This quarter, U.S. District Judge Lawrence J. Vilardo considered an issue of first impression: whether treaties between the United States and Native Americans ensuring the free use and enjoyment of tribal land bar taxes on income derived directly from the land. Notably, this decision tackles an interesting concept—the dueling principles of statutory and treaty construction.

Introduction and Procedural History

In Perkins v. United States, No. 16-CV-495(LJV), 2017 U.S. Dist. LEXIS 123543 (W.D.N.Y. Aug. 4, 2017), Frederick and Alice Perkins (a member of the Seneca Nations) (plaintiffs) claimed that the sale of gravel removed from the Seneca Nation Allegany Territory was not taxable under the Treaty with the Six Nations of Canandaigua of Nov. 11, 1974 (Canandaigua Treaty) or under the Treaty with the Seneca of May 20, 1842 (1842 Treaty) and that they were therefore owed a tax refund, interest, and penalties. After the plaintiffs had removed and sold the gravel, they received a notice of deficiency from the Internal Revenue Service.

In June 2016, the plaintiffs filed their complaint. The United States then moved to dismiss. In September 2016, plaintiffs filed their amended complaint. The government then filed an amended motion to dismiss.

The court referred the action to Magistrate Judge Hugh B. Scott for all pre-trial matters. 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. Perkins v. United States, No. 16-CV-495V, 2017 US Dist. LEXIS 11775 (W.D.N.Y. Jan. 27, 2017). Both parties filed objections and after the objections were fully briefed, the court heard oral argument.

The Court's Analysis

In deciding this case, the court interpreted numerous sources of law and determining their interconnected relationships to one another. These sources of law included the Internal Revenue Code, two treaties, and the relevant case law.

The court began its analysis of the various legal authorities by discussing the language of the Internal Revenue Code, which defines gross income as “all income from whatever source derived.” 2017 U.S. Dist. LEXIS 123543 at *4. It went on to state that “[a]t the same time, Code provisions must be applied 'with due regard to any treaty obligation of the United States.'” Id. This case dealt with two such treaties.

Dueling Principles

Accordingly, next the court addressed the “dueling principles of statutory and treaty construction” that were in tension in the case. Id. at *5. The court mentioned two competing principles: first, that “exemptions to tax laws should be clearly expressed,” id. (citing Squire v. Capoeman, 351 U.S. 1, 6 (1956)), and second, that even if “not clearly expressed, tax exemptions can be found in so-called Indian treaties by using established—and liberal—principles of treaty construction,” id. at *5. With regard to the latter principle, the court noted that “Indian treaties should be 'interpreted liberally in favor of the Indians, with any ambiguities … resolved in their favor',” id. (quoting Minnesota v. Mille Lacs Band of Chippewa Indians, 526 U.S. 172, 200 (1999)), and in contrast to statutory construction that the “words in treaties must be construed 'not according to their technical meaning, but in the sense in which would naturally be done by Indians …,” id. (quoting Lazore v. Comm'r, 11 F.3d 1180, 1184 (3d Cir. 1993)).

Circuit Split

Judge Vilardo highlighted the existing split between the Third and Ninth Circuits in reconciling the tension between these dueling principles of construction. The two circuits were “divided on the point at which the favorable standard of construction should be applied to treaties in tax-exemption cases.” Id. at *5. “The Third Circuit has suggested that one can use the liberal rules of treaty interpretation to find an exemptive purpose,” id. at 5* (citing Lazore, 11 F.3d at 1184), while the Ninth Circuit has found that it will not afford the favorable construction to Native Americans unless “express exemptive language is first found in the text of the statute or treaty,” id. at 6* (quoting Ramsey v. United States, 302 F.3d 1074, 1079 (9th Cir. 2002)). The Ninth Circuit did note that this express language does not have to be explicit and all that is needed is language showing that the federal government intended to exempt Indians from taxation. Id. (citing Ramsey, 302 F.3d at 1078-79).

Claims Under Canandaigua Treaty

The Canandaigua Treaty reads, in relevant part, that 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. (emphasis added).

The plaintiffs' first contention was that their income from the sale of the gravel was tax exempt under the Canandaigua Treaty because it would otherwise be a burden on their free use and enjoyment. Both Judge Scott and Judge Vilardo agreed. In reviewing Judge Scott's recommended disposition, Judge Vilardo mentioned two circuit court cases which supported (in dicta) the plaintiffs' contentions.

