Section 1 of Article XV of the Agreement in Implementation of Article III of the Panama Canal Treaty provides that the Panama Canal Commission and its contractors "are exempt from payment in the Republic of Panama of all taxes. . . on their activities or property." The first sentence of 2 of Article XV provides that "United States citizen employees . . . shall be exempt from any taxes . . . on income received as a result of their work for the Commission," and the second sentence exempts such employees "from payment of taxes . . . on income derived from sources outside the Republic of Panama." Section 3 provides that such employees "shall be exempt from taxes . . . on gifts or inheritance or on personal property, the presence of which within the territory of the Republic of Panama is due solely to the stay therein of such persons on account of their . . . work with the Commission." Petitioners, United States citizen employees of the Panama Canal Commission and their spouses, sought refunds of United States income taxes collected on salaries paid by the Commission for certain years, contending that 2 of Article XV constitutes an express exemption of those salaries from both Panamanian and United States taxation. The Claims Court agreed, but the Court of Appeals reversed.
Article XV applies only to Panamanian taxes, and hence petitioners are not entitled to refunds of United States income taxes paid. Section 1 of Article XV establishes the context for the discussion of tax exemption in the entire Article, so that when 2 and 3 state that "United States citizen employees . . . shall be exempt" from taxes they are understood to be dealing only with taxes payable in Panama. If the first sentence of 2 were interpreted to refer to United States as well as Panamanian taxes, then the second sentence and 3 would also do so, with the implausible consequence that United States citizen employees would be exempt not only from United States income taxes on their earnings from the Commission but also from such taxes on income from sources outside Panama and from all United States gift and inheritance [479 U.S. 27, 28] taxes. the Executive Branch's consistent application of the Agreement, but that application has gone unchallenged by Panama. Pp. 30-35.
761 F.2d 688, affirmed.
SCALIA, J., delivered the opinion for a unanimous Court.
[ Footnote * ] Together with No. 85-559, Coplin et ux. v. United States, and No. 85-560, Mattox et ux. v. United States, also on certiorari to the same court.
Carter G. Phillips argued the cause for petitioners in all cases. On the briefs were Andrew C. Barnard, David J. Kiyonaga, Allan I. Mendelsohn, Marvin I. Szymkowicz, John C. Morrison, George S. Barnard, Michael C. Pierce, and Dwight A. McKabney.
Jerrold J. Ganzfried argued the cause for the United States. With him on the brief were Solicitor General Fried, Assistant Attorney General Olsen, Deputy Solicitor General Wallace, Michael L. Paup, David English Carmack, and Abraham D. Sofaer.
JUSTICE SCALIA delivered the opinion of the Court.
The petitioners, United States citizen employees of the Panama Canal Commission and their spouses, seek refunds of income taxes collected on salaries paid by the Commission between 1979 and 1981. We granted certiorari to resolve conflicting appellate interpretations of an international agreement. 474 U.S. 1050 (1986).
From 1904 to 1979, the United States exercised sovereignty over the Panama Canal and the surrounding 10-mile-wide Panama Canal Zone under the Isthmian Canal Convention, 33 Stat. 2234. On September 7, 1977, the United States and Panama signed the Panama Canal Treaty, T.I.A.S. No. 10030, which was ratified by the Senate on April 17, 1978, and took effect on October 1, 1979. The Treaty transferred to Panama sovereignty over the Canal and Zone, but gave the United States the right to operate the Canal until December 31, 1999. The vehicle for United States administration of the Canal is the Panama Canal Commission, a United States Government agency supervised by a Board of nine members, four of whom are Panamanian nationals proposed by the Government of Panama. See 22 [479 U.S. 27, 29] T.I.A.S. No. 10031 (hereinafter Agreement), contains the provision that gives rise to the present dispute. Article XV of the Agreement, entitled "Taxation," provides as follows:
We agree with the Federal Circuit. The first section of Article XV, which confers upon the Commission and its contractors an exemption "from payment in the Republic of Panama of all taxes" (emphasis added), establishes the context for the discussion of tax exemptions in the entire Article - so that when 2 and 3 state that "United States citizen employees . . . shall be exempt" from taxes they are understood to be dealing only with taxes payable in Panama. In that regard the structure of Article XV is similar to that of Article XVI, which in most of its sections speaks generally of import duties, but is understood to refer only to Panamanian import duties principally because 1 sets the stage in that fashion by referring to "the customs laws and regulations of the Republic of Panama." Agreement, Art. XVI, 1 (emphasis added).
There is some purely textual evidence, albeit subtle, of the understanding that Article XV applies only to Panamanian taxes: In conferring an exemption from property taxes, 3 displays an assumption that only personal property within the Republic of Panama is at issue; otherwise, that significant qualification to the operation of 3 would more naturally have been set forth as an explicit limitation ("personal property [479 U.S. 27, 31] within the territory of the Republic of Panama, whose presence there," etc.) rather than being referred to incidentally in the modifying clause ("personal property, whose presence within the territory of the Republic of Panama," etc.). And the assumption that only personal property within Panama is at issue in turn reflects the more fundamental assumption that only Panamanian personal property taxes are being addressed.
