Petitioners Brief — O'CONNOR v. United States

Supreme Court, U.S.

r ) FILED

No. 85-558 — MAR 22 1988

— JR.

IN THE ri

Supreme Court of the United States

OCTOBER TERM, 1985

RoBERT E. O’CONNOR AND GLADYS E. O’CONNOR,

Petitioners,

Vv.

UNITED STATES OF AMERICA,

Respondent.

———

On Writ Of Certiorari To The United States Court Of

Appeals For The Federal Circuit

BRIEF FOR PETITIONERS

ALLAN I. MENDELSOHN

Counsel of Record

Marvin L. SZYMKOWICZ

Warp & MENDELSOHN, P.C.

1100 17th Street, N.W.

Suite 900

Washington, D.C. 20036

(202) 785-0200

Counsel for Petitioners

Of Counsel

Dwicut A. MCKABNEY

Apartado 3116

Balboa-Ancon

Republic of Panama

011-507-63-5316

$e

PRESS OF BYRON 8S. ADAMS, WASHINGTON, D.C. (202) 347-8203

QUESTIONS PRESENTED

1. Whether United States citizen employees of the Pan-

ama Canal Commission (PCC) are exempt from taxation

by the United States on their PCC salaries under Article

XV(2) of the Agreement in Implementation of the 1977

Panama Canal Treaty which, by its terms, exempts such

employees

“from any taxes, fees, or other charges on in-

come received as a result of their work for the

Commission.”

2. Whether diplomatic correspondence may be intro-

duced by the Government immediately before oral argu-

ment in the court of appeals where the Government is

itself the litigant and where it repeatedly refused the trial

court’s urgings to obtain and introduce such matters be-

low.

TABLE OF CONTENTS

QUESTIONS PREGENTED .....00ccccccccccscccossccccecsscscveseesses

En em

POUTE ccececcoccnssntittistsnniaie

TREATY,

INVOLVED

EXECUTIVE AGREEMENT, AND STATUTE

STATEMENT GF THB GASB ccccocstisiaeee

A. The Issue In Dispute: Historical Back-

B.

ground Of The 1977 Treaty ..............000

The Treaty Negotiations On The Subject

OF FERED accsscccessoseindiiannaiae

1. DRGRIIUNEE ...ncssienniadel

2. The Panamanian Position in The Ne-

UREN ccocncscnisennnipitapiiiadaaimameiiiieds

3. The U.S. Government’s Position In the

NE ES a

4. The U.S. Government’s In-House Po-

HES a

. The Gaps In The Negotiation Record .....

The Failure Of The Government To Seek

Clarification Before Ratification Of The

The Diffe Explanations

As To Wet eee In August 1977

1. The Initial Panamanian Views ...........

2. The U.S. Government Declines to Ob-

tain Views from the Panamanian Gov-

GRUIGTTS ewccncececsnsnensuateniiet iain

3. The U.S. Government Gives Panama

An “Historic’”’ $30 Million Direct Grant

Of Aid and Obtains the Views of the

Panamanian Government .....................

The United States View ...................0c0000

14

16

17

iil

G. The Principal, Relevant Provisions Of The

1977 Treaty .......ccccscseeeseesssssessresensersensnenes

H. Procedural Posture Of Litigation ............

SUMMARY OF ARGUMENT ...ccccsssseseeeeeeeensseneeeeesnnensesees

ARGUMENT ....cccccccccccssscsecccccsscccssececececsscssceseesnenensessees

I.

Il.

The es Level Introduction Of Diplo-

matic Correspondence Was Precluded By The

Doctrine Of Judicial am oe And The Nor-

mal Prohibition On Supplementation Of The

Trial Record On Appeal ..........:sssssssseeeeereeeees

A. The Government’s Representations To The

Claims Court That It Would Be Improper

and Unnecessary To Seek A Diplomatic

Note From Panama wy’ Estopped It

From Presenting Such A Note To The

Federal Circuit ...........:cccccccceeeseeeerreeeeeeeees

B. The Federal Circuit’s Consideration Of

Diplomatic Neck ny As New Evi-

dence On Appeal Was Improper ............-

Article XV(2) Exempts U.S. Citizen Employ-

ees Of The Panama Canal Commission From

U.S. Income Taxation On Their Commission

SalavieS .....ccccccccccescccccccccsscssccceeccceesccsssssseereress

A. The Monging S Article XV(2) Is Clear And

Should Be Given Effect ............:ssscesseeeeees

B. The Cmission From Article XV(2) Of Lim-

ag he That Was Used Elsewhere

In ty And Agreement Requires

aa The Plain Meaning Be Given

WEE ccccovccccccccccccscccsccccccccsccoccoecsccoosococcoes

C. The Use By The United States Of Specific

Limitations In Other International Agree-

ments Demonstrates That This Was A De-

liberate Omission .........ccssseseeeeeeereereeeeeeees

D. The Federal Circuit Erred In Refusing To

Consider Other Official Statements By

Panama That Support The Construction Of

Article XV(2) As A Binational

Exemption ......sccsccssesseeeeseserseneerneenseneeneess

18

19

21

23

23

23

28

33

33

34

36

iv

E. The Cases Relied On By The Government

RR TE “cat. 43

F. The History And Tenor Of The Treaty Ne-

gotiations Confirm That Article XV(2) Is

A Binational Tax Exemption ................... 46

49

CONTIN scciccnnsinidiinelinindadanttte gs

TABLE OF AUTHORITIES

CASES: Page

Aetna Life Ins. Co. v. Wells, 557 S.W.2d 144, 147

(Tex.Civ.App. 1977), writ of error refused, 566

S.W.2d 900, 901 (Tex. 1978) (per curiam) _ ..... 25

Associated Hospital Service v. Pustilnik, 497 Pa. 221,

227, 439 A.2d 1149, 1151 (1981) ....cceeceeeeeeeees 24

Belton v. Commissioner, 562 F.Supp. 30 (D.D.C.

WGBB) —recccccccrvscecsssssorccscossscccvescoeccsssorsoscssccssossoess 24

Boone v. Chiles, 35 U.S. 117 (1836) — ......scsesseseeeeeees 28

Bower v. O’Hara, 759 F.2d 1117 (8rd. Cir.

19BB) ......cccecscserccssscsescccccosncsseceseesssonesossscsoesscess 24-25

Chandler v. Roudebush, 425 U.S. 840, 849 (1976) 46

Choctaw Nation of Indians v. United States, 318 U.S.

423, 432 (1943) .......ecccccsssoceecrceenrsessrresssnseseners 33

City of Los Angeles v. Superior Court, County 9 Los

Angeles, 170 Cal. App. 3d 744, 216, Cal. Rptr.

B11 (1985) — .....csescccesssssrsceerccesreessccessssssresesenseees 33

Donovan v. United States Postal Service, 530 F.Supp.

894 (D.D.C. 1981) cccccccssseesseeseeseeeeesennsenseennenns

Duplan Corp. v. Deering Milliken, Inc., 397 F.Supp.

1146, 1177-1179 (D.S.C. 1975) ...ccececceeeeeeeeeeees

Harris v. United States, 768 F.2d 1240 (11th Cir.

1985) ...ccccccrcccccccsscesessserereees 2, 17, 20, 25, 28, 34, 48

Harris v. United States, 585 F. Supp. 863 (S.D. Ga.

19B4) — ...crcoccceccesscscresccsosvseccerccensenssssssosssessonsensees 20

Himel v. Continental Ill. Natl. Bank, 596 F.2d 205,

210-211 (7th Cir. 1979) ...cccssccccerseesereeeeeeereeees 24

Hohri v. United States, 782 F.2d 227 (D.C. Cir.

1986) — ..ecscccccsssssccsssorssessceecenscensssssssesecsesnsennenses 24

Huffman v. Pursue, Ltd., 420 U.S. 592, 606 n. 18,

95 S.Ct. 1200, 1209 n.18, 43 L.Ed.2d 482 *

(1975) — ceccssesssssessesseesensensessescsesnessessnsensenessenenns 24

Table of Authorities Continued

In re Yarn Processing Patent Validity Litigation,

498 F.2d 271, 279 (5th Cir. 1974), cert. denied

419 U.S. 1057, 95 S Ct. 640, 42 L.Ed.2d 654

GOTD . svniecistniesiaiinbihunieiddebaniadanma te, 24

Jan a v. Nationwide Life Insurance Co., 288 F.2d

Lf ot ee nena 30

Labadie Coal Co. v. Black, 672 F.2d 92 (D.C. Cir.

SUCHET.‘ hertceninsanintsdaundnitbiabideandemsaidoliinadicusaeecie hae: 33

Maximov v. United States, 373 U.S. 49, 54

UNITED ssiovvaniststionscewusiapstindsitesldenniitelitngsiaiiiaiciaaibesind 33, 44-45

Mecham v. City of Glendale, 15 Ariz.App. 402, 489

oc }, YL nee... Rie 24

Pigeon River Improvement, Slide & Boom Co. v.

Charles W. Cox, Ltd., 291 U.S. 188, 160-61

SONNET. cuvvisidaiidanpaaidsidiiesninteaeeeiaaee ae 43

Ronson Corp. v. Aktiengesellschaft, 375 F.Supp. 628,

TE sdeshstinssiesenhliciiciininincinseacaretsnnniene 24

Ross v. McIntyre, 140 U.S. 453 (1891) ..0......c.e. 44-45

Santovincenzo v. Egan, 284 U.S. 30, 40

INIT Sandsrmpeiiesthcatteatnidicteiade data aca 33, 39, 46

Scarano v. Central R. R., 203 F.2d 510, 513 (3d Cir.

REE | sceaicincinininapniseimdaesibeecaclsacaisdddiadieietsn 24

Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S.

ff aE ay 31-33, 43-44

United States v. Reynes, 50 U.S. 127 (1850) _........ 41

United States v. Texas, 162 U.S. 1, 36

I A ine ae Sc 33, 44-45

United States v. VETCO, 691 F.2d 1281 (9th Cir.

SUT eercerecstabientciatbciilititiecialnialiticiciia ica 29

United Virginia Bank v. Saul Real Estate, 641 F.2d

% >; %{ & *6artinieetaee 24

Valentine v. United States, 299 U.S. 5, 11

GEE ssenwdiieseiasnninisbiidindapinninlianaiiiianinernibtens 33

vii

Table of Authorities Continued

Page

Zell v. Jacoby-Bender, Inc., 542 F.2d 34 (7th Cir.

WDTG) — cencccsccccncsveeessescerseccccssccosesseseoscessssoosssconsees 28

STATUTES AND INTERNATIONAL AGREEMENTS:

Agreement Concerning the Status of United States

a in Australia, May 9, 1963, T.1.A.S. No.

IE” o-- ceanidasnabanddadmmneutenimannenasistateeocens 38

Agreement in Implementation of Article III of the

Panama Canal Treaty, September 7, 1977,

T.I.A.S. No. 10081 ............ccccccccccrerecesssssccscooes passim

Agreement in Implementation of Article IV of the

Panama Canal Treaty, September 7, 1977,

T.I.A.S. No. 10082 .............0ccccccrrrreeesees 4, 18, 42, 47

Agreement Under Article VI of the Treaty of Mutual

Operation and Security between Ja and the

United States, January 19, 1960, T.I.A.S. Nos.

4509 and 4510 — ......cccccccccssssscccssorscccsererensseeooes 37

2 “a Zone Code, §146(1), 76 A. Stat. 17 (1962

Convention Between the United States and Egypt,

August 24, 1980, T.I.A.S. No. 10149 ............. 38-39

Exchange of Notes between Panama and the US.,

September 7, 1977, reprinted in S. Exec. Rep.

i. 22 --- 19, 49

Internal Revenue Code of 1939 §251 — .........scesseeeee 7

Internal Revenue Code of 1954,

§894(a), 26 U.S.C. § 894(a) ....sceseesseeeeeeeeeeens

§931(h), 26 U.S.C. $931) ...--eesceseeesreeereeerees

Mutual Defense Treaty between the United States

and the Republic of Korea, July 9, 1966, T.LA.S.