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. 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 clause might be sufficient to support an exemption from a tax on income derived directly from the land.

2017 U.S. Dist. LEXIS 123543 at *7 (internal quotations, citations omitted).

Judge Vilardo went on to quote Judge's Scott's Report and Recommendation, agreeing that the “the present case 'potentially fills in the case law with a rare demonstration of how a direct connection to Indian land would actually look.'” Id. at *7-8. Ultimately, Judge Vilardo agreed with both Judge Scott and the plaintiffs because of 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.” Id. at *8. Moreover, Judge Vilardo went as far as to say that no matter which rule of construction he used, the answer is still the same: The Canandaigua Treaty exempts the income at issue from the tax.

In a failed attempt, the government argued that even if the Seneca nation was exempt under the Canandaigua Treaty, particular individuals were not. The government argued that there is a difference between the “true” possessory interest in the land (which it conceded that the Seneca Nation might have) and a “mere” permit to use the land, which the government stated would not warrant a tax exemption. The court rejected the government's argument and stated that the Canandaigua Treaty protected not only the Seneca Nation itself, but also the “Indian Friends” residing on and using the Nation's land. Accordingly, the court held that the plaintiffs were able to state a plausible claim for relief.

Claims Under the 1842 Treaty

In relevant part, the 1842 Treaty states that:

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.

To the contrary, however, Judge Scott recommended granting the government's motion to dismiss under the 1842 Treaty. Judge Vilardo disagreed with this finding. In his Report and Recommendation, Judge Scott primarily relied upon a Second Circuit decision (United States v. Kaid, 241 F App'x 747 (2d Cir. 2007), which addressed whether, under the Treaty of 1842, the government could tax cigarette sales made on reservations to non-Native Americans. In that case, the court held that “[b]oth the treaty and the New York statute clearly prohibit only the taxation of real property, not chattels like cigarettes.” 2017 U.S. Dist. LEXIS 123543 at *11 (quoting Kaid, 241 F. App'x at 750-51). Judge Scott interpreted this language to mean that the 1842 Treaty “proscribed only taxes on real property itself.” 2017 U.S. Dist. LEXIS 123543 at *11. Judge Vilardo disagreed with and did not adopt Judge Scott's interpretation of this case.

Rather, Judge Vilardo first noted that the Second Circuit case was not binding because it was a summary order published in the Federal Appendix and did not carry the weight of a binding decision. Second, he reasoned that the Second Circuit case did not decide the same issue that was presented in this particular fact pattern. He distinguished the two fact patterns by focusing on the origin of the products sold. The Second Circuit case dealt with cigarettes made from tobacco brought onto Seneca land and not with products of that land such as gravel, timber or crops. In relevant part, Judge Vilardo stated that

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. So Kaid says little, if anything, about the issue presented in this case.

Id. at *12 (internal citations omitted).

Third, Judge Vilardo looked to the language of the 1842 Treaty itself. Specifically, he highlighted the words “the lands of the Seneca Indians … from all taxes.” Applying a liberal construction standard, he stated that there was “no reason to believe that one rule would apply to the taxing the dirt, gravel and foliage that make up the property and another to the property itself.” Id. The court then held that “the language of the 1842 Treaty provides no reason to distinguish between exemptions from what we think of as real property tax and exemptions from a tax on what makes up that real property.” Id. at *13. Therefore, Judge Vilardo denied the government's motion to dismiss under the 1842 Treaty as well.

Ultimately, in adopting the recommendation of Judge Scott regarding the claims under the Canandaigua Treaty but rejecting his recommendation regarding the claims under the 1842 Treaty, Judge Vilardo found that “the distinction between taxing land and taxing the gravel that makes up that land cuts the baloney too thin.” Id. The court not only addressed an issue of first impression, but had to strike a delicate balance between competing principles of statutory and treaty construction. It was necessary to respect both the treaties by which the United States promised to abide years ago, while also respecting the traditionally-established principles with regard to tax exemptions.

Sharon M. Porcellio, a member of Bond, Schoeneck & King, can be reached at [email protected]. Alyssa J. Jones, an associate trainee with the firm, assisted with the preparation of this article.

