Critzer v. United States, 134-75.

• Decision Date: 18 April 1979
• Docket Number: No. 134-75.,134-75.
• Parties: Amy T. CRITZER v. The UNITED STATES.
• Court: U.S. Claims Court

597 F.2d 708

Amy T. CRITZER v. The UNITED STATES.

No. 134-75.

United States Court of Claims.

April 18, 1979.

Charles A. Hobbs, Washington, D.C., attorney of record, for plaintiff. Wilkinson, Cragun & Barker, Herbert E. Marks, Jerry R. Goldstein, Washington, D.C., Coward, Coward & Dillard, Orville D. Coward, and Roger L. Dillard, Jr., Sylva, N.C., of counsel.

M. Carr Ferguson, Asst. Atty. Gen., Washington, D.C., for defendant. Theodore D. Peyser, Jr. and Gilbert W. Rubloff, Washington, D.C., of counsel.

Before FRIEDMAN, Chief Judge, and DAVIS, NICHOLS, KASHIWA, KUNZIG, BENNETT, and SMITH, Judges, en banc.

OPINION

KUNZIG, Judge:

In this income tax case of first impression, plaintiff Amy T. Critzer, an enrolled member of the Eastern Band of Cherokee Indians (the Tribe), operates several businesses and derives income from certain leases on buildings, all of which are physically located on tax-exempt reservation land. The issue is whether or not the income received from the operation of the businesses and the building leases is exempt from federal income tax. We hold that it is not exempt.

During the year 1971, plaintiff operated a 50-unit motel, a 284-seat restaurant, and a gift shop. She also rented out two craft shops and certain apartments. All of these structures are located on the federally-owned Eastern Cherokee Reservation (the Reservation) in North Carolina.¹ All Reservation lands are owned by the United States in trust for the Tribe pursuant to the Act of June 4, 1924, 43 Stat. 376, 25 U.S.C. § 331 (note). Under this 1924 Act, the lands were to be allotted to the individual members of the Tribe. Before any allotments were made, however, Congress passed the Indian Reorganization Act of 1934, 48 Stat. 984, 25 U.S.C. § 461 et seq., precluding further allotments.

The Tribe has allowed its members to use designated portions of the Reservation land on a continuous and exclusive basis. The right of a Tribe member to use a specific parcel of property is based upon historical use by the individual or his family. In 1960, the Tribe began issuing Certificates of Possessory Holding² to record formally an individual's exclusive right to use parcels of Reservation land. Prior to 1960, this right had been recognized simply by tribal resolution. A Certificate of Possessory Holding reserves to the holder the right to construct buildings and other improvements which are considered the personal property of the holder and in which the Tribe has no interest. There is also a limited right to transfer the holding to other members of the Tribe. Upon the death of a possessory holder, the Tribe normally permits his interest to pass to his devisees or heirs under North Carolina law, provided they are members of the Tribe.³ The Tribe cannot reassign a possessory holding without providing due process rights to the incumbent holder.

A possessory holding is not an allotment, but differs only in the fact possessory holdings can never ripen into fee title. The Indian Reorganization Act of 1934, ch. 576, 48 Stat. 984, 25 U.S.C. § 461 et seq., precluded further allotments in order to halt the practice of many Indians who would receive fee title and promptly sell the land, leaving themselves without any means of support and adversely affecting the unity of the Tribe.

Plaintiff Critzer was born on the Tribe's Reservation in western North Carolina. After a twenty-year career as a Registered Nurse, Mrs. Critzer returned to the Reservation in 1953. At that time, her assets consisted of about $1,000, some stock, half of a possessory interest in the reservation land underlying the six-unit Cool Waters Motel, and a half interest in the motel, which she had inherited from her father. (The other half-interest in the land and motel was left to Mrs. Critzer's twin sister, Marion T. Parton.) The motel had been in disuse for about 30 years and lacked the proper furniture and facilities; however, it was situated on a main highway among beautiful mountains and a scenic creek, and was thus favorably located for tourists.

The two sisters started operating the motel, but Mrs. Parton died in late 1953, leaving her half interest to plaintiff. Mrs. Critzer and her husband began improving the property, gradually expanding the number of rooms from six to fifty by 1965. Using revenues from the operation of the motel and other of plaintiff's business interests, and several small bank loans, capital investments totalling over $233,000 were made. These improvements included air conditioning, television sets, a swimming pool, and a tennis court.