¢ fC a 38

Vili

Table of Authorities Continued

NATO Agreement Regarding Forces Stationed in the

Federal Republic of Germany, August 3,

SUE ‘wuistninsisccticsdlillataiiseviiianitaeaian als ieee 37

North American Treaty, SOPA ...-cccccccccocccoccoeeees.... 36, 37

Panama Canal Act, Pub.L. 96-70, September 27,

1979, 93 Stat. 452, 22 U.S.C. 3601 .............. 40, 42

Panama Canal Treaty, September 7, 1977, T.LA.S.

SOU SIE hteitediadiancutmdatmelinadas cos 2, 18, 34, 40

Vienna Convention on the Law of Treaties, 63 AJIL

PED . wndésianeeee 29

MISCELLANEOUS:

Annual Report, Panama Canal Commission, Fiscal

ft ERIS «i -. aa eiome, 8

Code of Federal Regulations, Title 35, §134(b) ..... 42

Federal Register

Vol. 44, p. 56698, Oct. 2,1979 oo... 42

Vol. 45, p. 59150, Sept. 8, 1980 ................... 42

Federal Rules of Civil Procedure, Rule 44.1 ........ 29

Federal Rules of Evidence, Rule RT eae 29

Restatement of Foreign Relations Law, Section 147

OU. Seessttintditainnadusigtetibii tc Regs 29

S. Exec. Rep. 95-12, 95th Cong. 2nd Sess. (1978),

OOP We Oe I ecninsissaeenaiaiaiintiieeeeeeee 19, 35, 49

Senate Hearings on the Panama Canal Treaty be-

fore the Committee on Foreign Relations, 95th

Cong., Ist Sess. (1977) ooo.ecccccsessseseeecece.... 4-7, 13

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1985

No. 85-558

Ropert E. O’CONNOR AND GLADYS E. O’CONNOR,

Petitioners,

Vv.

UNITED STATES OF AMERICA,

Respondent.

On Writ Of Certiorari To The Unite? States Court Of

Appeals For The Federal Circuit

BRIEF FOR PETITIONERS

OPINIONS BELOW

The opinion of the United States Court of Appeals for

the Federal Circuit is reported at 761 F.2d 688 (Pet. App.

la-8a).! That opinion, which reversed the decision of the

: References to material in the Petitioners’Appendix will be in the

form: “Pet. App. ___”. By Order entered February 24, 1986, this

Court granted a Motion by Petitioners to dispense with the printing

of a joint appendix. References in this Brief to the record below will

be to the two volume Joint Appendix prepared for use in the United

States Court of Appeals for the Federa! Circuit, 10 copies of which

2

United States Claims Court, reported at 6 Cl.Ct. 115 (1984)

(Pet. App. 9a-69a), is in direct conflict with the opinion

of the United States Court of Appeals for the Eleventh

Circuit in Harris v. United States, reported at 768 F.2d

1240 (1985) (Pet. App. 72a-86a), petition for certiorari

pending.

JURISDICTION

The judgment of the Court of Appeals was entered May

10, 1985. A petition for rehearing was denied on July 3,

1985 (Pet. App. 70a-7la). The petition for a writ of

certiorari, filed September 30, 1985, was granted by this

Court on January 13, 1986. The jurisdiction of the Court

is invoked unger 28 U.S.C. §1254(1).

TREATY, EXECUTIVE AGREEMENT, AND

STATUTE INVOLVED

Panama Canal Treaty between the United States of

America and the Republic of Panama, September 7, 1977,

T.LA.S. No. 10030:

Article III

Canal Operation and Management

ses t¢*# &

9. The use of the areas, waters and installations

with respect to which the United States of America

is granted rights pursuant to this Article, and the

rights and legal status of the United States Govern-

have been lodged with this Court by the Respondent. Reference to that

appendix will be in the form: “App. __". References to material in

the Appendix to the U.S. Government's Brief, filed on December 3,

1985, acquiescing in the Petitions for Certiorari will be in the form:

“U.S. App. __”.

ment agencies and employees operating in the Re-

public of Panama pursuant to this Article, shall be

governed by the Agreement in Implementation of this

Article signed this date.

Agreement in Implementation of Article III of the Pan-

ama Canal Treaty, September 7, 1977, T.1.A.S. No. 10031:

Article XV

Taxation

2. United States citizen employees and dependents

shall be exempt from any taxes, fees, or other charges

on income received as a result of their work for the

Commission. Similarly, they shall be exempt from pay-

ment of taxes, fees or other charges on income de-

rived from sources outside the Republic of Panama.

United States Code, Title 26, Section 894(a):

Income exempt under treaty.—Income of any kind,

to the extent required by any treaty obligation of the

United States, shall not be included in gross income

and shall be exempt from taxation under this subtitle.

STATEMENT OF THE CASE

A. The Issue In Dispute: Historical Background Of The

1977 Treaty

On September 7, 1977, the United States and the Re-

public of Panama signed the Panama Canal Treaty of 1977.

Article III of that Treaty provided that the “rights and

legal status of United States Government agencies and

employees operating in the Republic of Panama’”’ shall be

governed by a separate executive agreement titled ‘‘Agree-

ment in Implementation of Article III of the Panama Canal

Treaty of 1977” (hereafter “the Implementation Agree-

ment”’). The Implementation Agreement was signed on the

same day as the Treaty. The basic issue before the Court

involves the interpretation of one provision of that Agree-

ment—Article XV(2), which states that U.S. citizens em-

ployed by the Panama Canal Commission (hereafter “the

Commission”’) “shall be exempt from any taxes, fees, or

other charges on income received as a result of their work

for the Commission”’.

The 1977 Treaty supplanted the earlier Canal treaties

of 1903, 1936, and 1955.° The 1903 Treaty ceded to the

United States in perpetuity exclusive sovereign rights over

the area that was called the Canal Zone. During the sub-

sequent 74 years, Panama’s dissatisfaction with that grant

of sovereignty was said to be the reason for its recurring

and increasingly acrimonious protests against the U.S.

presence there. Throughout those 74 years, Panama’s as-

pirations for eventual recovery of sovereignty over the

Canal Zone were the fundamental irritant in her relations

with this country.

*The Treaty appears at T.I.A.S. 10030. The Implementation Agree-

ment appears at T.I.A.S. 10031. A separate Implementation Agreement,

covering military personnel and implementing Article IV of the Treaty,

appears at T.I.A.S. 10032. No issue is raised here as to any difference

in status between the Treaty and the Implementation Agreements.

When the Senate was considering both documents as part of the advice

and consent process, then State Department Deputy Legal Advisor,

Mark Feldman, testified before the Senate Foreign Relation Committee

that the Agreements “are an integral part of the treaty’ and that “by

giving its advice and consent to the treaties’’, {the Senate] authorizes

the entry and brings into force those Agreements‘. Senate Hearings

on the Panama Canal Treaty Before the Committee on Foreign Re-

lations, 95th Cong., Pt. V, 1st Sess. (1977) at 117-121 (hereafter cited

as ‘‘Hearings’’).

* Isthmian Canal Convention, November 18, 1903, 33 Stat. 2234, T.S.

No. 431; General Treaty of Friendship & Cooperation, March 2, 1936,

53 Stat. 1807, T.S. 945; Treaty of Mutual Understanding & Coopera-

tion, January 25, 1955, T.I.A.S. 3297, 6 UST 2273. *

as

After the final phase of their negotiation of the 1977

Treaty, U.S. Ambassadors Ellsworth Bunker and Sol Li-

nowitz testified at hearings conducted by the Senate For-

eign Relations Committez. On September 26, 1977,

Ambassador Linowitz described the treaty history of the

Panama Canal as follows:

“(The 1903 Canal Treaty] granted the United States

rights in perpetuity to construct a canal within a zone

10 miles wide over which the United States would

exercise, as the treaty says, the rights, power, and

authority it would have if it were the sovereign.

“Secretary of State Hay, who signed the treaty, can-

didly wrote to a leading Senator that the treaty was,

in his words, and I quote, ‘very satisfactory, vastly

advantageous to the United States and, we must con-

fess, with what face we can muster, not so advan-

tageous for Panama’. The treaty was ratified in 1904,

and construction of the canal was begun immediately.

It was completed in 1914, after a brilliant engineering

and scientific performance by American engineers,

doctors, scientists, and builders who were determined

to conquer the unconquerable and make the canal a

reality.

“Now, while the canal has been a source of deep

understandable pride to the United States, it has been

a troubling and festering presence in Panama. Under

the treaty, the United States established jurisdiction

over the Canal Zone courts. It has established the

zone’s schools, jails, and its police force. It has set

up what the Panamanians have regarded as a colonial

enclave splitting their country in two and using 550

square miles of their best land, and the Panamanians

have made known their resentment at the United

6

States having done so pursuant to a treaty which was

not even signed by a Panamanian.’”

In a constituent newsletter, Senator Hollings described the

U.S. role as follows:

“There is no question, the United States rooked

Panama back in 1903. We actively supported the rev-

olution against Colombia by its Isthmus section after

Colombia refused to ratify the treaty we wanted. We

sent ships and troops and this guaranteed the out-

come. Then we signed the treaty hurriedly before the

official delegation objecting from Panama could even

arrive in Washington. Signing for Panama was—not

a Panamanian—but a French citizen who had not been

in Panama for 17 years, and who returned to France

immediately after the ratification.’

Secretary of State Cyrus Vance, also testifying in sup-

port of the Treaty, was asked whether Senator Hollings’

historical summary was “generally on all fours with the

understanding that you gentlemen have of how we got

into this situation”. He replied that it indeed “was gen-

erally on all fours with our understanding as to how we

got into it’’.* The 1977 Treaty was the culmination of ne-

gotiations that began in 1964. In that year, as then Senate

Foreign Relations Committee Chairman Sparkman ob-

served, “rioting broke out in Panama and diplomatic re-

lations were broken”. President Johnson dispatched his

then special envoy, Cyrus Vance, to the Canal Zone. In

the aftermath of those events, based upon Mr. Vance’s

recommendations, President Johnson began to negotiate a

new agreement with Panama on the canal. Each President

since President Johnson, as Secretary Vance added, “has

‘Hearings, Part I at 20-21.

*IJd. at 5).

® Jd.

— eee eee eee Lae...

Se SS oa

believed that it was essential to negotiate a new treaty

and to put our relationship with Panama on a new and

sounder footing”.’ In testifying about the final result of

these negotiations, Secretary Vance stated that the new

Treaty removed ‘“‘one of the most difficult and exacerbat-

ing issues ... and that is the issue with respect to how

the U.S.’s presence will be handled there and the question

of the Canal Zone itself and the question of sovereignty.*

It is against the bacl:ground of those reports by high

officials in the United States Government that the disputed

provision of this international agreement should be viewed.

B. The Treaty Negotiations On The Subject Of Taxation

1. Background

Between the years 1921 and 1951, the salaries received

by U.S. citizen employees of the Panama Canal, the Canal

Zone Government, and other Federal agencies in the Canal

Zone were effectively exempt from taxation by the U.S.

Government. See §251, Internal Revenue Code of 1939

(prior to enactment of §220 of Revenue Act of 1950). Sec-

tion 251 conferred a total tax exemption with respect to

Panama Canal salaries paid to the U.S. citizen taxpayers—

unless the taxpayer had substantial non-Panama source

income (pursuant to a formula defined in §251). It may

safely be said that most, if not all, of the salaried em-

ployees of the federal government working for the Panama

Canal regularly qualified for the exemption. Beginning in

1951, their Panama Canal income became subject to tax-

ation under amended §251 (i.e., §931(h) of the 1954 Code).