This quarter, U.S. District Judge Lawrence J. Vilardo considered an issue of first impression: whether treaties between the United States and Native Americans ensuring the free use and enjoyment of tribal land bar taxes on income derived directly from the land. Notably, this decision tackles an interesting concept—the dueling principles of statutory and treaty construction.

Introduction and Procedural History

In Perkins v. United States, No. 16-CV-495(LJV), 2017 U.S. Dist. LEXIS 123543 (W.D.N.Y. Aug. 4, 2017), Frederick and Alice Perkins (a member of the Seneca Nations) (plaintiffs) claimed that the sale of gravel removed from the Seneca Nation Allegany Territory was not taxable under the Treaty with the Six Nations of Canandaigua of Nov. 11, 1974 (Canandaigua Treaty) or under the Treaty with the Seneca of May 20, 1842 (1842 Treaty) and that they were therefore owed a tax refund, interest, and penalties. After the plaintiffs had removed and sold the gravel, they received a notice of deficiency from the Internal Revenue Service.

In June 2016, the plaintiffs filed their complaint. The United States then moved to dismiss. In September 2016, plaintiffs filed their amended complaint. The government then filed an amended motion to dismiss.

The court referred the action to Magistrate Judge Hugh B. Scott for all pre-trial matters. 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. Perkins v. United States, No. 16-CV-495V, 2017 US Dist. LEXIS 11775 (W.D.N.Y. Jan. 27, 2017). Both parties filed objections and after the objections were fully briefed, the court heard oral argument.

The Court's Analysis

In deciding this case, the court interpreted numerous sources of law and determining their interconnected relationships to one another. These sources of law included the Internal Revenue Code, two treaties, and the relevant case law.

The court began its analysis of the various legal authorities by discussing the language of the Internal Revenue Code, which defines gross income as “all income from whatever source derived.” 2017 U.S. Dist. LEXIS 123543 at *4. It went on to state that “[a]t the same time, Code provisions must be applied 'with due regard to any treaty obligation of the United States.'” Id. This case dealt with two such treaties.

Dueling Principles

Accordingly, next the court addressed the “dueling principles of statutory and treaty construction” that were in tension in the case. Id. at *5. The court mentioned two competing principles: first, that “exemptions to tax laws should be clearly expressed,” id. (citing Squire v. Capoeman , 351 U.S. 1, 6 (1956)), and second, that even if “not clearly expressed, tax exemptions can be found in so-called Indian treaties by using established—and liberal—principles of treaty construction,” id. at *5. With regard to the latter principle, the court noted that “Indian treaties should be 'interpreted liberally in favor of the Indians, with any ambiguities … resolved in their favor',” id. (quoting Minnesota v. Mille Lacs Band of Chippewa Indians , 526 U.S. 172, 200 (1999)), and in contrast to statutory construction that the “words in treaties must be construed 'not according to their technical meaning, but in the sense in which would naturally be done by Indians …,” id. (quoting Lazore v. Comm'r , 11 F.3d 1180, 1184 (3d Cir. 1993)).

Circuit Split

Judge Vilardo highlighted the existing split between the Third and Ninth Circuits in reconciling the tension between these dueling principles of construction. The two circuits were “divided on the point at which the favorable standard of construction should be applied to treaties in tax-exemption cases.” Id. at *5. “The Third Circuit has suggested that one can use the liberal rules of treaty interpretation to find an exemptive purpose,” id. at 5* (citing Lazore , 11 F.3d at 1184), while the Ninth Circuit has found that it will not afford the favorable construction to Native Americans unless “express exemptive language is first found in the text of the statute or treaty,” id. at 6* (quoting Ramsey v. United States , 302 F.3d 1074, 1079 (9th Cir. 2002)). The Ninth Circuit did note that this express language does not have to be explicit and all that is needed is language showing that the federal government intended to exempt Indians from taxation. Id. (citing Ramsey, 302 F.3d at 1078-79).

Claims Under Canandaigua Treaty

The Canandaigua Treaty reads, in relevant part, that 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. (emphasis added).

The plaintiffs' first contention was that their income from the sale of the gravel was tax exempt under the Canandaigua Treaty because it would otherwise be a burden on their free use and enjoyment. Both Judge Scott and Judge Vilardo agreed. In reviewing Judge Scott's recommended disposition, Judge Vilardo mentioned two circuit court cases which supported (in dicta) the plaintiffs' contentions.

