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THE SUPREME COURT OF THEFEDERATED STATES OF MICRONESIA

Cite asAfituk v. FSM,2 FSM Intrm. 260 (Truk 1986)

[2 FSM Intrm. 260]MASAKO AFITUK,

Plaintiff,vs.

FEDERATED STATES OF MICRONESIA &ALOYSIUS J. TUUTH, SECRETARY OF FINANCE, FSM,

Defendants.

CIVIL NO. 85-1010

ORDER DENYING MOTIONSOPINION

Before Richard H. BensonAssociate JusticeOctober 22, 1986

APPEARANCES:For the Plaintiff: Jeanne Rayphand

MLSCP.O. Box DMoen, Truk 96942

For the Defendants: Randall E. FergusonAsst. Attorney GeneralP.O. Box 490Kolonia, Pohnpei 96941

* * * *COURT'S OPINION

RICHARD H. BENSON, Associate Justice:This matter came before the court on the motion of the plaintiff for an order

granting summary judgment. After oral argument on October 22, 1985, thematter was submitted to the court for decision.

I find that there is no genuine issue as to any material fact, but I do notconclude that the plaintiff is entitled to judgment as a matter of law.

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The issues presented are whether the gross revenue tax of the FederatedStates of Micronesia violates the due process or equal protection clause of theConstitution and whether the gross revenue tax is within Congress's power toimpose taxes on income.[2 FSM Intrm. 262]

Under the facts of this case I conclude that the tax is constitutional. In an earlier case the Trial Division in Pohnpei upheld the gross revenue tax

against an assertion that it was not a tax on income. Ponape Federation ofCoop. Ass'ns v. FSM, 2 FSM Intrm. 124 (Pon. 1985).

FACTSThe plaintiff does business in Truk State. For the period of January 1, 1985 to

March 31, 1985 the government assessed a tax of $80.00 against the plaintiffbased on the gross revenue of his business. The plaintiff has a retail store at

which canned sardines, canned mackerel, soap, cigarettes, biscuits, cookies,candy and similar items are sold. The plaintiff seeks a declaratory judgment andcertain injunctive relief.

Subchapter IV of Chapter I of Title 54 of the Code of Federated States ofMicronesia imposes a tax on gross revenue. There are three categories: $80per year for businesses earning not more than $10,000 annually; 3% per yearupon the portion of a business's gross revenue which exceeds $10,000; and anexemption for those businesses earning not more than $2,000.00. 54 F.S.M.C.141.

The definition of gross revenue appears in 54 F.S.M.C. 112(5):

"Gross revenue" means the gross receipts, cash or accrued, of the taxpayerreceived as compensation for personal services not in the form of salaries orwages as defined in subsection (11) of this section,

andthe gross receipts of the taxpayer derived from trade, business, commerce, orsales

andthe value proceeding or accruing from the sale of tangible personal property, orservice, or both,

andall receipts, actual or accrued by reason of the capital of the business engagedin, including interest, rentals, royalties, fees, or other emoluments howeverdesignated and without any deductions on account of the cost of property sold,

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the cost of materials used, labor cost, taxes, royalties, or interest paid or anyother expenses whatsoever.

The definition continues with a list of several items not included[2 FSM Intrm. 263]within the meaning of gross revenue. Those items are not applicable in thiscase, nor helpful in analyzing the questions posed by the plaintiff's motion.

For clarity the court has written the definition in the form appearing withoutaltering the text.

DUE PROCESS AND EQUAL PROTECTIONThe plaintiff contends that the tax deprives him of his property without due

process of law and denies him equal protection of the law, in that the threeclassifications for tax liability are unreasonable and arbitrary.

Article IV, Section 3 of the FSM Constitution states, "A person may not bedeprived of life, liberty, or property without due process of law, or be denied theequal protection of the laws." The due process clause is drawn from Fifth

Amendment of the Constitution of the United States which provides, "No personshall ... be deprived of life, liberty, or property, without due process of law."The equal protection clause appears in the Constitution of the United States onlyin regard to state action. The Fourteenth Amendment provides, "No State shall... deny to any person within its jurisdiction the equal protection of the laws."

Because the Declaration of Rights is patterned after provisions of the U.S.Constitution, and United States cases were relied on to guide the ConstitutionalConvention, U.S. authority may be consulted to understand the meaning of theserights. Alaphonso v. FSM, 1 FSM Intrm. 209, 214, 215 (App. 1982), SCREP No.14, II J. of Micro. Con. Con. 795-797.

