Perkins, et al v. United States of America

MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

W.D.N.Y.September 14, 2016

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK x FRDERICK PERKINS and : ALICE J. PERKINS, : : Plaintiffs, : : v. : : UNITED STATES OF AMERICA, : : Defendant. : x No. 1:16-cv-00495-LJV NOTICE OF MOTION TO DISMISS The United States of America hereby provides notice of its motion to dismiss Plaintiffs’ Verified Amended Complaint under Fed. R. Civ. P. 12(b)(6). Plaintiffs have failed to allege facts sufficient to establish a violation of the Supremacy Clause, and they fail to allege facts sufficient to establish that their income was tax exempt under a treaty or statute of the United States or under the five factor test applied by the Internal Revenue Service. A memorandum of law is being filed contemporaneously with this notice of motion. The United States intends to serve and file reply papers. Respectfully Submitted, CAROLINE D. CIRAOLO Principal Deputy Assistant Attorney General Tax Division, U.S. Department of Justice s/ Jordan A. Konig JORDAN A. KONIG Attorney for United States Tax Division, U.S. Department of Justice Post Office Box 55, Ben Franklin Station Washington, D.C. 20044 Phone: (202) 305-7917/Fax: (202) 514-5238 Email: Jordan.A.Konig@usdoj.gov Case 1:16-cv-00495-LJV Document 9 Filed 09/14/16 Page 1 of 2 2 CERTIFICATE OF SERVICE I certify that service of the foregoing Notice of United States’ Motion to Dismiss, has this 14th day of September, 2016, been made via electronic notification through the Court’s CM/ECF electronic filing system, to all parties who have entered an appearance in this action and are participating in the Court’s CM/ECF electronic filing system. s/ Jordan A. Konig JORDAN A. KONIG Trial Attorney, Tax Division, U.S. Department of Justice Case 1:16-cv-00495-LJV Document 9 Filed 09/14/16 Page 2 of 2 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK x : FRDERICK PERKINS and : ALICE J. PERKINS, : : Plaintiffs, : : v. : : UNITED STATES OF AMERICA, : : Defendant. : x No. 1:16-cv-00495-LJV DEFENDANT UNITED STATES’ MEMORADUM IN SUPPORT OF MOTION TO DISMISS PLAINTIFFS’ VERIFIED AMENDED COMPLAINT Defendant United States of America, through undersigned counsel, submits the following memorandum in support of its motion to dismiss Plaintiffs’ Verified Amended Complaint pursuant to Fed. R. Civ. P. 12(b)(6). Background Plaintiffs Fredrick Perkins and Alice J. Perkins (“Plaintiffs”) filed an amended complaint under Section 6402 of the Internal Revenue Code, seeking the refund of $9,863.68 in personal income taxes, interest, and penalties paid to the United States for income tax year 2010. See Doc. No. 7. Plaintiffs allege that Alice J. Perkins is an enrolled member of the Seneca Nation of Indians and had been given permission by the Seneca Nation to extract and sell gravel from property on the Nation’s territory. Id. at 1, 5. The Plaintiffs reported to the IRS that income from sales of gravel extracted and removed from Seneca land made in tax year 2010 was excepted from federal taxation, but the IRS determined the income to be taxable. Id. Plaintiffs contend that “the income for Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 1 of 12 2 which the refund is claimed was exempt from federal income tax under federal treaties with the Seneca Nation.” Id. at 2. Specifically, Plaintiffs now urge that their income was exempt from federal taxation pursuant to the Canandaigua Treaty of 1794 (the “Canandaigua Treaty”) and the 1842 Treaty with the Seneca (the “1842 Treaty”). Id. at 2-3. The Plaintiffs also appear to allege that their income is tax exempt as “income derived directly from the land protected by these federal treaties.” Id. at 5. Plaintiffs filed a complaint against the United States on June 16, 2016. See Doc. No. 1. The United States filed a Rule 12(b)(6) motion to dismiss the complaint on August 16, 2016. See Doc. No. 5. Plaintiffs then filed their Verified Amended Complaint on September 6, 2016. See Doc. No. 7. Because Plaintiffs’ allegations still fail to state a claim for relief, the United States now moves to dismiss the Amended Complaint pursuant to Fed. R. Civ. P. 12(b)(6). Legal Standard To survive a Rule 12(b)(6) motion, a plaintiff must plead sufficient factual allegations in the complaint to “state a claim [for] relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). A pleading that states a claim for relief must contain “‘a short and plain statement of the claim showing that the pleader is entitled to relief,’ in order to ‘give the defendant fair notice of what the … claim is and the grounds upon which it rests[.]’” Id. at 