9th Cir. Rips Guam for Keeping Tax Refunds

by Katherine Proctor, Courthouse News, August 26, 2015 

HONOLULU (CN) - Guam illegally withheld income-tax refunds to balance its budget and should not have employed an unfair and random "expedited refund" process to clear the backlog, the Ninth Circuit ruled Wednesday.

A class of the territory's taxpayers sued Guam and three of its officers, claiming that Guam refused to issue tax overpayment refunds "often for several years at a time," instead using the money to fund the government.

Then, in response to a mounting backlog of claims for the refunds, Guam instigated an "expedited refund" process that the Ninth Circuit's opinion calls "effectively standard-less" and based on "arbitrariness and favoritism" - returns went primarily to those with personal or political connections rather than those who needed them the most.

The taxpayers alleged that Guam's deeds violated the tax provisions of the Organic Act of Guam and their rights to equal protection.

A federal judge found for the taxpayers and issued a permanent injunction that ended the expedited refund program and required Guam to pay approved refunds in a timely manner.

The Ninth Circuit upheld the court's decision, finding Guam's "starkly unequal treatment of refund requests" via an "opaque and tedious" process illegal.

Guam argued that neither it nor any of the named defendants - who were all sued in their official capacities - was a statutory "person," and thus could not be sued for violating the plaintiffs' rights to equal protection.

"Guam is wrong," Circuit Judge Marsha Berzon wrote in the three-judge panel's 27-page opinion, adding that the individual defendants were "persons" for the purposes of prospective relief.

Berzon also rejected Guam's argument that no action was taken "under color of territorial law" and that the taxpayers' suit contained only federal allegations.

The defendant officials, Berzon said, "used the power vested in them by virtue of their position as territorial officers to authorize or refuse refunds of tax overpayments collected by Guam, held by Guam, and obliged to be refunded by Guam."

"No officer or agency of the federal government was involved at any point," she wrote.

Addressing Guam's final challenge - which took issue with the provision in the court's permanent injunction requiring Guam to pay refunds within six months - Berzon said that "a reasonable time limitation was amply justified by Guam's chronic failure to pay refunds, sometimes for years, and the court's concern that an indefinite injunction would only spark new litigation."

She added, "Such a limitation was well within the court's broad discretion in fashioning relief."

Nor does Guam have the power to defer refund payments for its own budgetary purposes for "as long as it pleases, so long as it eventually pays the overpayment back with interest," Berzon said.

"These tax overpayments were never Guam's to begin with, and it has no legal claim to them," she wrote.

Berzon acknowledged that "many governments struggle to balance their budgets, particularly in times of economic uncertainty and increasing fiscal demands," but Guam's solution was illegal, she said.

"Guam's policy also fell most heavily on taxpayers of limited means," she wrote. "Guam must find another way to deal with its fiscal difficulties."

Neither side immediately responded to request for comment on Wednesday.

The Guam Organic Act of 1950 established the South Pacific island as an unincorporated organized territory of the United States and gave its inhabitants - now nearly 162,000 - U.S. citizenship.

Because it is not a U.S. state, however, Guamanians cannot vote in national elections and their congressional representative is a non-voting member.

Under a special law of Congress, federal income taxes paid by Guamanians go to Guam's treasury rather than the U.S. government's coffers.

PDF: Court Ruling

Meanwhile: California tax return donations for charity delayed, lost in state bureaucracy