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United States v. King Mountain Tobacco Company
Citation: 899 F.3d 954Docket: 14-36055
Court: Court of Appeals for the Ninth Circuit; August 13, 2018; Federal Appellate Court
Original Court Document: View Document
The United States Court of Appeals for the Ninth Circuit affirmed the district court's judgment against King Mountain Tobacco Company, Inc. regarding unpaid federal excise taxes and penalties, totaling almost $58 million, for the manufacture of tobacco products under 26 U.S.C. § 5701. The court confirmed its jurisdiction over the appeal of the amended judgment, as it was deemed a final judgment under 28 U.S.C. § 1291, providing sufficient detail on the amount owed and the calculation method. King Mountain, a tribal tobacco manufacturer operating on federally held trust land, contended it was exempt from the federal excise tax based on the General Allotment Act of 1887 and the Treaty with the Yakamas of 1855. However, the panel rejected these claims, concluding that the manufacturer is subject to the federal excise tax applicable to all tobacco products produced in the U.S. The background indicates that Delbert Wheeler, Sr. purchased trust property to establish King Mountain, which has since operated with a federal tobacco manufacturer’s permit. The ruling underscores the applicability of federal tax obligations to tribal enterprises manufacturing tobacco products on trust land. Trust lands, including those on King Mountain, are allotted to various Yakama members, with King Mountain historically sourcing tobacco from North Carolina. However, it has progressively increased the amount of tobacco grown on trust land, rising from 3.1% in 2009 to 55% by the end of 2013. King Mountain blends this trust land-grown tobacco with non-trust tobacco and also produces traditional use tobacco for ceremonial purposes. Federal excise taxes, managed by the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau, apply to manufactured tobacco products, with specific rates outlined for cigarettes and roll-your-own tobacco. King Mountain initially complied with these tax obligations but fell behind in 2009, receiving statutory notice of delinquent taxes without contesting it. Consequently, the Treasury assessed King Mountain for unpaid taxes, penalties, and interest for late 2009. Although King Mountain paid some taxes in 2010, it neglected associated penalties and eventually stopped paying federal excise taxes entirely. In 2012, the United States initiated a lawsuit to collect these delinquent taxes, which coincided with King Mountain’s earlier legal action seeking relief from the federal excise tax. The district court dismissed King Mountain’s claims based on the Anti-Injunction Act but found that the Yakama’s claims were exempt from this Act. Ultimately, the court granted summary judgment for the government, determining that neither the General Allotment Act nor the Treaty with the Yakamas prevented the application of federal excise taxes. The Yakama Nation's lawsuit was dismissed due to the Anti-Injunction Act, leading to a remand for lack of subject-matter jurisdiction. The district court granted summary judgment to the Government regarding King Mountain's liability for an excise tax, determining the issues were similar to those in the Yakama case and incorporating previous legal conclusions. Although the court reserved judgment on the specific amount owed to allow for further discovery, it later ruled that King Mountain owed $57,914,811.27. An oversight in the final judgment omitted this amount, prompting the Government to request a correction under Federal Rule of Civil Procedure 59(e). The district court initially felt it lacked jurisdiction to amend but later corrected the omission as a clerical error under Federal Rule of Civil Procedure 60(a). King Mountain appealed this amended judgment, arguing it was not a final judgment and thus the appellate court lacked jurisdiction. However, the appellate court disagreed, stating that a final judgment for money must specify the amount due, which the amended judgment did. The appellate court ultimately found that it had jurisdiction over the appeal. King Mountain acknowledges that the Internal Revenue Code contains "highly mechanical" formulas for calculating statutory additions but contests the amended judgment for not detailing the components of the $57,914,811.27 award related to unpaid taxes, penalties, and interest. King Mountain argues this lack of specification hinders its ability to ascertain its owed statutory additions. The court, however, found that the amended judgment sufficiently addresses these components, relying on the Blue Ribbon Transcript submitted by the Government, which includes detailed documentation of King Mountain's tax liabilities for each taxable period. This transcript comprises records such as Transaction History Reports and Notices of Taxes Due, which collectively demonstrate the amounts due, including penalties and interest. The district court ruled that the Blue Ribbon Transcript serves as presumptive proof of a valid assessment, leading to the amended judgment that confirmed King Mountain’s total liability as of June 11, 2013. The court concluded that King Mountain can independently calculate the amounts attributable to taxes, penalties, and