FSM 10 Intrm. 024-032

A person adversely affected or aggrieved by agency action is entitled to judicial review thereof in the FSM Supreme Court. The court shall conduct a de novo trial of the matter, and shall decide all relevant questions of law and fact. Ting Hong Oceanic Enterprises v. Ehsa, 10 FSM Intrm. 24, 28 (Pon. 2001).

Gross revenue is defined as the gross receipts of the taxpayer derived from trade, business, commerce, or sales and business is defined to mean any undertaking carried on for pecuniary profit carried on within the FSM for economic benefit either direct or indirect. Ting Hong Oceanic Enterprises v. Ehsa, 10 FSM Intrm. 24, 29 (Pon. 2001).

FSM Civil Rule 37(b)(2) gives the court the authority to levy sanctions against a party, including dismissal, for failure to obey a discovery order, and Rule 41(b) allows the court to dismiss a plaintiff's complaint for failure to comply with a court order. Ting Hong Oceanic Enterprises v. Ehsa, 10 FSM Intrm. 24, 29 (Pon. 2001).

In a summary judgment motion the moving party has the initial burden of showing that there are no triable issues of fact. Once the moving party has done this, the burden then shifts to the nonmoving party to show that there is a triable issue. The nonmoving party must show that there is enough evidence supporting his position to justify a decision upholding his claim by a reasonable trier of fact. Ting Hong Oceanic Enterprises v. Ehsa, 10 FSM Intrm. 24, 31 (Pon. 2001).

Once a party moving for summary judgment has presented a prima facie case of entitlement to summary judgment, the non-moving party may not rely on unsubstantiated denials of liability to carry its burden to produce evidence showing a genuine issue of material fact, but must present affidavits or some other competent evidence that would be admissible at trial that there is a genuine issue of material fact. Counsel's unsupported statements at oral argument do not qualify as competent evidence upon which a court could find a genuine issue for trial. Argument alone cannot create a disputed fact that will defeat summary judgment. Ting Hong Oceanic Enterprises v. Ehsa, 10 FSM Intrm. 24, 31 (Pon. 2001).

Once the Secretary of Finance determines that a taxpayer has failed to pay the gross revenue tax it owes, he notifies the taxpayer and demands that the tax be paid. If the taxpayer fails within 30 days to make and file a return and pay the tax which has been assessed, it is appropriate for the Secretary to make a return for the taxpayer from the information available to the Secretary and to assess that amount against the taxpayer. Ting Hong Oceanic Enterprises v. Ehsa, 10 FSM Intrm. 24, 31 (Pon. 2001).

Pursuant to 54 F.S.M.C. 152(3), the Secretary's gross revenue tax assessment is be presumed to be correct unless and until it is proved incorrect by the person, business, or employer disputing the amount of the assessment. Ting Hong Oceanic Enterprises v. Ehsa, 10 FSM Intrm. 24, 31 (Pon. 2001).

When the taxpayer has failed to meet its burden of showing that the Secretary's assessment was incorrect and has failed to put forth competent evidence in opposition to the Secretary's summary judgment motion and its lengthy opposition contained only legal argument, the taxpayer has failed to submit evidence establishing that the Secretary's assessment was incorrect and summary judgment in the Secretary's favor is appropriate. Ting Hong Oceanic Enterprises v. Ehsa, 10 FSM Intrm. 24, 31 (Pon. 2001).

This matter comes before the Court on the defendant's motion for summary judgment; alternatively to dismiss, filed on June 3, 1997. Plaintiff filed a timely opposition to the motion on June 13, 1997. For the reasons set forth below, the Court will grant defendant's motion for summary judgment.

If a decision of the Secretary is adverse to the taxpayer, in whole or in part, the taxpayer shall have the right within 1 year from the date of such decision to institute an action for review, irrespective of the amount, in a Court of competent jurisdiction in the FSM. Such action shall be commenced by filing a petition setting forth assignments of all errors alleged to have been committed by the Secretary in his determination of the assessment, the facts relied upon to sustain such assignments of errors, and a prayer for appropriate relief The Secretary or his successor in office shall be the defendant in such proceedings.