In 1965, plaintiff constructed a 284-seat restaurant on the property across the highway from her motel. The cost of the building, furniture and fixtures exceeded $90,000. She also added a gift shop.

Mrs. Critzer has further interests in other land on the Reservation she acquired through purchase and inheritance, and full interest in a parcel of reservation land known as the Old Post Office Lot. She repaired the building on this lot and operated it as a craft shop until 1963. In 1968, Mrs. Critzer replaced the existing building with a larger structure containing a craft shop and four rental apartments. This new structure cost $50,000, $10,000 of which was obtained as a loan and repaid from plaintiff's income.

She had also inherited from her sister an interest in a parcel of reservation land known as the Old Filling Station Lot. After operating a craft shop there for several years, she constructed a new building (at a cost of $10,000) and then continued her craft shop business there until 1963. At that time, she leased the building to a non-member of the Tribe who continued to operate it as a craft shop.

Thus, during the year in question (1971), plaintiff received income from the operation of the restaurant,⁴ gift shop, and motel,⁵ from the rental of the craft shops and apartments,⁶ and interest and dividends. Mrs. Critzer concedes the taxability of the interest and dividends, but contests the taxability of all other 1971 income, which she reported and paid taxes on in the amount of $8,941.59. She then filed a claim for refund in this court. The IRS counterclaims for $6,622.76 (a $4,206.22 deficiency, plus penalty and interest). Thereafter the tax exemption problem was severed by the Trial Judge who recommended a decision on this issue for plaintiff. The Government now contests this recommendation, and the question of exemption is the sole issue before us at this juncture.⁷

Plaintiff argues first and foremost that her business and leasing income is clearly exempt under § 21 of the 1924 Act, although acknowledging the courts have held income must be directly derived from the land. She claims it is so derived. Defendant disagrees.

Mrs. Critzer further claims her argument gets an added boost since as long ago as 1903 in United States v. Rickert, 188 U.S. 432, 23 S.Ct. 478, 47 L.Ed. 532 (1903), the Supreme Court held that if the Indian land is tax-exempt, the exemption applies to permanent improvements as well.

Defendant counters that plaintiff's second point assists her in no way whatsoever because the Rickert case applies only to property taxes, not income taxes (as here).

We hold for the Government.

I.

Indians, like all other citizens, are subject to the federal income tax unless some provision of a statute or a treaty expressly and specifically confers an exemption. Section 21 of the 1924 Act is such a statute:

That all lands, and other property, of the band, or the members thereof, except funds held in trust by the United States, may be taxed by the State of North Carolina, to and including the tax year following the date of this Act. Such taxes shall be paid from the common funds of said band for such period, except upon such tracts as shall have been lawfully sold prior to the date when tax assessments can be made thereon under the State law. All tax assessments made pursuant to this Act on restricted allotments or undivided tribal property held in trust by the United States shall be subject to revision by the Commissioner of Indian Affairs for a period of one year following the date when such assessments are spread on the local tax rolls, but if he shall take no action thereon during said year, such assessments shall be final, but this shall not be construed to deprive any allottee of any remedy to which he would be entitled under the State law: Provided, That such restricted and undivided property shall be exempt from sale for unpaid taxes for two years from the date when such taxes become due and payable, and no penalty for delinquency in the payment of such taxes shall be charged or collected for or during said period, so that Congress may have an opportunity to make provision for the payment of such taxes if the band, or tribal, funds are found insufficient for the purpose.

After the expiration of the tax year following that in which this Act is approved all lands allotted to members of said band, from which restrictions shall have been removed, shall be subject to taxation the same as other lands. But from and after the expiration of said tax year all restricted allotments and undivided property shall be exempt from taxation until the restrictions on the alienation of such allotments are removed or the title of the band to such undivided property is extinguished. (emphasis added)

Though at first glance it may seem that "all restricted allotments and undivided property shall be exempt from taxation," the Supreme Court has restricted the exemption to income derived directly from the land.⁸ Mrs. Critzer says her income is directly derived from the land. Her buildings sit on the land; her businesses are conducted in the buildings; the beautiful view, which attracts customers to her motel, is derived from the land. On the other hand, the Government argues that income can only be considered as derived directly from tax exempt Indian land where the essential and primary source of the revenue is...