Gravel mining income not exempt under Native American treaties

The Tax Court holds that the treaty provisions apply to tribes, not individuals.
By David Silversmith, CPA

The Tax Court ruled that the General Allotment Act as well as two treaties signed with Native American nations generations ago did not exempt income earned from selling gravel mined from Seneca Nation land.

Facts: Alice Perkins, an enrolled member of the Seneca Nation, and her husband, Fredrick Perkins, lived on the Allegany Territory of the Seneca Nation in New York state. In 2008 and 2009, A&F Trucking, a company owned by the Perkinses, received permission from the Seneca government to mine and sell gravel from Seneca land. A&F Trucking grossed almost $1.5 million in 2008 and nearly $1.7 million in 2009.

In October 2011, the Perkinses filed late 2008 and 2009 tax returns, which disclosed the gravel income but took the position that it was not subject to federal income taxes because the gravel was mined on Native American land. The IRS asserted that the gravel income was taxable and assessed late-filing, late-payment, and accuracy-related penalties.

Issues: The Perkinses first contended that the gravel income was exempt from tax under the General Allotment Act of 1887 (also known as the Dawes Act), which was signed into law by President Grover Cleveland. Under the General Allotment Act, the U.S. government surveyed Native American land and divided it into allotments for individual Native Americans. The law stated that Native Americans would receive land free of all restrictions as to sale, encumbrance, or taxation of the land. The Perkinses overlooked the fact that Section 8 of the Dawes Act specifically exempted any of the reservations of the Seneca Nation of New York. After this was pointed out during an IRS audit, the Perkinses raised additional arguments based on other treaties signed by the Seneca Nation and the federal government.

The Perkinses then based their position on the Treaty of Canandaigua of 1794, which was between the Six Nations of the Iroquois and the United States. The treaty defined land that belonged to the Seneca and stated that the United States would never claim the land or disturb the Seneca Nation "in the free use and enjoyment" of it. The Perkinses claimed that the phrase "in the free use and enjoyment" was essentially a tax exemption giving them personal rights to tax-free income derived from the use of that land.

The Perkinses also relied upon the Treaty With the Seneca of 1842, also known as the Third Treaty of Buffalo Creek. The treaty states that Seneca lands in New York should be protected "from all taxes, and assessments for roads, highways, or any other purpose until such lands shall be sold and conveyed by the said Indians." The Perkinses argued that this section of the treaty was an explicit tax exemption that covered their mining business, as the gravel had come from Seneca land.

Holding: In a divided ruling, the Tax Court rejected the Perkinses' arguments and found for the IRS. The Tax Court found that the Treaty of Canandaigua of 1794 did not create a tax exemption because it conferred rights on the Seneca Nation as a whole and not on individual Native Americans. The court cited six cases in which various federal courts have ruled that the Canandaigua Treaty did not create a tax exemption for individual members of the constituent nations of the Iroquois Confederacy.

The Tax Court next dealt with the contentions raised under the Seneca Treaty of 1842. Based on a ruling by the Second Circuit (Kaid, 241 F. Appx. 747 (2d Cir. 2007)), the Tax Court ruled that the treaty only gave an exemption from taxation of land or real property. The court cited the definition of "real property" in Black's Law Dictionary to conclude that the gravel did not count as real property because it had been severed from the land.

Judge Maurice Foley, in a dissenting opinion, noted that in a concurrent, related action by the Perkinses in the federal court for the Western District of New York (Perkins, No. 16-CV-495(LJV) (W.D.N.Y. 8/4/17)), that court held that, under the liberal principles of treaty construction required under case law, there was "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" (slip op. at 18). The Tax Court's opinion to the contrary ignored complexities of mineral rights and property law, Foley wrote.

  • Perkins, 150 T.C. No. 6 (2018)

— By David Silversmith, CPA, senior tax accountant at Fulvio & Associates, New York City.

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