8 FSM Intrm. 129-139

A court should construe a statute as the legislature intended. Legislative intent is determined by the wording of the statute. What a legislature says in the text of a statute is considered the best evidence of the legislative intent or will. Thus a court must give effect to the plain meaning of a statutory provision whenever possible. FSM Social Sec. Admin. v. Kingtex (FSM) Inc., 8 FSM Intrm. 129, 131 (App. 1997).

A provision of law must be read so as to be internally consistent and sensible. Courts should read different sections of the same statute, or even the two sentences that form one subsection, in a manner that permits them to be consistent with each other rather than to be inconsistent or at cross purposes. FSM Social Sec. Admin. v. Kingtex (FSM) Inc., 8 FSM Intrm. 129, 131-32 (App. 1997).

Under 53 F.S.M.C. 605(3) an employer is delinquent each quarter that it fails to both file a report and pay within ten days after the end of the quarter. Therefore an employer may be subject to the maximum penalty of $1,000 each time (quarter) it is delinquent. FSM Social Sec. Admin. v. Kingtex (FSM) Inc., 8 FSM Intrm. 129, 132 (App. 1997).

When Congress has determined that the application of two subsections together would deter tax delinquencies, it is not a court's function to make a contrary determination. A court's function is to apply the statute as Congress intended unless doing so would violate the Constitution. FSM Social Sec. Admin. v. Kingtex (FSM) Inc., 8 FSM Intrm. 129, 133 (App. 1997).

When Congress has specifically given Social Security, not the courts, the discretion to levy a penalty and limited that discretion to $1,000 a quarter and Social Security has exercised its discretion by levying a penalty less than that allowed by the statute, the court is generally bound to enforce it. The courts cannot usurp the power Congress granted to another governmental body. FSM Social Sec. Admin. v. Kingtex (FSM) Inc., 8 FSM Intrm. 129, 133 (App. 1997).

This appeal arises from the FSM Social Security Administration's ("Social Security") collection of social security taxes from a delinquent employer. The sole question raised on appeal is whether the applicable statute allows Social Security to levy a penalty of up to $1,000 for each quarter that an employer is delinquent, or whether $1,000 is the maximum penalty Social Security may impose no matter how many quarters an employer is delinquent. We hold that the statute plainly permits Social

Social Security audited Kingtex (FSM) Inc. ("Kingtex"), an employer in Yap. Social Security concluded that Kingtex had underpaid its social security tax for the seven quarters from July, 1991 to March, 1993 because it omitted from its wage reporting the value of meals that were supplied to its Chinese employees pursuant to their employment contract. Their contract provided they would be paid $240 a month with $80 deducted for the cost of the meals furnished by the employer. Social Security, pursuant to its statutory authority to sue, 53 F.S.M.C. 702, brought an action to collect the unpaid social security taxes on $80 a month deducted for meals plus applicable penalties and interest. Kingtex denied that meals constituted wages on which social security tax was due.

The trial court first concluded that meals provided by the employer to its employees constituted "wages" upon which a social security tax was due. FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (I), 7 FSM Intrm. 280 (Yap 1995). It then determined that the amount of the "wages" upon which tax was due was $24,925.27, the amount actually spent on the meals, not the contract amount. FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (II), 7 FSM Intrm. 365, 368 (Yap 1996). The trial court computed the tax and interest and penalties due. Because Social Security's policy was to assess a civil penalty of ten percent on delinquent taxpayers, it sought a penalty of $2,492.52.

The trial court ruled that the statutory language authorizing a penalty, 53 F.S.M.C. 605(3), did not link the penalty to any length of time. It held that statutes imposing a penalty are subject to strict construction, particularly where the penalty may be imposed without requiring a finding of a culpable state of mind. It concluded that the statute limited the penalty to a onetime maximum of $1,000, which it therefore levied against Kingtex. Id. at 367-68. Social Security appeals this ruling only.

Any covered employer who fails to submit the quarterly report and pay the social security tax within ten days after the end of the quarter shall be considered delinquent. The [FSM Social Security] Board or its authorized representatives shall be vested with the authority to levy a penalty of not more than $1,000 on delinquent employers.

