Kahn v. Arizona State Tax Commission

• Decision Date: 24 November 1971
• Docket Number: No. 2,CA-CIV,2
• Citation: 490 P.2d 846,16 Ariz.App. 17
• Parties: Edmund D. KAHN and Kathleen M. Kahn, husband and wife, Appellants, v. ARIZONA STATE TAX COMMISSION, Appellee. 1013.
• Court: Arizona Court of Appeals

Page 846

490 P.2d 846

16 Ariz.App. 17

Edmund D. KAHN and Kathleen M. Kahn, husband and wife, Appellants, v. ARIZONA STATE TAX COMMISSION, Appellee.

No. 2 CA-CIV 1013.

Court of Appeals of Arizona, Division 2.

Nov. 24, 1971.

Rehearing Denied Dec. 23, 1971.

Review Denied Jan. 18, 1972.

Edmund D. Kahn, Tucson, for appellants.

Gary K. Nelson, Atty. Gen., by James D. Winter, Asst. Atty. Gen., Phoenix, for appellee.

KRUCKER, Chief Judge.

This is an action for the refund of Arizona State Income taxes paid under protest by the plaintiffs-appellants. Plaintiffs also claim a deduction for moving expenses.

Two questions are raised by this appeal:

(1) May the State of Arizona impose its state income tax upon plaintiffs (2) Are plaintiffs entitled to deduct their moving expenses as a necessary expense for the production of income under A.R.S. § 43--123, as amended?

who are non-Indian residents and employees of the Navajo Indian Reservation?

The following statement of the facts was certified to this court by the court below. Plaintiffs-appellants, husband and wife, are non-Indians who, during the taxable years in question, earned income upon the Navajo Indian Reservation within the boundaries of Arizona. Plaintiff Edmund D. Kahn earned the taxable income at issue on behalf of the community. During this period the plaintiffs-appellants paid Arizona State Income taxes under protest and now seek a refund of these taxes and claim a deduction for moving expenses as an expense incurred for the production of income.

Plaintiff Edmund D. Kahn was employed first as a law clerk and then later as an attorney for the Navajo Tribe. He was subject to the approval and regulations of the United States Secretary of the Interior governing employment of attorneys by Indian Tribes. Plaintiff's salary was paid out of Indian Tribal Funds.

In September, 1969, plaintiffs moved from the Navajo Reservation to Tucson, Arizona in order for Mr. Kahn to undertake new employment.

The Superior Court granted defendant-appellee's motion to dismiss for failure to state a claim upon which relief could be granted pursuant to Rule 12(b), Rules of Civil Procedure, 16 A.R.S., and judgment of dismissal was entered against plaintiffs. This appeal followed.

Appellants have raised three contentions on appeal in relation to the state taxation issue: (1) That the Navajo Indian Reservation is a federal enclave and the State of Arizona is thereby precluded from imposing this tax on plaintiffs who earned income and resided within this enclave. (2) That the Navajo Reservation is subject only to the plenary power of Congress as well as the residual power of the Navajo Tribe and therefore the State of Arizona is precluded from taxing plaintiffs' income. (3) That plaintiff Edmund D. Kahn earned his income as a tribal attorney and was subject to the regulations of the United States Secretary of the Interior and that the Federal Government has preempted this area so as to preclude the State of Arizona from taxing plaintiffs' income.

A recent case out of Division One, Department B of this court would appear to be directly determinative of the first issue raised by appellants. McClanahan v. State Tax Commission, 14 Ariz.App. 452, 484 P.2d 221 (1971) held that Navajo Indians living and working within the confines of the Navajo Reservation of Arizona are subject to the Arizona State Individual Income Tax. And if Navajo Indians are subject to the State Income Tax, then A fortiori appellants in the case at bench, as non-Indians are subject to the tax. Because we believe McClanahan successfully answers most of appellants' contentions, we will devote more discussion to those contentions not dealt with in that opinion.

FEDERAL ENCLAVE

Accepting, Arguendo, plaintiffs' definition of a federal enclave as 'those areas where laws of the states can have no force or effect, save as is permitted by the Congress of the United States * * *', plaintiffs offered no factual basis in support of this contention which would have precluded the summary disposition which was made.

Plaintiffs contend that the Disclaimer Clause of the Arizona Constitution (Article XX, paragraph Fourth, A.R.S.) grants 'absolute' jurisdiction over Indian lands to the United States and that the Navajo Reservation is therefore a federal enclave. A closer reading of Article XX, paragraph Fourth reveals that it does indeed grant 'absolute' jurisdiction over the title to the lands but absolute is not synonymous with the 'exclusive' jurisdiction granted in Article XX, Fourth disclaims:

Humble Pipe Line Company, infra, and does not thereby make the Navajo Reservation a federal enclave.

