FSM SUPREME COURT
TRIAL DIVISION
Cite as NIH Corporation v. FSM,
5 FSM Intrm. 411 (Pon. 1992)

[5 FSM Intrm. 411]

NIH CORPORATION,
Plaintiff,

v.

FEDERATED STATES OF MICRONESIA,
Defendant.

FSM CIV. 1991-054

OPINION
 
Before Andon L. Amaraich
Associate Justice
FSM Supreme Court

Trial:  September 1, 1992
Decision:  December 10, 1992

[5 FSM Intrm. 412]

APPEARANCES:
For the Plaintiff:          Matt Mix, Esq.
                                     P.O. Box 143
                                     Kolonia, Pohnpei  FM 96941

For the Defendant:     Douglas Juergens, Esq.
                                     Chief of Litigation
                                     Office of the FSM Attorney General
                                     P.O. Box PS-105
                                     Palikir, Pohnpei  FM 96941

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HEADNOTES
Taxation
    Statute mandates that all businesses compute gross revenue tax liability using the accrual accounting method.  54 F.S.M.C. 143(2).  NIH Corp. v. FSM, 5 FSM Intrm. 411, 413 (Pon. 1992).

Taxation
    By statute a taxpayer is liable for penalties and interest on any payment of his gross revenue tax liability regardless of the reason for underpayment, unless some other principle of law applies to afford the taxpayer relief.  NIH Corp. v. FSM, 5 FSM Intrm. 411, 413-14 (Pon. 1992).

Equity
    A party may sometimes be precluded by his act or conduct from asserting a right which he otherwise would have had.  When a party has failed to assert its rights over along period of time, and another party has relied on this nonassertion, the first party may be estopped from asserting those rights now.  NIH Corp. v. FSM, 5 FSM Intrm. 411, 414 (Pon. 1992).

Equity; Taxation
    Where the government's prior audit methods had the effect of permitting gross revenue tax computation on the cash basis and where the government's attempts to advise businesses that they are required to use the accrual method have for many years been woefully inadequate, the government will be barred by equitable estoppel from assessing penalties and interest on any underpayment of taxes that was the result of being led to believe that the cash basis was an acceptable method of tax computation.  NIH Corp. v. FSM, 5 FSM Intrm. 411, 415 (Pon. 1992).

Taxation
     Moneys held in a fiduciary capacity are specifically excluded by statute from the definition of gross revenue.  54 F.S.M.C. 112(5)(b).  The term "fiduciary capacity" is not restricted to technical or express trusts, but extends to money that is not the taxpayer's own, but which is handled for the benefit of another.  NIH Corp v. FSM, 5 FSM Intrm. 411, 416 (Pon. 1992).

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[5 FSM Intrm. 413]

ANDON L. AMARAICH, Associate Justice:

I.  Background
    The plaintiff taxpayer, NIH Corporation, brought this actions against the defendant FSM National Government after the government, following an audit of the taxpayer's gross revenue tax returns for the years 1988 and 1989, presented the taxpayer with a claim for underpaid gross revenue taxes along with penalties and interest.  The taxpayer's alleged underpayment comes from two sources. The government assessed an underpayment of $4,716.71 in taxes from the operation of the taxpayer's store, and to which it added a penalty of $4,070.90 and interest of $675.83 for a total of $10,100.44.  The government also assessed a tax of $1,513.13 for underreported gross revenues derived from the taxpayer's contract with the U.S. Representative's Office, and to which it added a $1,513.13 penalty and $194.14 interest, for a total of $3,220.40.

II.  Accounting Method for Gross Revenue Taxes
    The taxpayer asserted in its pleadings that the alleged under reporting of gross revenues in its store operations was because the government's audit assessed the gross revenue tax liability using the accrual accounting method while the taxpayer had been using the cash basis method of accounting.  The taxpayer's complaint sought a declaration that the cash basis method was an acceptable method of computing gross revenue tax liability.  In the alternative, the taxpayer asserted that, if only the accrual method was acceptable, it should not be assessed penalties and interest for the underexposing because it had, in good faith, believed the cash basis method was a lawful method of computing gross revenue tax liability.  The taxpayer further contends that the government's actions led him to believe that the cash basis was acceptable.

    The government's position is that the accrual method is mandated by statute,1 and that 54 F.S.M.C. 902 requires that the penalty be paid for any underpaid gross revenue tax regardless of whether the failure to pay was intentional. Furthermore, the government's audit revealed that $1,765.85 of the underpaid tax was due to the taxpayer's arithmetic errors in the addition of cash sales.  The government's witness so testified at trial.  The taxpayer did not attempt to rebut this statement.