In the United States, the federal government's violation of equal protection toany of its citizens is deemed a deprivation of due process of law. J. Novak, R.Rotunda & J. Young, Constitutional Law 585 (2d ed. 1983).

The classification of those who receive differing gross revenue is permissibleif the classifications are rationally related to a legitimate legislative purpose.Allied Stores of Ohio v. Bowers, 358 U.S. 522, 527-28, 79 S. Ct. 437, 441, 3 L.

Ed. 2d 480, 485 (1959). Here the government suggests the purpose is so thatthose receiving less revenue pay less tax. The payment of one tax ($80.00) for arange of revenue under $10,000 might also suggest a legislative purpose ofadministrative simplicity.

I conclude the tax does not violate the due process or equal protectionprovisions of the Constitution of the Federated States of Micronesia. This

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conclusion is in harmony with the constitutional history of these rights. SCREPNo. 14, II J. of Micro. Con. Con. 793, 795-797.

IS GROSS REVENUE INCOME?The plaintiff next contends that the gross revenue tax Is not "income" that can

be taxed by Congress, and marshalls abundant United States authority that"income" means gain or profit.[2 FSM Intrm. 264]

The gross revenue tax first became effective in the Trust Territory in 1971.Pub. L. No. 4C-2, 8.

The rate of the tax and the imposition thereof was amended by the InterimCongress of Micronesia, Pub. L. No. IC-26, 5. This Act is entitled "An Act

Amending Title 77 of the Trust Territory Code to conform the tax laws of theFederated States of Micronesia to the Constitution thereof, and for other

purposes."The definition of gross revenue has been twice amended by the Congress of

the Federated States of Micronesia. Pub. L. No. 1-83; Pub. L. No. 2-23. Pub. L.No. 1-83 also provided that the Lax on gross revenue be paid to the NationalRevenue Officer of the Federated States of Micronesia.

Pub. L. No. 2-48 of the Federated States of Micronesia was enacted to codifythe laws of the Federated States of Micronesia. Section 3(1) of thatlaw states,"All enacted law of the Interim Congress of the Federated States ofMicronesia ...and all enacted law of the Congress of the Federated States of Micronesia which

are incorporated in Part II of the attached manuscript are hereby readopted andreenacted as positive law of the Federated States of Micronesia in the formappearing in the manuscript."

Based on this history I conclude that the gross revenue tax as it now appearsis a law enacted by Congress. The interpretation of the law will therefore, ifpossible, avoid a finding of unconstitutionality. In re Otokichy, 1 FSM Intrm. 183,190 (App. 1982).

The court agrees with the plaintiff that the gross revenue tax as enacted bythe Congress of Micronesia continued in effect in the Federated States ofMicronesia by virtue of the transition article of the FSM Constitution. FSM Const.

art. XV, 1. Subsequent enactments by theInterim Congress of the FSM and bythe Congress of the FSM determine its nature as a national law and fix apresumption of constitutionality.

Article IX, Section 2(e) of the FSM Constitution empowers Congress "toimpose taxes on income." In the examination of the issue presented, noparticular weight is given to the cases of the United States because there is noevidence in the Journal of the Constitutional Convention that the phrase "to

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impose taxes on income" was derived from the Sixteenth Amendment of theUnited States Constitution which permits Congress to "lay and collect taxes onincome," and because the word "income" is not a term of art which derives itsmeaning only from judicial decision.

The nature of the plaintiff's business causes its gross revenues to comewithin the second clause of the definition of gross revenue, ". . . the grossreceipts of the taxpayer derived from trade, business, commerce, or sales."

Does gross revenue, so defined, come within the meaning of "income"? Thecourt finds that it does.[2 FSM Intrm. 265]

Definitions of "income" in Webster's Third New International Dictionary (1971)include:

4a: a gain or recurrent benefit that is usually measured in money and for agiven period of time, derives from capital, labor, or a combination of both,includes gains from transactions in capital assets, but excludes unrealizedadvances in value: commercial revenue or receipts of any kind except receipt orreturns of capital - see earned income, gross income, net income, unearnedincome, compare profit, wage (emphasis added).

For the reasons stated, the plaintiff's motion for summary judgment is denied.