The complaint alleges that on February 3, 1995, Benedict Rikin, Commissioner of Revenue of the FSM, issued a Notice of Demand for Payment of Taxes (the "Taxes Notice") which claimed that plaintiff had failed to pay certain taxes and demanded payment in the amount of $8,412,570.67. On February 22, 1995, plaintiff filed a Petition to Appeal the Taxes Notice with the FSM Secretary of Finance. On May 9, 1995, FSM Secretary of Finance A.J. Tuuth held a hearing (the "Hearing") on the petition. The hearing did not complete and all present at the Hearing agreed that the Hearing would be reconvened at a later date. On July 31, 1995, defendant Ihlen K. Joseph (the acting FSM Secretary of Finance) sent a memorandum to the parties informing them that he had decided to have both parties submit their final arguments or positions to the Office of the Secretary of the Department.

a. The decision failed to recognize plaintiff's role in acting as an agent for others did not subject it to tax liability under the gross revenue tax ("GRT") imposed by the FSM for funds that passed through plaintiff's control in its role as agent;

e. The decision stated that "[t]he decision has been delayed for months to allow you time to collect records and other data necessary to factually prove your allegations. None were submitted." This statement was unfair and incorrect;

f. Neither the Secretary nor the FSM Commissioner of Revenue corrected the determination of tax in order to correct mistakes in the amount of taxes assessed which were admitted by the Department Tax Advisor Donald E. Mitchell and by Mark Driver, an FSM Assistant Attorney General at the time;

j. The decision incorrectly sustained an assessment of taxes on alleged revenue of plaintiff with respect to plaintiff's alleged involvement in the provision of freight services;

n. The decision incorrectly sustained an assessment of taxes on alleged revenue of plaintiff based solely upon the records of deposits which were made by plaintiff into certain of its bank accounts; and

Plaintiff requested that the Court enter an order: (i) confirming that there were errors in computing the claimed tax owed by plaintiff, and (ii) holding that plaintiff owes no further taxes with respect to calendar years 1992, 1993 and 1994. Plaintiff also requested attorneys fees and costs.

On January 8, 1996, defendant filed a motion to deem the complaint to be a petition for review and to limit the scope of review. On June 28, 1996, the Court entered an order granting defendant's motion to deem the complaint a petition. In that order the Court also held that 17 F.S.M.C. sections 111(2) and (3) provide that a person adversely affected or aggrieved by agency action is entitled to judicial review thereof in the FSM Supreme Court, that the Court shall conduct a de novo trial of the matter, and that the Court shall decide all relevant questions of law and fact.

Defendant noticed the deposition of "designated officers, directors, managing agents, or other persons who consent to testify on behalf of plaintiff." The sole deposition taken in this case, that of Michael Mendiola, apparently proceeded on January 3, 1997. During the deposition, defendant objected to the deposition based on Mr. Mendiola's inability to answer many of defendant's questions and inability to address certain topics.

On June 3, 1997, defendant filed its motion for summary judgment; alternatively to dismiss. The grounds for the motion are that (1) plaintiff cannot provide evidence that creates a genuine issue of material fact sufficient to rebut the presumption that the defendant's tax assessment was correct, and (2) plaintiff failed to prosecute the action since it was filed.

Defendant's motion for summary judgment is based on the premise that plaintiff cannot produce evidence sufficient evidence to create a genuine issue of material fact sufficient to prevent the granting of defendant's motion.

Citing the deposition testimony of plaintiff's witness Michael Mendiola, defendant claims that plaintiff provided fuel, bait and supplies to its licensed foreign fishing vessels each time the vessels came into an FSM port. Plaintiff kept a ledger for each vessel which itemized all services provided and their associated costs. These costs were later deducted from revenues received from the sale of fish. Plaintiff also provided transshipment services, and received commissions and reimbursement for these services as well.

