Farris v. Commissioner

Decision Date15 July 1985
Docket NumberDocket No. 20300-81.
PartiesHarold Farris v. Commissioner.
CourtU.S. Tax Court

Christopher R. Boutelle, for the petitioner. Thomas N. Tomashek, for the respondent.

Memorandum Opinion

WILBUR, Judge:

Respondent determined the following deficiencies in petitioner's Federal income taxes:

                       Year                  Deficiency
                       1977 ................. $14,295
                       1978 .................  97,134
                       1979 .................  37,793

The issues for decision are: (1) whether income earned by an enrolled member of the Puyallup Indian Nation from the operation of a smokeshop and gambling casino is subject to Federal income taxation, and (2) whether, assuming the gambling income is taxable, petitioner is entitled to a deduction for the loss of cash and gambling equipment seized by the Federal Bureau of Investigation (F. B. I.).

This case was submitted under Rule 122.1 The stipulation of facts and attached exhibits are incorporated herein by this reference.

Petitioner is an enrolled member of the Puyallup Indian Nation. Petitioner resided in Tacoma, Pierce County, Washington, within the boundaries of the Puyallup Indian reservation. When the petition herein was filed, petitioner was the beneficial owner of land held in trust by the United States of America (trust land).2 Petitioner operated a retail store called the "Indian House" (hereinafter "the smokeshop") that sold tobacco and other merchandise during the years 1977 through 1979. The land upon which the smokeshop is located consists of .38 acres in Pierce County, Washington. The property was deeded by Frank and Lorna LePonis to the United States in trust for petitioner on March 28, 1977.

The trust land falls under the jurisdiction of the General Allotment Act of 1887, 24 Stat. 388, 25 U. S. C. section 331, et seq. (1982). The purpose of the legislation was to prevent diminution in the value of trust land until such time as the Secretary of the Interior determines that the individual allottee is competent to hold title to the land in fee simple. Board of Commissioners v. Seber, 318 U. S. 705, 715 (1943). In 1977, 1978, and 1979 the fair rental value of the real property upon which the smokeshop was situated was $7,000 per year. This value is based on the rental value of the land for use in the operation of a smokeshop or other similar commercial endeavor and represents the highest and best use of this particular property.

The income shown on the tax return filed by petitioner in 1977 consisted solely of wages earned by petitioner as a butcher for the Hygrade Food Products Corporation in Tacoma, Washington. Petitioner failed to include the income earned in 1977 from his smokeshop and gambling operations conducted on trust land. In addition, petitioner failed to file an income tax return in 1978 and 1979. The net income of the smokeshop for the years in question is as follows:

                          Year                   Net Income
                          1977 .................. $60,604
                          1978 ..................  83,453
                          1979 ..................  81,224

In the notice of deficiency, the Commissioner determined that the smokeshop earnings are includable in petitioner's gross income. Petitioner does not dispute the correctness of the taxable income from his smokeshop operation as determined by respondent for the years 1977, 1978, and 1979, but argues that such income is exempt from Federal taxation.

In August of 1977, petitioner and three other individuals opened up a cardroom. The cardroom initially restricted itself to poker games but was later expanded to include blackjack tables and dice games. On April 24, 1978, the gambling operation was closed by the F. B. I. and $75,234.18 in cash and gambling equipment was seized. As stipulated, the income received by petitioner from the gambling enterprise was $24,000 in 1977 and $63,000 in 1978. Petitioner argues that if this Court should find that the gambling income is not exempt from Federal income tax, he should be entitled to a loss deduction to reflect the value of the cash and property seized in the F. B. I. raid.

We turn our attention first to whether income earned from petitioner's smokeshop and gambling operation is exempt from Federal income taxation. In a recent Court reviewed opinion, this issue was decided adversely to petitioner. Cross v. Commissioner Dec. 41,518, 83 T. C. 561 (1984), on appeal (9th Cir. June 27, 1985).3

Section 61 provides that income from whatever source derived is subject to Federal income taxation.4 It is now well established that the income of American Indians is subject to Federal taxation "unless an exemption from taxation can be found in the language of a Treaty or Act of Congress." Commissioner v. Walker 64-1 USTC ¶ 9208, 326 F. 2d 261, 263 (9th Cir. 1964), affg. in part and revg. in part Dec. 25,361 37 T. C. 962 (1962); Jourdain v. Commissioner Dec. 35,917, 71 T. C. 980 (1979), affd. 80-1 USTC ¶ 9297 617 F. 2d 507 (8th Cir. 1980); Hoptowit v. Commissioner Dec. 38,740, 78 T. C. 137 (1982), affd. 83-2 USTC ¶ 9449 709 F. 2d 564 (9th Cir. 1983). The mere fact that petitioner is an Indian will not exclude him from liability for Federal income tax. Choteau v. Burnet 2 USTC ¶ 746, 283 U. S. 691 (1931); Superintendent v. Commissioner, 295 U. S. 418 (1935).

