implementation of this Article."
The petitioners contend that § 2 of this Article constitutes an
express exemption of their Commission salaries from both Panamanian
and United States taxation.
See 26 U.S.C. § 894(a)
("Income of any kind, to the extent required by any treaty
obligation of the United States, shall not be included in gross
income and shall be exempt from taxation under this subtitle"). The
Claims Court agreed, 6 Cl.Ct. 115 (1984), but was reversed by a
five-judge panel of the Federal Circuit. 761 F.2d 688 (1985). In a
substantively identical case, the Eleventh Circuit has ruled for
the taxpayers.
Harris v. United States, 768 F.2d 1240
(1985),
cert. pending,
Page 479 U. S. 30
No. 85-1011. The same issue is presented in numerous cases still
pending in the lower courts. [
Footnote 1]
We agree with the Federal Circuit. The first section of Article
XV, which confers upon the Commission and its contractors an
exemption "from payment
in the Republic of Panama of all
taxes" (emphasis added), establishes the context for the discussion
of tax exemptions 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. In that regard, the structure of Article
XV is similar to that of Article XVI, which in most of its sections
speaks generally of import duties, but is understood to refer only
to
Panamanian import duties, principally because § 1 sets
the stage in that fashion by referring to "the customs laws and
regulations
of the Republic of Panama." Agreement, Art.
XVI, § 1 (emphasis added).
There is some purely textual evidence, albeit subtle, of the
understanding that Article XV applies only to Panamanian taxes: In
conferring an exemption from property taxes, § 3 displays an
assumption that only personal property within the Republic of
Panama is at issue; otherwise, that significant qualification to
the operation of § 3 would more naturally have been set forth as an
explicit limitation ("personal property
Page 479 U. S. 31
within the territory of the Republic of Panama, whose
presence there," etc.), rather than being referred to incidentally
in the modifying clause ("personal property, whose presence within
the territory of the Republic of Panama," etc.). And the assumption
that only personal property within Panama is at issue in turn
reflects the more fundamental assumption that only
Panamanian personal property taxes are being
addressed.
More persuasive than the textual evidence, and in our view
overwhelmingly convincing, is the contextual case for limiting
Article XV to Panamanian taxes. Unless one posits the ellipsis of
failing to repeat, in each section, § 1's limitation to taxes "in
the Republic of Panama," the Article takes on a meaning that is
utterly implausible and has no foundation in the negotiations
leading to the Agreement. For if the first sentence of § 2 refers
to United States as well as Panamanian taxes, then the second
sentence of § 2, and the totality of § 3, must do so as well --
with the consequence that United States citizen employees and their
dependents would be exempt not only from United States income tax
on their earnings from the Commission, but also from United States
income tax on all income from sources outside Panama
(
e.g., United States bank accounts), and from all United
States gift and inheritance taxes. While, as the petitioners
assert, there might have been some reason why Panama would insist
that its inability to tax United States citizen Commission
employees upon their earnings in Panama be matched by a detraction
from the United States' sovereign power to tax those same earnings,
there is no conceivable reason why this hypothetical
"your-sovereignty-for-mine" negotiating strategy would escalate
into a demand that the United States yield more sovereign
prerogatives than it was asking Panama to forgo -- and no
imaginable reason why the United States would accept such an
escalation, producing tax immunity of unprecedented scope.
Page 479 U. S. 32
The petitioners' attempts to explain why these broader tax
consequences need not follow from their interpretation are
unpersuasive. With regard to the second sentence of § 2, they argue
that the opening word "similarly" should be read to incorporate
into that sentence the first sentence's restriction to "income
received as a result of . . . work for the Commission." On this
understanding, the second sentence provides a "simila[r]" tax
exemption for Commission-related income "derived from sources
outside the Republic of Panama," but allows both countries to tax
non-Commission income. In addition to being an unnatural reading of
"similarly" in this context, this interpretation is flatly
inconsistent with the language of § 2. Contrary to the petitioners'
tacit assumption, the first sentence contains nothing limiting the
scope of its exemption to income received as a result of work for
the Commission in Panama. A person receiving a Commission salary
for work performed in, for example, Bogota would seem plainly to
qualify for exemption under this provision -- rendering the second
sentence, on the petitioners' understanding, superfluous. With
regard to § 3, the petitioners assert that its reference to
taxation of property "within the territory of the Republic of
Panama" is sufficient to demonstrate that only Panamanian taxation
is intended to be covered. But as a reading of the provision will
readily demonstrate, that reference applies only to personal
property taxes; there is no comparable qualification on § 3's
exemption from taxes "on gifts or inheritance." That is limited, if
at all, only by the implication that Panamanian
Page 479 U. S. 33
taxes alone are at issue. In sum, we find the verbal distortions
necessary to give plausible content, under the petitioners' theory,
to the second sentence of § 2 and § 3 far less tolerable than the
acknowledgment of ellipsis which forms the basis of the
Government's interpretation.
Not only is limitation of Article XV to Panamanian taxes in
accord with the consistent application of the Agreement by the
Executive Branch -- a factor which alone is entitled to great
weight,
see Sumitomo Shoji America, Inc. v. Avagliano,
457 U. S. 176,
457 U. S.
184-185 (1982) -- but that application has gone
unchallenged by Panama. It is undisputed that, pursuant to clear
Executive Branch policy, the Panama Canal Commission consistently
withheld United States income taxes from petitioners and others
similarly situated,
see Letter from John L. Haines, Jr.,
Deputy General Counsel, Panama Canal Commission, to David Slacter,
United States Department of Justice, Dec. 20, 1982, pp. 2-3, 1 App.
in Nos. 85-504, 85-505, 85-506, and 85-507 (CA Fed.), pp. 61-62,
and that Panama, which had four of its own nationals on the Board
of the Commission, did not object. The course of conduct of parties
to an international agreement, like the course of conduct of
parties to any contract, is evidence of its meaning.