On appeal, Social Security contends that the penalty is properly based on quarters because if the two sentences are read together this construction is preferable, and because a construction of the second sentence to carry out the intent of the FSM Social Security Act leads to the same result. Kingtex contends that the statute is not ambiguous; that the second sentence therefore is read in its plain meaning (a penalty of $1,000, regardless to time); and that if this leads to an undesirable result, it is for Congress to remedy it.

A court should construe a statute as the legislature intended. 2A C. Dallas Sands, Sutherland Statutory Construction § 45.05, at 20-21 (4th ed. 1984). Legislative intent is determined by the wording of the statute. Id. § 46.03, at 82 ("What a legislature says in the text of a statute is considered the best evidence of the legislative intent or will."). Thus a court must give effect to the plain meaning of a statutory provision whenever possible. Setik v. FSM, 5 FSM Intrm. 407, 410 (App. 1992). Furthermore, "a provision of law must be read so as to be internally consistent and sensible."

McCaffrey v. FSM Supreme Court, 6 FSM Intrm. 279, 281 (App. 1993). Courts should "read different sections of the same statute in a manner that permits them to be consistent with each other rather than to be inconsistent or at cross purposes." FSM v. Moroni, 6 FSM Intrm. 575, 579 (App. 1994). In this case, however, it is not different sections of a statute we must read together consistently, but the two sentences that form one subsection.

Reading the two sentences of subsection 605(3) together, it is plain1 that the maximum allowable penalty is $1,000 per quarter. In the first sentence of subsection 605(3) the time frame of one quarter is included in the definition2 of "delinquent." Delinquency consists of 1) failing to submit the report each quarter and 2) failing to pay within ten days after the end of each quarter. An employer becomes delinquent each quarter that he fails to both file and pay. Thus that time frame must necessarily be a part of the second sentence when the word "delinquent" is repeated there.

It is suggested that a "gap" exists in the second sentence because the period covered by the penalty is not specified. We do not agree with this suggestion, and attach no significance to the omission. The file and pay requirements are not restated in the second sentence either, but no party has contended that the sentence is thus in need of construction because the definition of delinquent is ambiguous.

Having found Congress's intention from the plain meaning of the statutory language, no principle of construction, such as strict construction of a statutory penalty, need be applied. The trial court's conclusion is thus an error of law. An employer may be subject to the maximum penalty of $1,000 each time (quarter) it is delinquent. Because the penalty levied on Kingtex did not exceed $1,000 for any one quarter, the imposition of a $2,492.52 penalty for seven quarters' delinquency is permitted by 53 F.S.M.C. 605(3).

The dissent, however, believes that subsection 605(3), unlike its surrounding subsections, has no substantive element requiring the quarterly reports and payments to be correct, but that its only element is that the reports and payments be made on time whether correct or not. The dissent would hold that subsection 605(3) cannot be applied to Kingtex because it did file reports and make payments within ten days of each quarter's end. The dissent states, and we agree, that if an employer deliberately files an erroneous report Social Security can also pursue fines and penalties under subsections 605(1) and (2). The dissent also states that it believes that Congress intended to penalize other, "inadvertent" errors only through the interest imposed by subsection 605(4). The dissent, however, is unable to show where Congress expressed this intention, either in the plain statutory language or its legislative history. Both subsection 605(4) ("If any tax or penalty imposed by this subtitle is not paid . . . .") and subsection 605(3) ("Any covered employer who fails to submit . . . and pay . . . .") apply to both deliberate and nondeliberate errors. Such cumulative penalties are present elsewhere in the FSM Code. Both penalties and interest are assessed for inadvertent failure to pay

gross revenue taxes. See, e.g., Setik v. FSM, 5 FSM Intrm. 407, 411 (App. 1992); NIH Corp. v. FSM, 5 FSM Intrm. 411, 413-14 (Pon. 1992); FSM v. George, 2 FSM Intrm. 88, 91 (Kos. 1985). Similarly, the plain language of the Social Security Act shows that Congress intended cumulative penalties (subsections 605(3) and (4)) to be available for inadvertent failure to pay social security taxes. The intention is plain. There is no ambiguity. Strict construction of the language would thus not yield a different result.

