FSM SUPREME COURT
Cite as KCCA v. Tuuth ,
5 FSM Intrm. 118 (Pon. 1991)
ALOYSIUS J. TUUTH, in his
Official Capacity as Secretary of Finance,
Federated States of Micronesia,
FSM CIV. 1990-026
MEMORANDUM OF DECISION
Before Edward C. King
July 29, 1991
For the Plaintiff: Roberta Lindberg
Micronesia Legal Services Corp.
Kolonia, Pohnpei FM 96941
For the Defendant: Douglas Juergens
Assistant Attorney General
FSM Attorney General
Palikir, Pohnpei FM 96941
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Equitable estoppel should be applied to governments in the Federated States of Micronesia where this is necessary to prevent manifest injustice and where the interests of the public will not be significantly prejudiced. KCCA v. Tuuth, 5 FSM Intrm. 118, 120 (Pon. 1991).
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[5 FSM Intrm. 119]
EDWARD C. KING, Chief Justice:
In an opinion entered on May 14, 1991, this Court held that the national government's interpretation of the Federated States of Micronesia Income Tax Law, 54 F.S.M.C. 111 et seq., to the effect that the cooperatives' "patronage refunds" paid by Kolonia Consumers' Cooperative Association are not deductible from KCCA's taxable gross revenue, is a reasonable and enforceable interpretation of the statute.
However, the Court noted its concern that from 1971 until October 31, 1989, the government had always interpreted the identical statutory language as excluding amounts paid as patronage dividends from the taxable revenue of KCCA and other cooperatives. The parties were therefore asked to file memoranda concerning the legal propriety of the government's change of position. Those briefs have now been filed and a hearing was held on July 25. The Court announced its decision at that hearing and this memorandum is issued to explain more fully the Court's reasoning.
The Constitution and national statutes are silent concerning the power of the national government to reverse its interpretations of the tax law and to give those changed interpretations retroactive effect. No party has suggested that custom and tradition, or even general Micronesian values, provide a formula for assessing the government's change of direction. This analysis therefore focuses on more general principles concerning the legal effects of changed postures.
This Court has previously recognized existence of the doctrine of equitable estoppel whereby "a person may sometimes be precluded by his act or conduct...from asserting a right which he otherwise would have had." Etpison v. Perman, 1 FSM Intrm. 405, 417 (Pon. 1984). This equitable doctrine may apply "only when justice demands intervention on behalf of a person misled by the conduct of the party estopped." Id.; see also In re Island Hardware, 3 FSM Intrm. 332, 348 (Pon. 1988).
A. Application to governments.
Historically, governments have been thought to be shielded from estoppel, for reasons closely aligned with those which underlie sovereign immunity. However, sovereign immunity itself has been eroded in recent decades. See Samuel v. Pryor, 5 FSM Intrm. 91, 98 (Pon. 1991); Panuelo v. Pohnpei, 2 FSM Intrm. 150, 161 (Pon. 1986). This erosion has simultaneously weakened support for the government's insulation from the doctrine of estoppel.
There are other reasons too why application of equitable estoppel to the FSM national government seems appropriate. In Panuelo v. Pohnpei, the Court noted that "substantial responsiveness of leaders" has been an important part of custom in Micronesia. 2 FSM Intrm. at 161. This traditional value furnishes additional impetus for applying the equitable estoppel doctrine to the national government. Moreover, application of the doctrine to the national government presumably would have been anticipated by any of the nation's leaders who might have reflected on the question when the nation was being formed. By that time, a trend had developed and many courts in the United States had concluded that the doctrine should be applied to governments. See Johnson v. State Tax Commission, 435 P.2d 302 (Or. 1967); Foote v. McHenry, 607 S.W.2d 323, 21 A.L.R.4th 565 (Ark. 1980). See also Annot., Estoppel of State or Local Government in Tax Matters, 21 A.L.R.4th 573 (1983).
For the reasons already mentioned the Court concludes that the equitable estoppel doctrine should be applied to governments in the Federated States of Micronesia where this is necessary to prevent manifest injustice and where the interests of the public will not be significantly prejudiced.
B. Effect in this case.
The doctrine normally may apply when one person, having access to the relevant information, through statements or conduct induces another, who reasonably relies upon the statements or conduct, to act in a way that is detrimental to the other. Etpison, 1 FSM Intrm. at 417. In those circumstances, the first person may be estopped from pressing against the other claims which arose out of steps taken by the other in reliance upon the first person's conduct or representations.
1. Penalty and interest - Here, it can be seen that the government's conduct from 1971 to October 31, 1989 did induce KCCA not to make timely payment of taxes which the government now says should have been paid. Therefore the government should be estopped from assessing penalties against KCCA for KCCA's failure to pay those pre-November, 1989 taxes. Similarly, the government is estopped from charging KCCA for interest on those taxes that would have been payable prior to October 31, 1989.
2. Assessment of taxes - There is no indication that KCCA increased its patronage refunds or in any way inadvertently increased its tax liability as a result of the government's statements or conduct before October 31, 1989. The government therefore is not precluded from collecting taxes on the basis of that new interpretation even as to revenue realized by KCCA prior to October 31, 1989.
The national government may change its substantive position concerning the taxability of patronage refunds and may give its new position retroactive effect as to the tax liability, but is estopped from assessing penalties and interest accrued on the basis of the failures of KCCA to make payments while the government policy was that those payments need not be made.