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Gravel Sales Not Exempt from Tax under Native American Treaties

(Parker Tax Publishing March 2018)

The Tax Court held that a member of the Seneca Nation of Indians who sold gravel mined from Seneca Nation land was not exempt from income tax on the sale proceeds under either the Canandaigua Treaty or the Treaty of 1842. However, the court denied the IRS's motion for summary judgment on its imposition of an accuracy-related penalty because it found that the IRS was required to produce written approval of the penalty before issuing the deficiency notice. Perkins v. Comm'r, 150 T.C. No. 6 (2018).

Alice Perkins is a member of the Seneca Nation of Indians in western New York. Perkins's trucking company got permission from the Nation's government to mine and sell gravel during 2008 and 2009. Although the mining permit was withdrawn in 2009, the business continued to sell the gravel in 2010. Perkins had almost $1.5 million in gross receipts from the gravel in 2008 and $1.7 million in 2009.

Perkins filed her tax returns for 2008 and 2009 in October 2011. She included a statement explaining that the gravel income was from Native American land and was therefore not subject to federal income tax. In 2014, the IRS sent a notice of deficiency for 2008 through 2010 claiming that the gravel income was taxable. The notice also added accuracy-related and failure-to-file penalties.

Perkins challenged the deficiency for 2008 and 2009 in the Tax Court. For 2010, she paid the deficiency and sued for a refund in a district court. Perkins argued that the income was exempt under the Canandaigua Treaty, in which the U.S. agreed never to claim the Seneca Nation's land, nor disturb the Seneca Nation or "their Indian friends residing thereon" in the free use and enjoyment of the land. Perkins argued that this language conferred a tax exemption on individual members of the Seneca Nation for income derived directly from Seneca Nation land. Perkins also asserted an exemption under the 1842 Treaty, which protects the lands of the Seneca Indians in New York from all taxes and assessments until the lands are sold. Perkins said that the 1842 Treaty provided an exemption not just for property taxes but for taxes on income derived from the use of tribal land.

In Perkins v. U.S., 2017 PTC 363 (W.D.N.Y. 2017), the district court found in favor of Perkins, holding that the "Indian friends" language in the Canandaigua Treaty provided an individual tax exemption to members of the Seneca Nation. It also held that the 1842 Treaty provided an exemption from "all taxes" on income derived from Seneca land. The district court declined to follow U.S. v. Kaid, 241 F. App'x 747 (2d Cir. 2007), where the Second Circuit held that the 1842 Treaty exempted only real property taxes. The district court reasoned that as a summary order, Kaid was not precedential, and found that there was no meaningful distinction between Seneca land and gravel mined from it.

The Tax Court disagreed with the district court and held that neither treaty exempted Perkins's gravel income from tax. First, the court found that the Canandaigua Treaty did not create an exemption for individual members of the Seneca Nation. Rather, the court found that the treaty was intended to protect the Seneca Nation's lands from being disturbed. In the court's view, the relevant language was not a tax exemption provision but rather a restriction on alienation of the Nation's lands, and the inclusion of "Indian friends residing thereon" meant that Seneca Nation had the right to choose its members and could perhaps be seen as a promise not to use non-Seneca Indians as putative sellers. The court found that in previous cases finding an exemption for income derived directly from land, the land was allotted, or set aside in trust for individual Indians. The exemption for allotted land was intended to ensure that the land would be unencumbered when it was released from trust and became the property of the Indian who received the allotment. The court found that the land from which Perkins mined the gravel was common land, so the basis for the exemption on allotted land was absent.

The Tax Court also found that the 1842 Treaty did not exempt Perkins's income. Unlike the district court, the Tax Court was persuaded by the Second Circuit's reasoning in Kaid. Agreeing that the 1842 Treaty exempts only taxes on real property, the Tax Court found that it was not difficult to distinguish between real property and gravel and other materials severed from it. In the Tax Court's view, the gravel was not attached to the land when it was sold, so Perkins was not exempt under the 1842 Treaty.

Turning to penalties, the Tax Court found that the Perkins had conceded the late filing penalty by failing to address it in her brief. However, the court held that the IRS was not entitled to summary judgment on the accuracy-related penalty. The Tax Court reasoned that under the Second Circuit's decision in Chai v. Comm'r, 2017 PTC 124 (2d Cir. 2017), written approval of the initial penalty determination was required no later than date the IRS issued the notice of deficiency and that the written approval requirement was part of the IRS's burden of production. The Tax Court said that the IRS had not met its burden with respect to the penalty, so the court could not find that the IRS had established its entitlement to judgment as a matter of law on the penalty.

For a discussion of the exclusion from income as a result of a Native American Treaty, see Parker Tax ¶79,201.

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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