Ute Distribution Corp. v. U.S.

• Citation: 938 F.2d 1157
• Decision Date: 16 July 1991
• Docket Number: Nos. 90-4030,90-4031,s. 90-4030
• Parties: -5196, 91-2 USTC P 50,359 UTE DISTRIBUTION CORPORATION, a Utah Corporation; Floyd and Helen Wilkerson; Henry Wopsock; Sam N. and Sandra K. Aloia; and Chris H. Denver, Plaintiffs-Appellants/Cross-Appellees, v. UNITED STATES of America, Defendant-Appellee/Cross-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1157

938 F.2d 1157

68 A.F.T.R.2d 91-5196, 91-2 USTC P 50,359

UTE DISTRIBUTION CORPORATION, a Utah Corporation; Floyd and Helen Wilkerson; Henry Wopsock; Sam N. and Sandra K. Aloia; and Chris H. Denver, Plaintiffs-Appellants/Cross-Appellees, v. UNITED STATES of America, Defendant-Appellee/Cross-Appellant.

Nos. 90-4030, 90-4031.

United States Court of Appeals, Tenth Circuit.

July 16, 1991.

Max D. Wheeler (Michael D. Blackburn and David W. Steffensen, with him on the briefs), of Snow, Christensen & Martineau, Salt Lake City, Utah, for plaintiffs-appellants/cross-appellees.

Robert W. Metzler (Shirley D. Peterson, Asst. Atty. Gen., and Gary R. Allen and Richard Farber, Attys., with him on the briefs), Atty., Tax Div., Dept. of Justice Washington, D.C., for defendant-appellee/cross-appellant; Dee V. Benson, U.S. Atty., of counsel, Salt Lake City, Utah.

Before TACHA and SETH, Circuit Judges, and BRATTON, District Judge. ^*

TACHA, Circuit Judge.

Plaintiffs-appellants/cross-appellees Ute Distribution Corporation (UDC) and representative stockholders appeal the district court's ruling that UDC's distributions to its stockholders are subject to federal income tax. The government cross-appeals, claiming the district court erred in refusing to apply its decision retroactively. We exercise jurisdiction under 28 U.S.C. Sec. 1291, reverse the district court's refund of income taxes collected on UDC distributions, and dismiss for lack of jurisdiction appellants' claim for declaratory judgment regarding future taxation of distributions.

I. Background

During the 1950s, federal Indian policy underwent significant reform intended to reduce federal involvement in Indian affairs. In 1954, the 83rd Congress voted to terminate federal supervision over several Indian tribes. ¹ Most of these termination acts contained similar provisions relating to the termination of federal supervision over the Indians' property. Typically, the tribal assets consisted of land and trust funds that were divided easily among the members of the tribe.

Congress provided for the termination of the mixed-blood members of the Ute Indian Tribe of the Uintah and Ouray Reservation in Utah in the Ute Partition Act (UPA), 25 U.S.C. Secs. 677-677aa. The mixed-bloods were tribe members who did not possess enough Indian or Ute Indian blood to fall within the fullblood class and those members who became mixed-bloods by choice under provisions of the UPA. See 25 U.S.C. Sec. 677a(c). Unlike other Indian tribes terminated by Congress in 1954, a substantial portion of the Ute tribal assets consisted of subsurface oil, gas, and mineral rights (indivisible assets). These assets were not "susceptible to equitable and practical distribution." Id. Sec. 677o (a). Congress therefore devised a method of distributing the proceeds of the indivisible assets over an extended period of time to the members of the terminated and non-terminated groups. Under the procedures outlined in the UPA, membership rolls were to be prepared for the fullblood and mixed-blood groups. After these rolls were published, the Tribal Business Committee, representing the fullbloods, and the authorized representative of the mixed-bloods were directed to distribute the divisible assets. The indivisible assets were to remain in government trust and be jointly managed by the Tribal Business Committee and the mixed-bloods' representative.

Pursuant to statutory authorization, the mixed-bloods organized the Affiliated Ute Citizens (AUC) and empowered its board of directors to act as their authorized representative. The mixed-bloods approved a plan for a division of the tribal assets, which later was adopted by the Tribal Business Committee and the AUC. Under this plan, most of the divisible assets were directly transferred to the mixed-bloods. With respect to the indivisible assets, the plan provided for the formation of a corporation responsible for managing these assets for the mixed-bloods. This corporation also would distribute income from the assets to its stockholders.

UDC was formed for these purposes in late 1958. Each mixed-blood listed on the rolls received ten shares of UDC stock. The stock was freely transferable, except members of the Ute Indian Tribe were given a right of first refusal until August 26, 1964. The termination of the mixed-blood members of the Ute Indian Tribe was completed when the Secretary of the Interior issued a proclamation, effective August 27, 1961, declaring "[a]ll statutes of the United States which affect Indians because of their status as Indians shall no longer be applicable [to the mixed-bloods.]" 26 Fed.Reg. 8042 (1961). This proclamation did not purport to terminate the trust status of the indivisible assets.