In order for petitioner to prevail he must point to a specific exemption from taxation in the language of a treaty or Act of Congress. Where there is a lack of any language with respect to the question of taxation, an exemption cannot thereby exist by negative implication. Mescalero Apache Tribe v. Jones, 411 U. S. 145, 156 (1973); United States v. Anderson 80-2 USTC ¶ 9631, 625 F. 2d 910 (9th Cir. 1980); Karmun v. Commissioner Dec. 40,962, 82 T. C. 201 (1984), affd. 84-2 USTC ¶ 10,003 749 F. 2d 567 (9th Cir. 1984). Petitioner has failed to identify an express exclusion in any treaty or Congressional Act. Thus, we must agree with respondent that the income from the smokeshop as well as from petitioner's gambling operation is taxable under section 61.

Petitioner contends that the Medicine Creek Treaty of 1854, 10 Stat. 1132, is the definitive document regulating relations between the United States and the Puyallup Indian Tribe of which petitioner is an enrolled member. Article 12 of the treaty provides that "the said tribes and bands finally agree not to trade at Vancouver's Island or elsewhere out of the dominions of the United States." Petitioner contends that this geographical limitation is the sole trade limitation intended by the parties to the treaty. Thus, petitioner asserts that taxing the income from the smokeshop and gambling operation would be tantamount to an additional trade restraint not sanctioned by the treaty. This Court has previously reviewed the language of the Medicine Creek Treaty of 1854, and the intent of Congress with regard to the taxation of the Puyallup Indians, and has concluded that no treaty or statute exempts petitioner from his liability for Federal income taxation. Cross v. Commissioner, supra at 564-565.

The General Allotment Act of 1887, 24 Stat. 388, 25 U. S. C. section 331 et seq. (1982) under which jurisdiction petitioner's trust land falls, similarly fails to exempt petitioner's income from taxation. Squire v. Capoeman 56-1 USTC ¶ 9474, 351 U. S. 1, 9 (1956). In Squire, a noncompetent Indian argued that income from the sale of timber growing on land held in trust for him by the United States pursuant to the General Allotment Act was not taxable. The Supreme Court interpreted the Act as exempting the proceeds from taxpayer's timber sales. This exemption, however, was restricted to income "directly derived" from the land itself. In Squire, the sale of the timber decreased the intrinsic value of the land and thereby impaired the capacity of taxpayer-Indian, once declared competent, to survive economically.

The cases that have applied the "directly derived" test to exempt income have generally done so only in situations in which the land itself was physically exploited in some manner.5 Income generated by a taxpayer's personal efforts and activities is not directly derived from trust land merely because such activities are being conducted on that particular parcel. Furthermore, it is now well established that income earned from the retail sales of a smokeshop located on trust land is not within the narrow tax exemption afforded by the General Allotment Act. Cross v. Commissioner, 83 T. C. at 566; Hoptowit v. Commissioner, supra; Hale v. United States 84-1 USTC ¶ 9168, 579 F. Supp. 646 (E. D. Wash. 1984). Critzer v. United States 79-1 USTC ¶ 9334, 220 Ct. Cl. 43, 597 F. 2d 708 (1979).

The income at issue in this case emanated primarily from petitioner's business activities and his investment in improvements to his trust land. "There is no legal reason why this type of income should escape taxation while all other taxpayers, including Indians who work and operate businesses off the reservation, must pay their fair share of taxes." Critzer v. United States, 220 Ct. Cl. at 54, 597 F. 2d at 714. Our finding that the smokeshop income is subject to Federal income taxation applies with equal force to petitioner's gambling income.6

In the alternative, petitioner argues that the portion of the smokeshop income allocable to the fair rental value of the unimproved land upon which the smokeshop is situated should be exempt from taxation as income "directly derived" from the land within the meaning of Squire v. Capoeman, supra. This argument was carefully considered and rejected by this Court on similar facts in Cross v. Commissioner, supra. See also Hale v. United States, supra. We continue to reject this argument.

We now turn to the question of whether petitioner should be allowed a deduction for the loss of cash and gambling equipment valued at $75,234.18 seized by the F. B. I. In 1977 and 1978 petitioner and several...

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