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Perkins v. United States

United States District Court, W.D. New York

January 27, 2017

Fredrick Perkins and Alice J. Perkins, Plaintiffs,
v.
United States of America, Defendant.

          REPORT AND RECOMMENDATION

          Honorable Hugh B. Scott United States Magistrate Judge

         I. INTRODUCTION

         Plaintiffs Fredrick Perkins (“Fredrick”) and Alice Perkins (“Alice”) live on the Allegany Territory of the Seneca Nation of Indians (“Seneca Nation”), a member of the Haudenosaunee (or Iroquois) Confederacy. Alice has a possessory interest in some land on the Allegany Territory; part of her interest comes by deed and part of it comes by lease. Alice had obtained permission from the Seneca Nation to mine gravel from her deeded or leased land in 2008 and 2009; she sold the resulting gravel in those years and in 2010. When plaintiffs filed their income-tax return for 2010, they included $6, 113 of income from gravel sales but listed it as tax-exempt. The Internal Revenue Service (“IRS”) issued a tax deficiency in the amount of the gravel income plus interest and penalties.

         Plaintiffs paid off the deficiency to eliminate it but now have filed suit to obtain a refund of what they paid. Plaintiffs believe that their income from gravel sales in 2010 was exempt from income tax under certain Indian treaties that protect Seneca Nation land and activities connected directly to it. Defendant the United States of America has filed a motion to dismiss plaintiffs' amended complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure (“FRCP”). (Dkt. No. 9.) In short, defendant maintains that the Indian treaties in question either lack the language needed to create an exemption from income tax or contain language that applies only to real property taxes.

         The Hon. Lawrence J. Vilardo has referred this case to this Court under 28 U.S.C. § 636(b). (Dkt. No. 10.) The Court has deemed the pending motion submitted on papers under FRCP 78(b). For the reasons below, the Court respectfully recommends granting the motion in part with respect to one of the treaties but denying the motion with respect to the other treaty.

         II. BACKGROUND [1]

         This case concerns allegations that defendant improperly assessed income tax for gravel that Alice mined from Seneca land in 2008 and 2009. Alice is an enrolled member of the Seneca Nation and lives with Fredrick on the Seneca Nation Allegany Territory. At an unspecified time, Alice obtained permission from the Seneca Nation to extract or to mine gravel from certain land on the Allegany Territory during the years 2008 and 2009. Alice holds a restricted deed for some of the land in question and a lease for the remainder. Alice mined gravel until about June 22, 2009 but had built up a stockpile that she continued to sell after that date. Alice sold gravel until 2010. The record does not state how much gravel Alice mined, to whom she sold it, or whether she sold it personally or through some kind of commercial entity. The record also is not quite clear exactly what gross income or net income plaintiffs obtained through Alice's mining operations. The parties do agree, though, that plaintiffs reported $6, 113 of exempt income when they filed their 2010 tax return. The exempt income came from Alice's mining operations. Plaintiffs consider the income exempt because it derived directly from Seneca land protected by certain treaties that the Court will discuss below.

         The exempt income reported on plaintiffs' 2010 tax return is the heart of plaintiffs' case and defendant's pending motion. The IRS issued plaintiffs a tax deficiency for 2010 in the amount of $9, 863.68. (Dkt. No. 7 at 14.) The deficiency comprised the income that plaintiffs claimed as exempt plus interest and penalties. Plaintiffs paid the tax to eliminate the deficiency but then filed a claim for a refund. (Dkt. No. 7 at 10-12.) The IRS has not responded to plaintiffs' claim for a refund.

         Plaintiffs began this case by filing their original complaint on June 16, 2016 (Dkt. No. 1) and their amended complaint on September 9, 2016 (Dkt. No. 7). Simply put, plaintiffs seek a refund in the amount of $9, 863.68, plus interest and costs. Plaintiffs assert that two treaties between the United States and the Seneca Nation make the income in question exempt. Plaintiffs have not numbered or labeled any distinct claims within the amended complaint, but the Court will treat the alleged violation of each treaty as a separate claim or cause of action for a refund. Plaintiffs claim exemption from income tax under the Treaty with the Six Nations of 1794 (the “Canandaigua Treaty”)[2] and the Treaty with the Seneca of 1842 (the “1842 Treaty”).[3] Plaintiffs cite the following passage from the Canandaigua Treaty as support for their claim to a refund:

Now, the United States acknowledge all the land within the aforementioned boundaries, to be the property of the Seneka Nation; and the United States will never claim the same, 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.

7 Stat. 44, 45, Art. III. According to plaintiffs, “[t]axation of land or income derived from the land on the Seneca Nation territories would have been viewed as a burden placed on the Seneca people disturbing their free use and enjoyment of such lands.” (Dkt. No. 7 at 3.) Plaintiffs additionally cite the following passage from the 1842 Treaty:

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 Senecas 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 be relinquished by them.

7 Stat. 586, 590, Art. 9. “This 1842 treaty is further evidence the United States never contemplated the taxation of land for any purpose.” (Dkt. No. 7 at 3.)

         Defendant filed the pending motion on September 14, 2016. (Dkt. No. 9.)[4] Defendant argues that the Canandaigua Treaty contains no language specific enough to taxation to be construed as a prohibition on income tax assessments. The closest that the Canandaigua Treaty comes to addressing taxation, according to defendant, is the phrase “free use and enjoyment.” Defendant argues that this phrase is too vague to be considered an exemption from income tax and would create a policy where none currently exists. Defendant acknowledges that the 1842 Treaty makes an explicit reference to taxes but cites to case law interpreting the reference to refer only to property taxes. Defendant also makes an argument that plaintiffs cannot find relief under criteria for exemptions ...


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