Virgin Islands v. W. Michael Blumenthal, Secretary Department of the Treasury,appellant.virgin Islands, Appellant, v. W. Michael Blumenthal, Secretary Department of the Treasury, 642 F.2d 641 (D.C. Cir. 1981)

In a companion opinion issued today¹  this panel resolves several issues presented by these consolidated appeals. In this opinion we separately address a question concerning the disposition of certain customs duties which is at issue only in the appeals taken in the Virgin Islands case.

For more than sixty years the disposition of customs duties collected on goods entering the United States by shipment from the Virgin Islands (the "Islands") has not differed from the disposition of most other customs duties collected on entry in this country; the amounts collected have been paid into the general United States Treasury. Objecting to this disposition, the Islands brought suit in the district court, contending under the applicable statutory language that the proceeds of customs duties levied here on goods shipped from the Islands must be "covered"²  to the Islands' treasury. The district judge agreed with the Islands and on cross-motions for summary judgment, he "ORDERED and DECLARED that section 28(a) of the 1954 Revised Organic Act of the Virgin Islands requires the ... Secretary of the Treasury to cover into the Treasury of the Virgin Islands all customs duties ... collected on goods transported into the United States from the Virgin Islands ...."³ 

We have carefully examined the pertinent statutory language, the statutory, administrative and legislative history, and the full record of the proceedings in the district court. Because we think the ambiguous language of the Revised Organic Act of the Virgin Islands (the 1954 Act),⁴  when read in light of its statutory, administrative and legislative history, indicates an intention to produce a result different from that reached by the district court, we vacate the judgment there entered and remand with directions to enter judgment with respect to the 1954 Act in favor of the Secretary of the Treasury.⁵ 

Section 28(a) of the 1954 Act provides:

The proceeds of customs duties, the proceeds of the United States income tax, the proceeds of any taxes levied by the Congress on the inhabitants of the Virgin Islands, and the proceeds of all quarantine, passport, immigration, and naturalization fees collected in the Virgin Islands, less the cost of collecting all of said duties, taxes, and fees, shall be covered into the treasury of the Virgin Islands, and shall be available for expenditure as the Legislature of the Virgin Islands may provide.

(emphasis supplied).

According to the Islands, it was the "clear objective" of the 1954 Act and its predecessors that "revenues collected by the United States from commerce with the Islands be used for the benefit of the Islands."⁶  "This Congressional objective has been thwarted," the Islands argue, by "decisions which, in the guise of interpretation, have rewritten the words of the Congress."⁷ 

The controversy dates from 1917, when the United States purchased the Islands from Denmark. Legislation enacted at the time of purchase⁸  provided, in consecutively numbered sections, for the imposition of customs duties on Islands goods entering the mainland (section three), for the imposition of customs duties on goods entering the Islands (section four), and for the "cover" to the Islands' treasury of the "duties and taxes collected in pursuance of this Act " (section five) (emphasis supplied).⁹  The Islands argue that the Congress that passed the 1917 Act fully intended to cover into the Islands' treasury customs duties on goods shipped from the Islands to the United States as well as customs duties on goods shipped into the Islands from elsewhere.¹⁰ 

However, less than two months after the 1917 Act became law, the Comptroller of the Treasury interpreted the cover provision quite differently from what the Islands assert was the manifest intention of Congress.¹¹  The Comptroller's interpretation had the effect of limiting the duties rebated to the Islands treasury to those collected on goods entering the Islands (local duties) and of retaining in the United States treasury those duties collected on goods entering the mainland by shipment from the Islands (mainland duties).¹²  The Comptroller reasoned that only those duties specifically authorized for the first time by the 1917 Act were collected "in pursuance of this act;"¹³  and that because mainland duties were collected under the previously and separately enacted general laws of the United States, the 1917 Act did not require cover of these duties.¹⁴  The Comptroller's decision was reinforced nine years later when an opinion issued by the Attorney General employed the same reasoning to deny cover of certain internal revenue taxes.¹⁵ 

Administrative practice concerning the cover of customs duties has not deviated from the Comptroller's interpretation, despite the enactment in 1936 of replacement legislation which omitted the "in pursuance of this Act" language,¹⁶  and despite objections to the practice raised in 1941 by the Department of the Interior in correspondence with the Justice Department.¹⁷  In fact, apart from the position taken by the Interior Department in 1941, objections to this consistent administrative interpretation appear to have lain dormant for more than half a century.