Notwithstanding the comparatively modest contribution

to the Federal fisc made by this small group of American

7 Jd. at 54.

* Id. at 37.

taxpayers—numbering 1,895 in 1980 and 1,360 in 1985°—

the question of the right to tax them was the subject of

considerable dispute during the Treaty negotiations. It was

also among the very last issues to be resolved. As of June

24, 1977, Secretary of State Vance advised that all other

Treaty questions had been settled and that the matter of

“economic arrangements” (which included the tax issue)

was “‘the major remaining issue relating to the Canal ne-

gotiations’” (App. 163).

2. The Panamanian Position in the Negotiations

Negotiations on the taxation issue were strained and,

at times, contentious. Both t! = United States and Panama

claimed the right to tax the U.S. citizen employees. Pan-

territory. Consistent with that view, the Panamanian ne-

gotiating team proposed the direct imposition of Pana-

manian taxation on all Americans employed by the Panama

Canal Commission. See Kozak affidavit (App. 89). On July

11, 1977, Minister Aristides Royo, a member of the Pan-

amanian negotiating team, summarized Panama’s position

as follows (App. 120-21);

“Also, in another paper that we submitted to you, we

brought out the need for U.S. citizen employees who

worked for the entity [i.e., the Panama Canal Com-

mission], which will be operating the Canal after the

treaty, to pay income tax to Panama, and the reason

is very simple. These employees, despite the fact that

they are United States nationals, are employees who

are working outside the United States and in territory

that will not be subject to the jurisdiction of the

United States, and their salaries wil] be generated

* Annual Report, Panama Canal Commission, Fiscal Year 1980, p.

21; Govt. Brief Acquiescing in Certiorari Petitions, at 12

not from U.S. Treasury funds, but from the activities

involved in operating the Canal; and accordingly, and

furthermore, because these persons, as you know and

as we have already agreed, have the right of free

movement throughout the breadth of our country, and

will receive all due attention from us in every respect

whether it is hospitals, social matters, or travel in our

country, these are people that ought to pay our coun-

try, as do the remainder of those citizens and persons

working on our soil, that they should pay income tax.

You said that you were going to study this problem,

and we are again hoping for a positive response from

you in order to arrive at the conclusion of a treaty

between our two countries.’’”

While insisting on its own right to tax, Panama was

not inflexible on the issue of whether the U.S. could also

tax. Thus, during an earlier session, on June 30, 1977,

Mr. Royo suggested a division of tax revenues (App. 117):

“So on the basis of that credit, the tax credit, on the

basis of that difference that could be provided to de-

termine the difference with the Panamanian taxes,

which are lower—the United States would receive a

part of the tax and we would be receiving the other

part. And in that way we would get all of the amount

we expect from the income tax—this might be a for-

mula that might be found to be satisfactory.

“We will be willing to provide additional information

later on, on this topic.”

3. The U.S. Government’s Position In the Negotiations

The U.S. negotiating position was stated by Ambassador

Linowitz during the session of June 30, 1977. He in no

© The State Department has never released that “another paper’’

referred to by Mr. Royo in his first sentence as having previously been

“submitted” to the U.S. Government.

10

way took issue with Panama’s claim of right to tax based

upon territorial sovereignty. Rather, he indicated that the

-S. objected to the Panamanian proposal because depriv-

ing the U.S. of the right to tax would mean a loss of

revenue for the U.S. Treasury. His statement was (App.

117):

“Then it would be a cost to the United States. That

is the point. What you are Saying is: it would not be

an additional charge on the employees, but would rep-

resent a loss to the United States of taxes that would

otherwise be paid in the United States. The*’s what

you are saying, aren’t you?”

Ambassador Linowitz indicated that the U.S. would study

the issue and let the Panamanians “know what further

work we have done” (App. 116).

4. The U.S. Government’s In-House Position

In contrast to what they told the Panamanians, the

American negotiating team held a different view. They

considered the potential loss of revenue not to be signif-

icant. By means of a U.S. Treasury Department memo-

randum entitled “Rebating to Panama U.S. Income Tax

on Canal Zone Taxpayers” (App. 159), the U.S. represen-

tatives were informed that only a modest amount of tax

revenue was involved. The memorandum, which was dated

June 29, 1977 and prepared for the discussion of tax and

revenue issues at the 21st round of the negotiations, re-

ported that Americans residing in the Canal Zone paid

little or no taxes and the total of lost revenue would be

about $600,000.

In a State Department memorandum from Secretary

Vance to the Panama Review Committee, it was estimated

that, by taxing the U.S. employees, Panama would realize

revenues of “not more than $3 million per year’. See

Memorandum, July 19, 1977 (App. 151-52). At a later point,

the State Department estimated that Panama “would re-

ee ee ee

11

alize only $2-3 million per year” from taxing these em-

ployees, but that this would “set a bad precedent” (App.

164). The Department was also concerned that this “‘would

be the type of issue which treaty opponents could use to

considerable advantage” (App. 162).

As noted in a Department briefing paper of July 8, 1977

(App. 130), the American team recognized that the tax

dispute was a matter principally of sovereignty, not of

revenue:

Panama may be raising this as an issue to assert its

‘sovereign right’ to tax persons resident within its

jurisdiction. The money involved is not important to

the GOP [Government of Panama], but the principle

is. At current Panamanian tax rates, tax payments

by U.S. employees would total approximately $2 mil-

lion per annum (average U.S. employee taxable in-

come is $11,000 plus)..... {remainder of paragraph

still classified] A concession to Panama on this issue

could result in demands from other countries for sim-

ilar treatment.”

Consistent with this view, the U.S. team also rejected still

another Panamanian suggestion, advanced about July 19,

1977, that Panama not tax U.S. employees until “three

years after entry into force of the treaty” (App. 128, 151-

152, 154).”

: Two Confidential Memoranda prepared by then Secretary of State

Vance sometime around July 19, 1977, put the issue in these terms

(App. 151-152, 164):

Panama has proposed that effective three years after entry into

force of the treaty the United States citizens employed by the

Canal Administration pay income taxes to Panama on their salaries

and other income collected in Panama. It estimates these taxes at

$7-10 million a year.

While we have told Panama that it would be most difficult for

the United States to acquiesce to Panamanian taxation of its USS.

citizen employees, we could dgggo if we chose. However, United

12

C. The Gaps In The Negotiation Record

The Department of State represented to the Claims

Court that, after July 18, 1977, there is no contempora-

neous record of any of the negotiations on the issue of

taxing the U.S. citizen employees. Coplin, supra (Pet. App.

28a-29a, 34a). Accordingly, with minor exceptions (e.g.,

App. 161-62), there is no record of the position papers or

discussions within the U.S. team, nor any information

showing how the language of Article XV was proposed,

discussed or adopted. Nevertheless, when the treaty ne-

gotiations ended in August 1977, the language of para-

graph 2 of Article XV somehow had reconciled the sharply

conflicting objectives of the two nations.

It is clear that, however the dispute was resolved, it

was done in haste. As late as the session of July 11, the

American negotiators still had not given the Panamanians

a paper showing the U.S. position in writing (App. 126-

27):

MINISTER ROYO: Do you have anything on income tax?

AMBASSADOR BUNKER: Yes.

MR. WYROUGH [a U.S. negotiator]: Yes, we do.

AMBASSADOR LINOWITZ: We don’t have a paper.

[... here a half page of the classified document was

deleted ...] Now, on the income-tax question we do

not have a paper. ....... we have no authority to

accede to your request on this score.

Similarly, as of July 18, the U.S. had still not given

Panama the text of a proposed Article XV but, instead,

States Government employees are exempted from host country

income taxes throughout the world. Making Panama an exception

would set a bad precedent for U.S. Government operations in other

foreign countries. Secondly, we estimate that revenue generated

from such taxation would amount to not more than $3 million per

year (emphasis in original).

13

was merely referring orally to a provision in the Status

of Forces Agreement (i.e., Article XVI of what became

the Agreement in Implementation of Article IV of the 1977

Treaty) (App. 156, 158, 178). Even as late as the date of

the State Department’s secret cable of August 3, 1977,

the matter was still unresolved (App. 99, 166). Yet, within

the next two to three weeks, the negotiations were con-

cluded. On September 7, 1977, the Treaty was signed.

D. The Failure Of The Government To Seek Clarifica-

tion Before Ratification Of The Treaty

By September 21, 1977, attorneys in the Treasury De-

partment realized that Article XV(2) would create an ex-

emption from United States, as well as Panamanian, taxes

(App. 58-59). They recommended that the language be clar-

ified. Their recommendation was not acted upon. Later,

during hearings before the Senate Foreign Relations Com-

mittee, Senator Stone raised the same question—referring

to what he described as the “glee‘‘ shown by Canal Zone

residents who also had read Article XV(2) as exempting

their salaries from taxation. The Senator questioned the

State Department’s Legal Advisor, Mr. Herbert Hansell,

as to whether the language should be clarified if an ex-

emption was not intended. Mr. Hansell replied that some-

thing would be done (Hearings, Part I at 268-269) (U.S.

App. 10a-12a). The record is devoid of evidence that an-

ything was ever done by the Government prior to February

1985.

E. The Differing Panamanian Explanations As To What

Happened In August 1977

1. The Initial Panamanian Views

There is evidence showing the meaning given by certain

Panamanian representatives to the phrase “exempt from

any taxes’. By correspondence dated December 13, 1983,

Mr. Demetrio B. Lakas, a former President of Panama,

and Mr. Juan Antonio Tack, a former Minister of Foreign

14

Relations of Panama, both stated «ir views that Article

XV(2) was intended to create a = onal tax exemption

(App. 188, 190).

Similarly, in an affidavit executed on March 2, 1984,

one of Panama’s principal treaty negotiators, Dr. Carlos

Lopez-Guevara, stated that only during the last negotiation

session sometime in August did the U.S. for the first time

provide to Panama a written proposal for the text of Ar-

ticle XV (App. 192-93). Lopez-Guevara further stated that

paragraph 2 of Article XV was viewed by Panama as

compelling “both Panama and the United States of Amer-

ica not to tax United States citizens by reason of their

work with the Panama Canal Commission”.

2. The U.S. Government Declines to Obtain Views From

the Panamanian Government

During February and March 1984, when this case was

before the Claims Court and the views of Messrs. Lakas,

Tack and Lopez-Guevara were already matters of public

record, the Claims Court made a determined effort to as-

certain whether the U.S. Government could or would ob-

tain a view on the issue from the Panamanian Government.

On February 23, 1984, after expressing some scepticism

as to the persuasiveness of the U.S. Government’s asserted

position, the Claims Court continued the case for two

weeks to give the Government an opportunity “to consider

supplementing the record by obtaining an indication from

Panama as to its intentions in agreeing to the language

of Article XV” (Pet. App. 64a). Thereafter, and as de-

scribed in the Court’s opinion (Jd.):

“At the next hearing on the matter, [Government]

counsel informed the court that no clarification would

be requested or obtained from Panama (Mar. 8 Tran-

script at 3, 8). The court then took the unusual step

of inviting an appearance by a more senior attorney

to ensure that the implications of this decision were

fully understood and appreciated by [the Government].

ee a ee

moat - . ‘

Pi tm ee A EP NM gh te

~ nd tly od

15

[Government] counsel and her supervisor [Mr. Peyser]

appeared at a hearing later the same day and the

court once again stated that it found plaintiff's pres-

entation persuasive but urged [the Government] to

supplement the record by obtaining clarification from

Panama or through some other means. Id. at 26-27,

39-40, 43-45, 49-50. Despite numerous statements by

the court that it would decide the case in favor of

plaintiff on the record as presented, [the Government]

steadfastly refused the opportunity to supplement the

record.”

Government counsel specifically represented w the Court,

during the March 8, 1984 hearing, that the United States

did not think “the opinion of any official in Panama in

1984 is persuasive’’.””

