Cross v. Comm'r of Internal Revenue
| Decision Date | 27 September 1984 |
| Docket Number | 11880-78.,Docket Nos. 11879-78 |
| Citation | 83 T.C. 561,83 T.C. No. 29 |
| Parties | SILAS V. CROSS AND MILLIE CROSS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSILAS A. CROSS AND FRANCINE V. CROSS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners, members of the Puyallup Indian Nation, operate a smokeshop on land held in trust by the United States under the provisions of the Medicine Creek Treaty of 1854 and the General Allotment Act of 1887. HELD, income derived from the smokeshop is taxable because it is neither ‘directly derived‘ from the underlying trust land, nor expressly exempted from taxation by any statute or treaty. HELD FURTHER, smokeshop income allocable to the fair rental value of the unimproved land upon which the smokeshop sits is not income ‘directly derived‘ from the trust land within the meaning of Squire v. Capoeman, 351 U.S. 1 (1956) and is not excludable from gross income. FREDERICK O. FROHMADER, CHARLES J. HERRMAN, and NORMAN L. MARGULLIS, for the petitioners in docket No. 11879-78.
CHARLES J. HERRMAN and NORMAN L. MARGULLIS, for the petitioners in docket No. 11880-79.
THOMAS N. TOMASHEK, for the respondent.
In these consolidated cases respondent determined the following deficiencies and additions to tax in petitioners' Federal income taxes:
+--------------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦Sec. 6653(a) 1 ¦
+------------+-----------------+------+------------+-----------------¦
¦Docket No. ¦Petitioner ¦Year ¦Deficiency ¦addition to tax ¦
+------------+-----------------+------+------------+-----------------¦
¦ ¦ ¦ ¦ ¦ ¦
+------------+-----------------+------+------------+-----------------¦
¦11879-78 ¦Silas V. and ¦1976 ¦$27,233 ¦$1,362 ¦
+------------+-----------------+------+------------+-----------------¦
¦ ¦Millie Cross ¦ ¦ ¦ ¦
+------------+-----------------+------+------------+-----------------¦
¦11880-78 ¦Silas A. and ¦1976 ¦542 ¦27 ¦
+------------+-----------------+------+------------+-----------------¦
¦ ¦Francine V. Cross¦ ¦ ¦ ¦
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This case was submitted under Rule 122, Tax Court Rules of Practice and Procedure. All facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.
The petitioners in each of these cases are husband and wife. Petitioner Silas V. Cross and petitioner Silas A. Cross are father and son and both are enrolled members of the Puyallup Indian Nation. All petitioners resided in Tacoma, Pierce County, Washington, within the boundaries of the Puyallup Indian Reservation when the petitions herein were filed.
Petitioner Silas V. Cross (Cross) is the beneficial owner of land held in trust by the United States of America (trust land).3 The original patent granting beneficial ownership of the trust land was issued to his grandfather on January 30, 1886, under the provisions of the Medicine Creek Treaty of 1854 (Medicine Creek Treaty), 10 Stat. 1132.
The trust land also falls under the jurisdiction of the General Allotment Act of 1887, 24 Stat. 388, 25 U.S.C. sec. 331 et seq. (1982). The purpose of the General Allotment Act is to preserve the value of land in trust until the Secretary of the Interior determines that the individual allottee is competent to hold title to the land in fee simple.4
Cross operates the Cross Smokeshop on 0.62 acres of the original patent allotted to his grandfather in 1886. In 1976, the fair rental value of the 0.62 acres was $6,500, based upon the rental value of the property for use in the operation of a smokeshop or other similar commercial enterprise, the highest of the smokeshop or other similar commercial enterprise, the highest and best use of this particular property.
In 1976, the net profit received by Cross from operation of the smokeshop was $41, 687. This income resulted from the sale of cigarettes, other tobacco products and merchandise sold in the smokeship. The son (petitioner Silas A. Cross) received $1,899 in wages for working at the smokeshop in 1976. None of the petitioners reported these amounts as income on their respective joint 1976 Federal income tax returns.
Respondent determined that both the smokeshop income and the wages paid to the son were includable in petitioners' respective gross incomes.
