Perkins, et al v. United States of America
DECISION AND ORDER adopting in part and denying in part Judge Scott's 14 Report and Recommendation. FURTHER, the Court denies the government's 9 Motion to Dismiss, as specified. FURTHER, this matter is referred back to Judge Scott consistent with the Order of Referral already in place. See Docket Item 10. SO ORDERED. Signed by Hon. Lawrence J. Vilardo on 8/4/2017. (CMD)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
FREDRICK PERKINS and ALICE J. PERKINS,
DECISION AND ORDER
UNITED STATES OF AMERICA,
This case presents what appears to be an issue of first impression: whether a
treaty between the United States and Native Americans ensuring the free use and
enjoyment of tribal land bars taxes on income derived directly from the land—here, the
sale of gravel mined on the land. Although at least two circuit courts have suggested in
dicta that “income derived directly from the land” might be exempt from taxation under
such treaties, they did so to distinguish that scenario from cases where an exemption
was sought for income earned in ways that do not relate to the land itself. See Lazore
v. Comm’r, 11 F.3d 1180 (3d Cir. 1993); Hoptowit v. Comm’r, 709 F.2d 564 (9th Cir.
1983). This case presents the very issue about which those courts speculated. And for
the reasons that follow, this Court agrees with their speculation and finds that the
plaintiffs have plausibly stated a claim for relief under two treaties with the Native
American Seneca Nation.
On June 16, 2016, Fredrick and Alice Perkins commenced this action against the
United States of America. See Docket Item 1; see also Docket Item 7 (Verified
Amended Complaint). The plaintiffs, one of whom is “an enrolled member of the
Seneca Nation,” removed gravel, with permission, from the Seneca Nation Allegany
Territory and later sold it. See Docket Item 7 ¶¶ 1, 22-25. After receiving a “notice of
deficiency” from the Internal Revenue Service, the plaintiffs paid taxes on the income
from the sale. See id. ¶¶ 5-7. In the amended complaint,1 they have alleged that they
are owed a tax refund, interest, and penalties—totaling $9,863.68—because their
income from the sale of gravel is not taxable 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”). See id. ¶¶ 8, 10-15, 26-29. The United States
has moved to dismiss the amended complaint. See Docket Item 9.
On September 16, 2016, this Court referred this action to Magistrate Judge Hugh
B. Scott for all pre-trial matters, pursuant to 28 U.S.C. § 636(b)(1)(A) and (B). See
Docket Item 10. On January 27, 2017, Judge Scott issued a Report and
Recommendation, concluding that the motion to dismiss should be denied with respect
to claims under the Canandaigua Treaty but granted with respect to claims under the
1842 Treaty. See Docket Item 14 (Report and Recommendation). Both parties
After the plaintiffs filed their complaint in June 2016, the government filed a motion to
dismiss. See Docket Item 5. The plaintiffs filed an amended complaint on September
6, 2016, Docket Item 7, and the government filed an amended motion to dismiss on
September 14, 2016. Docket Item 9. On September 19, 2016, Magistrate Judge Hugh
B. Scott deemed the first motion to dismiss superseded by the amended motion. See
Docket Item 11 (Text Order).
objected, and after the objections were fully briefed, see Docket Items 15, 16, 19, 20, 21
& 22, this Court heard oral argument.
Based on the analysis below, this Court adopts the recommendation of Judge
Scott regarding the claims under the Canandaigua Treaty but rejects the
recommendation regarding the claims under the 1842 Treaty. Accordingly, the
government’s Motion to Dismiss (Docket Item 9) is denied.
REVIEW OF REPORT AND RECOMMENDATION
This Court “must determine de novo any part of the magistrate judge’s
disposition that has been properly objected to” and “may accept, reject, or modify the
recommended disposition.” Fed. R. Civ. P. 72(b)(3); see 28 U.S.C. § 636(b)(1).
MOTION TO DISMISS STANDARD
“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face. A claim
has facial plausibility when the plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citation
omitted). “The plausibility standard is not akin to a probability requirement, but it asks
for more than a sheer possibility that a defendant has acted unlawfully.” Id. Courts
assess Rule 12(b)(6) motions “accepting all factual allegations in the complaint as true,
and drawing all reasonable inferences in the plaintiff’s favor.” Peter F. Gaito
Architecture, LLC v. Simone Dev. Corp., 602 F.3d 57, 61 (2d Cir. 2010) (internal
quotation marks and citation omitted). “On a motion to dismiss, the court may consider
any written instrument attached to the complaint as an exhibit or any statements or
documents incorporated in it by reference.” Yak v. Bank Brussels Lambert, 252 F.3d
127, 130 (2d Cir. 2001) (internal quotation marks and citation omitted).
