Fredrick Perkins and Alice J. Perkins, Plaintiffsv.United States of America, Defendant
Report and RecommendationI. INTRODUCTION “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).II. BACKGROUNDAlthough 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”).2Alice 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 later acquired 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 tax return, 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) (codified as amended at 25 U.S.C. §§334, 339, 341, 342, 348, 349, 354).4 (Id. at 8-9.) During her deposition, Alice explained how her tax preparer proposed the idea of exempt gravel income:Q. What do you remember about when you started to take that position [i.e., treaty-based exemptions] with the IRS?A. All I know is when I started I was paying income tax on everything. I did for years and years and I remember going into Bob Ellis’s office and Joe Stevens was standing there and he says just I’m gonna throw something by you. We’ve got all these loggers and we’ve got all these other people. They are claiming they’re exempt from this due to a treaty. So he’s actually the one that said you know, would you — what do you think of that?I wasn’t sure because I don’t — I don’t like to be in the wrong. I mean I don’t like to do something wrong and I remember complaining about it and complaining about it to my husband. I was like he’s recommending this and I’m not sure.Then they come across — a friend of his come[s] across with this book and showed me in there and I don’t remember the name of the book. It’s been so long, but it said that, so I said okay, well, then yeah, we’ll do it.(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:Q. How did you provide — how did you provide the information that led to that number for your tax preparer?A. A lot of times I could go off my gravel reports because there’s invoice numbers and I could go back through — I have to go back through my invoices manually because there were no computers, no QuickBooks, and actually pull out the gravel, anything that was sold for gravel.Q. So you sort of did a manual separation of money you got from gravel sales and money you got from non gravel business?A. Right, but I could go back to my gravel reports and look at those too because they are listed on my gravel reports. Every invoice is on my gravel report.Q. So did you have to kind of put a bunch of paper in front of you, first you had your bank statements and then you had the gravel reports and you kind of looked to make sure this goes into the pile of gravel sales and this goes into the pile of non gravel sales and you kind of manually separated out so you could let him know what was tax exempt income?A. I just gave him the total amount of what I had to pay to the Seneca Nation and I knew how much income was in those invoices.(Dkt. No. 60-5 at 31-32.)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 a demand 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 amount of tax than was legally due.(Id. at 2.)The ability of the two treaties in question to support a cognizable claim for a refund was addressed during proceedings for defendant’s motion to dismiss. (Dkt. No. 9.) This Court recommended to Judge Vilardo that the Canandaigua Treaty potentially supported plaintiffs’ claim for a refund, subject to discovery, while the 1842 Treaty did not. (See generally Dkt. No. 14.) Judge Vilardo decided that plaintiffs had a cognizable claim under both treaties. (See generally Dkt. No. 24.) For reasons that will be discussed in more detail later, the Court notes that Judge Vilardo’s decision issued on August 4, 2017. Judge Vilardo’s decision issued months before a decision from the Tax Court — in plaintiffs’ case concerning the 2008 and 2009 tax years — that applied neither the law of the case doctrine nor the collateral estoppel doctrine to Judge Vilardo’s analysis. See generally Perkins v. Comm’r, No. 28215-14, 2018 WL 1146343 (T.C. Mar. 1, 2018).The parties filed dispositive motions on May 18, 2018. Plaintiffs seek summary judgment on their refund claim for several reasons. Plaintiffs again rely on the Canandaigua Treaty and the 1842 Treaty to support their assertion that A&F Trucking generated a substantial amount of tax-exempt income in 2010. To the extent that defendant is arguing again that the treaties in question did not lead to any tax-exempt income, plaintiffs note that Judge Vilardo’s Decision and Order is the law of the case:As set forth in 26 U.S.C. §7481(a)(2), “the decision of the Tax Court shall become final” once the decision has been affirmed or an appeal has been dismissed by federal appellate courts. Plaintiffs, therefore, have the right to file a notice of appeal to have any dispositive decision rendered by the Tax Court reviewed by the Second Circuit and the right to petition for certiorari before the United States Supreme Court. In other words, it may be years before a final judgment can be issued relating to the matters now pending before the Tax Court. “What matters to the Court is that, as of now, neither res judicata nor collateral estoppels override plaintiffs’ statutory right to pursue relief in two different fora, each of which still has to resolve some important factual questions.” (Docket Entry No. 53 at 5).Second, the Tax Court’s opinion does not set forth any “new evidence.” In fact, Tax Court Judges Lauber and Pugh, who concurred in part and in the result and with whom eight other judges concurred with their opinion, are stunningly misinformed as to the historical facts of the 1842 Treaty, royalty payments made to the Seneca Nation, and the plenary powers of Congress over Indian affairs. (Docket Entry No. 43-2 at 21-28).