The active interest which resurfaced in the 1970's may be attributable in part to the greater autonomy conferred upon the Islands government by recent acts of Congress¹⁸  and in part to that government's awareness of the large sums of mainland duties¹⁹  and fees collected since the 1966 opening of an Islands-based oil refinery.²⁰ 

In 1975 the Interior Department, acting at the request of the Islands governor, asked the Justice Department to reconsider its continuing approval of the Comptroller's ruling.²¹  The Department's response, however, only reconfirmed its earlier interpretation of applicable law.²²  Earlier overtures to the Treasury Department had been no more successful. Rebuffed in these forums, the Islands brought suit in the district court in May, 1976, seeking, inter alia, declaratory and injunctive relief. The case was submitted for decision in June, 1978 on plaintiffs' motion for partial summary judgment and defendants' motion for summary judgment.

The district court agreed with the Islands' interpretation of the 1954 Act and granted summary judgment to the Islands. Conceding some inherent ambiguity in the scope of the "customs duties" required by section 28(a) of the 1954 Act to be covered into the Islands' treasury, the district court nonetheless found an examination of the other provisions of section 28 persuasive of an intent to cover mainland duties into the Islands' treasury. The district court observed that each of the other provisions of section 28 dealt not with locally-imposed duties, taxes, or other local laws,²³  but with the specifics of how more generally applicable United States law would apply to the special situation of the Islands. According to the district court,

it becomes clear, when the reference to "customs duties" in section 28(a) is ... (read in the context of the other provisions of section 28) that the term "customs duties" must be interpreted to include those duties imposed on goods transported to the United States from the Virgin Islands.

The focus throughout section 28 on internal revenue laws and other laws generally applicable to the Virgin Islands strongly suggests the conclusion that the reference in section 28(a) to "customs duties" was not intended to be limited to those duties imposed under local law on goods imported into the Virgin Islands.²⁴ 

In addition, the district court reasoned that if Congress had intended to cover only customs duties locally collected it would have so specified, as it did in the case of quarantine, passport, immigration and naturalization fees. Finally, the district court cited the absence of any indication that Congress intended, either in 1954 or in enacting predecessor legislation, to restrict the covered customs duties to those locally collected.

The court rejected the defendants' argument based on settled administrative interpretation of predecessor law as follows:

(S)ection 28 cannot properly be viewed as a mere reenactment of section 5 of the 1917 Act; the 1954 Revised Organic Act completely superseded any inconsistent provisions of the 1936 Organic Act and the 1917 Act. See Virgo Corp. v. Paiewonsky, 384 F.2d 569 (3d Cir. 1967), (cert. denied, Master Time Co. v. De Jongh, 390 U.S. 1041, 88 S. Ct. 1633, 20 L. Ed. 2d 303 (1968)). Thus, section 28(a) must be read on its own terms and cannot be presumed to have the same meaning as section 5 of the 1917 Act. In fact, the terms of section 28(a) are considerably different from those of section 5 of the 1917 Act and section 28(a) does not include the "in pursuance of this Act" clause relied on so heavily by the Comptroller of the Treasury in support of this narrow construction of section 5. Accordingly, whatever force the interpretation of the Comptroller and the Attorney General may originally have had (and it appears to the Court that their interpretation disregards the clear meaning of section 5), that force has been essentially dissipated by the marked difference between the terms of section 28(a) of the 1954 Act and section 5 of the 1917 Act.²⁵ 

Finally, the court rejected an argument that the rebate of duties on goods which were merely passed through the Islands would be "illogical." The court concluded:

(I)t is (even) more illogical (to assert) that Congress intended to cover over only the meager customs duties levied on goods imported into the Virgin Islands. As discussed earlier, these goods traditionally have entered the Virgin Islands almost duty free, and the amount of revenues from duties imposed on such goods would be negligible. It would be surprising if Congress intended that only the insubstantial amount of duties collected on imports into the Virgin Islands be covered into the Virgin Islands Treasury.²⁶ 

As already noted,²⁷  section 28(a) of the 1954 Act requires, in pertinent part, that "the proceeds of customs duties ... be covered into the treasury of the Virgin Islands ...." Literally read, this provision could require cover of all customs duties anywhere collected by the United States government.²⁸  The patent absurdity of such an interpretation mandates a closer examination of Congressional intent as revealed by the structure of the statute and its legislative history.