Defendant argues that the revenues plaintiff received from its licensed vessels for the services it provided were taxable gross revenues. The gross revenue tax (GRT) in the FSM is 3% per year on gross revenues in excess of $10,000. Gross revenue is defined as the:

gross receipts of the taxpayer derived from trade, business, commerce, or sales and the value proceeding or accruing from the sale of tangible personal property, or services, or both, and all receipts, actual or accrued by reason of the capital of the business engaged in, including interest, rentals, royalties, fees, or other emoluments however designated and without any deductions on account of the cost of property sold, the cost of materials used, labor costs, taxes, royalties, or interest paid or any other expenses whatsoever.

54 F.S.M.C. 112(5). "Business" is defined to mean any "undertaking carried on for pecuniary profit . . . carried on within the [FSM] for economic benefit either direct or indirect . . . ." 54 F.S.M.C. 112(1).

Defendant further argues that sections 152(2) and 152(3) of Title 54 provide that if the government determines that a business has failed to pay a tax, it may give the taxpayer notice, and prepare a return from any information and records obtainable.54 F.S.M.C. 152(3) mandates that any assessment so made "shall be presumed to be correct unless and until it is proved incorrect by the person, business, or employer disputing the amount of the assessment." Defendant argues plaintiff failed to produce documentary evidence of the actual revenues involved, and therefore the Secretary's decision to prepare a return for plaintiff and assess the determined amount against plaintiff was appropriate.

Defendant claims that plaintiff's gross revenue from sashimi sold abroad is taxable, because in the absence of any evidence to the contrary it may be presumed that these fish were caught in the FSM. Plaintiff also received revenue from the sale of "reject fish" (those not shipped to Japan) in the FSM. Because plaintiff did not cooperate with the Department of Revenue's (DOR) audit, it was acceptable for the Secretary to took to deposits plaintiff made into bank accounts it maintained as evidence of plaintiff's revenue where other information was not provided. Lastly, defendant argues that plaintiff's claim that plaintiff entered into "agreements" with FSM government officials regarding its liability for the payment of GRT is completely unsupported by any evidence and must be disregarded.

The Defendant makes two arguments in support of its motion to dismiss: (1) that plaintiff's complaint should be dismissed based on its failure to comply with Court ordered discovery; and (2) that the complaint should be dismissed plaintiff has failed to adequately prosecute the action.

Rule 37(b)(2) of the FSM Rules of Civil Procedure gives the Court the authority to levy sanctions against a party, including dismissal, for failure to obey a discovery order. Additionally, FSM Civil Rule 41(b) allows the Court to dismiss a plaintiff's complaint for failure to comply with a court order. See

Defendant argues that the Court twice ordered plaintiff to produce a witness to testify on the topics listed in the defendant's notice of deposition. Defendant claims that the witness designated by plaintiff (Michael Mendiola) had no personal knowledge of any of the topics listed. Defendant requests that plaintiff's claims be dismissed pursuant to FSM Civil Rule 37(b) and/or FSM Civil Rule 41(b).

Defendant argues that FSM Civil Rule 41(b) allows the Court to dismiss a party's claims for failure to prosecute them. Plaintiff commenced this action in November of 1995. In its complaint, plaintiff stated it intended to prove its claims through discovery it would undertake in this action. Since that time, it has not performed any discovery. Therefore, defendant requests that the Court dismiss plaintiff complaint.

Plaintiff argues that certain revenues on which the DOR seeks to levy a GRT were actually receipts which merely passed through plaintiff's hands as an agent for the owners of the vessels.

Plaintiff also argues that the fish sold by it in Japan, as well as reject fish sold in the FSM, were caught in the FSM's Exclusive Economic Zone (EEZ), and that FSM taxation rights do not extend into the EEZ or beyond, only to the territorial seas of the FSM. Plaintiff apparently bases this interpretation on Attorney General Opinion 1988-33. That opinion concerned the export of textiles to which value had been added locally, without local sales. Plaintiff argues that by analogy, since the sale of fish occurs outside the FSM, plaintiff should have a right to exclude all sales of fish in Japan from the gross revenues of its activities in the FSM. Plaintiff also cites three other Attorney General opinions which it maintains support its arguments.

Plaintiff does note that an April 1995 Attorney General Opinion is to the contrary, but claims that memorandum is self-serving and was filed after the tax assessment underlying this case was filed, and therefore should be disregarded. That opinion states that "[i]t is appropriate . . . to view fish taken from the FSM EEZ and brought into port for transshipment as having been produced in the FSM," and that "there is no reason a taxpayer must report income which derives from business activities or transactions which occur wholly outside the FSM."