554 (citing FED. R. CIV. P. 8(a) & Conley v. Gibson, 355 U.S. 41, 47 (1957)). The complaint does not need “detailed factual allegations,” but it demands “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. at 555. In addition, the facts Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 2 of 12 3 pleaded in the complaint “must be enough to raise a right to relief above the speculative level.” Id. Determining whether a plaintiff has met his or her burden is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Harris v. Mills, 572 F.3d 66, 72 (2d Cir. 2009). On a motion to dismiss, a plaintiff gets the benefit of all reasonable inferences, see, e.g., Litwin v. Blackstone Group, L.P., 634 F.3d 706, 711 n.5 (2d Cir. 2011), but “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The liberal pleading standard permits a plaintiff “to enjoy all favorable inferences from facts that have been pleaded, [but] does not permit conclusory statements to substitute for minimally sufficient factual allegations.” Furlong v. Long Island College Hosp., 710 F.2d 922, 928 (2d Cir. 1983). Analysis The Court should dismiss Plaintiffs’ Verified Amended Complaint for failure to state a claim. Supremacy Clause Plaintiffs’ continued assertion of a Supremacy Clause violation, see Doc. No. 7 at 1 & 4, is without legal merit. The Supremacy Clause provides, in relevant part, that: [A]ll Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution of any State to the Contrary notwithstanding. Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 3 of 12 4 U.S. CONST. art. VI, cl. 2. By its plain terms, then, the Supremacy Clause invalidates state conduct that interferes with, or is contrary to, the treaties and laws of Congress - it does not apply to conduct of the United States. The United States itself cannot violate the Supremacy Clause, since the purpose of the Supremacy Clause is to “secure federal rights by according them priority whenever they come in conflict with state law.” Chapman v. Houston Welfare Rights Organization, 441 U.S. 600, 613 (1979). Although it would violate the Supremacy Clause for a state to tax income that is expressly exempted from tax under federal treaties, see, e.g., Moe v. Confederated Salish and Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 480-81 (1976), no such Supremacy Clause bar applies to the United States. Accordingly, Plaintiffs have failed to state facts sufficient to support the claim in their amended complaint that the United States violated the Supremacy Clause. Canandaigua Treaty and 1842 Treaty In their amended pleading, Plaintiffs now urge that the taxation of personal income from the sale of gravel from Seneca Nation land violates the Canandaigua Treaty and the 1842 Treaty. See Doc. No. 7 at 3. However, their pleading fails to allege facts sufficient to show that the imposition of the income tax violates either treaty. The Supreme Court has explained that, in the absence of a clear expression to the contrary, general acts of Congress apply to Native Americans, like all other citizens. Federal Power Comm’n v. Tuscarora Indian Nation, 362 U.S. 99, 116 & 120 (1960). Native Americans therefore are subject to the same federal income tax laws as are other United States citizens unless there is an exemption explicitly created by treaty or statute. Squire Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 4 of 12 5 v. Capoeman, 351 U.S. 1, 6 (1956); Superintendent of Five Civilized Tribes, for Sandy Fox, Creek No. 1263 v. Comm’r, 295 U.S. 418, 420-21 (1935); Estate of Poletti v. Comm’r, 99 T.C. 554, 557-58 (1992). The Supreme Court held in Squire that Native Americans generally “are subject to the payment of income taxes as are other citizens[,]” so, “to be valid, exemptions to tax laws should be clearly expressed.” Squire, 351 U.S. at 6 (emphasis added); see also Choteau v. Burnet, 283 U.S. 691, 697 (1931) (“The intent to exclude must be definitely expressed, where, as here, the general language of the act laying the tax is broad enough to include the subject-matter.”); Gunton v. Comm’r, T.C. Memo 2006-122, 2006 WL 1627978, at *1 (Tax 2006) (“Any exemption must be based on the clear and unambiguous language of a statute or treaty”). Although “doubtful expressions are to be resolved in favor” of Indians, Squire, 351 U.S. at 6, it is well-settled that the rule of liberal statutory construction “comes into play only if such statute or treaty contains language which can reasonably be construed to confer income [tax] exemption.” Holt v. Comm’r, 364 F.2d 38, 40 (8th Cir. 1966). “[I]t is one thing to say that courts should construe treaties and statutes dealing with Indians