THE SUPREME COURT OF THE
FEDERATED STATES OF MICRONESIA
Cite as FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (II),
7 FSM Intrm. 365 (Yap 1996)
FEDERATED STATES OF MICRONESIA
SOCIAL SECURITY ADMINISTRATION,
KINGTEX (FSM), INC.,
CIVIL ACTION NO. 1994-3020
ORDER AND MEMORANDUM OF DECISION
Trial: October 10, 1995
Decided: January 5, 1996
For the Plaintiff: R. Barrie Michelsen, Esq.
Law Offices of R. Barrie Michelsen
P.O. Box 1450
Kolonia, Pohnpei FM 96941
For the Defendant: Clement Mulalap, Esq.
Mulalap & Mulalap
P.O. Box 461
Colonia, Yap FM 96943
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Both employer and employee must pay a tax or contribution to the social security trust fund. It is the employer's responsibility to deduct the employee's contribution from the wages it pays. FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (II), 7 FSM Intrm. 365, 367 (Yap 1996).
Social security taxes are a percentage calculated from the wages actually received by the employee not from the amount in the employment contract. FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (II), 7 FSM Intrm. 365, 367 (Yap 1996).
Statutes ) Construction
A statute that imposes a penalty is subject to strict construction, particularly where a penalty may be imposed without requiring a finding of a culpable state of mind. FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (II), 7 FSM Intrm. 365, 368 (Yap 1996).
The maximum statutory penalty that may be assessed for failure to pay social security taxes is $1000. FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (II), 7 FSM Intrm. 365, 368 (Yap 1996).
Judgments; Social Security
Interest on unpaid social security taxes is assessed at 12% from date due until paid even if part of a court judgment and even though court judgments normally bear a 9% interest rate. FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (II), 7 FSM Intrm. 365, 370 (Yap 1996).
The Social Security Administration is entitled to its reasonable attorney's fees and costs when a court determines that a contribution is due. FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (II), 7 FSM Intrm. 365, 370 (Yap 1996).
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MARTIN YINUG, Associate Justice:
On September 15, 1995, partial summary judgment was granted to the plaintiff, FSM Social Security Administration ("SSA"), on the issue of liability for social security contributions due from the defendant, Kingtex (FSM), Inc., ("Kingtex"). The case proceeded to trial on the issue of the amount of contributions due, and based on that figure, the penalty, interest, and attorney fees and costs due.
The trial was on October 10, 1995. The SSA called one witness, SSA Operations Officer Marilyn Johnson, and offered six exhibits. Kingtex called two witnesses: Kingtex President Oliver Cheng, and Lolita Libunao, a Kingtex accountant. Kingtex also offered two exhibits. All the exhibits were moved into evidence without objection. Since the action was tried on the facts, the Court makes its Findings of Fact and Conclusions of Law, as required by FSM Rule of Civil Procedure 52(a).
III. Findings of Fact and Conclusions of Law
A. Amount of Contributions
There is only one issue of fact: the amount of contributions due. Based on the Order Granting Partial Summary Judgment, FSM Social Sec. Admin. v. Kingtex (FSM), Inc. (I), 7 FSM Intrm. 280 (Yap 1995), the amount of contributions due is equal to eight percent of the cash value of the meals provided to the Kingtex workers for the period in question, July 1991 to March 1993. Once that figure is determined, the remaining penalty, interest, and attorney fees and costs may be calculated.
The figure of eight percent comes from the statute. During the period in question, an employer was required to pay a tax or contribution to the social security trust fund on behalf of each employee equal to four percent of each employee's wages. 53 F.S.M.C. 902(3). An employee was likewise required to pay a tax to the social security trust fund, equal to four percent of the wages received by an employee. 53 F.S.M.C. 901(1)(c). The employee contribution was required to be deducted from wages paid by the employer. 53 F.S.M.C. 901(2). It was, and is, the employer's responsibility to deduct the employee's contribution. Id.
The parties submitted different calculations of the eight percent contributions due. The SSA argued that the contribution due is eight percent of $80 per employee per month, the difference between $240 salary stated in the written contract, and the $160 cash payment a worker actually received. Kingtex's calculation was lower, based on its summary of records of food expenses for its employees for the time in question.
The statute defines social security contributions or taxes as a percentage of "wages received by" an employee, 53 F.S.M.C. 901(1), and of "wages, paid by" an employer, 53 F.S.M.C. 902. The Court has ruled that Kingtex owes contributions to the social security trust fund for the cash value of meals provided by Kingtex and received by the Chinese workers. Kingtex (FSM), Inc. (I), 7 FSM Intrm. at 284. Based on that ruling and a plain reading of the statute, Kingtex's calculations of the contributions owed is better reasoned. Accordingly, the Court adopts the figure offered by Kingtex, in the amount of $24,925.27, as the amount of contributions due.