For several years, UDC distributions to its stockholders were considered tax-exempt. In 1982, an IRS field agent asserted the probable tax status of the distributions based on section 677p of the UPA. This position was formalized in a letter by an IRS attorney that stated:

[T]here is no basis for distinguishing distributable and nondistributable assets or property for the purposes of this exemption and that it was the intent of Congress in terminating federal supervision over mixed-blood trust assets to treat the mixed-bloods as non-Indians. Therefore, we believe that any distribution made to a mixed-blood after August 27, 1961 was and is subject to income tax.

Based on this reasoning, the IRS assessed taxes on all UDC distributions for tax year 1984.

While the original UDC stockholders were either mixed-bloods or fullbloods who elected to be terminated, the current stockholders include individuals who have inherited stock, mixed-blood and fullblood purchasers, and non-Indian purchasers of stock. Individual stockholders were selected to represent these different categories of stockholders in challenging the IRS decision to tax UDC distributions. ² UDC and the representative stockholders exhausted their administrative remedies by unsuccessfully appealing the proposed assessments to the IRS Appeals Office. They paid the taxes, penalties, and interest and filed timely claims for refund, which were denied. Then they filed this suit in federal district court. UDC sought refunds of penalties and interest assessed and collected for tax years 1984 and 1985 and a declaratory judgment that it was not required to file 1099 information returns. The individual stockholders sought refunds of income taxes and interest assessed and collected for tax year 1984 and a declaratory judgment that the distributions are not subject to federal and state taxes.

Following a bench trial, the district court concluded:

UDC's claim for refund of penalties paid for its failure to file 1099 returns for tax years 1984 and 1985 is granted, and refunds to UDC for those years is ordered. The claims of the individual plaintiffs seeking tax refunds for the year 1984 is also granted. However, commencing with tax year 1989, all distributions of property and income to stockholders of UDC are declared to be taxable, that is, "subject to the same taxes, State and Federal, as in the case of non-Indians."

Ute Distribution Corp. v. United States, 721 F.Supp. 1202, 1209 (D.Utah 1989). In the final order, the district court awarded refunds to UDC and the individual shareholders and granted the government a declaratory judgment. All parties filed timely notices of appeal.

II. Discussion

A. Jurisdiction Over Claims for Declaratory Judgment

The government contends the district court should not have exercised jurisdiction over appellants' claims for declaratory judgment. Declaratory judgment actions relating to federal taxes are not permitted. 28 U.S.C. Sec. 2201; see also 26 U.S.C. Sec. 7421(a). The purpose of this prohibition is protection of the government's need to assess and collect taxes expeditiously without pre-enforcement judicial interference. See South Carolina v. Regan, 465 U.S. 367, 374-75, 104 S.Ct. 1107, 1112-13, 79 L.Ed.2d 372 (1984); Bob Jones Univ. v. Simon, 416 U.S. 725, 736-37, 94 S.Ct. 2038, 2045-46, 40 L.Ed.2d 496 (1974). An individual seeking to challenge the imposition of a tax must pursue his claim in a suit for refund. See Lowrie v. United States, 824 F.2d 827, 830 (10th Cir.1987).

Appellants pursued the proper procedure for challenging the imposition of the tax on UDC distributions. They paid the tax and then sought a refund. The district court, however, did not have jurisdiction to consider appellants' accompanying claims for declaratory judgment.

Additionally, the government argues the appellants have failed to join the appropriate state taxing authority as an indispensable party to their request for declaratory judgment. The government did not raise this issue below. We need not address this question because we dismiss appellants' claims for declaratory judgment. These claims are dismissed.

B. Taxation of UDC Distributions

The government argues appellants are not entitled to appeal the district court's judgment because that court awarded the entire amount of refunds sought by appellants. When one party files a notice of appeal challenging the district court's decision, the opposing party is entitled to cross-appeal on all other issues litigated below. See W.W. Windle Co. v. Commissioner, 550 F.2d 43, 45 n. 2 (1st Cir.), cert. denied, 431 U.S. 966, 97 S.Ct. 2923, 53 L.Ed.2d 1062 (1977). The rule limiting issues raised on appeal merely restricts a party with a judgment in his favor from seeking appellate review of "findings he deems erroneous which are not necessary to support the decree." Electrical Fittings Corp. v. Thomas & Betts Co., 307 U.S. 241, 242, 59 S.Ct. 860, 860, 83 L.Ed. 1263 (1939).

Here, the government commenced this appeal by filing a notice of appeal challenging the district court's prospective application of its ruling. Appellants may challenge the district court's ruling on the taxation of distributions because it is an integral part of...