Daney v. United States

• Decision Date: 12 October 1965
• Docket Number: Civ. A. No. W-3046.
• Citation: 247 F. Supp. 533
• Parties: Joseph DANEY and Bertha Daney, Plaintiffs, v. UNITED STATES of America, Defendants.
• Court: U.S. District Court — District of Kansas

247 F. Supp. 533

Joseph DANEY and Bertha Daney, Plaintiffs, v. UNITED STATES of America, Defendants.

Civ. A. No. W-3046.

United States District Court D. Kansas.

October 12, 1965.

Barefoot, Moler, Bohanon & Barth, Oklahoma City, Okl., and Cooper, Esco, Cooper & Loyd, Wichita, Kan., for plaintiffs.

Newell A. George, U. S. Dist. Atty., Topeka, Kan., Louis F. Oberdorfer, Asst. Atty. Gen., Giora Ben-Horin, C. Moxley Featherston, and Jerome Fink, Trial Section, Tax Div., Dept. of Justice, Washington, D. C., for defendants.

WESLEY E. BROWN, District Judge.

This is a civil suit brought to recover a sum certain, plus interest, alleged to have been wrongly taxed and collected by defendant on income received in 1958 by plaintiff Joseph Daney in the form of a cash bonus paid for the execution of an oil and gas lease. Plaintiff Bertha Daney is a party to this suit only because the Daneys filed a joint return for the calendar year 1958. The transaction involved occurred in 1958; at that time and at all pertinent times, plaintiff Joseph Daney was a noncompetent, restricted, full-blooded Choctaw Indian No. 6206. The Choctaws, of course, are one of the "Five Civilized Tribes" composed of the Creek, Choctaw, Chicasaw, Cherokee and Seminole.

This matter is currently before the court for determination on a stipulated fact pattern. The stipulated facts are approved and adopted by the court and will not be set out here except as necessary to clarify our views.

The parties have also stipulated that the two questions of law to be determined by the court are as follows:

(a) whether plaintiffs are barred from recovery by virtue of their failure to timely file a refund claim at the office of the appropriate District Director of Revenue;

(b) whether the income realized in 1958 by plaintiff Joseph Daney hereinafter referred to as "plaintiff' or "taxpayer" or "Daney" from an oil and gas lease executed on his allotted Indian land is subject to federal income tax.

STATUTE OF LIMITATIONS ISSUE

It is stipulated that plaintiffs filed a timely joint tax return for the calendar year 1958 with the District Director of Internal Revenue at Wichita, Kansas, reporting a tax liability of $18,794.53. Only $18,114.89 of the tax liability is attributable to the oil and gas lease transaction and this is the principal sum involved herein. The tax liability was paid. It is also stipulated that the tax return was prepared by the Indian Office in Muskogee, Oklahoma, and the tax liability was paid by the Indian Office out of the restricted funds of the taxpayer.

It is further stipulated that plaintiffs filed their claim for refund in 1962 and that it was received in the Ardmore, Oklahoma office of the District Director of Revenue, Oklahoma City, on April 16, 1962 and at the Wichita Office on May 14, 1962. April 15, 1962 fell on a Sunday.

It is conceded by both sides to this suit that the refund claim was timely filed in Oklahoma, since April 15, 1962 was a Sunday. Defendant contends, however, that it was not timely filed at Wichita, and relies on Treas.Reg. § 301.6402-2(a) (2), which requires the refund claim to be filed in the office of the district director for the district in which the tax was paid.

Under general tax law, this statute of limitations requirement is normally a jurisdictional prerequisite. See, e. g., 10 Mertens, Federal Income Tax § 58A.06 (1960). But general rules of tax law, like general acts of Congress, do not apply to restricted Indians in such a strict manner. See, e. g., Blackbird v. Commissioner, 38 F.2d 976 (10th Cir. 1930). Cf. Big Eagle v. United States, 300 F.2d 765, 156 Ct.Cl. 665 (1962).

Judge Rizley of the Western District of Oklahoma has recently ruled that a refund claim can be filed by a restricted Indian at any time. Nash v. Wiseman, 227 F.Supp. 552 (W.D.Okl. 1963). See also 10 Mertens, Federal Income Tax § 58A.06 n. 54 (1960). In other words, the noncompetency of an Indian tolls the applicability of the statutes of limitations. In the case at bar, Daney was no longer a noncompetent at the time he filed his refund claim, but he had been a noncompetent Indian during all of 1958, and the restrictions on his land were not removed until October 21, 1959 Stipulation, ¶ 7. We are therefore of the opinion that the running of the three-year period for the filing of refund claims did not commence until after Daney's noncompetence restrictions were removed. Thus the filing of the refund claim in Wichita was timely made; and plaintiffs' claim for refund is not barred by the statute of limitations assuming arguendo that Treas.Reg. § 301. 6402-2(a) (2) applies to restricted Indians.

