Bank of the Federated States of Micronesia v Federated States of Micronesia [1992] FMSC 35; 5 FSM Intrm. 346 (Pon. 1992) (31 August 1992)

FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION
Cite as Bank of the FSM v. FSM, [1992] FMSC 35; 5 FSM Intrm. 346 (Pon. 1992)

[1992] FMSC 35; [5 FSM Intrm. 346]

BANK OF THE FEDERATED STATES
OF MICRONESIA,
Plaintiff,

v.

GOVERNMENT OF THE FEDERATED
STATES OF MICRONESIA,
Defendant.

FSM CIV. 1991-016

OPINION

Before Edward C. King
Designated Justice
Decided: August 31, 1992

[5 FSM Intrm. 347]

APPEARANCES:

For the Plaintiff:
R. Barrie Michelsen
Attorney at Law
P.O. Box 1450
Kolonia, Pohnpei FM 96941

For the Defendant:
Douglas Juergens
Acting FSM Attorney General
P.O. Box PS-105
Palikir, Pohnpei FM 96941

* * * *

HEADNOTES

Taxation
Limitation of the definition of "business" under the FSM income tax law to "all activities...carried on within the Federated States of Micronesia" strongly implies that activities carried on elsewhere by a business functioning within the Federated States of Micronesia are not subject to FSM income tax. 54 F.S.M.C. 112(1). Bank of the FSM v. FSM, [1992] FMSC 35; 5 FSM Intrm. 346, 348 (Pon. 1992).

Taxation
While there is a presumption that all revenue of a business is derived from sources within the Federated States of Micronesia, the presumption may be rebutted and the tax "levied only on that portion which is earned or derived from sources or transactions within the Federated States of Micronesia." 54 F.S.M.C. 142. Bank of the FSM v. FSM, [1992] FMSC 35; 5 FSM Intrm. 346, 349 (Pon. 1992).

Taxation
The statutory scheme emphasizes the location of the business activity which generates the revenue in question. Therefore revenue derived from investment transactions in Honolulu and Chicago are not taxable sine they are not derived from sources or transactions within the Federated States of Micronesia. Bank of the FSM v. FSM, [1992] FMSC 35; 5 FSM Intrm. 346, 349 (Pon. 1992).

* * * *

COURT'S OPINION

EDWARD C. KING, Designated Justice:

This action has been filed by the Bank of the Federated States of Micronesia to challenge the assertion of the national government of the Federated States of Micronesia that the bank must pay FSM income taxes on income realized by the bank from funds invested in banks in Chicago and Honolulu in the United States.

[5 FSM Intrm. 348]

The case is now before the Court on the bank's motion for summary judgment. The bank seeks a ruling that the bank's investments in Chicago and Honolulu are not business activities within the Federated States of Micronesia and therefore are not taxable under 54 F.S.M.C. 141.

I. Background

The parties have stipulated to the material facts in this case. The bank is a banking corporation organized and operating under the banking laws of the Federated States of Micronesia. Since the bank has full service branches in each state of the Federated States of Micronesia and does not engage in general banking activities elsewhere, there is no dispute that most revenues generated by the bank are subject to the national tax on gross revenues.

The dispute here concerns only the income realized from the bank's investment of excess funds in overnight loans or "fed funds" in accounts maintained by the bank with First Hawaiian Bank in Honolulu and with Boulevard Bank in Chicago.

Although interest from these investments in Chicago and Honolulu is reflected in the books and records of the bank, the bank has excluded that investment revenue for FSM income tax purposes on the theory that the revenue was derived from business outside the Federated States of Micronesia.

The government rejected the bank's interpretation and assessed taxes upon the bank's unreported investment income for the years 1987 through 1989. The bank has tendered the disputed amount to the Court for safekeeping and has filed this lawsuit to obtain a court ruling.

II. Legal Analysis

The national income tax law does not seem to represent an effort to tax all income realized from all business activities of a business entity operating within the Federated States of Micronesia. The law does not contemplate taxation of business income generated outside of the Federated States of Micronesia.

"Business" under the FSM income tax law means "any . . . undertaking carried on for a pecuniary profit and include all activities . . .carried on within the Federated States of Micronesia for economic benefit either direct or indirect . . . ." 54 F.S.M.C. 112(1)(emphasis added). Limitation of this definition to activities carried on within the Federated States of Micronesia strongly implies that activities carried on elsewhere by a business functioning within the Federated States of Micronesia are not subject to FSM income tax.

The implication of section 112(1) is confirmed by 54 F.S.M.C. 142, which provides a method of apportionment for the earnings of a business which "derives its gross revenue from business activities or undertakings both within and without the Federated States of Micronesia during the taxable year . . ." 54 F.S.M.C. 142(1).

[5 FSM Intrm. 349]

Section 142(1) creates a presumption that all of the revenue of such a business was "derived from sources within the Federated States of Micronesia." However, the section goes on to provide a method for rebutting the presumption. "The business may file for an apportionment of the tax on a form prescribed by the Secretary and the tax shall be levied only on that portion which is earned in or derived from sources or transactions within the Federated States of Micronesia." 54 F.S.M.C. 142(2).

The government has not questioned the procedures employed by the bank in seeking apportionment. The only question then is whether the investment income generated by the deposits of funds in Honolulu and Chicago is derived from "sources or transactions or parts of transactions" within the Federated States of Micronesia.

In rejecting the bank's request for apportionment, the government pointed out that the funds invested by the bank in Honolulu and Chicago have been obtained from depositors in the FSM. The government therefore asserted that the funds are derived from"sources of transactions" within the Federated States of Micronesia.

This approach, focusing on the source of funds used to generate the additional revenue, ignores the statutory scheme, which emphasizes the location of the business activity which generates the revenue in question. The fact that the funds invested flowed from sources and transactions within the Federated States of Micronesia does not alter the fact that the investment transactions themselves, which actually generated the new revenue sought to be taxed, took place outside of the Federated States of Micronesia. Those investments in Chicago and Honolulu were the source of this new revenue. Thus, the revenue is not subject to FSM income tax under the existing statute.

This result makes it unnecessary for the court to reach the other questions, relating to assessment of penalties, raised in the bank's motion for summary judgment.

III. Conclusion

The motion of plaintiff Bank of the Federated States of Micronesia for summary judgment is granted and declaratory judgment is granted in favor of the plaintiff. The funds tendered to the Court by the bank to be held while this case remains pending may be returned to the bank.