liberally, and quite another to say that, based on those same policy considerations which prompted the canon of liberal construction, courts themselves are free to create favorable rules.” Fry v. United States, 557 F.2d 646, 649 (9th Cir. 1977). Here, Plaintiffs rely upon two treaties to justify their claims of tax exemption. Neither treaty remotely confers the exemption they seek. First, Plaintiffs contend that the Canandaigua Treaty’s acknowledgement that the United States will not “disturb the Seneca Nation … in the free use and enjoyment” of its lands bestows on Seneca members Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 5 of 12 6 an exemption from taxation of land or personal income derived from the land. See Doc. No. 7 at 3 (quoting Canandaigua Treaty of 1794, Nov. 11, 1794, 7 Stat. 44, Art. III). This argument is meritless. The Canandaigua Treaty, by its plain terms, does not “clearly express” any such income tax exemption. Instead, it simply protects the tribe’s use of native land.1 As the Federal Circuit Court of Appeals explained when faced with an argument that the Canandaigua Treaty’s “free use and enjoyment” clause confers an individual exemption from a federal excise tax, While it is true the treaty rights secured to the Indians by agreement with the government are to be liberally construed, Red Lake Band v. United States, 17 Cl. Ct. 362, 381 (1989), and that the Indians’ understanding of an agreement informs the court’s interpretation, Peoria Tribe of Indians v. United States, 390 U.S. 468, 472-73 (1968), there is no language in the treaties cited which could be construed as conferring an exemption from federal excise tax. Absent a definitely expressed exemption, Indians, like all other United States citizens, are subject to federal taxation. We recognize that if there are ambiguities in treaty language, they should be resolved in favor of the Indians. See Rosebud Sioux Tribe v. Kneip, 430 U.S. 584 (1977). But, we cannot create ambiguities where none exist. Neither the Canandaigua Treaty, the Fort Stanwyx Treaty nor the Treaty of Fort Hamar contains any language which confers an exemption from excise tax or presents an ambiguity which could be resolved in favor of conferring such an exemption. 1 The purposes of the 1794 Treaty of Canandaigua were: (1) to reconfirm peace and friendship between the United States and the Six Nations (the Senecas in particular); (2) to correct the inadvertent geographical error in the boundaries allotted to the Indians at the 1784 Treaty of Fort Stanwix; and (3) to relinquish any rights the United States may have acquired through that error. Seneca Nation of Indians v. New York, 206 F. Supp. 2d 448, 487 (W.D.N.Y. 2002) (citations omitted). Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 6 of 12 7 Contrary to the Cooks’ contentions, the Canandaigua Treaty which grants the Indians “free use and enjoyment” of their land cannot reasonably be interpreted as exempting them from the payment of excise tax. This, like the other treaty provisions at issue which secure the Indians “peaceful possession” of their land, applies to the use of land. Federal excise tax is a tax on the sale of a commodity. As the Court of Federal Claims correctly held, the federal excise tax is a tax on the particular activity of selling diesel fuel, not a tax on the use of the land. Consequently, these treaty provisions do not exempt the Cooks from the assessed excise taxes and the Court of Federal Claims properly granted partial summary judgment in favor of the government. Cook v. United States, 86 F.3d 1095, 1097-98 (Fed. Cir. 1996). Like the Cook court, this Court cannot “create ambiguities where none exist.” Id. The Canandaigua Treaty does not in any way confer the income tax exemption that Plaintiffs seek. The 1842 Treaty, too, contains no income tax exemption or ambiguity that plausibly may be read to confer any such exception. Plaintiffs note that the 1842 Treaty “protect[s] such of the lands of the Senecas within the State of New York as may from time to time remain in their possession from all taxes and assessments for roads, highways or any other purposes, until such lands shall be sold and conveyed by said Indians and the possession thereof shall be relinquished by them.” Doc. No. 7 at 3 (quoting Treaty With the Seneca, May 20, 1842, 7 Stat. 586, art. 9). Although Plaintiffs contend that this language shows that “the United States never contemplated the taxation of land for any purpose,” Doc. No. 7 at 3, the treaty simply does not confer the personal income tax exemption they seek. As the Second Circuit has explained in an unpublished decision, the 1842 Treaty “clearly prohibit[s] only the taxation of real property[.]” United States v. Kaid, 241 F. App’x 747, 750 (2d Cir. 2007) (citing Snyder v. Wetzler, 193 A.D. 2d 329, 603 N.Y.S. 2d Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 7 of 12 8 910, 912-13 (N.Y. App. Div. 1993)). It does not exempt personal income. New York appellate courts, considering other plaintiffs’ claims of tax exemption under the 1842 Treaty, have similarly concluded that “the Treaty clearly refers only to taxes levied upon real property or land[.]” Snyder, 193 A.D. 2d at 332-33. It only “prohibits the State from taxing reservation land[.]” New York State Dep’t of Taxation and Fin. v. Bramhall, 667 N.Y.S.2d 141, 147-48 (N.Y. App. Div. 4th Dep’t 1997). It cannot be said, then, that the 1842 Treaty “clearly expresses” the income tax exemption that Plaintiffs seek, nor does the language contain any ambiguity that reasonably could be interpreted as conferring such exemption. Plaintiffs have failed to allege facts to support a violation of a treaty between the United States and the Seneca Nation. Accordingly, their amended complaint should be dismissed with prejudice. Five Factor Test of Revenue Ruling 67-284 In the wake of the Supreme Court’s decision in Squire, the Internal Revenue Service issued a revenue ruling “to set forth the general principles applicable to the Federal income tax treatment of income paid to or [o]n behalf of enrolled members of Indian tribes.” Rev. Rul. 67-284, 1967-2 CB 55, 1967 WL 14945, at *1. The IRS thereby set forth clear guidance as to what income is exempted from taxation with regard to Native American lands, explaining that, Two basic categories of income are not subject to Federal income tax, to wit, where a treaty, agreement or act of Congress expressly provides that income is not subject to tax, and where income is derived directly from restricted allotted land held under circumstances discussed [in Revenue Ruling 67-284]. Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 8 of 12 9 Id. at *2. The five factor test set forth in Revenue Ruling 67-284 applies whenever an Indian is claiming that his income is exempt because it is directly derived from restricted allotted land under either the General Allotment Act or some other Act or Treaty. See id. (considering “income derived directly by a noncompetent Indian from allotted and restricted land held under the General Allotment Act or derived directly from land held under acts or treaties containing an exception provision similar to the General Allotment Act”); see also P.L.R. 6906100230A, 1969 WL 21337 (IRS PLR June 10, 1969) (considering taxation of income from allotted land “received under the General Allotment Act, or under other acts or treaties containing an exception provision similar to the General Allotment Act”). The five factors are: (1) The land in question is held in trust by the United States Government; (2) such land is restricted and allotted and is held for an individual noncompetent Indian, and not for a tribe; (3) the income is “derived directly” from the land; (4) the statute, treaty or other authority involved evinces congressional intent that the allotment be used as a means of protecting the Indian until such time as he becomes competent; and (5) The authority in question contains language indicating clear congressional intent that the land, until conveyed in fee simple to the allottee, is not to be subject to taxation. Id. “If one or more of these five tests is not met, and if the income is not otherwise exempt by law, it is subject to Federal income taxation.” Id. Courts have recognized that treaty-based tax exemptions were not intended “to benefit [the allottee] simply because he was an Indian or to benefit Indians generally.” United States v. Anderson, 625 F.2d Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 9 of 12 10 910, 914 (9th Cir. 1980); see also Fry, 557 F.2d at 649 (citation omitted) (“The exemption construed in Squire and Stevens was intended to provide the allottee with unencumbered land when he became competent … It was not to benefit him simply because he was an Indian, or to benefit Indians generally.”). Plaintiffs appear to argue that their claim falls within the first category of exempt income (i.e., exempted by treaty), so that the five factor test would not apply. See Doc. No. 7 at 2. Plaintiffs concede that the income at issue in this proceeding cannot be held to be tax exempt as deriving from “restricted allotted land” under the General Allotment Act of 1887. See Doc. No. 8 at 13 (“the Seneca Nation, its enrolled members and its territory are not subject to any provisions of the General Allotment