Perkins v. United States
| Decision Date | 24 July 2018 |
| Docket Number | 16-CV-495V |
| Parties | Fredrick Perkins and Alice J. Perkins, Plaintiffs, v. United States of America, Defendant. |
| Court | U.S. District Court — Western District of New York |
"The federal income taxation of American Indians is not a sexy topic." John Lentz, When Canons Go to War in Indian Country, Guess Who Wins? Barrett v. United States: Tax Canons and Canons of Construction in the Federal Taxation of American Indians, 35 Am. Indian L. Rev. 211, 211 (2011). Neither is gravel. Yet the two topics have come together in this case to present a question that no prior case has had to answer directly. When Indians extract gravel from Indian land through an Indian-owned sole proprietorship, is the resulting income exempt from federal income tax based on treaties that promise the "free use and enjoyment" of land or protection from "all taxes"? And even if the Court answers in the affirmative, have plaintiffs Fredrick Perkins ("Fredrick") and Alice J. Perkins ("Alice") made enough of a showing of business income and expenses that treaty protection would make a practical difference on their 2010 federal income tax return? On the flipside, has defendant United States of America demonstrated, beyond the reach of any reasonable jury, that plaintiffs underreported income and overreported expenses in 2010, such that treaty protection cannot give them a refund?
The parties bring these questions before the Court by way of their cross-motions for summary judgment under Rule 56 of the Federal Rules of Civil Procedure ("FRCP"). (Dkt. Nos. 60, 61.) District Judge Lawrence J. Vilardo has referred this case to this Court under 28 U.S.C. § 636(b). (Dkt. No. 10.) The Court held oral argument on July 11, 2018. For the reasons below, the Court respectfully recommends denying both motions for summary judgment. The Court also recommends denying defendant's related motion to strike (Dkt. No. 70).
Although the basic facts of the case are well known by now, the Court will provide a summary that reflects new details appearing in the parties' motion papers.
This case revolves around two related issues: 1) plaintiffs believe that they were overcharged on income tax for the year 2010; and 2) plaintiffs believe that correcting the overcharge requires invoking two Indian treaties in a way that defendant strongly opposes. The treaties in question are the Treaty with the Six Nations of 1794 (the "Canandaigua Treaty")1 and the Treaty with the Seneca of 1842 (the "1842 Treaty").2
Alice is an enrolled member of the Seneca Nation of Indians ("Seneca Nation"). Fredrick is Alice's husband; he is not a member of the Seneca Nation, but he lives with Alice on the Allegany Territory. In 1985, Alice founded A&F Trucking, a sole proprietorship registered with the Cattaraugus County Clerk's office. (Dkt. No. 60-5 at 2.) In the beginning, according to Alice, A&F Trucking had only Alice and Fredrick as employees and only a dump truck as notable business equipment. (Dkt. No. 61-2 at 5.) The company essentially was a hauling company, though it lateracquired a backhoe and expanded services to excavating, paving, snowplowing, and site development. (Id.) By 2010, A&F Trucking had seven employees. (Id. at 13.)
The events that would later give rise to this case started in the 1990s. Alice became aware of a state highway reconstruction project that, inter alia, would require some quantity of gravel. (Id. at 5-6.) Alice decided that she wanted to add gravel operations to her business, but she had to clear two hurdles. The first hurdle was a practical one—access to gravel from an existing pit. Alice solved this problem when an enrolled Seneca named Alton Jimerson approached her with a desire to have her operate a gravel pit that he owned on Seneca Nation property. (Dkt. No. 60-5 at 11.) The arrangement continued with the subsequent owner of the gravel pit after Mr. Jimerson died. (See, e.g., Dkt. No. 61-2 at 7, 73, 75.) The second hurdle was permission from the Seneca Nation. From the 1990s until June 13, 2009, Alice obtained whatever permits were necessary to allow for gravel extraction from the gravel pit. Alice has asserted that she had one employee dedicated to gravel extraction and stockpiled gravel at her business for subsequent sale. (Id. at 13; Dkt. No. 72-1 at 14.) Alice did not physically extract the gravel herself but visited the pit frequently "just to make sure everything was okay." (Dkt. No. 60-5 at 22.) As part of the agreement, Alice paid royalties to the Seneca Nation. (Id. at 15.) On June 13, 2009, the Seneca Nation declined to renew Alice's permit. (Dkt. No. 61-2 at 12, 81.) The Seneca Nation nonetheless permitted Alice to sell whatever gravel she had stockpiled up to that point. (Id. at 83.) Plaintiffs finished selling off the stockpiled gravel in 2010. (Id. at 14.)
The immediate cause of this litigation was the way in which plaintiffs chose to account for income from the stockpiled gravel when they filed their 20103 tax return. In their original 2010 taxreturn, prepared by a third party (Dkt. No. 60-5 at 28), plaintiffs listed $184,552 of "other costs" that affected their cost of goods sold. (Dkt. No. 60-13 at 5.) Plaintiffs disclosed that this "other cost" actually was gravel income not subject to federal income tax in accordance with the Indian General Allotment Act of 1887 ("IGAA"), 24 Stat. 388 (1887) ().4 (Id. at 8-9.) During her deposition, Alice explained how her tax preparer proposed the idea of exempt gravel income:
(Dkt. No. 60-5 at 29.) Alice further explained how she provided her tax preparer with information that would be used for the tax return:
The claiming of the tax exemption led plaintiffs to claim a negative adjusted gross income of $144,253 and a refund of $15. (Dkt. No. 60-13 at 1-2.) The Internal Revenue Service ("IRS") audited plaintiffs and assessed them a deficiency of $9,863.68, which included $6,113 of underreported tax plus various penalties and interest. (Dkt. No. 7 at 12.) Plaintiffs elected to pay the deficiency in full and then seek a refund under 26 U.S.C. §§ 6402 and 6511. As part of their request for a refund, plaintiffs filed an amended tax return that again asserted the $144,253 of negative adjusted gross income. (Id. at 10.) Unlike in the original tax return, which cited the IGAA, plaintiffs now cited federal treaties as the basis for the tax exemption. (Id. at 11.) Plaintiffs did not specify the treaties.
When the IRS failed to respond to the claim for a refund within six months, see 26 U.S.C. § 6532(a)(1), plaintiffs filed suit here under 26 U.S.C. § 7422. The current operative complaint, the amended complaint, essentially contains one claim for a refund of $9,863.68, plus costs and fees. (Id. at 6.) Plaintiffs rest their claim on the application of the Canandaigua Treaty and the 1842 Treaty. Those treaties, according to plaintiffs, support the $144,253 of negative adjusted gross income, which in turn would require the refund. Defendant filed an amended answer with ademand for jury trial on March 29, 2018. (Dkt. No. 46.) Among other assertions, defendant denied that plaintiffs correctly reported income from gravel sales as tax-exempt. (Id. at 7.) Defendant further asserted the following as a fifth affirmative defense:
Plaintiffs are not entitled to a refund of income, taxes, penalties, and interest, because the income taxes Plaintiffs paid to the United States for tax year 2010 do not exceed the amount that Plaintiffs owed to the United States in taxes for that year. See Lewis v. Reynolds, 284 U.S. 281, 283 (1932). Plaintiffs under-reported their gross receipts or sales and over-reported the costs of goods sold and expenses, resulting in their reporting and paying a lower...
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