2 A portion of the court's colloquy with Government counsel is re-

printed below (Transcript, pp. 43-47, March 8, 1984):

Court: I am giving you the opportunity to obtain from Panama

their understanding as to the meaning of this provision. That is

what I gave your attorney two weeks ago. It is done all the time

for one Government to get a diplomatic note from another Gov-

ernment saying we had a Treaty provision and this is what it

means. If you don’t want to get it, I will draw whatever inferences

can be drawn from the refusal to obtain that.

Mr. Peyser: I think the case should be decided on the materials

before the Court.

Court: So I am going to ask you one more time, Mr. Peyser, do

you wish to take advantage of the opportunity to supplement the

record by obtaining a clarification of Panama's understanding of

the Treaty language? If you wish, have a few days or a week to

go back and check on that. I will give it to you, but I want a

concise and clear yes or no answer from the United States.

Mr. Peyser: No. No., your Honor.

Mr. Peyser: I don’t [think] the opinion of any official in Panama

16

3. The U.S. Government Gives Panama An “‘Historic’”’ $30

Million Direct Grant Of Aid and Obtains the Views of

the Panamanian Government

On December 24, 1984, the U.S. Government gave Pan-

ama a direct grant in aid of $30 million. U.S. Ambassador

to Panama, Everett Briggs, was reported as having de-

scribed the grant as “historic” because it was the first

time the U.S. had ever made such a direct grant to Pan-

ama. (Annex C to Motion by Appellees to Strike, filed

March 4, 1985.)

On Thursday, February 28, 1985, one working day prior

to oral argument in the Federal Circuit on Monday, March

4, 1985, the Government filed its reply brief. Without prior

notice, the Government attached to its reply brief three

nearly identical letters from former Panamanian officials

who were members of the Panamanian negotiating team.

These letters, which were accompanied by a transmittal

note from then Panama Foreign Minister Fernando Car-

doze, stated that the provision in issue was “drafted ex-

clusively with respect to the tax exemption that the

Republic of Panama would grant to U.S. citizen employ-

ees’’ and “resulted from negotiations which did not deal

in 1984 is persuasive.

Court: ... All I can gather is that you don’t think you are going

to get from Panama the interpretation that you want.

Mr. Peyser: I have no idea what the response would be from

Panama.

Court: Well, would you like to go find out?

Mr. Peyser: I decline the invitation to do that. I understand you

are asking if we would like to do that, and the answer is, no. |

don’t think it would be appropriate or necessary.

ee ee ee ee OR Tee ee en at Sree. |

PP eB eg Cindy. Smt hy Oh Seem be —

17

with the United States authority to tax the individuals

mentioned therein’ (U.S. App. 4a-9a).’*

F. The United States View

The gist of the United States position in the courts

below has been that, notwithstanding the continued sharp

differences between the two nations on the issue of

whether Panama enjoyed the sovereign right to tax, the

Panamanians simply capitulated, withdrew their claim of

a sovereign right to tax, and agreed that only the United

States could assess such taxes. Regarding the views ex-

pressed by Messrs. Lakas, Tack and Lopez-Guevara, the

United States argued below that this ‘“‘simply is an opinion

after the fact. It’s not contemporaneous. It was prepared

in preparation of this lawsuit” (Transcript, Feb. 13, 1984

at 26).'

'3On March 4, 1985, shortly preceding ora] agrument, the taxpayers

moved unsuccessfully to strike the correspondence from the record,

arguing that they had had no opportunity to inquire into the provenance

of the correspondence or its validity. At issue was the peculiar nature

of the letters themselves plus the fact that the authors of two of the

letters did not state that they participated at all in the Article XV(2)

negotiations, and the author of the third letter claimed to have had a

role only in the negotiation of Article XVI(2) of the Article IV Imple-

menting Agreement. In addition (and as is more fully discussed below

at pp. 40-42), former Panama Foreign Minister Fernando Cardoze had

earlier expressed a contrary official view to the effect that U.S. citizens

enjoyed a binational exemption under Article XV(2).

“In various district counts that ruled for the Government in similar

cases brought prior to the litigation below, the Government introduced

into evidence an affidavit of a Mr. Michael Kozak who is now a State

Department Deputy Legal Advisor. In 1977, Mr. Kozak was a member

of the U.S. team negotiating the Treaty, but ‘was not privy to the

actual negotiations on the tax exemption issue’’. Harris v. United States

(Pet. App. 82). Mr. Kozak’s affidavit (App. 87-90) concluded that Article

XV was intended to create an exemption only from the payment of

Panamanian taxes. Although various of the district courts that had

earlier ruled for the Government relied principally on Mr. Kozak’s af-

fidavit, the Government in the Claims Court below conceded that Mr.

18

G. The Principal, Relevant Provisions Of The 1977

Treaty

The Treaty was ratified by President Carter on June

15 and by Panama on June 16, 1978. It entered ato force

on October 1, 1979 and will terminate on December 31,

1999. Article III(1) recognizes Panama as the “territorial

sovereign” and grants the United States the “rights to

manage, operate, and maintain the Panama Canal, its com-

plementary works, installations and equipment and to pro-

vide for the orderly transit of vessels ...”. Article III(3)

provides for the creation of a Panama Canal Commission

by means of which the two countries are to carry out their

responsibilities under the Treaty.

Although the Commission is constituted under Federal

law and is denominated as a U.S. Government agency, the

' Treaty requires that it be managed by a binational su-

pervisory board. Five of the board members are Ameri-

cans. The other four must be Panamanians who are

nominated by the Government of Panama and cannot be

removed without Panama’s consent. The two executive of-

ficials of the Commission are an Administrator and a Dep-

uty Administrator. Until 1990, only the Deputy need be

Panamanian (nominated by his government). Thereafter,

until the treaty expires, the Administrator must be a Pan-

amanian and the Deputy an American. Article III(8) pro-

vides that there shall be a growing participation of

Panamanian nationals at all other levels and areas of em-

ployment in the Commission. Finally, Article X(3) requires

the United States, within the first five years after the

Treaty enters into force, to reduce the number of U.S.

citizen employees by 20%.

Kozak’s affidavit “may not be used to divine the purpose of Article

XV” (Pet. App. 35a, n. 16). The Government later disavowed Mr.

Kozak’s affidavit presumably because the Government could not con-

sistently argue that Mr. Kozak’s affidavit was probative while saying

that Mr. Lopez-Guevara’s affidavit was nothing more than “‘an opinion

after the fact ... prepared in preparation of this lawsuit”.

19

The treaty and related agreements also contain sub-

stantial economic benefits and concessions for Panama.

The United States agreed to pay from Canal operations

four separate annuities, three of which would be fixed and

one that would be based upon, and vary with, the amount

of vessel traffic passing through the Canal. The value of

these Canal annuities was estimated in 1978 at from $50

to $90 million per year for the duration of the Treaty.

There were also undertakings by the United States to

extend housing investment guarantees up to $75 million;

loans, loan guarantees, and insurance up to $200 million

through the Export-Import Bank; and $50 million in re-

payment guarantees under the foreign military sales pro-

gram to facilitate the purchase by Panama of defense

articles and services. Article XIII provides that upon ter-

mination of the Treaty, the Panama Canal shall be given

to the Republic of Panama in operating condition and free

of liens and debts. The estimated replacement value of

property that has been or -will be given to Panama is $8

billion. See S. Laec. Rep. No. 95-12, 95th Cong., 2nd Sess.,

1978, at 91 et sey.; Exchange of Notes between Panama

and the U.S., September 7, 1977.

H. Procedural Posture Of Litigation

Petitioner Robert O’Connor is a U.S. citizen employee

of the Panama Canal Commission. The O’Connors paid

their income taxes for the year 1980 and then sued for

refund in the Claims Court based on the Article XV(2)

exemption. On July 30, 1984, the Claims Court (Chief

Judge Kozinski) entered summary judgment in the Coplin

case (Pet. App. 9a) and separate judgments for the O’Con-

nors and Mr. and Mrs. Jack Mattox, all of which cases

are consolidated herein. In addition, the Claims Court sus-

pended action on all pending Article XV(2) refund suits

until the outcome of Coplin. There are now more than

200 taxpayer suits pending in the Claims Court, awaiting

the outcome of this appeal.

20

The Government appealed the Claims Court action to

the U.S. Court of Appeals for the Federal Circuit. By

opinions entered on May 10, 1985, the Federal Circuit

reversed the Claims Court. Writing for the five-member

panel, Judge Bissell concluded that, in view of the “letters

from the Panamanian team that negotiated the Imple-

mentation Agreement’’(Pet. App. 7a):

“[T]he record now reveals the intent of each gov-

ernment. Since both treaty parties agree that para-

graph 2 was not intended to create an exemption from

United States domestic taxation, the trial court’s de-

cision cannot be upheld.”’

The opinion held that the letters could properly be received

into evidence because of the court’s power to take judicial

notice of “‘the public acts and proclamations of (foreign)

governments” (Pet. App. 6a). In a concurring opinion of

Judge Nies, in which Judges Rich and Baldwin joined, the

court concluded that it was not necessary to consider the

evidence provided by the diplomatic correspondence, in-

asmuch as the words “‘by the Republic of Panama” should

simply be inserted into the title of Article XV —even

though, as drafted, that title is simply ‘Taxation’ (Pet

App. 8a).

Mr. and Mrs. Ralph Harris, also U.S. citizen employees

of the Commission, filed a similar refund suit in the U.S.

District Court for the Southern District of Georgia, seeking

a refund of $6,647.00 for taxes paid on 1979 income. On

March 21, 1984, Judge Dudley H. Bowen entered judgment

for the Harrises on the basis that Article XV(2) is “‘needful

of no interpretation. It says what is says.”’ 585 F.Supp.

862, 863. The Government appealed Judge Bowen’s deci-

sion to the U.S. Court of Appeals for the Eleventh Circuit.

As it did in the Claims Court, the Government submitted

the three letters to the Eleventh Circuit. On August 14,

1985, a unanimous panel of the Eleventh Circuit affirmed

Judge Bowen (Pet. App. 72a-86a). The Court considered

21

the Federal Circuit’s decision in Coplin and declined to

follow it. The Court rejected the Government’s “‘suggestion

that self-serving evidence outside the record [i.e., the three

letters], for which additional explanation is required, can

be considered by this Court”. In any case, so the Court

added, a full reading of the Treaty and the available leg-

islative history compels the conclusion that “ ‘exempt from

any taxes’ meant just that’ (Pet. App. 76a, 79a). The

Government’s petition for certiorari is presently pending

disposition (No. 85-1011).

SUMMARY OF ARGUMENT

1. It was error for the Federal Circuit to accept and

consider on the merits the diplomatic correspondence ob-

tained by the United States on the eve of oral argument

below. The Claims Court had earlier entreated counsel for

the United States to secure a statement from the Gov-

ernment of Panama of its interpretation of Article XV(2).

The United States refused, representing that it would not

be “appropriate or necessary” to do so. Its contradictory

position before the Federal Circuit created a judicial es-

toppel against introduction of the material.

The doctrine of judicial estoppel prohibits litigants from

taking inconsistent positions before different Courts with

respect to the same set of facts. It is meant to protect

Courts and litigants from parties that would otherwise

vary and contradict themselves where expediency dictates.

In the instant case, the application of judicial estoppel also

would have the salutary effect here of preventing the

United States from using diplomacy to influence the out-

come of domestic litigation.

The late introdustion of the diplomatic correspondence

should also have been barred by the prohibition on sup-

plementing the trial record on appeal. By considering the

new material and treating it as conclusive on the question

of the intent of the Panamanian negotiating team, the

22

Federal Circuit deprived the O’Connors and their co-

petitioners of an opportunity to develop a proper adversary

trial record on the diplomatic correspondence.

2. Article XV(2) must be construed according to the rule

that the plain meaning of a legal instrument is normally

controlling. The language of Article XV(2), on its face,

creates an exemption from ‘any taxes”. By contrast, other

provisions of the Treaty documents specifically define

rights and obligations that are to apply to Panama alone.