The district court found in section 28's focus on generally applicable United States law a design indicating that section 28(a)'s reference to "customs duties" should be read to include customs duties on goods shipped from the Islands to the mainland.

However, we do not agree that the lack of reference to other "local" taxes or duties in section 28 evinces a purpose to cover non-local customs duties. Even apart from the cover provision's history, which we discuss below,²⁹  we think there is a sound reason for providing for cover of exclusively locally collected customs duties in a section which otherwise tailors generally applicable United States law to the Islands situation. That is because duties imposed at entry in the Islands are collected by the United States customs service,³⁰  whose employees are required by generally applicable United States law to transmit the monies collected to the United States treasury.³¹  Thus the provision's inclusion in section 28 would conform to the statutory scheme identified by the district judge, creating for the Islands a special exemption from generally applicable United States law.³² 

Moreover, even if we accepted the premise that section 28 was intended to fashion specific Islands application of general United States law, we would not be required from this to conclude that the customs duties cover was intended to equal the sum of local duties plus duties levied on goods entering the mainland by shipment from the Islands. Additional guidance would be necessary either to explain why the cover should not be more inclusive, given its vague language, or to explain why it should not be more limited, given section 28's focus on transactions with a more substantial connection with Islands activities than merely a stopover in an Islands port.

Like the district court, we find in the common elements of section 28's provisions some general guidance for the interpretation of section 28(a)'s reference to customs duties. The guidance we find, however, suggests that the "customs duties" included in cover to the Islands cannot be read as broadly as the district court held in its memorandum opinion.

An examination of certain common features of the provisions of section 28 will reveal the reasons for our conclusion. Section 28(a) covers into the Islands treasury not only "customs duties" and "the proceeds of the United States income tax" but also "the proceeds of any taxes levied by the Congress on the inhabitants of the Virgin Islands, and the proceeds of all quarantine, passport, immigration, and naturalization fees collected in the Virgin Islands." "Inhabitants of the Virgin Islands" are defined for purposes of the cover provision as those "persons whose permanent residence is in the Virgin Islands."³³  The definition of inhabitant for purposes of the cover of taxes levied on inhabitants and the specification of the situs of collection for purposes of the cover of quarantine, passport, immigration and naturalization fees demonstrates an intent, at least as to those fees and taxes, that the cover be limited to amounts collected which have some substantial nexus to the Islands. This obvious intent concerning two specific categories of items to be covered suggests an overarching design for the entire cover provision, a design with which more ambiguous categories should be read consistently.

The district court, applying a different principle of construction, would read Congress' inclusion of specific limitations on only certain categories of items covered to exclude by implication such or similar limitations on the other categories mentioned. Doing so, however, leaves us with no guidance concerning the interpretation of "customs duties," when guidance is needed to avoid an absurd result, i. e., the cover into the Islands treasury of all customs duties, anywhere collected.

The guidance we gather from the whole of section 28(a) would limit the items covered to those with some substantial nexus to the Islands. Customs duties levied upon goods entering the Islands would certainly meet such a test; Congress itself selected situs of collection as the determinative variable for purposes of cover of quarantine, passport, immigration and naturalization fees. The question remains, however, whether customs duties collected here on items shipped from the Islands have a substantial enough nexus with the Islands to require cover to the Islands treasury.

The conclusion reached by the district court would require that cover to the Islands include duties levied on goods which merely pass through the Islands on their way to the mainland as well as duties levied on goods produced on the Islands and shipped here. However, certain other provisions of section 28 strongly suggest that Congress did not consider the mere passing through of goods enough of a nexus with the Islands to derive any advantage under the statute.

First, the limited "matching" rebate provision of section 28(b), discussed above, is restricted to internal revenue taxes "on articles produced in the Virgin Islands and transported to the United States" (emphasis supplied).³⁴  The language of the provision demonstrates an intent to exclude from rebate those taxes collected on items that are merely shipped from elsewhere through the Islands to the mainland. Second, section 28(d) provides for an exemption from customs duties and from certain internal revenue taxes for a good shipped from the Islands only if the good were grown or produced in the Islands and only if the total contribution of foreign materials to the good's value were fifty percent or less.³⁵  In other words, even goods whose value derived by more than fifty percent from Islands materials and which were shipped from the Islands were not given the benefit of the customs duty exemption unless they were also "produced" on the Islands. Thus, the language of the statute itself suggests that Islands production of the article might be an appropriate test of nexus for determining those customs duties to be covered and those to be retained.