The SSA argued that social security contributions should be calculated on the employment contract as signed, claiming that it is not possible for the employer to repudiate a written contract once it is shown to the SSA. Also, using the contract to determine the contribution makes for easier calculation. The SSA's arguments do not withstand scrutiny. Although relying on the contract may ease calculation of contributions, the SSA's own witness testified that examining the contract is only the start of an SSA audit. An auditor checks the contract against payroll records ) a better record of wages "received by" an employee, and "paid by" an employer. The auditor also checks the company records with those maintained by other departments, like immigration and State labor departments.
Second, the argument that contracts are less subject to manipulation by devious employers than are payroll records is neither necessary nor sound. Contracts are as subject to manipulation as any other document. More importantly, there is no suggestion that Kingtex manipulated any documents. The SSA stated that Kingtex provided nothing less than complete and open cooperation with the audit and this litigation. The Court observes that this openness included the opportunity to review, without objection, confidential communications to Kingtex from its attorney. As such, the possibility that a devious employer might manipulate contracts to underpay social security contributions is not before the Court. The Court should decide only the issues necessary to resolve the dispute before it. Palik v. Kosrae, 6 FSM Intrm. 362, 364 (App. 1994).
The Court therefore holds that the social security contributions due from Kingtex for the value of meals "received" by the Chinese workers for the period in question, and "paid by" Kingtex, is $24,925.27.
B. Statutory Penalty
Once the amount of contributions due is calculated, the Court may then determine the penalty, interest, and attorney fees and collection costs the SSA claims. The statute levies a penalty as follows:
Any covered employer who fails to submit the quarterly report and pay the social security tax within ten days after the end of the quarter shall be considered delinquent. The [FSM Social Security] Board . . . shall be vested with the authority to levy a penalty of not more than $1000 on delinquent employers.
53 F.S.M.C. 605(3). Kingtex failed to pay the tax due within ten days of the end of each quarter between July, 1991 and March, 1993. Assessment of the penalty on a delinquent employer does not require a showing of a knowing or willful failure to report and pay contributions. A penalty is therefore due.
Kingtex requested that the Court waive the penalty in the interest of justice. But the statute vests authority to levy a penalty with the Board, not with the Court. This Court will not waive the statutory requirement to levy a penalty.
The fact that a penalty is due is clear; the amount of the penalty is not. The SSA claims a penalty of $2,492.52, calculated at ten percent of the contributions due for each quarter between July 1991 and March 1993, and claiming it may do so by Board policy. The Board adopted a Policy, pursuant to statute, of levying a penalty based on a percentage of the contributions due. "The FSMSSA Board in its FY 1990 First Regular Meeting approved a 10% penalty charge not exceeding $1,000, on delinquent employers." FSM Social Security Administration Policy Number AP-500 (Mar. 20, 1991), Ex. A to Pl.'s Post-Trial Memorandum. Kingtex argued that the statute is not clear as to whether the penalty should be assessed quarterly or yearly, and points out that a Board "Policy" does not have the same force as a regulation.
The Court does not adopt either position. The statutory language regarding a penalty does not link the penalty to a quarter, a year, or indeed to any length of time. The statute does not say that a penalty is linked to a number of violations, or to one continuous violation. It says simply that the maximum penalty due from a delinquent employer is $1000. 53 F.S.M.C. 605(3). A statute that imposes a penalty is subject to strict construction. 36 Am. Jur. 2d Forfeitures and Penalties § 8, at 616 (1968). Such statutes should not be construed to include anything beyond their letter. Id. This rule of strict construction should be applied particularly where, as here, a penalty may be imposed without requiring a finding of a culpable state of mind. As such the penalty should be assessed according to the strict terms of the statute. The maximum penalty allowed by 53 F.S.M.C. 605(3) is $1000. A penalty of $1000 is therefore levied against Kingtex.
The Court's decision is bolstered by the lack of indication in the statute, the legislative history, or the policy adopted by the Board, that the penalty can be assessed in the manner that counsel for the SSA suggests. The statute is not vague or ambiguous, and it is not necessary for the Court to examine legislative history in order to interpret it. See FSM v. George, 2 FSM Intrm. 88, 92 (Kos. 1985). However, the Court notes that the legislative history indicates Congressional intent that the maximum penalty be $1000. "These amendments . . . increases [sic] the amount of a penalty that can be collected from $250 to $1,000 . . . ." SCREP No. 5-334, J. of 5th Cong., 4th Reg. Sess. 434
(1988). Likewise, the Board adopted a Policy of assessing a ten percent penalty, "not exceeding $1,000, on delinquent employers." FSM Social Security Administration Policy Number AP-500. The SSA claims much more than the maximum penalty allowed by statute and regulation. The maximum penalty of $1000 is therefore levied against Kingtex.
C. Statutory Interest
The second post-trial issue is the amount of interest authorized by the statute. Resolving this issue requires determining whether interest must be levied, and the dates from which any interest may be assessed. The statute provides:
If any tax or penalty imposed by this Subtitle is not paid on or before the date prescribed for such payment, there shall be collected, in addition to such tax and penalty, interest on the unpaid balance of the tax principal at the rate of twelve percent per annum from its due date until the date it is paid.
