Tax Court Disagrees With US District Court Over Potential Tax Exemption for Sale of Gravel

The Tax Court and U.S. District Court were considering the same basic issue for different years for the same taxpayers.  The courts came to opposite conclusions in the issue.  The United States District Court for the Western District of New York ruled in 2017 that the taxpayers in Perkins v. United States, No. 1:16-cv-00495, plausibly stated a claim for exemption from taxation for the 2010 sale of gravel based on two treaties between the United States and the Seneca Nation.  But in a case looking at the same two cases, the Tax Court decided in the case of Perkins v. Commissioner, 150 T.C. No. 6 that no exemption was available to the taxpayers under those treaties for sales of gravel in other years.

Alice Perkins is an enrolled member of the Seneca Nation and had received permission from the Seneca Nation to remove and sell gravel from lands held by Nation.  She and her husband lived on Seneca property.  For the years in question they sold gravel which they had mined from Seneca lands.

The Perkins claimed that, based on two treaties, they should be exempt from taxation on the sale of that gravel. They based this claim on terms of two different treaties.

The first treaty, the Canandaigua Treaty, provided the following basis upon which the taxpayers claimed exemption from tax, as described in the District Court opinion:

The plaintiffs argue that their income from the sale of gravel from Seneca land is tax exempt under the Canandaigua Treaty. See Docket Item 7 ¶¶ 10-14. In that treaty, the United States

acknowledge [sic] all the land within the aforementioned boundaries, to be the property of the Seneka [sic] nation; and the United States will never claim the same, nor disturb the Seneka [sic] 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.

Docket Item 14-1 at 2 (Canandaigua Treaty, art. III, Nov. 11, 1794, 7 Stat. 44) (emphasis added). The plaintiffs claim that taxes on the land itself, or on income derived from the land, would have been viewed by the Seneca Nation as a burden on its free use and enjoyment of that land. See Docket Item 7 ¶ 14. For that reason, the plaintiffs argue, the treaty exempts the Seneca Nation and “their Indian friends” from such taxes.

The taxpayers also argued that a separate treaty, the 1842 Treaty, also exempts the income from tax.

Like the Canandaigua Treaty, the 1842 Treaty appears on its face to provide a tax exemption. In fact, the tax exemption in the 1842 Treaty is even more explicit:

The parties to this compact mutually agree to solicit the influence of the Government of the United States 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 assessments 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.

Docket Item 14-2 at 5 (1842 Treaty, art. IX)

The District Court decided to deny the IRS’s petition to dismiss the claim, finding that a plausible claim for relief had been stated by the taxpayers.

On the Canandaigua Treaty the District Court first found that the provision granting free use and enjoyment meant that it would not be encumbered by taxes.  And, citing dicta in cases from the Ninth and Third Circuit Courts of Appeal, the District Court found that as the gravel was derived from the land, that protection extended to selling the gravel.

The Court also rejected the IRS’s argument that any exemption only applied to the Seneca Nation as an entity, and not individual members of the Nation.    As the District Court notes:

The Canandaigua Treaty provides that “the United States will never . . . disturb the Seneka [sic] nation,” or “their Indian friends residing thereon and united with them, in the free use and enjoyment” of the Seneca land. Docket Item 14-1 at 2 (Canandaigua Treaty, art. III) (emphasis added). The Canandaigua Treaty thus benefits not only the Seneca Nation itself, but also its "Indian Friends" residing on and using the nation’s land. On a motion to dismiss, the facts pleaded in the complaint are accepted as true, and here the amended complaint alleges that plaintiff Alice Perkins is a member of the Seneca Nation and has leasehold and permit rights to mine and sell gravel. See Docket Item 7 ¶¶ 1, 21, 22, 25. The plaintiffs thus have stated a plausible claim for relief as "Indian Friends" under the Canandaigua Treaty.

The District Court also found that the 1842 Treaty provided a similarly plausible claim.  The Court rejected the view that that language only barred real estate taxes from being imposed on the land.  The Court held:

The treaty protects “the lands of the Seneca Indians . . . from all taxes.” Docket Item 14-2 at 5 (1842 Treaty, art. IX) (emphasis added). Given the liberal principles of treaty construction that apply here, there is no reason to believe that one rule would apply to taxing the dirt, gravel, and foliage that make up the property and another to the property itself — if “the property” can even be distinguished from the dirt, gravel, and foliage that comprise it. In other words, the language of the 1842 Treaty provides no reason to distinguish between exemptions from what we think of as a real property tax and exemptions from a tax on what makes up that real property. So the government's motion to dismiss is denied under the 1842 Treaty as well.

However, a majority of the Tax Court did not agree with this view. 

The Tax Court holds that the Canandaigua Treaty does not confer rights on individuals, but rather only the Seneca Nation as a whole.  The District Court had used the “friends” term to cover the members of the Seneca Nation, but the Tax Court rejected that view, holding:

The District Court read the phrase “or of their Indian friends residing thereon” as creating rights for the Perkinses themselves. Perkins, 2017 WL 3326818, at *4. We must respectfully disagree — the phrase is part of a list that includes the Nation and any of the other nations of the Iroquois Confederacy. We don't think that the phrase “or of their Indian friends residing thereon and united with them” can reasonably be read as creating personal rights — the class of “Indian friends” being limited to those “friends” who have become “united” with one of the Iroquois nations.

The Court also rejected the view that the intent of the provision was to provide a tax exemption, noting:

By its express terms, the treaty protects the Seneca Nation's lands from being “disturbed”, which is different from creating a tax exemption. The rest of that sentence — “it shall remain theirs, until they choose to sell the same to the people of the United States, who have the right to purchase” — doesn't make sense as a tax-exemption provision, but makes perfect sense as a restriction on alienation of the Nation's lands. The inclusion of “Indian friends residing thereon and united with them” means that the Nation gets to choose who is a member of the Nation and perhaps even can be seen as a promise not to use non-Seneca Indians as putative sellers of Seneca land.

With regard to the 1842 Treaty, the Tax Court held that the treaty only exempted real property from tax and that once the gravel was removed from the land it was no longer real property.  As the Tax Court opinion continues, outlining its disagreement with the District Court reasoning:

We, on the other hand, are persuaded by the Second Circuit's reading of the 1842 Treaty, and we don't find it difficult to distinguish real property from the gravel severed from it. Black's Law Dictionary 1412 (10th ed. 2014) defines real property as “[l]and and anything growing on, attached to, or erected on it, excluding anything that may be severed without injury to the land.” The gravel wasn't attached to the land when it was sold, so the Perkinses aren't exempt from tax on the sale of the gravel under the 1842 Treaty. Cf. In re Briggs Ave. in New York, 89 N.E. 814, 816 (N.Y. 1909) (a building that is severed from real property becomes personal property).

Assuming one or both cases are appealed, the Second Circuit will have to determine which analysis it will choose to follow—or perhaps come up with its own reasoning in this area.

But the case does illustrate the importance of the choice of venue for taxpayers preparing to challenge the IRS in court.  Actually going “both ways” by using different approaches in different years is not something normally seen, but finding that the different courts can come to different results is not terribly surprising.