Fang Lin Ai v. United States, 809 F.3d 503

Background

Concorde Garment Manufacturing and >4,000 temporary nonresident Chinese workers employed in the CNMI paid FICA (Social Security and Medicare) taxes for 2004–2007 and sought refunds in 2008; IRS refunded only Concorde’s 2006 payment and took no further action.
Plaintiffs sued the United States in the District Court for the Northern Mariana Islands to recover the unpaid FICA amounts; the government counterclaimed to recoup the 2006 refund.
The district court entered judgment on the pleadings for the United States, holding FICA applies to all workers and employers in the CNMI irrespective of citizenship.
Appeal raised four main challenges: (1) Covenant §606(b) applies only to CNMI citizens (not temporary nonresidents); (2) a Guam exemption for nonresident Filipino H‑2 workers applies to these employees; (3) the employee portion of FICA is an income tax and thus outside §606(b)’s scope (which refers to excise and self‑employment taxes); and (4) the statutory scheme is unconstitutionally vague.
Ninth Circuit affirmed: it read Covenant §606(b) to make U.S. laws imposing taxes to support Social Security applicable to the CNMI as they apply to Guam (geographic application), rejected the Filipino‑only exemption for Chinese workers, held that §606(b) brings the entirety of FICA (and SECA) into effect in the CNMI, and rejected the vagueness challenge.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Covenant §606(b) makes FICA applicable in the CNMI only to CNMI citizens	§606(b) should be read to apply FICA only to CNMI citizens (citizenship‑based application)	§606(b) cross‑references Guam geographically; FICA applies based on location of services, not citizenship	§606(b) applies geographically; CNMI is treated as within the U.S. for FICA, so all workers/employers are covered regardless of citizenship
Whether the Guam exemption for nonresident Filipino H‑2 workers extends to these Chinese CNMI workers	Employees fall within an exemption analogous to Guam’s nonresident Filipino H‑2 exemption	The statutory exemption is expressly limited to Filipino H‑2 nonimmigrants and does not cover Chinese workers in CNMI	Exemption does not apply — it is limited to Filipino H‑2 workers and thus does not cover these employees
Whether the employee portion of FICA is excluded because §606(b) covers only excise and self‑employment taxes	The employee FICA tax is an income tax, so §606(b) (excise/self‑employment laws) excludes it	§606(b) applies to U.S. laws that impose excise/self‑employment taxes to support Social Security; when a law (e.g., FICA) imposes such a tax, the whole law applies as it does in Guam	§606(b) makes the entire laws (FICA and SECA) applicable as in Guam; employee and employer FICA taxes both apply in CNMI
Whether applying FICA via the Covenant is unconstitutionally vague	IRS inconsistently applied rules; scheme is vague so plaintiffs lacked fair notice	Statutory text and legislative history give ordinary persons notice; parties paid taxes and courts have uniformly applied FICA to CNMI workers	Vagueness challenge rejected — scheme gives sufficient notice and plaintiffs had paid taxes previously

Key Cases Cited

Zhang v. United States, 640 F.3d 1358 (Fed. Cir.) (persuasive decision upholding FICA’s applicability to CNMI workers under the Covenant)
White v. United States, 305 U.S. 281 (Supreme Court) (tax statutes are construed by courts according to their fair meaning; doubts not automatically resolved for taxpayer)
United States v. Merriam, 263 U.S. 179 (Supreme Court) (tax statutes should not be extended by implication beyond their clear language)
United States v. Fei Ye, 436 F.3d 1117 (9th Cir.) (statutory interpretation deference when plain language governs)
Northern Mariana Islands v. United States, 399 F.3d 1057 (9th Cir.) (precedent on interpreting the Covenant and its incorporation into U.S. law)