We would add that Rev.Rul. 61-11, 1961-1 Cum.Bull. 724 permits the allowance of a claim for refund notwithstanding the expiration of the statute of limitations for taxes wrongly assessed and collected "on tax-exempt income directly derived from allotted and restricted Indian lands." Defendant seems to concede that should we rule in favor of plaintiffs on the merits, defendant's statute of limitations argument must also fall. See Brief for Defendant, p. 21.

THE MERITS OF PLAINTIFFS' CLAIM FOR REFUND

It is stipulated that the land here involved was allotted to Daney by Patent No. 2493 dated July 17, 1903 and recorded December 22, 1924; that by Certificate No. 324 of June 10, 1929 the land involved was designated by taxpayer and the Department of Interior as tax exempt as long as title remained in Daney, such tax exemption not to extend beyond April 26, 1956; that by § 1 of ch. 786 of P.L. 348 enacted on August 11, 1955, 69 Stat. 666, the restrictions on lands held by members of the Five Civilized Tribes which were to expire to April 26, 1956 were extended for the lives of the Indians. It is further stipulated that the restrictions on Daney's land were removed by Order No. 58 on October 21, 1959.

We are met from the outset by several sets of competing principles. On the one hand, under the "general rules" applicable to the tax code, and applicable to "ordinary tax cases," it is well settled that a cash bonus paid for the execution of an oil and gas lease is "treated as" advance royalty in the hands of the lessor, and the bonus is taxable as ordinary income in the year received or accrued and is subject to a reasonable allowance for depletion. E. g., 4 Mertens, Federal Income Tax § 24.63 (1960); Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L. Ed. 199 (1932); Shamrock Oil & Gas Corp., 35 T.C. 979, 1040 (1961).

Further, as to the "ordinary tax case," under the tax code, tax exemptions must be clearly expressed and are not to be found or granted by implication. E. g., Big Eagle v. United States, 300 F. 2d 765, 769, 156 Ct.Cl. 665 (1962).

Bluntly, if the "general rules" apply to Daney he would be required to pay the tax to support the government which protects him, but general acts of Congress do not apply to Indians unless so expressed as to clearly manifest an intent to include them. E. g., Elk v. Wilkins, 112 U.S. 94, 5 S.Ct. 41, 28 L.Ed. 643 (1884); Blackbird v. Commissioner, 38 F.2d 976 (10th Cir. 1930). Blackbird, Chouteau v. Commissioner, and Petitt v. Commissioner were companion cases in the Tenth Circuit and were decided under the same citation. Chouteau was a competent Osage; Petitt was a white woman who had inherited land from her children who were Osage tribe members and Blackbird was a noncompetent Osage. The circuit court upheld taxability as to Chouteau and Petitt; denied taxability as to Blackbird. On review, the Supreme Court affirmed Chouteau but did not review Petitt or Blackbird. See Choteau v. Burnet, 283 U.S. 691, 51 S.Ct. 598, 75 L.Ed. 1353 (1931). In the circuit case the spelling was "Chouteau," but the circuit case and the Supreme Court case clearly involved the same Indian.

The Internal Revenue Codes of 1926, 1928, 1932, 1934, 1939 and 1954 made no specific reference to income taxation of noncompetent Indians. See Freeman P. Walker, 37 T.C. 962, 968-969 (1962). We therefore must conclude that special "Indian tax statutes" must be passed by Congress in order to impose tax liability on Indian income.

And while tax exemptions are to be strictly construed under the "general rules," the rule is just the opposite as applied to Indians: tax exemptions are found by implication in Indian tax cases. E. g., United States v. Hoffman, 306 F.2d 493 (10th Cir. 1962) (per curiam); United States v. Hallam, 304 F.2d 620 (10th Cir. 1962).

Further, all Indian statutes are to be liberally construed:

"The construction, instead of being strict, is liberal; doubtful expressions, instead of being resolved in favor of the United States, are to be resolved in favor of a weak and defenseless people, who are wards of the nation, and dependent wholly upon its protection and good faith. This rule of construction has been recognized, without exception, for more than a hundred years, and has been applied in tax cases." Choate v. Trapp, 224 U.S. 665, 675, 32 S.Ct. 565, 569, 56 L.Ed. 941, 946 (1912).

The tax cases involving restricted, noncompetent Indians are not to be analyzed as "ordinary tax cases." E. g., Squire v. Capoeman, 351 U.S. 1, 76 S.Ct. 611, 100 L.Ed. 883 (1956). Indian tax cases are to give recognition to the guardian-ward relationship between the government and the noncompetent Indian and to the Congressional policy regarding Indians. "It is not lightly to be assumed that Congress intended to tax the ward for the benefit of the guardian." Squire v. Capoeman, supra, 351 U.S. at 8, 76 S.Ct. at 616, 100 L.Ed. at 890.

Additionally, the Interior Department's publication on Federal Indian Law (1958) states at page 882 that in Squire the Supreme Court reverted to a policy of liberal construction in applying revenue laws to Indians. See Freeman P. Walker, 37 T.C. 962, 970 (1962).

It must also be noted that as applied to Indians, a tax exempt status accorded to restricted land extends to the income derived directly therefrom. Cohen,...