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. 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 clause might be sufficient to support an exemption from a tax on income derived directly from the land.

2017 U.S. Dist. LEXIS 123543 at *7 (internal quotations, citations omitted).

Judge Vilardo went on to quote Judge's Scott's Report and Recommendation, agreeing that the “the present case 'potentially fills in the case law with a rare demonstration of how a direct connection to Indian land would actually look.'” Id. at *7-8. Ultimately, Judge Vilardo agreed with both Judge Scott and the plaintiffs because of 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.” Id. at *8. Moreover, Judge Vilardo went as far as to say that no matter which rule of construction he used, the answer is still the same: The Canandaigua Treaty exempts the income at issue from the tax.

In a failed attempt, the government argued that even if the Seneca nation was exempt under the Canandaigua Treaty, particular individuals were not. The government argued that there is a difference between the “true” possessory interest in the land (which it conceded that the Seneca Nation might have) and a “mere” permit to use the land, which the government stated would not warrant a tax exemption. The court rejected the government's argument and stated that the Canandaigua Treaty protected not only the Seneca Nation itself, but also the “Indian Friends” residing on and using the Nation's land. Accordingly, the court held that the plaintiffs were able to state a plausible claim for relief.

Claims Under the 1842 Treaty

In relevant part, the 1842 Treaty states that:

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.

To the contrary, however, Judge Scott recommended granting the government's motion to dismiss under the 1842 Treaty. Judge Vilardo disagreed with this finding. In his Report and Recommendation, Judge Scott primarily relied upon a Second Circuit decision ( United States v. Kaid , 241 F App'x 747 (2d Cir. 2007), which addressed whether, under the Treaty of 1842, the government could tax cigarette sales made on reservations to non-Native Americans. In that case, the court held that “[b]oth the treaty and the New York statute clearly prohibit only the taxation of real property, not chattels like cigarettes.” 2017 U.S. Dist. LEXIS 123543 at *11 (quoting Kaid, 241 F. App'x at 750-51). Judge Scott interpreted this language to mean that the 1842 Treaty “proscribed only taxes on real property itself.” 2017 U.S. Dist. LEXIS 123543 at *11. Judge Vilardo disagreed with and did not adopt Judge Scott's interpretation of this case.

Rather, Judge Vilardo first noted that the Second Circuit case was not binding because it was a summary order published in the Federal Appendix and did not carry the weight of a binding decision. Second, he reasoned that the Second Circuit case did not decide the same issue that was presented in this particular fact pattern. He distinguished the two fact patterns by focusing on the origin of the products sold. The Second Circuit case dealt with cigarettes made from tobacco brought onto Seneca land and not with products of that land such as gravel, timber or crops. In relevant part, Judge Vilardo stated that

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. So Kaid says little, if anything, about the issue presented in this case.

Id. at *12 (internal citations omitted).

Third, Judge Vilardo looked to the language of the 1842 Treaty itself. Specifically, he highlighted the words “the lands of the Seneca Indians … from all taxes.” Applying a liberal construction standard, he stated that there was “no reason to believe that one rule would apply to the taxing the dirt, gravel and foliage that make up the property and another to the property itself.” Id. The court then held that “the language of the 1842 Treaty provides no reason to distinguish between exemptions from what we think of as real property tax and exemptions from a tax on what makes up that real property.” Id. at *13. Therefore, Judge Vilardo denied the government's motion to dismiss under the 1842 Treaty as well.

Ultimately, in adopting the recommendation of Judge Scott regarding the claims under the Canandaigua Treaty but rejecting his recommendation regarding the claims under the 1842 Treaty, Judge Vilardo found that “the distinction between taxing land and taxing the gravel that makes up that land cuts the baloney too thin.” Id. The court not only addressed an issue of first impression, but had to strike a delicate balance between competing principles of statutory and treaty construction. It was necessary to respect both the treaties by which the United States promised to abide years ago, while also respecting the traditionally-established principles with regard to tax exemptions.

Sharon M. Porcellio, a member of Bond, Schoeneck & King, can be reached at [email protected]. Alyssa J. Jones, an associate trainee with the firm, assisted with the preparation of this article.