(Dkt. No. 62 at 11.) Plaintiffs then turn to documenting the need for a refund. Plaintiffs acknowledge underreporting gross income but deny overreporting business expenses. (Dkt. No. 62 at 17.) More importantly to plaintiffs, they argue that the real question is not any underreporting or overreporting in itself, but ultimately whether they paid more tax in 2010 than they should have. To that question, plaintiffs say yes:Alice Perkins has shown that her gross taxable income in 2010 totaled $752,515 and that gross revenue from the sale of materials mined from the lands of the Seneca Nation totaled $177,108.16. She claims income generated by the sale of sand, stones, rocks, and fill dirt, mined prior to June 13, 2009, is tax exempt. She does not claim trucking charges or delivery fees relating to the sale of sand or gravel are tax-exempt and have included these charges and fees as part of her gross taxable income. Alice has not included IN her taxable gross income, checks received in 2009, but not deposited until 2010.*****With regard to Alice’s deductible business expenses, she has identified and described each and every deductible expense necessary for the production of taxable income. She claims no deduction for any expenses, relating in whole or in part to tax-exempt sales. She has set forth those expenses subject to allocation and the breakdown for each allocable expense.Plaintiffs have submitted more than 1,400 pages of evidence, showing Alice’s “deductible business expenses allocated to the undisputed taxable income exceed the undisputed amount of taxable revenue….” The evidence submitted is sufficient for a Government auditor to again review Alice’s business records kept for accounting and tax purposes. Plaintiffs have also presented to the Court the affidavit of John Pawlak, a certified public accountant. At this stage of the proceedings, Mr. Pawlak serves only as a summary witness and not as an expert witness. His affidavit is submitted to the Court for the purposes of assisting the Court in summarizing and calculating Alice’s net taxable income, if any. In his affidavit, Mr. Pawlak finds Alice Perkins doing business as A&F Trucking has no net taxable income in 2010. If the Court were to find the income generated from the sale of materials mined from land on the Seneca Nation territory was exempt, Mr. Pawlak concludes Alice and her husband would be entitled to a refund.(Id. at 18-20.)Defendant opposes plaintiffs’ efforts at summary judgment and seeks summary judgment for itself. Central to defendant’s cross-motion is the explicit argument that the Tax Court’s 2018 decision — in which the Tax Court reached the opposite conclusion about the treaties in question — will soon achieve finality and an implicit argument that the impending finality supersedes any collateral estoppel effect from Judge Vilardo’s Decision and Order:This Court certainly has jurisdiction to consider Plaintiffs’ request for a refund of taxes paid for 2010, even though the lawsuit relies on the same legal and factual basis as Plaintiffs’ earlier-filed Tax Court case challenging their 2008 and 2009 tax assessments. See, e.g., Bush v. Comm’r, 175 F.2d 391, 392-93 (2d Cir. 1949) (“each year is the origin of a new liability and a separate cause of action”). Plaintiffs are allowed their day in each court. But just because Plaintiffs may invoke the jurisdiction of two forums to litigate identical issues does not relieve them of the effects of estoppel. Plaintiffs soon will be barred from raising their claim of treaty-based tax exemption because that claim is “identical in all respects with that decided in the first proceeding and…the controlling facts and applicable legal rules remain unchanged.” Id. at 393.This lawsuit will be “redundant litigation of the identical question of the statute’s application to the taxpayer’s status.” Sunnen, 333 U.S. at 598. Plaintiffs’ claims of tax exemption are identical in both suits — the controlling facts and the applicable legal rules that apply to Plaintiffs’ failed challenges to IRS deficiency notices for 2008 and 2009 are essentially, if not entirely, identical to their claims for 2010. In short, the Tax Court’s rejection of Plaintiffs’ theory of tax exemption, once finalized by judgment, will bar Plaintiffs’ claims in their entirety.(Dkt. No. 60-1 at 31-32.) The impending finality also, in defendant’s view, helps set up the assertion that the Tax Court decision inherently should receive more weight:The gateway issue in this lawsuit is whether income “derived directly from the land” is exempted from income tax under the Canandaigua Treaty, the 1842 Treaty, or a general presumption that allegedly applies to income resulting from Seneca land. Fully 14 of the 15 participating members of the Tax Court, considering the identical issue in that proceeding, answered a resounding “no.” That determination should guide this Court’s analysis of the same argument.(Id. at 22.) After identifying the treaties in question as a “gateway issue” and arguing against their applicability, defendant makes an alternative argument that “Plaintiffs cannot obtain an advisory opinion establishing that some of their income is tax exempt where they cannot prevail on the primary issue of whether they are due a refund of income taxes.” (Id. at 40.) Combining the treaty/tax exemption issue with plaintiffs’ conceded underreporting issue, defendants then argue that “A&F Trucking’s total income in 2010 actually amounted to over $950,000 — not the $711,457 they reported to the IRS. Because Plaintiffs under-reported their gross receipts by $240,785.92, they still would not be entitled to a refund even if they succeed on their claim that $184,552 of gravel income was tax exempt.” (Id. at 39.)After attacking the competency of the business records that plaintiffs have submitted — a matter that the Court will address further below — defendant questions how plaintiffs calculated their taxable and tax-exempt income:Even if the Court considers the hearsay documents submitted by Plaintiffs, Plaintiffs’ contention that they earned a total of $742,515 in non-gravel income is based upon an incorrect and untrustworthy method of calculation. Plaintiffs now contend that, because A & F Trucking operates on a cash basis, their 2010 income must be calculated by including only checks received in calendar year 2010, no matter when deposited. See A. Perkins Aff. at