The legislative history reinforces this conclusion. The FSM Social Security Act as originally enacted only included subsections (1), (2), and (3). Pub. L. No. 2-74, § 105 (1), (2) & (3) (2d Cong., 4th Reg. Sess. 1982). All three of those subsections are identical to the current subsections (1), (2) and (3) except that the maximum penalty in subsection (3) was then only $250. The Social Security Act was amended in 1988 to raise the maximum amount of the penalty and to add subsection (4). Pub. L. No. 5-120, § 2 (5th Cong., 4th Reg. Sess. 1988). The committee report said this about the amendments:

These amendments allow interest to be collected on late payments [subsection 605(4)] of taxes or penalties, increases the amount of a penalty that can be collected from $250 to $1,000 [subsection 605(3)], and allows for payment of attorney's fees, costs of collection, and court costs [subsection 605(4)], should this be necessary to collect on late payments of contributions, interest or penalties. Your committee agrees with these changes to help reduce delinquent contributions . . . .

SCREP No. 5-334, J. of 5th Cong., 4th Reg. Sess. 431, 434 (1988). Subsections (3) and (4) are thus intertwined. Congress obviously intended that both 605(3) and (4) be applied to delinquent employers at the same time. Congress determined that the application of both subsections together would deter delinquencies. It is not a court's function to make a contrary determination. Our function is to apply the statute as Congress intended unless doing so would violate the Constitution.

The dissent suggests that it is unjust that an employer should be assessed penalties for quarters reaching back to 1991, but that, by its view that only 605(4) applies to inaccurate reports, it is not unjust to assess interest charges reaching back until then. Congress's consideration of 605(3) and (4) together undercuts this view of penalties. It is ironic that the dissent would hold the penalty in 605(3) inapplicable while enforcing the interest charges in 605(4).

Kingtex also contended that the trial court should have exercised its discretion to waive the penalty because it did not intentionally3 mislead Social Security. The dissent believes that a penalty was not mandatory. That is correct. Congress specifically gave Social Security the discretion to levy a penalty and limited that discretion to $1,000 a quarter. Congress did not give that discretion to the courts. The courts cannot usurp the power Congress granted to another governmental body. Social Security exercised its discretion in levying a penalty less than that allowed by the statute, and the court is generally bound to enforce it.

concern is misplaced because the cost will ultimately be borne by Kingtex, not Social Security. The trial court properly awarded Social Security attorney's fees and collection costs pursuant to 53 F.S.M.C. 605(4). Kingtex (II), 7 FSM Intrm. at 370. That award is not disturbed. Social Security may also apply to the trial court for a fee award for this successful appeal. Cf. Senda v. Creditors of Mid-Pacific Constr. Co., 7 FSM Intrm. 664, 674 (App. 1996).

We note a problem that is apparent from the record, but is not before us in this appeal. It concerns the Chinese employees of Kingtex. The employment contract entered into by each Chinese employee and Kingtex names a monthly salary of $240. Of this, each is paid $160 in cash. Additional wages are paid by the meals furnished by Kingtex. That amount, per month, can readily be determined by examining Defendant's Trial Exhibit 1. The amount, per month, as was found by the trial court, is less than $80. It thus appears that each employee is owed the balance. This balance is the contract wage of $240, less the $160 received in cash, and less the cost of the meals.

I agree with the majority that 53 F.S.M.C. 605(3) is properly construed to permit the Social Security Administration ("SSA") to levy a maximum penalty of $1,000 for each quarter in which an employer fails to either report or pay its quarterly social security taxes in a timely manner. However, because in this case SSA does not dispute that Kingtex filed its quarterly reports on time, or that it timely paid the social security taxes that it in good faith believed it owed, I would find that the trial court erred as a matter of law in imposing any penalty on Kingtex under that provision. I do not believe that Kingtex was a "delinquent" employer within the meaning of 53 F.S.M.C. 605(3).