'* * * all right and title * * * to all lands * * * owned or held by any Indian or Indian tribes * * * the same shall be, and remain, subject to the disposition and under the absolute jurisdiction and control of the Congress of the United States.'

The United States Surpeme Court in Organized Village of Kake v. Egan, 369 U.S. 60, 82 S.Ct. 562, 7 L.Ed.2d 573 (1962) distinguished the term 'absolute jurisdiction' as 'meaning undiminished, not exclusive.'

The Supreme Court discussed the jurisdiction of the United States in respect to Indian lands in Surplus Trading Co. v. Cook, 281 U.S. 647, 50 S.Ct. 455, 74 L.Ed. 1091 (1930):

'It is not unusual for the United States to own within a state lands which are set apart and used for public purposes. Such ownership and use without more do not withdraw the lands from the jurisdiction of the state. On the contrary, the lands remain part of her territory and within the operation of her laws, save that the latter cannot affect the title of the United States or embarrass it in using the lands or interfere with its right of disposal.

A typical illustration is found in the usual Indian reservation set apart within a state as a place where the United States may care for its Indian wards and lead them into habits and ways or civilized life. Such reservations are part of the state within which they lie, and her laws, civil and criminal, have the same force therein as elsewhere within her limits, save that they can have only restricted application to the Indian wards. Private property within such a reservation, if not belonging to such Indians, is subject to taxation under the laws of the state.' 281 U.S. at 650--651, 50 S.Ct. at 456.

The Supreme Court of Arizona has held in Porter v. Hall, 34 Ariz. 308, 321, 271 P. 411, 415 (1928), that the Indian Reservations of Arizona are within the political and governmental boundaries of the State and that the exception in the Constitution is proprietary:

'We have no hesitancy in holding, therefore, that all Indian reservations in Arizona are within the political and governmental, as well as geographical boundaries of the state, and that the exception set forth in our Enabling Act (same as Art. XX, Fourth) applies to the Indian lands considered as property, and not as a territorial area withdrawn from the sovereignty of the state of Arizona.'

In Humble Pipe Line Company v. Waggonner, 376 U.S. 369, 84 S.Ct. 857, 11 L.Ed.2d 782 (1964), Louisiana was held to be without jurisdiction to levy an Ad valorem tax on privately-owned property situated on Barksdale Air Force Base. The important distinction between Humble and the case presently before the court is Louisiana's cession of 'exclusive' jurisdiction over Barksdale Air Force Base to the United States. The court in Humble further held:

'* * * the United States acquired exclusive jurisdiction when the land was ceded to it with consent of the State (except for the State's express reservation as to civil and criminal process) just as if the United States had acquired its title by negotiation and payment of a money consideration.' 376 U.S. at 372, 84 S.Ct. at 859.

Plaintiffs would next have us believe that the Buck Act, 4 U.S.C.A. §§ 105--110 (1964) offers a definition of 'federal enclave' which would include the Navajo Reservation. The definition is actually of 'Federal Area' which is clearly not synonymous with federal enclave:

'(e) The term 'Federal area' means any land or premises held or acquired by or for the use of the United States or any department, establishment, or agency of the United States; and any Federal And the United States Supreme Court has already interpreted the Buck Act as inapplicable to Indian Reservations in Warren Trading Post Co. v. Arizona State Tax Commission. ¹ Even were we to accept the 'federal area' definition as applicable to the Navajo Indian Reservation, any further consideration of plaintiffs' contention would be precluded by § 106 of the same act:

area, or any part thereof, which is located within the exterior boundaries of any State, shall be deemed to be a Federal area located within such State.' 4 U.S.C.A. § 110.

'(a) No person shall be relieved from liability for any income tax levied by any State, or by any duly constituted taxing authority therein, having jurisdiction to levy such a tax, by reason of his residing within a Federal area or receiving income from transactions occurring or services performed in such area; and such State or taxing authority shall have full jurisdiction and power to levy and collect such tax in any Federal area within such State to the same extent and with the same effect as though such area was not a Federal area.'

We therefore find no merit in plaintiffs' contention that the Navajo Indian Reservation is a federal enclave under the exclusive jurisdiction of the United States.

LAW APPLIED TO INDIAN RESERVATIONS GENERALLY

Appellants next argue that federal authority over Indian areas is absolute and the Arizona's only power over the Navajo Reservation is that expressly granted by the Federal Government, citing United States v. Kagama, 118 U.S. 375, 6 S.Ct. 1109, 30 L.Ed. 228 (1886); Blue Jacket v. Commissioners of Johnson County, 72 U.S. (5 Wall.) 737, 18 L.Ed. 667 (1867); Worcester v. Georgia, 31 U.S. (6 Pet.) 515, 8 L.Ed. 483 (1832)....