Similar agreements between the United States and foreign

governments specifically define the circumstances under

which only the host country is prohibited from imposing

taxes. Article XV(2)’s radical departure from this estab-

lished patttern of international agreements confirms that

it was intended to be a binational exemption.

In July 1984, at a meeting of the PCC supervisory board,

Panamanian members of the board expressed the official

view that Article XV(2) exempted U.S. citizen employees

from U.S. income taxation. Those members were then For-

eign Minister of Panama Ortega and soon to become For-

eign Minister Cardoze. Dr. Cardoze was the same individual

who, a few months later, would sign the diplomatic cor-

respondence submitted to the Federal Circuit. That court

committed reversible error in refusing to consider the tran-

script of the board meeting tendered in the O’Connors’

petition for rehearing.

This Court’s case law on treaty interpretation supports

a plain meaning reading of the term “any taxes’’ as cre-

ating a binational exemption. No case relied upon by the

United States in the proceedings below sanctions a de-

parture from the plain meaning of a provision where there

is no ambiguity in the treaty or related documents.

The history of the Article XV(2) negotiations confirms

the plain meaning interpretation. The final Article XV(2)

language was presented for the first time in August 1977,

shorn of its earlier references to taxation “as provided by

23

Panamanian law’. It was accepted by both countries as a

compromise formulation under which neither nation would

tax. Such a result accommodated the objectives of both

countries: the U.S. did not wish Panama to tax the income

of American citizens whom the U.S. viewed as employees

of a U.S. agency; and Panama did not wish to allow the

U.S. to assert the sovereign right to tax individuals who

were residing in Panama and employed by a binational

enterprise.

ARGUMENT

I. The Appellate Level Introduction Of Diplomatic Cor-

respondence Was Precluded By The Doctrine Of Ju-

dicial Estoppel And The Normal Prohibition On

Supplementation Of The Trial Record On Appeal

A. The Government’s Representations To The Claims Court

That It Would Be Improper And Unnecessary To Seek

A Diplomatic Note From Panama Judicially Estopped

It From Presenting Such A Note To The Federal Circuit

As related in the O’Connors’ statement of the case, the

Claims Court repeatedly asked the United States to sup-

plement the trial record with a statement from the Gov-

ernment of Panama. The United States ‘‘decline[d]’’ the

Court’s invitation, stating that, coming in 1984, such a

statement would not be “persuasive” on the merits and

that the process of soliciting it would not be “appropriate

or necessary’.

The United States specifically requested that the Claims

Court decide the action based on the “materials before it”’

and agreed to the Claims Court approach of not relying

on any of the post-negotiation statements of either of the

contracting nations (Pet. App. 35a-36a, n. 16). As a result,

the Claims Court analysis was based on the Treaty lan-

guage and the negotiating transcripts.

The representations to the Claims Court by the United

States created a judicial estoppel that should have barred

24

any appellate consideration by the Federal Circuit of the

diplomatic correspondence. The Court’s reliance on the cor-

respondence was reversible error.

1. The doctrine of judicial estoppel prohibits a party

from advancing inconsistent positions with respect to the

same facts before different courts. Himel v. Continental

Til. Natl. Bank, 596 F.2d 205, 210-211 (7th Cir. 1979); In

re Yarn Processing Patent Validity Litigation, 498 F.2d

271, 279 (5th Cir. 1974), cert. denied 419 U.S. 1057, 95

S.Ct. 640, 42 L.Ed.2d 654 (1974). The doctrine prevents

litigants from “playing ‘fast and loose’ ” (Scarano v. Cen-

tral R. R., 203 F.2d 510, 513 (3d Cir. 1953)), or “blow(ing)

hot and cold” (Ronson Corp. v. Aktiengesellschaft, 375

F.Supp. 628, 630 (S.D.N.Y.1974)) with the courts. Its pur-

pose is to “protect the integrity of the courts and the

judicial process” from litigants who would seize upon any

expedient to advance their case. United Virginia Bank v.

Saul Real Estate, 641 F.2d 185, 190 (4th Cir. 1981), quot-

ing from Duplan Corp. v. Deering Milliken, Inc., 397

F.Supp. 1146, 1177-1179 (D.S.C. 1975). See also Bower v.

O’Hara, 759 F.2d 1117 (8rd. Cir. 1985); Donovan v. United

States Postal Service, 530 F.Supp. 894 (D.D.C. 1981).

Although judicial estoppel is not yet a universal doctrine,

it has been approved in dicta by this Court. See Huffman

v. Pursue, Ltd., 420 U.S. 592, 606 n. 18, 95 S.Ct. 1200,

1209 n.18, 43 L.Ed.2d 482 (1975). The doctrine has also

been endorsed by most United States Courts of Appeal

(see supra) and an increasing number of state courts. See,

for example, Associated Hospital Service v. Pustilnik, 497

Pa. 221, 227, 439 A.2d 1149, 1151 (1981); Mecham v. City

** Cf. also Hohri v. United States, 782 F.2d 227 (D.C.Cir. 1986) (gov-

ernment concealment of information tolled statute of limitations), and

Beiton v. Commissioner, 562 F.Supp. 30 (D.D.C. 1982) (government

misconduct in connection with tax lien levy that lulled third-party claim-

ant not to timely file claim of entitlement as to levied funds estopped

IRS from relying on otherwise applicable statute of limitations).

25

of Glendale, 15 Ariz.App. 402, 489 P.2d 65, 67 (1971);

Aetna Life Ins. Co. v. Wells, 557 S.W.2d 144, 147

(Tex.Civ.App. 1977), writ of error refused, 566 S.W.2d

900, 901 (Tex. 1978) (per curiam).

29. While the United States has neither explained the

genesis of the diplomatic correspondence nor conceded that

U.S. officials were responsible for obtaining it, its ap-

pearance on the eve of the oral argument before the Fed-

eral Circuit cannot be coincidental. It strains credulity to

believe that the Government of Panama, seven years after

the Panama Canal Treaty was executed, was suddenly im-

pelled, absent inducement by our State Department, uni-

laterally to express its views about a single provision of

one Treaty Implementation Agreement. Also, while there

is no evidence of a direct cause and effect relationship

between the sudden appearance of the diplomatic corre-

spondence and the “‘historic’’ $30 million foreign aid grant

to Panama only some eight weeks earlier, the temporal

proximity of the two events again hardly suggests a co-

incidence.

Such facts support the application of judicial estoppel

against the United States. Application of this doctrine re-

quires (1) an unqualified assertion of law or fact by a party

in one judicial proceeding, and (2) an intentional contrary

assertion by the same party in a subsequent judicial pro-

ceeding. Bower v. O'Hara, supra. Those elements are pres-

ent here.

Before the Claims Court, the United States made the

unqualified assertion that, as a matter of diplomatic prac-

tice it would not be “appropriate” to obtain a statement

from the Government of Panama. The United States also

maintained that it was not “necessary” to obtain such a

statement. Indeed, the Government effectively conceded

both before the Claims Court (Pet. App. 35a-36a) and be-

fore the Eleventh Circuit in Harris (Pet. App. 76a) that,

as a matter of law, the Article XV(2) issues should be

26

decided without reference to any post-negotiation state-

ments of any of the Panama Canal Treaty negotiators.

Before the Federal Circuit the United States took di-

rectly contrary positions—i.e. (a) that a statement from

Panama was appropriately obtained, and (b) that the con-

tent of the statement, consisting of present day assertions

of three individuals (two of whom were not even involved

in the Article XV(2) negotiations), was proper matter to

consider in interpreting Article XV(2). In other words,

after telling the Claims Court that it was not “appropriate

or necessary” to obtain any statement from Panama, it

procured a statement from Panama for use before another

Court.'*

This is precisely the type of conduct that judicial es-

toppel is meant to prevent—the formulation of ad hoc,

inconsistent litigation positions calculated to win at any

cost and without regard to an accurate rendering of the

facts and law. For that reason, the Federal Circuit should

have judicially estopped the United States from introduc-

ing the diplomatic note.

3. Apart from its judicial dimension, the United States’

conduct also taints the foreign policy process. The Gov-

ernment has used the tools of diplomacy not for any le-

gitimate foreign policy purpose, but to bail itself out of a

difficult, embarrassing and potentially costly domestic law-

suit.

4. A final consideration favoring the application of ju-

dicial estoppel was raised in the Claims Court opinion. In

Federal tax refund suits prior to Coplin, O’Connor, and

Mattox, the United States tendered an affidavit of Michael

’* Even in its opening brief below (at 46), the United States justified

its refusal to ask Panama for its interpretation of Article XV(2) “‘be-

cause the Panamanian interpretation would be of little relevance even

if it should prove to be contrary to the United States’ position”.

27

Kozak, now a deputy legal adviser at the State Department

(Pet. App. 35a-36a, n. 16; App. 87-90). In 1977, Mr. Kozak

was a member of the Department’s Panama Canal Treaty

negotiating team. The Kozak affidavit characterized the

purpose of the negotiations surrounding Article XV(2) as

limited to creating an exemption from Panamanian taxa-

tion. Id.

Below, the United States abandoned its reliance on the

Kozak affidavit, admitting that Mr. Kozak was not present

at the Article XV(2) negotiations. As the Claims Court

noted:

Defendant now concedes that the Kozak Affidavit may

not be used to divine the purpose of Article XV. Feb.

23 Transcript at 30-32. Defendant has also suggested

that reliance on the Kozak Affidavit to support its

proposed finding as to intent was inadvertent. Reply

Brief for the United States in Support of its Motion

for Summary Judgment at 7 n. 4 (filed Jan. 23, 1984).

Defendant has not, however, explained why paragraph

11 of the Kozak Affidavit was presented at all, given

its position as to the admissibility of post-hoc state-

‘ ments by negotiators.

(Pet. App. 35a, n. 16). Having definitively committed itself

to one position before the Claims Court on the admissibility

of post-execution accounts of the Treaty negotiating proc-

ess, the United States should not be permitted, on appeal,

to again change its ground and adopt an entirely new

position. Having conceded that the Kozak statement should

not be considered in construing Article XV(2), the similar

stetements of Mr. Kozak’s counterparts in Panama should

also not be considered.”

’ The Claims Court was particularly disturbed by the fact that the

Kozak affidavit had been submitted to Courts throughout the nation:

Moreover, the Kozak Affidavit, in the very form presented to this

28

B. The Federal Circuit’s Consideration Of Diplomatic Cor-

respondence As New Evidence On Appeal Was Improper

Apart from the doctrine of judicial estoppel, the appel-

late level submission of the diplomatic correspondence was

improper procedurally. Normally, material that is not part

of the trial record cannot be considered on appeal. Boone

v. Chiles, 35 U.S. 117 (1836). Zell v. Jacoby-Bender, Inc.,

542 F.2d 34 (7th Cir. 1976). The reasons for the prohibition

are self-evident. Litigants are entitled to develop a trial

record that includes all matters of fact and law that might

be presented on appeal; trial courts should be given the

first opportunity to rule on all contested matters of fact

and law; and appellate Courts are ill-equipped to consider

questions on which no record exists.

The Eleventh Circuit in Harris—based on the usual pro-

hibition against introducing new evidence on appeal —re-

fused to consider the same diplomatic correspondence

tendered to and received by the Federal Circuit. The Har-

mis court rejected the correspondence not because the court

lacked power to judicially notice it, but because the cor-

respondence required “additional explanation” (Pet. App.

76a). As we show below, that ruling was proper as a

court, has been presented to other courts that have considered

this issue. See n. 9 supra. Some of those courts have expressly

relied on it. See, e.g., Stabler v. United States, No. CA3-83-0166-

R, slip op. at 3 (N.D.Tex. Nov. 30, 1983); Pierpoint v. United

States, No. 83-0354-2, slip op. at 5-6 (D.S.C. Oct. 3, 1983). Other

courts may have been swayed by the affidavit without specifically

mentioning it.

