Clark v. U.S.

• Decision Date: 27 November 1978
• Docket Number: No. 76-2089,76-2089
• Citation: 587 F.2d 465
• Parties: 78-2 USTC P 9820 Thelma Horton CLARK, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 465

587 F.2d 465

78-2 USTC P 9820

Thelma Horton CLARK, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 76-2089.

United States Court of Appeals, Tenth Circuit.

Argued May 9, 1978.

Decided Nov. 27, 1978.

Bert Barefoot, Jr. and Joseph A. Claro of Barefoot, Moler & Claro, Oklahoma City, Okl., for plaintiff-appellee.

William S. Estabrook III, Atty., Tax Div., Dept. of Justice, Washington, D. C. (Myron C. Baum, Acting Asst. Atty. Gen., Gilbert E. Andrews and Grant W. Wiprud, Attys., Tax Div., Dept. of Justice, Washington, D. C., with him on brief), for defendant-appellant.

Before SETH, Chief Judge, and HOLLOWAY, McWILLIAMS, BARRETT, DOYLE, McKAY and LOGAN, Circuit Judges, (en banc).

LOGAN, Circuit Judge.

This case was brought by the plaintiff-appellee Thelma Horton Clark (Clark) to obtain a refund and interest on allegedly improperly paid federal income taxes. The United States appeals from summary judgment granted in favor of Clark.

Clark, a Chickasaw Indian, was under noncompetent restricted status from her birth on April 9, 1904, until October 3, 1975. The Chickasaws are one of the Five Civilized Tribes. Under Homestead Allotment Patent No. 21630, Clark was allotted 160 acres of Chickasaw National Indian Territory. The land was designated as tax exempt until April 26, 1956, provided title remained in her, which exempt status was later extended for her life. Act of Aug. 11, 1955, Pub.L.No. 348, § 1, 69 Stat. 666.

In 1947, during the period of Clark's restricted status, an oil and gas lease agreement was made with respect to a portion of her homestead with Republic National Gas Company and Grisso Royalty Corporation. The Bureau of Indian Affairs (BIA), a division of the Department of Interior, approved the lease in its capacity as trustee of Clark's allotted land and her income. It was also her personal guardian. Under the terms of the lease she received $186,100 total cash bonus and $150 delay rental during the year 1947. A total of $61,688.58 was paid in federal income taxes by the BIA with respect to these payments.

Clark filed what the parties agree is a timely request for refund for taxes paid out of her trust account. ¹ The Internal Revenue Service (IRS) disallowed the refund, refusing to follow our decision in United States v. Daney, 370 F.2d 791 (10th Cir. 1966). This suit followed.

The only question in the case is stipulated by the parties:

Are the oil and gas cash bonus and delay rentals paid a noncompetent, restricted member of the Five Civilized Tribes on restricted, allotted Indian land subject to federal income tax as advance royalty where oil production followed the payment of said cash bonus and delay rentals.

This requires us to consider whether Daney is distinguishable or erroneous. The IRS asks us to overrule that prior decision of our Court.

The general rule of tax law is that cash bonus and delay rental payments made at the time of leasing a tract for oil and gas are taxed as ordinary income. Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199 (1932) ("We cannot say that such payments by the lessee to the lessor, to be retained by him regardless of the production of any oil or gas, are any more to be taxed as capital gains than royalties which are measured by actual production." Id. at 112, 53 S.Ct. at 77). The cash bonus qualifies for percentage depletion. Herring v. Commissioner, 293 U.S. 322, 55 S.Ct. 89, 79 L.Ed. 646 (1934); Treas.Reg. § 1.612-3(d) (1960). When cost depletion is used the IRS distinguishes between situations where there is later commercial production and where there is not. See Treas.Reg. § 1.612-3(a) (1960). The IRS urges that these same rules should apply in the instant case.

This Court directly addressed that argument in United States v. Daney, 370 F.2d 791, 795 (10th Cir. 1966) as follows:

This misses the mark. We are not dealing with an ordinary citizen. We are dealing with a non-competent, restricted Choctaw Indian who, in 1958, was living on his allotted, restricted land. This Indian's lease bonus is taxable if and only if the Act of 1928 says it is. It is true that section three did and does subject to all State and Federal taxes any true production royalty which an Indian received from production on his restricted land. But it goes no further than that. It does not say that, under the "ordinary" rules of taxation, a lease bonus is to be treated as an advance royalty. The clear language and the history of the statute limit its application to royalties received on production. The government also says that: "Having made the initial decision to tax all minerals including oil and gas on the allotted lands, it is not fairly to be assumed that Congress thereafter intended one set of tax rules for the Indians and another, at variance with the latter, for ordinary citizens." We do not agree. Congress did accord to the Indians a different set of rules of taxation. The language of the statute purports to put Indians and other citizens of Oklahoma on equal footing only as regards minerals Produced. The Indians still enjoy the special tax advantage as to other income from the allotted, restricted lands. That advantage must be preserved to carry out the Congressional purpose behind the allotment system which "was to protect the Indians' interest and 'to prepare the Indians to take their place as independent, qualified members of the modern body politic.' " It may be said that there no longer exists any need to give the restricted Indian a tax advantage, that he has become an independent, qualified member of the modern body politic, and, indeed, that all the "ordinary" tax principles should be applicable to him. It is for Congress to make that determination and change the Act of May 10, 1928. This court cannot. (Footnotes omitted.)

Nothing has been presented to us in the instant case which persuades us that Daney was wrong, and we hereby reaffirm that decision.

We start from the proposition that native American Indians have consistently received different tax treatment than other American citizens, especially when restricted lands are concerned. Members of the Five Civilized Tribes were given tax exempt status as to the lands involved here. Act of June 28, 1898, c. 517, § 29, 30 Stat. 495; Act of Apr. 26, 1906, c. 1876, § 19, 34 Stat. 137. These payments may be taxed only if the law has been changed and they are clearly and unambiguously included in a taxation scheme; ambiguities should be resolved in their favor.

The Government urges us to view this case as an ordinary tax case without regard to the treaty, relevant statutes, congressional policy concerning Indians, or the guardian-ward relationship between the United States and these particular (Quinaielt) Indians. . . .

We agree with the Government that Indians are citizens and that in ordinary affairs of life, not governed by treaties or remedial legislation, they are subject to the payment of income taxes as are other citizens. We also agree that, to be valid, exemptions to tax laws should be clearly expressed. But we cannot agree that taxability of respondents in these circumstances is unaffected by the treaty, the trust patent or the Allotment Act.

Squire v. Capoeman, 351 U.S. 1, 5-6, 76 S.Ct. 611, 614, 615, 100 L.Ed. 883 (1956). See also, Board of County Comm'r v. Seber, 318 U.S. 705, 713, 63 S.Ct. 920, 87 L.Ed. 1094 (1943) (stating that tax exemption should not be terminated absent express Congressional direction); Choate v. Trapp, 224 U.S. 665, 675, 32 S.Ct. 565, 56 L.Ed. 941 (1912) (doubtful construction as to interpretations of...