Section 61 defines gross income to include ‘all income from whatever source derived.‘ It is well established that the income of Indians is taxable under this section, ‘unless an exemption from taxation can be found in the language of a Treaty or Act of Congress.‘ Commissioner v. Walker, 326 F.2d 261, 263 (9th Cir. 1964); Jourdain v. Commissioner, 71 T.C. 980 (1979), affd. 617 F.2d 507 (8th Cir. 1980); Hoptowit v. Commissioner, 78 T.C. 137 (1982), affd. 709 F.2d 564 (9th Cir. 1983). The mere fact that petitioners are Indians will not preclude them from being liable for the payment of income tax. Choteau v. Burnet, 283 U.S. 691 (1931); Superintendent v. Commissioner, 295 U.S. 418 (1935). In order to prevail, petitioners must point to ‘express exemptive language in some statute or treaty ‘ showing that they need not include amounts in their gross income. United States v. Anderson, 625 F.2d 910, 913 (9th Cir. 1980); Karmun v. Commissioner, 82 T.C. 201, 204 (1984).5 See Welch v. Helvering, 290 U.S. 111 (1933). Petitioners have failed to show an express exemption in any Treaty or Act of Congress. Thus we must agree with respondent that income from the smokeshop, as well as wages.paid for working in the smokeshop, constitutes taxable income under section 61.
Petitioner's primary contention is that the Medicine Creek Treaty is a contrast between the United States and the Puyallup Indian Nation reserving by implication the power of taxation in the Puyallup Indian Nation. Petitioners rely on two principles of contract construction: language is to be construed most strongly against the entity responsible for it; and, where items are specified in detail in a contract, other items of the same general character are excluded by implication on the ground that the specific terms express the meaning of the parties. Sands, Sutherland Statutory Construction (4th ed. 1972). We do not find these general principles of contract law to be applicable to this case.
The Medicine Creek Treaty, 10 Stat. 1132, in pertinent part states: Petitioners ask us to conclude that this geographical restriction in article 12 is the only trade limitation which was intended by the United States and the Puyallup Indian Nation when the treaty was executed. They argue that taxing the income from the smokeshop would be a further constraint on trade, not allowed under the treaty. We reject this interpretation as not arising from the plain language of article 12.
At the time the Medicine Creek Treaty was entered into, the Federal income tax did not yet exist. Posin, Federal Income Taxation, section 1.01, p. 1 (1983). 6 The parties surely did not intend a geographical trade limitation to restrict the taxing authority of the United States to impose a tax not in existence.
Moreover, we cannot find that petitioners have been exempted from the tax by implication. Mescalero Apache Tribe v. Jones, 411 U.S. 145, 156 (1973); Fry v. United States, 557 F.2d 646, 649 (9th Cir. 1977); Jourdain v. Commissioner, 71 T.C. at 990. Any exemption from taxation for Indians must be expressly stated in a Treaty or Act of Congress. United States v. Anderson, supra. The Medicine Creek Treaty simply does not provide petitioners with an express restriction on the ability of the United States to tax the profits arising from trade carried out on trust land. Earl v. Commissioner, 78 T.C. 1014 (1982).
The General Allotment Act, 25 U.S.C. sec. 331 et seq., under which jurisdiction the trust land falls, similarly fails to exempt petitioners' income from taxation.7 In Squire v. Capoeman, 351 U.S. 1, 9 (1956), the Supreme Court concluded that there exists within the General Allotment Act, an exemption from taxation of income from land held in trust by the United States, IF such income is ‘directly derived‘ from the land. Quite clearly income from land is not generally exempt, but only income ‘directly derived‘ from the land. The profits from petitioners' smokeshop do not fall within this narrow exemption.
In Squire v. Capoeman, supra, a noncomponent Indian, contested the inclusion in gross income of amounts derived from the sale of timber growing on land held in trust for him by the United States pursuant to the General Allotment Act. ‘The land was forest land, covered by coniferous trees from one hundred years to several hundred years old,‘ and ‘was of little value after the timber was cut.‘ Squire v. Capoeman, supra at 4. Quoting an earlier attorney general, that ‘it is not lightly to be assumed that Congress intended to tax the ward for the benefit of the guardian‘ (351 U.S. at 8), the Court read the General Allotment Act as exempting from tax income ‘directly derived‘ from the land itself, thus exempting the timber sales proceeds from the capital gains tax. However, this exemption was restricted to income ‘directly derived‘ from the land itself.
The Court stated that:
Once logged off, the land is of little value. The land no longer serves the purpose for which it was by treaty set aside * * * and for which it was allotted to him. * * * Unless the proceeds of the timber sale are preserved for (the taxpayer), he cannot go forward when declared competent with...
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