(Pet. App. 35a-36a, n. 16). As the Claims Court also noted (id.), this

conduct resulted in substantial costs to the American public and the

judicial system in litigating the Article XV(2) question:

At least 42 lawsuits, involving perhaps hundreds of plaintiffs, have

presented the issue to this and other courts. See n. 9 supra. The

cost borne by the plaintiffs, the defendant and the judicial system

in resolving this issue through piecemeal litigation has been, and

will continue to be, substantial.

29

matter of law. The Federal Circuit’s contrary ruling was

error.

1. In a dispute over treaty interpretation, many aspects

of the treaty’s genesis and subsequent development may

be considered. Section 147 of the Restatement of Foreign

Relations Law (1965) lists nine permissible criteria for

treaty interpretation including: the plain meaning of the

agreement, the historical context of the agreement, the

drafts and other documents submitted for consideration,

the record of negotiations, the language of the treaty in

any translation, and a comparison of the translations. Sig-

nificantly, the Restatement does not include post-treaty

diplomatic correspondence as an acceptable criteria.’

2. But assuming arguendo that post-treaty diplomatic

correspondence is relevant, the Federal Circuit's judicial

notice and consideration of the correspondence as conclu-

sive of the Treaty interpretation issue was reversible error.

To the extent it may be considered at all, the correspond-

ence should not have been considered without affording

the petitioners their rights to test and contest it on an

adversary record. Such an opportunity is required, for ex-

ample, by Rule 201(e) of the Federal Rules of Evidence,

which provides that the opponent of evidence proposed to

be noticed judicially must be heard on both the content

of the evidence and the manner of its introduction.”

‘8 Article 31 of the Vienna Convention on the Law of Treaties (63

AJIL 875 (1969)) would appear to accept such post treaty correspond-

ence as secondary criteria. The U.S. is not a party to the Vienna

Conventica.

1% To the same effect is Rule 44.1 of the Claims Court rules (identical

to the similarly numbered Federal Rule of Civil Procedure), which re-

quires a party intending to raise an issue of foreign law to provide

opponents with reasonable written notice of the issue. Rule 44.1 of the

Federal Rules of Civil Procedure has been held to require prior notice

of evidence relating to a foreign nation’s interpretation of a bilateral

treaty. See United States v. VETCO, 691 F.2d 1281 (9th Cir. 1981).

30

Before the Federal Circuit, the United States success-

fully urged that the correspondence be considered not-

withstanding ‘“‘the arbitrary rules that might normally

govern discovery in a trial court or preclude an appellate

court from reviewing information not considered by the

lower court’”’ (emphasis added). Opposition of the United

States to Appellee’s Motions to Strike, at 3, March 5, 1985.

The Justice Department may characterize American civil

procedure as it wishes, but the fact remains that those

“arbitrary” rules embody the basic tenets of due process

and fundamental fairness.

3. If those “arbitrary” rules had been applied, the Fed-

eral Circuit would have been required to consider the fol-

lowing points which were made in Petitioners’ Motions to

Strike (filed on March 4, 1985, prior to oral argument)

and Petitioners’ Petitions for Rehearing (filed on May 24,

1985, following the Federal Circuit’s decision):

- In the transcript of a July 1984 meeting of the Com-

mission’s supervisory board, Dr. Fernando Cardoze—

the author of the disputed diplomatic transmittal note—

expressed the view that the U.S. citizen employees of

the Commission should not receive any added com-

pensation (by way of a cost-of-living-allowance) because

they already were entitled to the substantial benefit

of exemption from U.S. income tax:

- Two of the three letters that accompanied the Cardoze

transmittal were written by individuals who were not

present at the negotiating sessions that involved the

As discussed above, the United States expressly declined the Claims

Court invitation to procure such evidence. See also Jannenga v. Na-

tronwide Life Insurance Co., 288 F.2d 169 (D.C.Cir. 1961) (per Burger,

J.) (party that sought the application of District of Columbia case law

at trial prevented from arguing on appeal that trial court should have

judicially noticed the law of Ohio or Missouri).

31

taxation of U.S. employees. Moreover, there is no evi-

dence that any of the three was present at the session

when Article XV(2) was accepted by Panama;

- Although Foreign Minister Cardoze says he consulted

Dr. Aristides Royo (a negotiator for the Government

of Panama, who was present at all the negotiating

sessions), no letter from Dr. Royo was sent to the

American Embassy with the other three;

- No inquiry was made of Dr. Carlos A. Lopez-Guevara,

Panama’s Ambassador Extraordinary and Plenipoten-

tiary to the Treaty negotiations, whose affidavit had

been of record in this litigation since March 8, 1984.

4. Nor was the Federal Circuit correct in equating the

late introduction of the diplomatic correspondence below

with the introduction, in Sumitomo Shoji America, Inc. v.

Avagliano, 457 U.S. 176, 184, n. 9 (1982), of a diplomatic

note from the Ministry of Foreign Affairs of Japan. The

Sumitomo note was submitted on February 26, 1982, two

months in advance of oral argument. (The Federal Circuit

incorrectly characterized the filing of the Sumitomo note

as occurring “within a few days of argument before the

Court’”’.)

As the amicus curiae brief of the United States in Sum-

itomo observed, the February 26, 1982 diplomatic cable

from the Ministry of Foreign Affairs of Japan (MFA) was

not submitted to establish a new interpretation of the dis-

puted Treaty. That cable was simply a reaffirmation of

the Ministry’s previous view. See Appendix B to Brief for

the United States as amicus curiae in the Sumitomo case.

The cable was submitted for the limited purpose of re-

solving an intra-mural squabble that surfaced during Sum-

itomo between the MFA and the Japanese Ministry of

International Trade and Industry (MITI). The cable clari-

fied that MFA and not MITI was the instrumentality within

32

the Government of Japan whose view should be deemed

the official view:

Sumitomo refers (Br. 20) to the brief amicus curiae

filed by the Ministry of International Trade and In-

dustry (MITI) of the Government of Japan in this

case. The MITI brief does not specifically address the

legal question of whether Sumitomo is a company of

Japan for purposes of the Treaty. But because MITI’s

brief might be understood to support Sumitomo’s po-

sition on this issue, and in order to assist the Court

by resolving any resulting confusion regarding the po-

sition of the Government of Japan on this issue we

requested the State Department to seek clarification

from MFA. The February 26, 1982 statement of MFA,

reiterating its previous view (App. B, infra) is the

result of that inquiry.

Brief for the United States as Amicus Curiae, supra, as

reported on LEXIS at 14. Sumitomo cannot be read, as

it was by the Federal Circuit, for the much broader prop-

osition that a foreign government may, by diplomatic cor-

respondence tendered to a U.S. court at any stage of its

proceedings, create a retroactive interpretation of an ex-

tant treaty. As this Court ruled in Sumitomo, it is not

proper to read a government’s current view of a treaty

as evidence of its original intent in entering into the treaty.

Sumitomo, supra, at n. 10.

Moreover, the form of the diplomatic correspondence

submitted below, i.e., 3 post-treaty statements by Pana-

manian negotiators, accompanied by a transmittal letter

from Panama’s then Foreign Minister, is dubious authority.

As the Claims Court observed below (Pet. App. 36a, n.

16), it is far from clear whether a negotiator’s post-treaty

accounts of negotiating sessions are admissible to create,

as the Federal Circuit did here, a retroactive interpre-

tation. The O’Connors submit that such accounts should

be subject to the bar against noncontemporaneous testimony

33

by legislators about legislative intent in enacting statutes.

City of Los Angeles v. Superior Court,County of Los An-

geles, 170 Cal. App. 8d 744, 216, Cal. Rptr. 311 (1985).

Nor should the Court overlook the fact that the United

States was amicus curiae in Sumitomo and therefore a

disinterestéd intermediary. Here, the United States’ con-

duct must be viewed with a jaundiced eye, as it is not

only a litigant, but it has a substantial financial interest

in the outcome. Its conduct, therefore, must be subject to

the customary restraints against the untimely introduction

of “‘new evidence’. See, for example, Labadie Coal Co. v.

Black, 672 F.2d 92 (D.C. Cir. 1982). Such evidence should

be subject to the healthy skepticism attaching to material

tendered at the last moment and having no prior inde-

pendent existence.

Il. Article XV(2) Exempts U.S. Citizen Employees Of

The Panama Canal Commission From U.S. Income

Taxation On Their Commission Salaries

A. The Meaning Of Article XV(2) Is Clear And Should Be

Given Effect

Treaties are contracts between nations. Like other con-

tracts they are interpreted according to the rule that the

plain meaning of a legal instrument is controlling, absent

extraordinary reasons. Sumitomo Shoji America, Inc. v.

Avagliano, 453 U.S. 176, 181 (1982); Maximov v. United

States, 373 U.S. 49, 54 (1963); Choctaw Nation of Indians

v. United States, 318 U.S. 423, 482 (1943); Valentine v.

United States, 299 U.S. 5, 11 (1936); Santowincenzo v.

Egan, 284 U.S. 30, 40 (1931); United States v. Texas, 162

U.S. 1, 36 (1896).

It is difficult to conceive of language with clearer mean-

ing than Article XV(2). The category of persons to which

it applies is expressly stated, and the nature of the ex-

emption to which they are entitled is precisely delineated.

Nowhere in the Treaty package is there treatment of the

34

same subject matter, nor is there other language that cre-

ates an ambiguity, or the latent possibility of one. The

decision of the Claims Court was correct on these grounds

alone. “Any taxes” means any taxes. The Claims Court

below and the Eleventh Circuit in Harris were correct in

so holding.

B. The Omission From Article XV(2) Of Limiting Language

That Was Used Elsewhere In The Treaty And Agree-

ment Requires That The Plain Meaning Be Given Effect

As noted by the Claims Court, the common-sense inter-

pretation of the phrase “‘any taxes” in accordance with

its plain meaning finds authoritative support in other pro-

visions of the Treaty package. For example, the first par-

agraph of Article XV, which applies to the Commission,

its contractors and subcontractors (but not the Commis-

sion’s employees), provides that they “are exempt from

payment in the Republic of Panama of all taxes ... on

their activities or property’ (emphasis added).

in the case of paragraph three of Article XV, which

deals with personal property, gift and inheritance taxes of

U.S. citizen employees, the exemption also is limited by

specific language. It provides that the mere presence of

personal property of American employees ‘within the ter-

ritory of the Republic of Panama ... due solely” to their

work for the Commission will not give rise to the host

country’s usual exercise of in situ tax jurisdiction.

The Treaty itself, in Article IX(9), provides another il-

lustration of how the parties used specific terms to limit

the application of the rule or restriction upon which they

had agreed. Paragraph 9 pertains to vessels, cargo, pas-

sengers and crew that transit the Canal. It says that they

“shall be exempt from any taxes, fees, or other charges

by the Republic of Panama” (emphasis added). The pro-

vision goes on to say—demonstrating the particularity with

which the negotiators treated taxation—that:

35

The Republic of Panama may also require the pas-

sengers and crew disembarking from such vessels to

pay such taxes, fees and charges as are established

under Panamanian law for persons entering its ter-

ritory (emphasis added).

Similarly, in paragraph 2(e) of Article XI of the Imple-

mentation Agreement, the income of the Commission’s U.S.

contractors (as distinguished from their activities and prop-

erty, which are covered by Article XV(1)) is expressly made

subject to Panama taxation unless it is taxed by the United

States at a substantially equivalent rate. This section

strongly suggests that the U.S. treaty negotiators were

capable of being equally as precise if they had intended

to retain for the United States the right to tax Americans

on their Commission salaries.”

The Government has argued below that the repeated

use of these explicit limitations in other parts of the Treaty

agreements should permit the court to engraft similar lan-

guage onto Article XV(2). The Claims Court correctly con-

cluded, however, that such a radical departure from the

plain meaning of Article XV(2) was unwarranted under

applicable rules of treaty construction (Pet. App. 26a).”