Act[.]”); see also 25 U.S.C. § 339 (specifically excluding the Seneca Nation of New York from its provisions). However, Plaintiffs also urge that the income was “directly derived from the land.” Id. at 3. Their complaint alleges that the gravel at issue in this lawsuit “was taken from land that was ‘allotted’ and for which Plaintiff Alice Perkins had been given permission by the Seneca Nation Council to extract and remove ‘during the years 2008 and 2009[.]” Id. at 5. This alternative claim - to the extent Plaintiffs wish to assert it - is without merit. As explained above, Plaintiffs have failed to sufficiently allege that any treaty provides the tax exemption they seek. That is, they cite no “acts or treaties containing an exception provision similar to the General Allotment Act.” Rev. Rul. 67-284, 1967 WL 14945, at *2. This alone is fatal to Plaintiffs’ complaint. Id. In addition, Plaintiffs engage in artful pleading in order to conceal the fact that their income did not derive Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 10 of 12 11 directly from land allotted to them as individuals. Plaintiffs contend that (1) Plaintiff Alice Perkins has by lease and by deed a possessory interest to land on the Seneca Nation territories; and (2) the Seneca Nation had permitted Perkins to mine gravel “on certain lands located on the [Seneca Nation’s] Allegany Territory.” Id. at 4-5. They also urge that the income at issue here was “derived directly from the land.” But Plaintiffs fail to actually allege that the gravel was taken from the land that was allotted to them personally and that is held in trust by the United States government until such time “as [they] become competent.” See Rev. Rul. 67-284, 1967 WL 14945, at *2. That is, they do not plead that the gravel was extracted from their own allotted land that is held in trust, as is required for income tax exemption. That is because the land from which the gravel was taken actually is common reservation land that was not allotted to them personally and is not held in trust by the United States.2 The fact that the gravel was directly derived from the common Seneca land does not convey any tax exemption to Plaintiffs. See Kieffer v. Comm’r, T.C. Memo. 1998- 202, 1998 WL 281900, at *2-*3 (Tax 1998), aff’d, 194 F.3d 1317 (Table), 1999 WL 731060 (9th Cir. 1999). Quite the opposite - “courts dealing with the taxability of 2 Plaintiffs conceded as much in their admissions submitted in a parallel Tax Court proceeding in which they claim income tax exemption for gravel sales in tax years 2008 and 2009. See Perkins v. Comm’r, No. 28215-14 (T.C.), Doc. No. 5 at 2. Because Plaintiffs do not plead otherwise in their amended complaint, and because this is a Rule 12(b)(6) motion based solely the allegations contained in Plaintiffs’ complaint, the United States has not attached those admissions as an exhibit to this motion. If the Court wishes to consider this as a motion for summary judgment pursuant to Rule 12(d), the United States will supplement its motion with Plaintiffs’ admissions. Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 11 of 12 12 income derived from common tribal lands, as opposed to allotted land, have consistently held such income to be taxable.” Tonasket v. Comm’r, T.C. Memo 1985-365, 1985 WL 15015 (Tax 1985) (citing United States v. Anderson, 625 F.2d 910, 914 (9th Cir. 1980), Fry, 557 F.2d at 648, and Wynecoop v. Comm’r, 76 T.C. 101, 107 (Tax 1981)). Insofar as Plaintiffs contend that the income they derived from excavation activities on unallotted Seneca land is tax exempt, “this argument lacks merit because the exemption applies only to allotted land.” Kieffer, 1999 WL 731060, at *1. Conclusion Plaintiffs have failed to allege facts sufficient to establish a violation of the Supremacy Clause. In addition, Plaintiffs have failed to allege facts to establish that their income is exempt from taxation under any treaty with the Seneca Nation, and their argument that the income is derived directly from Seneca land does not satisfy the five factor test applied by the IRS. Accordingly, Plaintiffs’ Verified Amended Complaint should be dismissed with prejudice pursuant to Fed. R. Civ. P. 12(b)(6). Respectfully Submitted, CAROLINE D. CIRAOLO Principal Deputy Assistant Attorney General Tax Division, U.S. Department of Justice s/ Jordan A. Konig JORDAN A. KONIG Attorney for the United States Trial Attorney, Tax Division U.S. Department of Justice Post Office Box 55, Ben Franklin Station Washington, D.C. 20044 Phone: (202) 305-7917/Fax: (202) 514-5238 Email: Jordan.A.Konig@usdoj.gov Case 1:16-cv-00495-LJV Document 9-1 Filed 09/14/16 Page 12 of 12