American Indians are not subject to US income taxes on gravel mined on the reservation, a federal district court said in late July.
The decision is at odds with the holding in the same case by the US Tax Court in March. The district court was dealing with income earned in 2010. The Tax Court looked at whether income had to be reported in 2008 and 2009.
A US appeals court will have to sort out the conflict if the case is appealed.
Alicia Perkins, a Seneca Indian, got permission from the tribe to mine gravel on a Seneca reservation in upstate New York. She owned a trucking company. The company had income from gravel sales in 2008, 2009 and 2010.
She argued that two treaties that the US government signed with the Seneca Indians in 1794 and 1842 bar the US from taxing income that a member of the tribe earns from gravel sales.
The Tax Court concluded that neither treaty spares her from having to pay income taxes on the gravel sales. The district court said both treaties protect her from having to pay taxes on the income.
American Indians have been considered US citizens since 1924. The US tax code says that “every individual” is taxed on “all income from whatever source derived” unless the income is specifically excluded. American Indians are subject to US income taxes like everyone else.
However, the tribes are still considered sovereign nations.
Treaties with Indian tribes are interpreted liberally by the US courts. Courts act based on what they believe the tribe understood was the agreement when it signed the treaty.
The 1794 treaty with the Senecas promised that the government will not disturb “the free use and enjoyment” by the Senecas of their land. The 1842 treaty bars the government from taxing “real property” belonging to the tribe.
The Tax Court said gravel is no longer “real property” after it has been removed from the ground.
The district court looked at analogous situations where courts have said there was a strong enough connection between income and land for the US government not to be able to tax the tribe. It said gravel is not a retail product, like cigarettes or gasoline, that is brought on to the reservation, or a commercial improvement on land like an apartment complex. Gravel is a type of mineral that was extracted directly from land belonging to the Seneca Nation.
The case landed in both courts because Ms. Perkins paid the 2010 taxes and sued for a refund in the federal district court. She challenged the taxes the IRS said she owed in 2008 and 2009 in the US Tax Court where taxes do not have to be paid before going to court.
The district court case is Perkins v. United States. Tax Court case is Alice and Frederick Perkins v. Commissioner.
The district court said a trial will be needed to establish the share of Ms. Perkins’ income in 2010 that was attributable to gravel sales.