Gravel mined on Seneca land is not exempt from tax

By James A. Beavers, CPA, CGMA, J.D., LL.M.

The Tax Court held that a taxpayer's income from selling gravel mined on Seneca Nation land was not exempt from tax under two treaties between the United States and the Seneca Nation.

Background

Alice Perkins is an enrolled member of the Seneca Nation. Perkins won permission from the Nation's council for her company, A&F Trucking, to mine gravel on the Nation's land. She mined and sold gravel in 2008 and 2009, and sold gravel mined in those years in 2010.

However, on her joint tax returns with her husband for 2008 and 2009, the Perkinses claimed they were not subject to tax on the gravel income. In particular, they claimed that the Tax Court had held that the income was exempt from taxation because the Indian General Allotment Act of 1887 created an exemption for income that an individual Indian derives from the land held in trust for him or her under an allotment.

The IRS disagreed and sent a deficiency notice for 2008 through 2010. The Perkinses challenged the determination in Tax Court for 2008 and 2009. For 2010, they paid the deficiency asserted by the IRS and filed a refund suit in district court. In both courts, the Perkinses gave up on their General Allotment Act argument for the exemption and instead claimed they were entitled to an exemption based on the Canandaigua Treaty of 1794 and the Treaty With the Seneca of 1842.

In district court, the government made a motion to dismiss the case, arguing that neither treaty exempted the gravel sales income from federal taxation. The district court denied the motion to dismiss based on both treaties. In Tax Court, the IRS moved for summary judgment, making the same arguments that the government made in district court.

The Tax Court's decision

The Tax Court, sitting en banc, granted the IRS's motion for summary judgment. It held that the Perkinses' income from the gravel sales was not exempt from tax under either the Canandaigua Treaty or the Seneca Treaty.

The Tax Court first made some general observations about the relevant law. It noted that all American Indians are American citizens, and as such they are subject to tax on all income from whatever source derived unless the income is specifically excluded. It further noted, though, that treaties with Indians are construed in favor of Indians and that they are construed, as far as possible, in the sense in which the Indians understood them. Nonetheless, this general canon of construction could not be used to create favorable rules for Indians.

The Canandaigua Treaty: Relevant to the Perkinses' case, the Canandaigua Treaty states:

[T]he United States will never claim the . . . [Seneca Nation's Treaty-defined lands], nor disturb the Seneka Nation, nor any of the Six Nations, or of their Indian friends residing thereon and united with them, in the free use and enjoyment thereof: but it shall remain theirs, until they choose to sell the same to the people of the United States, who have the right to purchase. [Canandaigua Treaty, Art. III, 7 Stat. 44 at 45]

The Perkinses argued that the guaranty not to "disturb . . . the free use and enjoyment" of the Seneca Nation's land includes a tax exemption for income derived directly from the land.

In rejecting the Canandaigua Treaty as a basis for the exemption, the court first considered whether the treaty provided rights to individuals. The ­Perkinses argued the treaty did, based on the language "of their Indian friends residing thereon," but the court, citing its own precedent, found that the treaty did not create a tax exemption for individual members of the Seneca Nation or the other nations in the Iroquois Confederacy (i.e., the Six Nations).

The court then looked at whether the treaty's guaranty not to "disturb . . . the free use and enjoyment" of the Seneca Nation's land created a tax exemption. The court concluded that it did not, finding that in conjunction with the rest of the sentence that the phrase was a part of — "it shall remain theirs, until they choose to sell the same to the people of the United States, who have the right to purchase" — it made sense as a restriction on alienation of the Seneca Nation's land but not as a tax-exemption provision. The court also cited a number of cases where the courts had held that taxation was not prevented by the Canandaigua Treaty's guaranteed "free use and enjoyment" of the land and similar guaranties in other treaties.

The Perkinses, however, argued that previous cases analyzing the Canandaigua Treaty arose from challenges by individual Iroquois to the taxation of income from wages or similar types of income, and that their case was different because the income in question was derived from the Nation's land. The Tax Court determined that this issue was settled by the Supreme Court case of Squire v. Capoeman, 351 U.S. 1 (1956).

In Capoeman, the Supreme Court held that the General Allotment Act created an exemption for "income derived directly" from land if the land is allotted and still held in trust. While the Perkinses agreed that the General Allotment Act did not apply to them, the Tax Court stated that they seemed to make an argument that there is a general exemption or presumption for exempting all income from Indian land from tax.

The Tax Court found that this argument failed because the Supreme Court had created an exemption only for income derived from allotted land. Allotted land is land set aside in trust for individual Indians, as opposed to land held by an Indian nation. The Perkinses had admitted that they took the gravel they mined from the common lands of the Seneca Nation and not land allotted to Alice Perkins and her husband. Thus, they did not derive the income from allotted land, and the exemption created by Capoeman did not apply to the income.

The Seneca Treaty: The pertinent part of the Seneca Treaty of 1842 reads:

to protect such of the lands of the Seneca Indians, within the State of New York, as may from time to time remain in their possession from all taxes, and assessment for roads, highways, or any other purpose until such lands shall be sold and conveyed by the said Indians, and the possession thereof shall have been relinquished by them. [Seneca Treaty, Art. 9, 7 Stat. 586 at 590]

The Perkinses argued that this language in the treaty explicitly provides a tax exemption for income derived from the use of tribal land. The Tax Court found, citing the Second Circuit in Kaid, 241 F. Appx. 747 (2d Cir. 2007), that the Seneca Treaty prohibited only the taxation of real property. Thus, whether the Seneca Treaty applied depended upon whether the gravel mined by the ­Perkinses was real property.

The Tax Court looked to the definition of real property in Black's Law Dictionary (10th ed. 2014) for its standard in making this determination. The definition given in the dictionary is "[l]and and anything growing on, attached to, or erected on it, excluding anything that may be severed without injury to the land." Because the gravel was not attached to the land when it was sold, it was not real property and the Perkinses were not exempt from tax on the sale of the gravel under the Seneca Treaty, the court held.

Reflections

A dissenting opinion took issue with the majority opinion's decision that the gravel mined by the Perkinses was not real property for purposes of the Seneca Treaty, impugning the majority's reliance on Black's Law Dictionary and Kaid, which it described as "an irrelevant nonprecedential summary order," as authorities. The dissent believed that the district court had rightly found in the parallel case that given the liberal principles of treaty construction, there was no reason to believe that the gravel mined should be treated differently than the real property it was taken from, and questioned whether the real property could even be distinguished from "the dirt, gravel, and foliage that comprise it."

The dissent also pointed to cases where the classification of gravel had not been treated as a foregone conclusion for purposes of several statutes. Thus, there were legal and factual issues that must be addressed on the issue, the dissent said, and the grant of summary judgment was not appropriate.

The district court also found that the government's motion to dismiss in the parallel case should not be granted based on the Canandaigua Treaty. However, the dissent did not question the majority's determination that the Canandaigua Treaty did not apply to the Perkinses.

Perkins, 150 T.C. No. 6 (2018)  

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