ANALYSIS OF THE PLAINTIFFS’ CLAIMS
A. Principles of Income Tax Application
The Internal Revenue Code defines gross income as “all income from whatever
source derived.” I.R.C. § 61(a). At the same time, Code provisions must be applied
“with due regard to any treaty obligation of the United States.” I.R.C. § 894(a)(1). Here,
the plaintiffs claim that their income from the sale of gravel from Seneca land is exempt
from federal income tax based on two treaties with the Seneca Nation. See Docket
Item 7 ¶¶ 3, 10-15.
B. Principles of Statutory and Treaty Construction
Dueling principles of statutory and treaty construction are in tension in this case.
To be valid, exemptions to tax laws should be clearly expressed. Squire v.
Capoeman, 351 U.S. 1, 6 (1956). On the other hand, even if they are not clearly
expressed, tax exemptions can be found in so-called Indian treaties by using
established—and liberal—principles of treaty construction. So-called Indian treaties
should be “interpreted liberally in favor of the Indians, with any ambiguities . . . resolved
in their favor.” Minnesota v. Mille Lacs Band of Chippewa Indians, 526 U.S. 172, 200
(1999). The words in treaties must be construed “not according to their technical
meaning, but ‘in the sense in which they would naturally be understood by the Indians.’”
Lazore, 11 F.3d at 1184 (quoting Jones v. Meehan, 175 U.S. 1, 11 (1899)). And any
“doubts concerning the meaning of a treaty with an Indian tribe should be resolved in
favor of the tribe.” Oregon Dep’t. of Fish & Wildlife v. Klamath Indian Tribe, 473 U.S.
753, 766 (1985).
In reconciling the tension between these principles of construction, the circuits
appear divided on the point at which the favorable standard of construction should be
applied to treaties in tax-exemption cases. The Third Circuit has suggested that one
can use the liberal rules of treaty interpretation to find an exemptive purpose. Lazore,
11 F.3d at 1184 (“The effect of these rules of interpretation is to make it possible for
language that could not have been concerned with the income tax to nevertheless
create an exemption from it.”). The Ninth Circuit, on the other hand, has found that
“when reviewing a claim for a federal tax exemption, we do not engage the canon of
construction favoring the Indians unless express exemptive language is first found in the
text of the statute or treaty.” Ramsey v. United States, 302 F.3d 1074, 1079 (9th Cir.
2002).2 But “express” exemptive language need not be explicit: language that shows
the “federal government’s intent to exempt Indians from taxation” creates an exemption,
with words such as “free from incumbrance,” “free from taxation,” or “free from fees”
sufficient to make that showing. Id. at 1078-79 (emphasis added).
Regardless of when the liberal standard of interpretation applies, it has its limits:
“even Indian treaties cannot be re-written or expanded beyond their clear terms to
remedy a claimed injustice or to achieve the asserted understanding of the parties.”
Choctaw Nation of Indians v. United States, 318 U.S. 423, 432 (1943).
C. The Plaintiffs’ Claims under the Canandaigua Treaty
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
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
Two circuit court cases support that argument—at least in dicta. In Hoptowit, the
Ninth Circuit held that a Native American’s income from service as a Tribal Council
member was not tax exempt, but it noted that under the Treaty with the Yakima there
might be an exception “limited to income produced directly by reservation land.” 709
F.2d at 566.3 Likewise, in analyzing the Canandaigua Treaty itself, the Third Circuit
held that a Native American’s income from work for a logging company operating on
Indian land was not tax exempt, but it observed that the “free use and enjoyment”
The language of the Treaty with the Yakima of 1855, art. II, mirrors that in the
Canandaigua Treaty: the “tract [given to the Yakima] shall be set apart . . . for the
exclusive use and benefit of said confederated tribes and bands of Indians.” Hoptowit,
709 F.2d at 566.
clause “might be sufficient to support an exemption from a tax on income derived
directly from the land.” Lazore, 11 F.3d at 1187.
In his Report and Recommendation, Judge Scott found that the present case
“potentially fills in the case law with a rare demonstration of how a direct connection to
Indian land would actually look.” Docket Item 14 at 13. Given the exemptive language
of the Canandaigua Treaty, the principle of liberal construction of Indian treaties, and
the close connection between mining gravel and “enjoyment of the land,” this Court
Indeed, under any rule of construction, taxing income from gravel mined on land
that is part of the Seneca territory interferes with “the free use and enjoyment” of that
land. When the liberal rules of construction are applied to the language of the
Canandaigua Treaty, that conclusion is even more compelling. For that reason, and for
the reasons included in Judge Scott’s analysis, the plaintiffs have indeed stated a viable
claim that the Canandaigua Treaty exempts the income at issue here from tax.