More persuasive than the textual evidence, and in our view overwhelmingly convincing, is the contextual case for limiting Article XV to Panamanian taxes. Unless one posits the ellipsis of failing to repeat, in each section, 1's limitation to taxes "in the Republic of Panama," the Article takes on a meaning that is utterly implausible and has no foundation in the negotiations leading to the Agreement. For if the first sentence of 2 refers to United States as well as Panamanian taxes, then the second sentence of 2, and the totality of 3, must do so as well - with the consequence that United States citizen employees and their dependents would be exempt not only from United States income tax on their earnings from the Commission, but also from United States income tax on all income from sources outside Panama (e. g., United States bank accounts), and from all United States gift and inheritance taxes. While, as the petitioners assert, there might have been some reason why Panama would insist that its inability to tax United States citizen Commission employees upon their earnings in Panama be matched by a detraction from the United States' sovereign power to tax those same earnings, there is no conceivable reason why this hypothetical "your-sovereignty-for-mine" negotiating strategy would escalate into a demand that the United States yield more sovereign prerogatives than it was asking Panama to forgo - and no imaginable reason why the United States would accept such an escalation, producing tax immunity of unprecedented scope. [479 U.S. 27, 32] from the United States' sovereign power to tax those same earnings, there is no conceivable reason why this hypothetical "your-sovereignty-for-mine" negotiating strategy would escalate into a demand that the United States yield more sovereign prerogatives than it was asking Panama to forgo - and no imaginable reason why the United States would accept such an escalation, producing tax immunity of unprecedented scope.
The petitioners' attempts to explain why these broader tax consequences need not follow from their interpretation are unpersuasive. With regard to the second sentence of 2, they argue that the opening word "similarly" should be read to incorporate into that sentence the first sentence's restriction to "income received as a result of. . . work for the Commission." On this understanding, the second sentence provides a "simila[r]" tax exemption for Commission-related income "derived from sources outside the Republic of Panama," but allows both countries to tax non-Commission income. In addition to being an unnatural reading of "similarly" in this context, this interpretation is flatly inconsistent with the language of 2. Contrary to the petitioners' tacit assumption, the first sentence contains nothing limiting the scope of its exemption to income received as a result of work for the Commission in Panama. A person receiving a Commission salary for work performed in, for example, Bogota would seem plainly to qualify for exemption under this provision - rendering the second sentence, on the petitioners' understanding, superfluous. With regard to 3, the petitioners assert that its reference to taxation of property "within the territory of the Republic of Panama" is sufficient to demonstrate that only Panamanian taxation is intended to be covered. But as a reading of the provision will readily demonstrate, that reference applies only to personal property taxes; there is no comparable qualification on 3's exemption from taxes "on gifts or inheritance." That is limited, if at all, only by the implication that Panamanian [479 U.S. 27, 33] taxes alone are at issue. In sum, we find the verbal distortions necessary to give plausible content, under the petitioners' theory, to the second sentence of 2 and 3, far less tolerable than the acknowledgment of ellipsis which forms the basis of the Government's interpretation.
Not only is limitation of Article XV to Panamanian taxes in accord with the consistent application of the Agreement by the Executive Branch - a factor which alone is entitled to great weight, see Sumitomo Shoji America, Inc. v. Avagliano, 457 U.S. 176, 184 -185 (1982) - but that application has gone unchallenged by Panama. It is undisputed that, pursuant to clear Executive Branch policy, the Panama Canal Commission consistently withheld United States income taxes from petitioners and others similarly situated, see Letter from John L. Haines, Jr., Deputy General Counsel, Panama Canal Commission, to David Slacter, United States Department of Justice, Dec. 20, 1982, pp. 2-3, 1 App. in Nos. 85-504, 85-505, 85-506, and 85-507 (CA Fed.), pp. 61-62, and that Panama, which had four of its own nationals on the Board of the Commission, did not object. The course of conduct of parties to an international agreement, like the course of conduct of parties to any contract, is evidence of its meaning. See Trans World Airlines, Inc. v. Franklin Mint Corp., 466 U.S. 243, 259 -260 (1984); Pigeon River Improvement, Slide & Boom Co. v. Charles W. Cox, Ltd., 291 U.S. 138, 158 -161 (1934). Cf. Uniform Commercial Code 2-208(1) (1978). 2 [479 U.S. 27, 34]
We find the petitioners' attempted reliance upon other elements of the negotiating history unavailing. While the Claims Court may have been correct that the negotiating history does not favor the Government's position sufficiently to overcome what that court regarded as a plain textual meaning in favor of the taxpayers, it certainly does not favor the taxpayers' position sufficiently to affect our view of the text. It contains, we may note, only a single (unhelpful) reference to United States income taxation - a silence that can perhaps be reconciled with the petitioners' position, but can hardly be said affirmatively to support it.
Finally, we find no significance in the fact, urged so strongly by the petitioners, that Article XV is entitled "Taxation" rather than "Panamanian Taxation." Of the 21 Articles of the Agreement, only 2 - Articles V and IX - are limited by title to Panamanian subject matter, though it is plain that most are so limited in their application. See, e. g., Article VII ("Water Rights"); Article XII ("Entry and Departure"); Article XVI ("Import Duties").
The judgment of the Court of Appeals is
[ Footnote 2 ] The Government has contended, here and before the Court of Appeals, that the answer to the current question is illumined, if not conclusively determined, by a February 22, 1985, diplomatic note from the Government of Panama, indicating that it shares the United States' view that Article XV pertains only to Panamanian taxation. The petitioners assert that mutual agreement between the contracting parties on interpretation cannot be dispositive of third-party rights, and that the note is in any event inadmissible on various grounds. Since we would sustain the Government's position without reference to the note, we need not resolve these disputes. [479 U.S. 27, 36]