    The taxpayer, in his written closing remarks, conceded that the accrual method was the proper method for a business to compute its gross revenue tax liability, but it still argued that the taxpayer should not be made to pay penalties and interest when the government's actions had led it to believe that the cash basis was an acceptable accounting method.  The government's

[5 FSM Intrm. 414]

position, however, is that 54 F.S.M.C. 902 assess a penalty for the underpayment of gross revenue taxes, regardless of the reason for the underpayment.  This position is correct.2  Therefore the taxpayer will have to pay penalties and interest on the underpaid gross revenue taxes from his store operation unless some other principle of law applies to give the taxpayer relief.

III.  Equitable Estoppel
    The taxpayer's argument is essentially one for equitable estoppel.  Equitable estoppel is the principle that a party "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).  Put another way, when one party has failed to assert its rights for a long period of time, and a second party has relied upon the first party's nonassertion of those rights, then the first party should be estopped, or barred, from asserting those rights now.

    This principle has previously been applied to estop payment of penalties and interest in another gross revenue tax case.  KCCA v. Tuuth, 5 FSM Intrm. 118 (Pon. 1991), rev'd on other grounds, 5 FSM Intrm. 375 (App. 1992).  Therein it was held that "the equitable estoppel doctrine should be applied to governments in the Federated States of Micronesia where [it] is necessary to prevent manifest injustice and where the interests of the public will not be significantly prejudiced." Id. at 120. In KCCA the Court had allowed the collection of back taxes based on a new interpretation of the tax law,3 but estopped the government from collecting penalties and interest.  Id.

    In the present case the taxpayer contends that it was led to believe by the government's actions or nonactions that the cash basis method of accounting was acceptable for gross revenue tax returns.  The government, in its answer to the taxpayer's requests for admissions, admitted that prior to the audit the government had never directly informed the taxpayer that returns

[5 FSM Intrm. 415]

were to be made on accrual basis.  The government further admitted that "[p]rior [Department of Revenue] audit methods had the effect of permitting [gross revenue tax] computation on the cash basis."  Def. Ans. to P1. Req. for Admissions at 2 (Dec. 5, 1991).

    The government introduced evidence that it prepared a tax information booklet in 1985 which it claimed advised businesses to use the accrual method, and that this booklet was sent to every known business in the FSM at that time, and that for some time afterward copies were available in the FSM Finance Office.  The booklet states: "Receipts are taxable when accrued (when earned or when a sale takes place) rather than when received."  Tax Information Booklet at III.B.  No other effort seems to have been made to inform the business community of the requirement to use the accrual rather than the cash basis method.  The FSM Tax Advisor, Antonio Ovalle, testified that taxpayers are informed of the need to use the accrual method at the time they are audited.  He also testified that the vast majority of the businessesaudited were using the cash basis method until they were informed not to do so.

    The Court finds that the government's attempts to inform businesses in the Federated States of Micronesia of the legal requirement to use the accrual method in computing gross revenue tax liability is so woefully inadequate as to amount to nonassertion of those rights.  The government could easily have taken fairly inexpensive steps to insure that the requirement that gross revenue tax liability be computed on the accrual basis was much more widely known.  For instance, the government could have printed in bold typeface on every blank form used for filing gross revenue tax returns a statement to the effect that businesses must use the accrual method to compute the return and that the cash basis method was neither lawful nor acceptable.  Other equally cost effective methods may well also be possible.  No such methods were tried.

    Therefore, except for the $1,765.85 underpayment attributed to the taxpayer's addition errors, no penalties or interest shall be added to the rest of the underpaid gross revenue taxes which were assessed on the taxpayer's store operation.  The government is estopped from doing so.  It would be manifestly unjust to do otherwise, and the public is not significantly prejudiced thereby.

IV.  Contract with the U.S. Representative's Office
    The government also assessed an underpayment of taxes for the gross revenues the taxpayer received from a contract with the U.S. Representative's Office.  The taxpayer contends that it merely provide payroll services to the U.S. Representative's Office, and that it charged a fifteen percent fee for this service. It is on this fifteen percent that the taxpayer had been computing its gross revenue tax liability.  The government's assessment was computed on the whole amount of moneys received from the U.S. Representative's Office.  The taxpayer contends that such a computation would be inequitable and that moneys other than the fifteen percent fee were "moneys held in a fiduciary capacity" and thus properly excluded from gross revenue.