Plaintiff argues it relied on the earlier Attorney General Opinions, and thus defendant should be equitably estopped from claiming the April 1995 opinion controls this case since it was issued after this case was filed.

Plaintiff also argues that summary judgment is inappropriate because many issues of material fact remain, including: How did the FSM DOR value the sales of fish in Japan? How did the DOR assess plaintiff for these sales? Are fish caught in the EEZ within or outside the FSM for GRT purposes? If a fishing vessel catches fish in the EEZ and sells them in Japan, is there any business done in the FSM? Plaintiff claims these questions are sufficient to defeat the defendant's motion for summary judgment.

In a motion for summary judgment the moving party has the initial burden of showing that there are no triable issues of fact. Once the moving party has done this, the burden then shifts to the nonmoving party to show that there is a triable issue. The nonmoving party must show that there is enough evidence supporting his position to justify a decision upholding his claim by a reasonable trier of fact.Alik v. Kosrae Hotel Corp., 5 FSM Intrm. 294, 295 (Kos. 1992). When the only issues to be decided in a case are issues of law, summary judgment is appropriate. Etscheit v. Adams, 6 FSM Intrm. 365, 373 (Pon. 1994).

Once a party moving for summary judgment has presented a prima facie case of entitlement to summary judgment, the burden shifts to the non-moving party to produce evidence showing a genuine issue of material fact. The non-moving party may not rely on unsubstantiated denials of liability to carry its burden, but must present some competent evidence that would be admissible at trial that there is a genuine issue of material fact. Urban v. Salvador, 7 FSM Intrm. 29, 30 (Pon. 1995); see also FSM Social Sec. Admin. v. Weilbacher, 7 FSM Intrm. 442, 444 (Pon. 1996); Kyowa Shipping Co. v. Wade, 7 FSM Intrm. 93, 95 (Pon. 1995).

If the adverse party does not respond to a motion for summary judgment with affidavits or other competent evidence, summary judgment, if appropriate, shall be entered against the adverse party. Black Micro Corp. v. Santos, 7 FSM Intrm. 311, 314 (Pon. 1995). Unsupported statements of counsel at oral argument do not qualify as competent evidence upon which a court could find a genuine issue for trial. Urban, 7 FSM Intrm. at 32. Argument alone cannot create a disputed fact that will defeat summary judgment. Nahnken of Nett v. United States, 7 FSM Intrm. 581, 589 (App. 1996).

In the present case, this Court is of the opinion that defendant has met its burden of establishing a prima facie case of entitlement to summary judgment. The Court notes that once the Secretary of Finance determined that plaintiff failed to pay the gross revenue tax it owed, in compliance with 54 F.S.M.C. 152(1), it notified plaintiff and demanded that the tax be paid. When plaintiff failed within 30 days to make and file a return and pay the tax which had been assessed, pursuant to 54 F.S.M.C. 152(2) it was appropriate for the Secretary to make a return for plaintiff from the information available to the Secretary and to assess that amount against plaintiff.

The Court further notes that pursuant to 54 F.S.M.C. 152(3), the Secretary's assessment shall be presumed to be correct unless and until it is proved incorrect by the person, business, or employer disputing the amount of the assessment. Therefore, in the instant matter, the burden of showing that the Secretary's assessment was incorrect would fall upon plaintiff. The Court believes that plaintiff has failed to meet that burden.

Plaintiff has failed to put forth competent evidence in opposition to defendant's motion for summary judgment. Plaintiff's opposition is lengthy but contains only legal argument. Plaintiff failed to submit evidence establishing that the Secretary's assessment was incorrect. Therefore, this Court is of the opinion that summary judgment in favor of the defendant is appropriate.

The Court is not convinced that plaintiff failed to comply with discovery or failed to prosecute this action in such a manner to warrant dismissal of plaintiff's case pursuant to either Rule 37 or 41 of the FSM Rules of Civil Procedure. Therefore, the Court will deny defendant's motion to dismiss.