The effect of the majority's ruling is to endorse the imposition of quarterly penalties on employers who may even mistakenly miscalculate the amount of social security taxes they owe to the government ) a result I do not believe Congress intended. I believe subsection 605(3) is inapplicable where, as here, an employer has made a reasonable good faith argument under the law for the taxable wages it reports, and where the issue of interpretation raised by the taxpayer's reporting has not yet been addressed or resolved by SSA.

these meals could be categorized as meals "provided for the convenience of the employer", and therefore believed it did not need to report the cost of these meals as taxable wages paid to its workers for the purpose of reporting social security wages. SSA filed suit against Kingtex to recover what it believed to be unpaid social security taxes on these meals.

After reviewing the evidence presented by both sides, and the legal arguments in favor and against application of the "convenience of the employer" rule in the FSM, the trial court found that this rule was not applicable here, although it had been in effect for a time in the United States. The trial court went on to find Kingtex liable for additional social security contributions based on what SSA then found to be past underreported wages. See FSM Social Sec. Admin. v. Kingtex (I), 7 FSM Intrm. 280 (Yap 1995).

Because Kingtex had not paid the amount of social security tax the agency subsequently found was properly due for each quarter between July 1991 and March 1993, once the value of meals provided to Kingtex workers had been added to cash wages, the trial court also found that the statutory penalty for delinquent employers contained in subsection 605(3) was mandatory:

The issue raised before the Appellate Division is whether the trial court correctly interpreted 53 F.S.M.C. 605(3), in finding that $1,000 is a maximum penalty SSA may impose on a delinquent employer, no matter how many quarters that employer is delinquent. SSA argues that a $1,000 penalty may be imposed for each quarter in which an employer is delinquent. I think the threshold question, which perhaps should have been raised directly in this appeal, is whether the penalty provision of subsection 605(3) should even have been applied to Kingtex at all. Kingtex voiced this concern at oral argument by asserting that the Court should have used its discretion under subsection 605 to waive any penalties under 605(3), due to Kingtex's cooperation with SSA and Kingtex's good faith belief that it was reporting correctly.

(1) Any person who knowingly makes any false statement or who falsifies any report to or record of the Federated States of Micronesia Social Security System in an attempt to defraud the system is guilty of a misdemeanor and upon conviction thereof shall be imprisoned for a period of not more than one year, or fined not more than $2,000 or both.

(2) Any person who willfully fails to report wages paid or pay contributions required thereon is guilty of a misdemeanor, and, in addition to any other penalty prescribed by law, such a person shall also pay penalties not in excess of one hundred percent of the tax due plus interest to the Board as it by regulation shall require.

(3) Any covered employer who fails to submit the quarterly report and pay the social security tax within 10 days after the end of the quarter shall be considered delinquent. The Board or its authorized representative shall be vested with the authority to levy a penalty of not more than $1,000 on delinquent employers.

(4) If any tax or penalty imposed by this subtitle is not paid on or before the date prescribed for such payment, there shall be collected, in addition to such tax and penalty, interest on the unpaid balance of the tax principal at the rate of twelve percent per annum from its due date until the date it is paid. . . .

(emphasis added). The subsection at issue in this case, subsection 605(3), provides that any covered employer who fails to submit the quarterly report and pay the social security tax within 10 days after the end of the quarter is considered "delinquent." The Board is authorized to "levy a penalty of not more than $1,000 on delinquent employers."

The term "delinquent" carries a connotation of untimeliness. Webster's New Collegiate Dictionary 297 (1980) defines "delinquent" as "1: offending by neglect or violation of duty or of law 2: being overdue in payment <a - charge account> 3: of, relating to, or characteristic of delinquents: marked by delinquency." Clearly if an employer fails to file a report on time or fails to write SSA a check in payment of its social security taxes on time, that employer is subject to a penalty under subsection 605(3). The question in my mind, which was discussed at some length at oral argument, is whether subsection 605(3) requires punishment of an employer who files a timely report, and makes timely payment, but through a mistaken good faith belief in the accuracy of its own reporting methodology, fails to report and pay what SSA later determines to have been the correct amount of social security taxes.

penalizes "any covered employer who fails to submit the quarterly report and pay the social security tax within 10 days after the end of the quarter." This provision gives employers an incentive to file reports on time, and to pay any social security taxes known to be due on time, in order to avoid a penalty. The trial court, mistakenly I believe, read into subsection 605(3) a substantive element ) a requirement that these reports and payments be correct. Certainly Title 53 as a whole requires employers to report their taxable social security wages correctly. However, I believe that subsections 605(1), 605(2) and 605(4) address the substantive aspects of wage reporting directly and completely.

