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Native American Treaties Exempt Gravel Sales from Income Tax

(Parker Tax Publishing September 2017)

In a case of first impression, a district court held that a Seneca Nation member who sold gravel removed with permission from Seneca Nation land plausibly stated a claim that the income from the sale was exempt from tax under two Native American treaties. The court noted that although exemptions generally must be clearly expressed to be valid, an exemption could be found by liberally interpreting the treaties. Perkins v. U.S., 2017 PTC 363 (W.D.N.Y. 2017).

Alice Perkins, an enrolled member in the Seneca Nation, removed gravel from Seneca Nation land with permission from the Seneca Nation Alleghany Territory and later sold it. She did not report the income from the sale on her tax return. Alice subsequently received a notice of deficiency from the IRS relating to the nonreporting of the gravel sale income, paid taxes on the income from the sale, and then sued the IRS for a refund of approximately $9,800. Perkins claimed that the income was exempt from tax under the Treaty with the Six Nations at Canandaigua of November 11, 1794 (Canandaigua Treaty) and the Treaty with the Seneca of May 20, 1842 (1842 Treaty). The IRS moved to dismiss Perkins's complaint for failure to state a claim. A magistrate judge recommended that the IRS's motion should be denied with respect to the claims under the Canandaigua Treaty but granted the IRS motion with respect to the claims under the 1842 Treaty. Both Perkins and the IRS objected to the magistrate judge's recommendation and appealed to a district court.

The Canandaigua Treaty provides that the U.S. will not interfere with the "free use and enjoyment" of Seneca land by the Seneca Nation or "their Indian friends" living on Seneca land. Under the 1842 Treaty, the U.S. agreed to protect the lands of the Seneca Nation "from all taxes." The IRS argued that even if the Canandaigua Treaty exempted the Seneca Nation, Perkins as an individual was not exempt because she had only a permit to use the land and not a possessory interest. With respect to the 1842 Treaty, the IRS argued that Perkins was not exempt because under U.S. v. Kaid, 241 F. App'x 747 (2d Cir. 2007), the 1842 Treaty applied only to taxes on real property.

The district court denied the IRS's motion to dismiss, holding that Perkins plausibly stated a claim for relief under both treaties. First, the court noted that two competing principles of statutory construction applied. The court reasoned that, although tax exemptions should be clearly expressed to be valid, tax exemptions can be found by liberally interpreting the treaties and resolving any ambiguities in the Native Americans' favor. The court determined that under longstanding precedent, treaty language must be construed in the sense in which it would naturally be understood by the Native Americans.

The district court held that, given the language of the Canandaigua Treaty, the principle of liberal construction, and the close connection between mining gravel and "enjoyment of the land," Perkins stated a viable claim that the Canandaigua Treaty exempted the income at issue from tax. The court reasoned that under any rule of construction, taxing income from gravel mined on land that is part of the Seneca Nation territory would interfere with the free use and enjoyment of that land. The court rejected the IRS's distinction between a possessory interest in land and Perkins's use of the land by permit, reasoning that under the treaty, the U.S. agreed not to disturb the Seneca Nation or "their Indian friends" living on Seneca land in the free use and enjoyment of the land. Because Alice Perkins is a member of the Seneca Nation and had a leasehold and permit rights to mine and sell gravel, the district court held that she stated a plausible claim for relief as an "Indian friend" under the Canandaigua Treaty.

With regard to the claim under the 1842 Treaty, the district court held that Perkins's income from the sale of the gravel was exempt under the plain language of the treaty because the treaty protects "the lands of the Seneca Indians ... from all taxes." Applying the liberal principles of treaty construction, the court determined that it would be unreasonable for one rule to apply to taxing the dirt and gravel that make up the property and another to the property itself. In the court's view, it was difficult even to distinguish between the property and the dirt and gravel that comprise it.

The district court also declined to follow the Second Circuit's decision in Kaid. First, it noted that Kaid was a summary order published in the Federal Appendix, which did not have precedential effect. Second, Kaid did not address the issue in this case, according to the district court, because it dealt with cigarettes made from tobacco brought onto Seneca land, not products of Seneca land like gravel. The court reasoned that when the Second Circuit distinguished between cigarettes and real property and found that the treaty applied only to the latter, it was not considering whether taxing income from the products of the real property might also be prohibited by the treaty. Moreover, the court noted that the parties objecting to the tax in Kaid were not even Native Americans.

For a discussion of the exemption from taxes under Native American Treaties, see Parker Tax ¶262,145.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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