[5 FSM Intrm. 416]

   "[M]oneys held in a fiduciary capacity" are specifically excluded by statute from the definition of gross revenue.  54 F.S.M.C. 112(5)(b).  "Fiduciary" or "fiduciary capacity" is not defined in the Title 54 of the FSM Code.4  It may thus be presumed to have its usual meaning.5

One is said to act in a "fiduciary capacity" or to receive money . . . in a "fiduciary capacity," when the business which he transacts, or the money or property which he handles, is not his own or for his own benefit, but for the benefit of another person . . .   The term is not restricted to technical or express trusts . . . .

Black's Law Dictionary 564 (5th ed. 1979) (emphasis added).

    The taxpayer asserts that except for its fifteen percent fee all the moneys received from the U.S. Representative's Office were not for its benefit, but were paid out for the benefit of that Office's employees and to cover various payroll taxes.  This state of affairs, if true, would make a strong, but not irrebuttable, argument that, except for the taxpayer's fifteen percent fee, the sums the taxpayer received from the U.S. Representative's Office were indeed moneys held in a fiduciary capacity, and not includable in gross revenues.

    The written contract, however, states otherwise.  By the terms of the contract between the taxpayer and the U.S. Representative's Office the employees are the taxpayer's not the Office's.  The taxpayer, under the contract's terms, hires, supervises, disciplines, and fires the employees.  See clauses B-1, E-1, H-2, & H-3 of the contract.  Id. at cl. H-3a.

    The taxpayer's general manager testified that the written contract did not reflect the actual relationship between the parties.  The taxpayer, however, was unable to introduce documentary evidence from the tax years audited to support this contention.  Nor did anyone from the U.S. Representative's Office testify to that effect.  The taxpayer has failed to meet his burden of proof to show by the preponderance of the evidence that the contract between the taxpayer and the U.S. Representative's Office was other than what the written contract executed by the parties provided.
 
    Therefore this Court must presume that the written contract expresses the parties' intent as to the terms of the contract between them.6  Under the

[5 FSM Intrm. 417]

terms of that contract none of the payments from the U.S. Representative's Office are moneys received in a fiduciary capacity.  Therefore the taxpayer is liable for gross revenue tax on all of its receipts from the U.S. Representative's Office, and is further liable for the penalties and interest thereon.

V.  Conclusion
    The taxpayer is liable for underreported gross revenue taxes and the corresponding penalties and interest on it contract with the U.S. Representative's Office.  Taxpayer is also liable for $1,765.85 in underpaid gross revenue taxes from its store operation, and penalties and interest thereon.  Taxpayer is also liable for a further underpayment of $2,950.86 from its store operation.  The government is barred by the doctrine of equitable estoppel from assessing penalties and interest on this sum.

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Footnotes:
 
1.  "Each business shall . . . make full, true, and correct return showing all such gross revenue received, accrued, or earned."  54 F.S.M.C. 143(2) (emphasis added).

2.  The statute reads:  "In case of failure to pay any tax, fee, or charge levied or imposed under this title when due, there shall be added to the amount due ten per cent of the amount of such tax, fee, or charge if the failure is not for more than one month, with an additional ten percent for each additional month or fraction thereof during which such failure continues, not exceeding one hundred percent in the aggregate."  54 F.S.M.C. 902.  It does not contain a requirement that the failure be done knowingly, willfully, or intentionally.  Additional penalties for willful failure to pay are assessed under 54 F.S.M.C. 901.

3.  The opinion upholding this new interpretation of the tax law is reported as KCCA v. Tuuth, 5 FSM Intrm. 68 (Pon. 1991).  This new interpretation was reversed in KCCA v. FSM, 5 FSM Intrm. 375 (App. 1992).  This reversal obviously does not affect the viability of the equitable estoppel doctrine.

4.  In 4 F.S.M.C. 124, which discusses the disqualification of judges, it states that "`fiduciary' includes such relationships as executor, administrator, trustee, and guardian."  4 F.S.M.C. 124(4)(b).

5.  "[W]ords in a statute are to be read according to their ordinary meaning and grammatical sense."  Michelsen v. FSM, 3 FSM Intrm. 416, 422 (Pon. 1988).

6.  In light of the tax consequences of this contract the taxpayer may be well advised to renegotiate its terms.
                                                                                                                                                                                                                                                                                                           
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