The government argues that even if the Seneca Nation has a tax exemption
under the Canandaigua Treaty, the plaintiffs, as individuals, are not exempt. See
Docket Item 15 at 2-3 (Objection to the Report and Recommendation). The government
distinguishes between a “true” possessory interest in the land, which it concedes the
Seneca Nation might have and which could potentially bestow a tax exemption, and the
plaintiffs’ “mere” permit to use the land, which the government claims does not warrant
a tax exemption for them. Id. at 3.
The government’s argument is misplaced. 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
D. The Plaintiffs’ Claims under the 1842 Treaty4
Judge Scott found that the government’s motion to dismiss the plaintiffs’ claims
arising under the 1842 Treaty should be granted. He relied on the Second Circuit’s
decision in United States v. Kaid, 241 F. App’x 747 (2d Cir. 2007), in reaching that
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
“Congress may abrogate Indian treaty rights, but it must clearly express its intent to do
so.” Mille Lacs Band, 526 U.S. at 202. The terms of the 1842 Treaty do not specifically
abrogate the Canandaigua Treaty. Article I of the 1842 Treaty states that the Seneca
will “continue in the occupation and enjoyment of the whole of the said two several
tracts of land . . . with the same right and title in all things, as they had and possessed
therein immediately before the date of the said indenture.” Docket Item 14-2 at 2 (1842
Treaty, art. I). Therefore, if the “free use and enjoyment” language of the Canandaigua
Treaty exempts the income here from tax, that exemption was not abrogated by the
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) (emphasis added).
Judge Scott interpreted the explicit tax exemption in the 1842 Treaty to apply
solely to taxes on real property. In reaching that conclusion, he relied on Kaid, Docket
Item 14 at 15, a case in which the Second Circuit addressed the claim that “taxing
cigarette sales made on reservations to non-Native Americans violates the Treaty with
the Seneca.” Kaid, 241 F. App’x at 750. Finding that claim “unavailing,” the Second
Circuit stated that “[b]oth the treaty and the New York statute clearly prohibit only the
taxation of real property, not chattels like cigarettes.” Id. at 750-51 (citing Snyder v.
Wetzler, 193 A.D.2d 329, 603 N.Y.S.2d 910 (3d Dep’t 1993), aff’d, 84 N.Y.2d 941, 644
N.E.2d 1369 (1994)).
Judge Scott read the Second Circuit’s language to mean that the 1842 Treaty
proscribed only taxes on real property itself, and he concluded that the plaintiffs
therefore were not exempt from income tax under that treaty. See Docket Item 14 at
15. The government likewise reads Kaid as “unambiguous guidance” on the issue
presented here and agrees with Judge Scott’s reliance on it. See Docket Item 19 at 2.
This Court disagrees. First, although Kaid might have persuasive value, it is not
a precedential decision because it is a summary order published in the Federal
Appendix. “Rulings by summary order do not have precedential effect.” 2d Cir. R.
32.1.1(a) (citation of summary orders); see also Lebron v. Sanders, 557 F.3d 76, 77 n.2
(2d Cir. 2009) (“we recognize that the summary order cited by the district court has no
precedential effect under our rules”) (citing 2d Cir. R. 32.1, currently 2d Cir. R. 32.1.1).
So even if Kaid stood for the proposition for which Judge Scott and the government
read it, it would not compel the conclusion they reach.
What is more, Kaid did not address—and there is no reason to believe the court
even considered—the issue presented here. Kaid dealt with cigarettes made from
tobacco brought onto Seneca land—not products of that land, such as gravel, timber, or
crops. So 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.
Indeed, there is no reason to believe that the Court even thought about taxing the
products of the real property, the relevant issue here. Moreover, the parties objecting to
the tax in Kaid were not Native Americans. See Kaid, 241 F. App’x at 750. So Kaid
says little, if anything, about the issue presented in this case.
The plain language of the treaty, on the other hand, does address—and
resolve—the issue. 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.
Given the liberal construction of treaties between the United States and Native
American tribes, the distinction between taxing land and taxing the gravel that makes up
that land cuts the baloney too thin. Accordingly, and for the reasons set forth above, the
government’s Motion to Dismiss (Docket Item 9) is DENIED. This matter is referred
back to Judge Scott consistent with the Order of Referral already in place. See Docket
IT IS SO ORDERED.
August 4, 2017
Buffalo, New York
s/Lawrence J. Vilardo
LAWRENCE J. VILARDO
United States District Judge
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