2 The trial court discussed other provisions in the treaty documents

where specific language was employed to create unilateral limitations

(Pet. App. 23a-27a).

2} When the Treaty was transmitted to the Senate by the Executive

Branch (S. Exec. Rep. 95-12, 95th Cong., 2d Sess. 155 (1978)), it was

accompanied by a section-by section analysis which stated that the

provision here in dispute was intended to provide an exemption only

from Panamanian taxes. In the courts below, the Government relied

on that section-by-section analysis implying that it constituted contem-

poraneous legislative history as to the meaning of the provision. In

fact, like the Kozak affidavit, the analysis was prepared after the Treaty.

In addition, the Government conceded before the Claims Court that

the analysis was prepared by State Department officers, Kozak and

Geraldeen Chester, ‘“‘who were not present at any of the negotiating

36

C. The Use By The United States Of Specific Limitations

In Other International Agreements Demonstrates That

This Was A Deliberate Omission

The Government suggested below the possibility of a

drafting error. The Government argued that, although the

U.S. negotiavors were skilled, “even skilled persons do not

always use the most precise language” (U.S. Government

Brief to the Federal Circuit, filed November 30, 1984, p.

42). If it is the Government’s explanation that this liti-

gation stems from a drafting error, taxpayers submit that

such a proposition is untenable. The record shows that

ranking officials in the State and Treasury Departments

participated in the preparation and negotiation of the U.S

position. The Court may take notice that Ambassadors

Elisworth Bunker and Sol Linowitz, who conducted and

concluded the negotiations with Panama, were experienced

officers in the diplomatic service.

The truth of the matter is that the language of Article

XV(2) is both special and unique. The Kozak affidavit (App.

87-90) says that it had its genesis in the standard Status

of Forces Agreements (SOFA) reached by the United

States with other countries. If that is so, then the sub-

stantive changes in wording from prior usage—which un-

deniably have changed the meaning—cannot reasonably be

said to have been unintentional or inadvertent. This is seen

by examining the corresponding provisions in various

SOFA Agreements, while noting that the O’Connors know

of no SOFA Agreement that is similar to Article XV(2).

In the SOFA negotiated among the parties to the North

sessions during which we know that the substance of Article XV was

discussed”’ (Pet. App. 57a). Finally, the Claims Court properly observed

that the issue was presented to the Senate by the Executive Branch

without disclosure of any of the negotiating history showing that there

was a serious binational question involved (Pet. App. 59a). Before the

Senate, therefore, the issue appeared as one merely of domestic tax

law which, as then Legal Advisor Hansell said, would be handled as

“‘an internal matter’ (U.S. App. 12a).

37

Atlantic Treaty (signed June 19, 1951 and entered into

force August 23, 1953), the pertinent language of Article

XI(1) states:

Members of a force or civilian component shall be

exempt from taxation in the receiving State on the

salary and emoluments paid to them as such members

by the sending State or on any tangible movable prop-

erty the presence of which in the receiving State is

due solely to their temporary presence there (empha-

sis added).

The supplementary agreement to the NATO Status of

Forces Agreement pertaining to forces stationed in the

Federal Republic of Germany was signed by seven coun-

tries on August 3, 1959 and entered into force July 1,

1963. In Part II of the agreement pertaining to Article

68, the following ‘“‘agreed declaration” concerning German

taxes appears at paragraph 2(a):

Tax is imposed only on internal income, i.e., in gen-

eral, income earned within the Federal Republic, ex-

cept emoluments and income paid to members of a

force or of a civilian component by the sending State

in their capacity as such members (emphasis added).

A similar provision limiting the tax exemption of U.S.

armed force members and the civilian component is con-

tained in the 1960 Agreement Under Article VI of the

Treaty of Mutual Cooperation and Security between Japan

and the United States. Article XIII(2) of that Agreement

provides:

Members of the United States armed forces, the ci-

vilian component, and their dependents shall not be

liable to pay any Japanese taxes to the Government

of Japan or to any other taxing agency in Japan on

income received as a result of their services with or

38

employment by the United States armed forces (em-

phasis added).

The SOFA between Australia and the United States, in

like manner, provides in Article 6(1), that:

Income derived by a member of the United States

Forces or of the civilian component from rendering -

services as a member to the United States Govern-

ment in Australia, shall be deemed not to have been

derived in Australia, provided it is not exempt, and

is brought to tax, under the taxation laws of the

United States (emphasis added).

Agreement Concerning the Status of United States Forces

in Australia, signed May 9, 1963 and entered into force

May 9, 1963. Article XIV(2) under Article IX of the Mutual

Defense Treaty between the United States and the Re-

public of Korea (signed July 9, 1966 and entered into force

February 9, 1967) similarly states:

Members of the United States armed forces, the ci-

vilian components, and their dependents shall not be

liable to pay any Korean taxes to the Government of

the Republic of Korea or to any other taxing agency

in the Republic of Korea on income received as a

result of their service with or employment by the

United States armed forces, including the organiza-

tions provided for in Article XIII (emphasis added).

Further illustrating the fact that Article XV(2) was a

special departure from established U.S. Government policy

is the Convention Between the United States and Egypt,

signed August 24, 1980 (T.I.A.S. 10149). That agreement,

executed three years after Article XV(2), continues the

pattern of the pre-Panama Canal treaty tax provisions dis-

cussed above. Article 21(1) of that Agreement states:

Wages, salaries, or similar remuneration, including

pensions, annuities, or similar benefits paid from pub-

lic funds of one of the Contracting States:

39

(a) To a citizen of that Contracting State, or

(b) To a citizen of a State other than a Contracting

State who comes to the other Contracting State

expressly for the purpose of being employed by

the first-mentioned Contracting State

for labor or personal services performed as an em-

ployee of the national Government of that Contracting

State, or any agency thereof, in the discharge of func-

tions of a governmental nature shall be exempt from

tax by the other Contracting State (emphasis added).

Given this depth of U.S. Government experience in

drafting tax provisions in treaties, it may properly be con-

cluded that the U.S. negotiating team simply could not

have been so lacking in knowledge as to have adopted

Article XV(2) without intending to create a binational ex-

emption. As stated so aptly in Santovincenzo v. Egan, 284

U.S. at 37 “(t]he omission from Article VI of the Treaty

with Persia of a clause of this sort, so frequently found

in treaties of this class, must be regarded as deliberate’.

D. The Federal Circuit Erred In Refusing To Consider

Other Official Statements By Panama That Support The

Construction Of Article XV(2) As A Binational Exemp-

tion

The admissibility of the diplomatic correspondence from

Panama is treated in Point I of this brief. Even if arguendo

the correspondence might be admissible from a procedural

standpoint, it was improper for the Federal Circuit to con-

sider that material alone. The papers consisted of almost

identical letters from three former Panamanian negotia-

tors. These letters were delivered, in February 1985, to

the U.S. Embassy in Panama with a brief transmittal note

from then Foreign Minister, Dr. Fernando Cardoze (U.S.

App. 4a-9a). The thrust of the note and the letters is that

the Ministry’s position at that time coincided with that of

the State Department.

40

On March 4, 1985, the O’Connors filed a motion to strike

the correspondence. Attached to their motion was a tran-

script of certain remarks made in July 1984 by the then

Foreign Minister of Panama (Mr. Oyden Ortega) and by

Dr. Fernando Cardoze (the person later to succeed Mr.

Ortega and who, as Foreign Minister, signed the note that

transmitted the three letters). The transcript was from the

official record of a meeting of the Commission’s nine-mem-

ber supervisory board (supra, pp.18, 30) established under

Article III(3a) of the Canal Treaty and Pub.L. 96-70, §1102,

Sept. 27, 1979, 93 Stat. 456, 22 U.S.C. §3612.

The question under discussion was whether U.S. citizen

employees should be given a cost of living allowance

(COLA) to compensate them for the impending loss of their

postal, commissary and post exchange privileges to take

place in October 1984 pursuant to Article XIII(3) of the

Implementation Agreement. Under §1206 of Pub.L. 96-70,

the Commission had permissive authority to grant such a

COLA. The four Panamanian members of the board were

adamantly opposed to extending such a benefit, principally

because it would create a disparity in treatment between

U.S. and Panamanian employees. Dr. Cardoze expressed

the view that the exemption from U.S. income taxation

created by the Treaty was the form of “special compen-

sation” that the U.S. citizen employees should receive:

I think the U.S. negotiators were wise, and just as

the Panamanian negotiators extablished that the priv-

ileges would be eliminated—why did they do that?

Because they knew that would be an irritant in the

relationship. Likewise, the American negotiators were

very wise. They looked for a manner in which they

could give a compensation to the U.S. employees, in

fact much more than the COLA could give. There is

a clause that says the U.S. citizen will not pay taxes

for the salaries that they earn from the Panama Canal

Commission.

41

So if you believe that it is necessary to grant an

additional compensation, then let’s not make a mis-

take. Let us give them—let’s give this additional com-

pensation to all employees, or if you want to give a

special compensation to the U.S. citizens who were

here prior to October 1, 1979, and who are going to

lose their privileges, then let us look for it in the U.S

treasury, and probably in the Treaty is already a basis

for such a benefit.

At the board’s session on the following day, Minister

Ortega commented as follows:

MINISTER ORTEGA: (Through the interpretor) It

happens, Mr. Chairman, that in my interventions pre-

viously, Dr. Cardoze had expressed the aspect related

to the income tax matter that could be something

that—could be an exemption for the U.S. citizen, and

that undoubtedly this would be a form of—it would

be a real economic compensation.

At these board meetings, Minister Ortega and Dr. Car-

doze both were participating officially on behalf of their

Government in the management of the Panama Canal as

contemplated by Article III of the Treaty. They were also

speaking on a matter directly related to the interpretation

of Article XV(2).” Their statements, clearly within the rule

set out in United States v. Reynes, 50 U.S. (9 How.) 127,

147-48 (1850), should have been accepted by the Federal

Circuit as more persuasive evidence of Panama’s position

than any other submission in the case.

# These meetings were under the Chairmanship of U.S. Assistant

Secretary of the Army William R. Gianelli. Only some two months

earlier (on May 4, 1984), Secretary Gianeili had written a three page

official letter to Assistant Secretary of State Langhorne A. Motley

urging that the Executive Branch agree that Article XV(2) did in fact

create a binational tax exemption. Secretary Gianelli’s letter was at-

tached as Appendix 6 to the O’Connor brief in the court below.

42

Such a conclusion becomes even more compelling upon

careful analysis of the three letters. In the case of Mr.

Jaime Arias (U.S. App. 9a), he claimed to have had a role

only in the negotiation of Article XVI(2) (which is in the

SOFA that implements Article IV of the Treaty), implicitly

admitting that he was not involved with Article XV(2). As

for Drs. Ahumada and Escobar, they stated that Articles

XV(2) and XVI(2) in question “were discussed, negotiated,

and drafted exclusively with respect to the tax exemptions

that ... Panama would grant.”’ Unlike Dr. Lopez-Guer-

vara, however, neither individual states that he partici-

pated in the negotiations where these articles were

adopted. Indeed, the record contains no evidence that Dr.

Ahumada ever participated in any of the meetings on the

question of taxation.

If the Court should conclude that the tendered diplo-

matic correspondence is admissible at all, the O’Connors

urge that, in any event, it should be considered side-by-

side with the diametrically inconsistent opinions expressed

by Minister Ortega and Dr. Cardoze only seven months

before.”

* The interpretation of Article XV(2) as a binational tax exemption

is further supported by the statute that was passed to implement the

Treaty package. Prior to the Treaty’s entry into effect on Oct. 1, 1979,

a tax allowance was paid U.S. citizen employees of the Canal agency

pursuant to 2 C.Z.Code §146(1), 76A Stat. 17. The authority for pay-

ment of that allowance was repealed by the Treaty-implementing leg-

islation, §3303(aX1) of Pub.L. 96-70, 98 Stat. 499, 22 U.S.C. §3602,

Sept. 27, 1979. The Commission, in turn, published regulations on Oct.