Second, I disagree with SSA's argument that the imposition of penalties on employers who sincerely believe they are reporting correctly, or who make errors in calculation, will deter similar errors in the future. The penalty provision of subsection 605(3) already provides employers with an incentive to review and maintain their books carefully, so that they can then complete and file their quarterly reports punctually, and pay the amounts they owe on time. Subsection 605(4) provides a further incentive for employers to file and report correctly and promptly by imposing interest on late payments. Subsection 605(4)'s twelve percent interest penalty ensures that the social security fund will be made whole in either the event of late reporting or erroneous underreporting. I do not believe that Congress intended to penalize honest errors in reporting in any manner other than by imposing interest on overdue amounts under subsection 605(4). Of course if SSA believes that an employer has deliberately ("knowingly" or "willfully") filed an erroneous report, then it may and should properly pursue fines under either subsection 605(1) or 605(2).

A third difficulty I have with the majority's construction of section 605(3) is that the size of any penalty ultimately assessed in future cases, that is based on errors in reporting methodology or on inadvertent errors in calculation, will necessarily depend on the frequency of SSA audits. Under the majority's ruling, the size of the penalty depends on the number of quarters of "delinquency." As the trial court, now affirmed by the majority, has decided to interpret the term "delinquent," in some cases, as happened in this case, employers may not even realize they are "delinquent" until many quarters have passed. Here, Kingtex had no warning that SSA considered its reporting methodology to be incorrect until after SSA belatedly made the results of its audit known. As a result, the company is now asked to pay a 10% penalty for a number of reporting periods, in addition to paying back taxes and 12% interest on those back taxes under subsection 605(4). If SSA had audited Kingtex at an earlier date, and put the company on notice that the agency disagreed with its methodology, Kingtex could have prepared its subsequent reports based on SSA's advice, and avoided the accumulation of substantial penalties. I cannot endorse an interpretation of subsection 605(3) under which an employer's ultimate penalty for a reporting error may depend upon the frequency of SSA audits. Again, I do not believe this is an interpretation of the Act or result Congress could have intended.

It is an ancient rule of statutory construction and an oft-repeated one that penal statutes should be strictly construed against the government or parties seeking to exact statutory penalties and in favor of persons on whom such penalties are sought to be imposed. When the law imposes a punishment which acts upon the offender alone, and it is not a reparation to the party injured, and the punishment is entirely within the discretion of the

Notwithstanding the crucial importance of tax revenues for the support of government and its services, however, it is a settled rule that tax laws are to be strictly construed against the state and in favor of the taxpayer. Where there is a reasonable doubt as to the meaning of a revenue statute, the doubt is resolved in favor of those taxed.

Id. § 66.01. With no clear indication from Congress that inadvertent errors in calculation are to be penalized, as opposed to delays in filing or delays in payment, which I believe the language of subsection 605(3) solely addresses, I believe this prosecution should not have been brought. Surely Congress intended that a distinction be drawn between those employers who intentionally fail to report or pay their social security contributions, and those employers who actually report and pay in a timely manner, and who have a good faith basis for the reports they file, but nevertheless make an honest error in calculation or reporting methodology.

In addition, at oral argument, SSA conceded that the issue of interpretation Kingtex had raised, concerning "for the convenience of the employer rule" was one of first impression for the agency and the court. SSA did not dispute that Kingtex had filed its report in a timely manner, or that Kingtex had interpreted the social security regulations in a manner it believed to be reasonable. SSA agreed that Kingtex had cooperated fully with SSA's audit. I believe that on the facts of this case a penalty was neither mandatory, as the trial court found, nor appropriate under subsection 605(3). For all the foregoing reasons, I would reverse the trial court's decision, and find that the court erred in concluding that subsection 605(3) required imposition of a penalty on Kingtex in this case.