Kingtex requested that the Court waive the assessment of interest under the Court's general powers, pursuant to 4 F.S.M.C. 117. But that code section limits the Court's general powers to necessary things "not inconsistent" with laws. The Social Security Act holds a delinquent employer strictly liable for statutory interest. If the tax is not paid before the due date, then interest is charged until it is paid. 53 F.S.M.C. 605(4). Because Kingtex failed to pay the social security tax when due, it must pay interest on that amount.
The date on which interest should be calculated is another question. The SSA claims interest from October 10, 1991. Kingtex argued the earliest it received notice that contributions were due was in the Statement of Accounts received in March 1994.
Among many other questions in this case, this is one of first impression. Kingtex's argument that it did not have to pay contributions is plausible, because there was no earlier case requiring it to do so. The SSA argued that it was policy to claim food expenses if those were deducted from the contracted salary. In answers to defendant's interrogatories, the SSA indicated that it considers food provided by employers to be remuneration, that is wages subject to the social security tax. But the SSA submitted no evidence or documents indicating that this conclusion about food expenses was pursuant to a Board Policy, adopted pursuant to statute. 53 F.S.M.C. 703. Accordingly the Court treats this as a question of fact, of which plaintiff has failed to bear its burden of proof.
By treating the date from which interest may accrue as one of fact, the Court adopts dates between the two extremes suggested by the parties. It would be unfair to demand that Kingtex pay interest from a date before the SSA determined that a tax was due. The Kingtex audit took place March 22 to 25, 1993. While the SSA did not prove that it sent Kingtex a statement of account before March 1994, Marilyn Johnson testified that the results of an audit were often communicated to employers by telephone. Although Oliver Cheng denied receiving any notice, he admitted he was off-island during the time of the audit. Likewise, defendant's witness Lolita Libunao testified that she was at Kingtex during the audit in March 1993. Finally, Kingtex sought advice of counsel and received it by letter dated March 22, 1993.
For these reasons, the date prescribed for payment of the contributions was the date the SSA first demanded payment, deemed to be March 22, 1993. However, the Court's adoption of the date should be limited to the unusual facts of this case. In the future, employers are on notice that food or
meals regularly provided to employees may be subject to the social security tax.
Adopting the March 22, 1993 date makes for slightly different calculations. Since contributions are due ten days after the end of the quarter, only contributions due as of January 10, 1993, can bear interest from the date the SSA first demanded payment, March 22, 1993. The sum of contributions due as of January 10, 1993, is $20,292.77. That sum bears interest at twelve percent per annum, or one percent per month, from March 22, 1993, until it is paid. The remaining quarter's contribution did not come due until April 10, 1993. The sum of contributions due from that quarter is $4,632.50. That sum bears interest at twelve percent per annum, or one percent per month, from April 10, 1993, again, until it is paid.
Finally, interest will continue to be assessed at twelve percent per annum or one percent per month until Kingtex pays all the contributions due. The statute provides interest shall be collected from the date contributions are due until the date paid. 53 F.S.M.C. 605(4). Thus, even if the Court enters judgment stating that interest is due, interest will continue to accumulate at twelve percent, provided for in 53 F.S.M.C. 605(4), rather than the nine percent post-judgment interest generally due under 6 F.S.M.C. 1401. When there is a conflict between a statute of general application, and a statute aimed at a particular procedure, the more particular provision will apply. Olter v. National Election Comm'r, 3 FSM Intrm. 123, 129 (App. 1987).
D. Attorney Fees and Collection Costs
The Court has concluded that there is a social security contribution due, as well as a penalty and interest. Under the statute, the SSA is entitled to claim reasonable attorney's fees and costs of suit. 53 F.S.M.C. 605(4). Since it requested attorney fees and costs, the SSA may file a detailed statement of attorney services rendered, and a cost bill, pursuant to FSM Rule of Civil Procedure 54(d), after receipt of these Findings of Fact and Conclusions of Law. Kingtex may file objections after service of the SSA's attorney fee statement and cost bill.
The Court finds for the plaintiff, FSM Social Security Administration, and against the defendant, Kingtex (FSM), Inc., as follows:
1. Kingtex is delinquent in the payment of social security contributions in the amount of $24,925.27.
2. Kingtex is assessed the maximum statutory penalty of $1000.
3. Kingtex is further assessed interest at the rate of twelve percent per annum, or one percent per month until the delinquent social security contributions are paid, as follows:
a. From March 22, 1993, until contributions in the amount of $20,292.77 are paid.
b. From April 10, 1993, until contributions in the amount of $4,632.50 are paid.
4. The SSA may submit a statement of attorney fees and collection costs within fourteen days of receipt of service of these Findings of fact and Conclusions of Law. Kingtex may file objections no later than ten days after service of the SSA's statement and cost bill.
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