We recognize that such a test strains the barren language of the statute somewhat more than a distinction based strictly on situs of collection. Such a test would, after all, require for its implementation a fairly elaborate administrative mechanism both to make the necessary inquiries concerning the place of the goods' production and to record this information for purposes of assessing the "cover." Unlike section 28(d), section 28(a) includes no express signal to the administrator that such an administrative mechanism will be required. A distinction based purely on situs of collection seems simpler to implement since one would reasonably assume that the information necessary to determine the cover could be obtained through available records independently compiled in the Islands and on the mainland.

Nevertheless, were we to have approached the question of statutory interpretation unencumbered by years of administrative practice under the 1954 Act that is consistent both with the Secretary's position in this court and with administrative interpretation of predecessor law or had we reason to believe that Congress has not been made aware of current or previous administrative practice and interpretation or were there an indication in the legislative history of the 1954 Act that administrative practice in this respect was to be altered, we might have looked with favor upon a construction of the statute which would have required cover to the Islands of customs duties levied upon goods produced in the Islands. However, the administrative, statutory and legislative history of the 1954 Act does not permit us this latitude.

B. Statutory, Administrative and Legislative History

As noted earlier,³⁶  administrative practice both before and after enactment of the 1954 Act has been to consistently withhold cover of customs duties levied on goods entering this country from the Virgin Islands. An erroneous administrative interpretation would not necessarily be saved by persistent administrative adherence to that interpretation and the district court, in rejecting the Secretary's emphasis on administrative practice, pointed to the lack of any evidence to show that Congress ever meant to limit the term "customs duties" to those locally collected. We think the more appropriate inquiry, however, is whether there was anything in the 1954 Act or its legislative history to show an intent to change an administrative course which, while not totally unopposed, nonetheless had been followed for more than thirty years before the 1954 Act was passed.

In our view, administrative interpretation and practice is controlling here for three reasons. First, the customs duties cover provision of the 1954 Act was taken from a bill proposed by the Interior Department,³⁷  which was vested by the 1936 Act and by executive order with substantial supervisory responsibility over the Islands³⁸  and whose own Secretary, thirteen years earlier, had registered with the Justice Department an official objection to the continuing failure to cover mainland duties.³⁹  Second, the applicable language as drafted and as enacted is substantially similar to that of the 1936 Act in effect when the Interior Department made its objections in 1941⁴⁰  and, although the Interior Department's draft⁴¹  and the 1954 Act⁴²  expressly addressed a different aspect of Interior's 1941 objections (cover of internal revenue taxes), nothing in the proposed or enacted statute indicates a comparable intention to depart from settled administrative practice concerning the cover of customs duties. Third, nothing in the legislative history suggests that Congress meant to change the practice that prevailed as a result of consistent administrative interpretation of the earlier acts.

We recognize that a primary concern of the 1954 Act was to advance the Islands' self sufficiency and local autonomy⁴³  and that this concern is consonant with an interpretation of the Act to require the cover of mainland duties.⁴⁴  However, we cannot believe that so dramatic a change to the benefit of the Islands would be made without debate or even comment within the contours of an act where fiscal concerns weighed so heavily⁴⁵  and an innovative matching scheme for certain internal revenue taxes was featured so prominently.⁴⁶  There is, in fact, a hint that previous administrative practice was to be perpetuated. Addressing the proposed internal revenue tax cover, the Senate Report noted that under the law then in effect "all customs and import duties" were covered into the insular treasuries.⁴⁷  Since the only customs duties then being covered were those locally collected, this notation suggests that "customs ... duties" were understood by the committee to mean only customs duties locally collected. With this understanding as a basis, the similarity in language between the 1954 Act and the 1936 Act is thus even more suggestive of an intent to perpetuate prior practice.

Taken as a whole, the history of the 1954 Act indicates no intention, express or reasonably to be inferred, that Congress proposed to change the practice of covering over only local duties. For this reason, we vacate the district court's judgment and remand with directions to enter judgment in favor of the United States. Because of our disposition of this issue we do not reach the question whether an oil import license fee should be treated as a customs duty for purposes of assessing the amount to be covered into the Islands treasury under the 1954 Act.