Finally, I dissent from the majority's "Digression," which addresses the difference between the cost and stated value of meals provided to Kingtex workers. The tax implications of this discrepancy were thoroughly briefed by the parties below and addressed by the trial court. See Pl.'s Motion for Summary Judgment at 4-6; Def.'s Reply to Pl.'s Motion for Summary Judgment at 3, 6-7; Aff. of Oliver Cheng at 1-3 (May 19, 1995); Kingtex (I), 7 FSM Intrm. at 282-85; Kingtex (II), 7 FSM Intrm. at 367. Whether Kingtex has satisfied the terms of its employment contracts with its workers is an issue for resolution between Kingtex and its workers, not between Kingtex and SSA, who are the only parties to this action.

As a final note, since I write in dissent, I wish to express two concerns I personally have with this litigation. First, my fellow judges do not feel that the issue of whether SSA properly sought penalties under section 605(3) is before the Appellate Division for resolution, because this issue was not directly raised by the appellant for decision. They feel that the sole issue we may address is whether the $1,000 maximum penalty is a per quarter, or a one-time charge.

We are the Court of last resort in this country. I believe that where the question presented to the Appellate Division is whether the trial court properly construed section 605(3), and we detect an error of interpretation, it is our responsibility to correct that error, or at a minimum, address the

possibility that an error has been committed. I do not believe that in this case we can reverse the trial court, and in so doing, impose a more substantial penalty on the defendant, without questioning the trial court's assumption that a penalty is mandatory under section 605(3) for Kingtex's actions. Kingtex (II), 7 FSM Intrm. at 368. At trial, defendant argued that any penalty under section 605(3) should have been waived because defendant did not intentionally mislead the agency. Id. Counsel made the same argument before the appellate panel. While these arguments were certainly not central to Kingtex's presentation, I believe the company's good faith defense to a penalty under subsection 605(3) was sufficiently preserved for our consideration on appeal.

My second concern has to do with the SSA's role in this action. According to Congress, the Social Security Act was passed "to effect economy and efficiency in the fields of Government and business by providing a means whereby employees may be ensured a measure of security in their old age and given an opportunity for leisure without hardship and complete loss of income." 53 F.S.M.C. 102. The cost to the government of litigating this case at the trial and appellate levels has been substantial. I question whether the funds used to litigate this case might have been better spent on programs designed to offer advice to Kingtex and other taxpayers, or to increase the frequency of agency audits. The twin goals of economy and efficiency might be better served by focusing agency resources on working cooperatively with taxpayers to prevent reporting errors, rather than on engaging in protracted litigation after mistakes have already been made.

1. Even if this statute were ambiguous, resort to legislative history is still unhelpful. The committee report to the bill that amended the Social Security Act to raise the maximum penalty supports no conclusion other than that the figure was to be changed from $250 to $1,000. SCREP No. 5-334, J. of 5th Cong., 4th Reg. Sess. 434 (1988). There is no legislative history for the original provision that was identical except for the amount.

2. The dissent places some reliance on a dictionary definition of "delinquent." As we have previously noted, basing legal analysis on dictionary definitions can be an uncertain proposition. Nena v. Kosrae (II), 6 FSM Intrm. 437, 439 (App. 1994); In re Extradition of Jano, 6 FSM Intrm. 93, 107-08 (App. 1993). This is particularly so where, as here, Congress has explicitly defined the term in the statute.

3. The parties argued this appeal on the presumption that Kingtex's failure to report the meals as wages was not deliberate. Kingtex's prior performance casts doubt on this. The record reveals that Kingtex had previously tried to avoid the payment of all social security taxes on its foreign workers. It told Social Security that its (then) Sri Lankan workers were covered by the Sri Lankan social security system and were thus exempt from FSM social security taxes pursuant to 53 F.S.M.C. 801(1). When Social Security contacted the Sri Lankan government it found Kingtex's representation to be false.

The old rate, which charges an employer a flat $5.00 for the first 10 employees plus $0.50 for every employee in excess of 10, did not provide enough deterrence in avoiding delinquency among employers, according to FSMSSA management. The Board approved the policy in order to close the widening gap in non-payment of taxes on time, explained ex-officio Board member and Administrator Hubert K. Yamada.