2, 1979, to deny the tax allowance to newly-hired U.S. citizens. 44

Fed.Reg. 56693. Subsequently, the Commission eliminated the allowance

with respect to all U.S. citizen employees. 45 Fed.Reg. 59150, Sept.

8, 1980. See 35 CFR 134(b), Dec. 1979 ed.

Repeal of the tax allowance, which became superfluous in view of

the tax exemption, constituted a practical construction of Article XV(2)

by Congress consistent with the interpretation of Article XV(2) as a

binational tax exemption. In an appropriate case, subsequent legislative

action may demonstrate what intent underlies the initial enactment.

43

E. The Cases Relied On By The Government Are

Inapposite

The appellate court below based its decision almost en-

tirely upon the three letters that_the State Department

received from then Panama Foreign Minister Cardoze and

transmitted to the Court of Appeals one working day be-

fore the oral argument. In doing so, the Court failed to

acknowledge that the words “‘any taxes’’ as used in Article

XV(2) can reasonably be interpreted in only one way. The

Court concluded simply that its role was “limited to giving

effect to the intent of the Treaty parties’ (Pet. App. 6a)

as disclosed in the three letters. By doing so, the Court

ignored the applicability of the plain meaning rule and,

with nothing more than a single sentence of its opinion,

dismissed the extended, careful discussion by the Claims

Court of the plain meaning rule as it affects this treaty

dispute.

In a concurring opinion, three of the five-member panel

below expressed the view that the letters were not essen-

tial to their decision in favor of the Government. Their

conclusion also ignored the text and plain meaning of Ar-

ticle XV(2). Rather than construing the language, they

judicially engrafted on the title of the article (i.e., “Tax-

ation’) the words “‘by the Republic of Panama” (Pet. App.

8a).

In the proceedings below, the Government repeatedly

asserted that the plain meaning of the Implementation

Agreement need not be followed if the result would be

contrary to the intent of the signatories. In support of

that contention, the Government cited this Court’s deci-

sions in the following cases: Sumitomo Shoji America, Inc.

“We regard the action of the Congress, following that of the State,

as a practical construction of the treaty....” Pigeon River Imrrove-

ment, Slide & Boom Co. v. Charles W.Coz, Ltd., 291 U.S. 138, 160-61

(1934).

44

v. Avagliano, 457 U.S. 1/6 (1982); Maximov v. United

States, 373 U.S. 49 (1963); United States v. Texas, 162

U.S. 1 (1896); and Ross v. McIntyre, 140 U.S. 453 (1891).

Examination of these decisions reveals that in none of

them does the actual holding stand for the proposition

espoused by the Government. The Government relies prin-

cipally on Sumitomo and places special emphasis (as did

the Federal Circuit) on the portion of the opinion which

reads: “Our role is limited to giving effect to the intent

of the Treaty parties.’”’ 457 U.S. at 186. Both the Gov-

ernment and the Federal Circuit, however, overlook the

subsequent statement that delineates what the Court ac-

tually held:

When the parties to a treaty both agree as to the

meaning of a treaty provision, and that interpretation

follows from the clear treaty language, we must, ab-

sent extraordinarily strorg contrary evidence, defer

to that interpretation (emphasis added).

In Sumitomo, which involved only private litigants, the

Government appeared as amicus curiae, as noted above

(supra at 31-33), and presented a cable from Japan which

reaffirmed that country’s earlier opinion. The opinion

agreed upon by the U.S. and Japan accorded with the

plain meaning of the clause in question, and the Court

held that it should be so construed. There is a crucial

difference between that situation and the case at bar. Here

the Government asserts that Article XV(2) does not mean

what it says and that Panama now shares the same view.

The result and reasoning of Sumitemo do not support the

Government’s theory that the plain and obvious meaning

of the words “any taxes” may be altered merely because

the two governments are said to have arrived at that

conclusion in February 1985, seven years after the article

was agreed upon.

Examination of the three other decisions also reveals

that none of them supports the Government’s position. In

45

Maximov, this Court considered a tax treaty which ex-

empted residents of the United Kingdom from U.S. capital

gains taxation. It held that the plain meaning of the term

“resident of the U.K.’”’ should be given effect and a tax

exemption was denied to the claimant trust that was a

resident of the U.S., although with U.K. beneficiaries. The

opinion by way of dicta said:

... it is particularly inappropriate for a court to sanc-

tion a deviation from the clear import of a solemn

treaty between this Nation and a foreign sovereign,

when, as here, there is no indication that application

of the words of the treaty according to their obvious

meaning effects a result inconsistent with the intent

or expectations of its signatories. 373 U.S. at 54.

In United States v. Texas, as noted above, the Court

stated that the intention of the two governments, gathered

from the words of the treaty, must control. The decision

shows, however, that there were complex questions raised

by the nonconformity of the treaty text with a map to

which it made reference. Those ambiguities meant that

there was no plain meaning that could be given effect—

making it necessary for the Court to construe the disputed

language by referring to objective geographic data.

Ross v. MeIntyre required the interpretation of two trea-

ties between the U.S. and Japan, entered into in 1857 and

1858, to determine whether the American Consul General

had jurisdiction to try a U.S. citizen for a crime committed

in Japan. It was necessary to resolve an ambiguity raised

by the second treaty. Application of plain meaning, such

as is presented in the present case, was not at issue.

None of the cases relied upon by the Government below

supports the alteration of language sense where, as here,

there is no ambiguity and the subject matter does not

appear elsewhere in the treaty documents. This is an in-

stance, it is submitted, where no applicable precedent or

principle permits the treaty terms to be narrowed. “As

46

treaties are contracts between independent nations, their

words are to be taken in their ordinary meaning ‘as under-

stood in the pubiic law of nations.’ ” Santovincenzo v. Egan,

284 U.S. at 40. The O’Connors urge the Court to apply

here the elementary canon of construction that it used in

interpreting a provision of the Civil Rights Act of 1964,

when it said:

[T]he plain, obvious and rational meaning of a statute

is always to be preferred to any curious, narrow, hid-

den sense that nothing but the exigency of a hard

case and the ingenuity and study of an acute and

powerful intellect would discover.

Chandler v. Roudebush, 425 U.S. 840, 849 (1976).

F. The History And Tenor Of The Treaty Negotiations Con-

firm That Article XV(2) Is A Binational Tax Exemption

As indicated above, Panama was adamantly opposed to

the notion that it should be barred from taxing United

States citizens who lived and worked in Panama as PCC

employees. As late as July 14, 1977, Panama insisted that

such employees, who would enjoy all the governmental

services of the new sovereign, must pay their fair share

of taxes to Panama.

In all previous Article XV(2) litigation, the United States

maintained that, notwithstanding the exemption from ‘‘any

tax2s’’ contained in Article XV(2), the negotiations ended

in mid-August 1977 with Panama acceding to the U.S.

demand that the PCC income of U.S. citizen employees

be off-limits to Panamanian taxation. As shown below,

however, such a result is inconsistent with the course and

tenor of the Treaty negotiations, and the long, stormy

history of Panama-U.S. relations. The negotiating history

clearly suggests that Article XV(2)’s object was to establish

a binational tax exemption as a compromise between the

sharply divergent Panamanian and American positions.

47

1. The precise language of Article XV(2) was adopted

from a parallel provision of Article XVI(2) of the Imple-

mentation Agreement of Article IV of the Treaty, gov-

erning the status of U.S. Forces in Panama. The language

of the Article IV Implementation Agreement is almost

identical to the language of Article XV(2) except that, in

the second sentence, an explicit reference is made to tax-

ation “‘as is provided by Panamanian law’”’:

Members of the Forces or the civilian component, and

dependents, shall be exempt from any taxes, fees, or

other charges on incorne received as a result of their

work for the United States Forces or for any of the

service facilities referred to in Articles XI or XVIII

of this Agreement. Similarly, as is provided by Pan-

amanian law they shall be exempt from payment of

taxes, fees, or other charges on income derived from

sources outside of the Republic of Panama (emphasis

added).

An earlier draft of the Article XV(2) language, dated June

26, 1977, contained the identical second sentence reference

to taxation “as is provided by Panamanian law”’.

The final text (supra, pp.3,36) shows that the language

ultimately agreed to by Panama and the Uniied States in

Article XV(2) was purged of all reference to “Panamanian

law”’.

Given the absence of a negotiating record for the ses-

sions at which Article XV(2) was adopted, it may never

be definitively ascertained why the terminology ‘‘as pro-

vided by Panamanian law” was dropped from Article XV(2)

but retained in the parallel Implementation Agreement for

Article IV of the Treaty. The circumstances suggest, how-

ever, that the elimination from Article XV(2) of the only

language referring to either Treaty party was intended. to

leave absolutely no question but that the Article XV(2)

exemption was applicable to both Treaty parties.

48

2. Interpretation of Article XV(2) as a compromise for-

mulation, exempting the U.S. citizen PCC employees from

taxation by both Treaty parties, is fully consistent with

the political agenda of each of the negotiating parties.

From the Panamanian point of view, mutual acceptance

of a binational tax exemption would confer special re-

cognition on the binational status of the Panama Canal

Commission, which Panama viewed as a partnership of

equals. It would also erase any lingering doubt that the

U.S. intended to assert, by the taxation power, vontinuing

“colonial” authority over the Canal area.

From the perspective of the United States, a binational

exemption would avoid the undesirable precedent of Pan-

amanian taxation of the income of Americans employed

by the Panama Canal Commission. It also would avoid the

danger (noted by Ambassadors Bunker and Linowitz) that

giving Panama the right to tax these U.S. employees might

be used by treaty opponents to oppose ratification.

3. For both nations, a binational tax exemption was a

relatively inexpensive solution to the impasse. Panama, of

course, had never taxed income earned by U.S. citzen em-

ployees of the former “‘Canal Zone’’. Accordingly, Panama

lost notk ~g by negotiating away the power to tax them.

And, as «uiscussed above, such salaries, historically, have

been either free of U.S. tax prior to 1951 or taxed at a

lower effective rate thereafter. Moreover, the fiscal impact

on the U.S. was even further diminished because the pool

of U.S. citizen-employees potentially benefiting from the

exemption would, by operation of the Treaty, progressively

diminish and, by the year 2000, disappear. Alsc, the U.S.

negotiators, in general, viewed the taxation dispute as a

political problem largely bereft of any real economic sig-

nificance.”

*In contrast to these tenable explanations for the compromise, the

Government in its Reply Brief in Harris (at p. 7, n.4), was unable to

offer any explanation of why Panama allegedly capitulated, stating that:

49

4. Finally, a tax exemption for U.S. citizen PCC em-

ployees was a modest cost compared with the other eco-

nomic concessions made by the United States to Panama

in the Treaty package. In all, the United States obligated

itself: to pay Panama an annuity which would increase

from $50 or 60 million annually to $80 or 90 million an-

nually when the treaty terminates in 1999; to secure ap-

proximately $300 million in aid credits for Panama; and

to turn over to Panama property previously owned by the

U.S. Government having an estimated replacement value

of $8 billion. See S. Exec. Rep. 95-12, 95th Cong., 2d Sess.

(1978) at 91 et seg. The modest tax exemption conferred

by Article XV(2) is entirely consistent with the pattern of

other economic concessions provided for in the Treaty

package.

CONCLUSION

For the foregoing reasons, the decision of the United

States Court of Appeals for the Federal Circuit should be

reversed.

ALLAN I. MENDELSOHN

MARVIN L. SZYMKOWICZ

Warp & MENDELSON, P.C.

1100 17th Street, N.W.

Suite 900

Washington, D.C. 20036

Of Counsel

Der A McKamsey 2) TEEO2

Apartado 3116

Balboa-Ancon

Republic of Panama

011-507-63-5316

“Exactly why the Panamanians accepted the U.S. position may never

be known with certainty’.