See Trans
World Airlines, Inc. v. Franklin Mint Corp., 466 U.
S. 243,
466 U. S.
259-260 (1984);
Pigeon River Improvement, Slide
& Boom Co. v. Charles W. Cox, Ltd., 291 U.
S. 138,
291 U. S.
158-161 (1934).
Cf. Uniform Commercial Code §
2-208(1) (1978). [
Footnote
2]
Page 479 U. S. 34
"Agreement. Similarly,
as is provided by Panamanian
law, they shall be exempt from payment of taxes, fees or other
charges on income derived from sources outside the Republic of
Panama."
Panama Canal Treaty: Implementation of Article IV, Sept. 7,
1977, Art. XVI, § 2, T.I.A.S. No. 10032 (emphasis added).
The petitioners contend that the variation in the phraseology of
the two provisions demonstrates that the taxation provisions of the
Article III Agreement were meant to be bilateral. We think not. It
would be another matter if the variation at issue were alteration
of the phrase "Panamanian taxes" in one agreement to merely "taxes"
in the other; there would have been no reason to object to the
former formulation
except the belief that more than
Panamanian taxes were covered. Several plausible reasons, however,
would justify objection to the phrase "as is provided by Panamanian
law." The most obvious is the concern that the phrase would be
interpreted to leave future scope of the tax exemption within
Panama's unilateral control, through the amendment of its domestic
law. (To be sure, that reason would seemingly call for deletion of
the phrase from both agreements, rather than merely the Agreement
in Implementation of Article III -- but perhaps it was only with
respect to the latter agreement, in which Panama had steadfastly
opposed the whole concept of tax exemption, that unilateral
Panamanian action was feared.) The surmise that the reason for
deletion of the phrase in the Article III Agreement was its
implication that only Panamanian taxes were covered would perhaps
be reasonable if it were clear that the deletion was prompted by
Panama. In fact, however, the deletion was made in the course of
the American side's own internal drafting, before any text had even
been presented to the Panamanians. (The phrase "as is provided by
Panamanian law" was included in the June 26, 1977, United States
draft of § 2 of Art. XV, 1 App. in Nos. 85-504, 85-505, 85-506, and
85-507 (CA Fed.), p. 74, but was dropped from subsequent United
States
Page 479 U. S. 35
drafts,
id. at 77, 81.) The petitioners assert that
this occurred as a consequence of the American side's knowledge
that Panama would not accept a unilateral tax exemption provision
and would accept a bilateral one -- but they point to no Panamanian
negotiating proposal supporting that speculation, which seems to us
not inordinately credible on its face.
We find the petitioners' attempted reliance upon other elements
of the negotiating history unavailing. While the Claims Court may
have been correct that the negotiating history does not favor the
Government's position sufficiently to overcome what that court
regarded as a plain textual meaning in favor of the taxpayers, it
certainly does not favor the taxpayers' position sufficiently to
affect our view of the text. It contains, we may note, only a
single (unhelpful) reference to United States income taxation -- a
silence that can perhaps be reconciled with the petitioners'
position, but can hardly be said affirmatively to support it.
Finally, we find no significance in the fact, urged so strongly
by the petitioners, that Article XV is entitled "Taxation," rather
than "Panamanian Taxation." Of the 21 Articles of the Agreement,
only 2 -- Articles V and IX -- are limited by title to Panamanian
subject matter, though it is plain that most are so limited in
their application.
See, e.g., Article VII ("Water
Rights"); Article XII ("Entry and Departure"); Article XVI ("Import
Duties").
The judgment of the Court of Appeals is
Affirmed.
* Together with No. 85-559,
Coplin et ux. v. United
States, and No. 85-560,
Mattox et ux. v. United
States, also on certiorari to the same court.
[
Footnote 1]
After this case was argued, the President signed into law the
Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085. Section
1232(a) of that Act provides, in relevant part, that for
"all taxable years whether beginning before, on, or after the
date of the enactment of this Act (or in the case of any tax not
imposed with respect to a taxable year, [for] taxable events after
the date of enactment of this Act),"
provisions of the Treaty or Agreement
"shall be construed as exempting (in whole or in part) any
citizen or resident of the United States from any tax under the
Internal Revenue Code of 1954 or 1986."
Because we find that the Agreement, properly interpreted,
provides for the same result, we do not rely upon the statute, and
thus avoid confronting the constitutional questions posed by
retroactive income taxation.
See United States v.
Darusmont, 449 U. S. 292,
449 U. S.
296-301 (1981);
Welch v. Henry, 305 U.
S. 134,
305 U. S.
146-151 (1938).
[
Footnote 2]
The Government has contended, here and before the Court of
Appeals, that the answer to the current question is illumined, if
not conclusively determined, by a February 22, 1985, diplomatic
note from the Government of Panama, indicating that it shares the
United States' view that Article XV pertains only to Panamanian
taxation. The petitioners assert that mutual agreement between the
contracting parties on interpretation cannot be dispositive of
third-party rights, and that the note is in any event inadmissible
on various grounds. Since we would sustain the Government's
position without reference to the note, we need not resolve these
disputes.