interest based on the transcript, negating the need for further court clarification. The judgment was deemed final, allowing for jurisdiction over the appeal. Regarding the imposition of federal excise tax on tobacco products, the court is tasked with determining whether a tobacco manufacturer on trust land is subject to this tax. The prevailing assumption is affirmative, as the federal government holds comprehensive authority over Indian tribes. Consequently, tribal members, like all citizens, are subject to federal taxation unless explicitly exempted by treaty or statute. King Mountain claims an exemption under the General Allotment Act of 1887 and the Treaty with the Yakamas of 1855. The General Allotment Act of 1887 marked a significant shift in U.S. policy towards Indian tribes from land segregation to individual allotment. Allotment refers to the distribution of specific land to individual members of tribes, aiming to eliminate tribal sovereignty, dissolve reservation boundaries, and promote the assimilation of Native Americans into mainstream society. Initially, land was allocated on a tribe-by-tribe basis, but this approach led to many allottees losing their land due to immediate sales, often resulting from poor decisions or fraud, which hindered their ability to develop economic skills. To address these issues, the General Allotment Act empowered the President to allot tribal lands without tribal consent, instituting a trust period of twenty-five years during which the land could not be sold or encumbered. After this period, the U.S. would convey the land to the allottee free of all charges. Amendments allowed for the Secretary of the Interior to issue a fee patent once an allottee was deemed competent, at which point all restrictions on land sales, encumbrances, or taxation would be lifted. The Supreme Court recognized the tax exemption under this Act in Squire v. Capoeman, ruling that federal capital-gains taxes could be viewed as a "charge or encumbrance" prohibited by the Act. The Court's decision reinforced the notion that the Act's language regarding charges included taxation, particularly in light of amendments that facilitated the removal of restrictions following the issuance of a fee patent. Section 6 of the relevant statute indicates that an Indian allotment is subject to taxation only after a patent in fee is issued, meaning it remains tax-exempt until that point. The court emphasized that this tax exemption should also apply to income generated from the allotment. The purpose of the allotment system is to safeguard Indian interests and facilitate their integration as independent members of society, thus necessitating the preservation of both the trust and its income from taxation. However, it was determined that reinvestment income does not require tax exemption. Numerous circuits have recognized tax exemptions for allotment land and income derived from it, citing cases where income from timber, farming, ranching, and oil leases on allotted lands was exempt from federal income tax. Nonetheless, these precedents do not apply to King Mountain's appeal concerning a federal excise tax on manufactured tobacco products, which is distinct from land or income taxes. The court affirmed that the General Allotment Act’s tax exemptions do not extend to excise taxes, highlighting that these taxes are based on the manufacture or sale of goods or the enjoyment of privileges. In contrast to property or income taxes, excise taxes can often be passed on to consumers, thus distinguishing them in terms of tax obligations. Excise taxes are fundamentally different from property or income taxes related to land, as indicated by the Supreme Court's interpretation since the Capoeman case. In County of Yakima v. Confederated Tribes and Bands of the Yakima Indian Nation, the Court ruled that a state cannot impose an excise tax on the sale of fee-patented lands, reiterating a rule that prohibits state taxation of Indians unless authorized by Congress. While the Court recognized that Congress intended to subject patented Indian allotments to all taxes, it clarified that "all taxes" refers specifically to taxes on the land itself, not on transactions involving the land. The distinction is that excise taxes apply to the act of selling the land rather than the land itself. Consequently, the General Allotment Act only permits taxes directly on land, not those related to transactions involving it. If excise taxes do not qualify as taxes "on land," they also do not fall under the broader terms of "charges or encumbrances" specified in the Act. The federal government retains the authority to tax Indians unless explicitly restricted by law, aligning with the precedent set in County of Yakima regarding federal excise taxation of products made on trust land. Furthermore, interpreting the General Allotment Act to include federal excise taxes raises constitutional issues, particularly concerning uniformity in taxation as mandated by the Constitution. Allotments are considered U.S. land held in trust for Indians or tribes. Exempting King Mountain's allotments from federal excise taxes would violate the constitutional requirement for uniformity in taxation across the United States. The Government's interpretation of the Act, which only exempts trust land and its direct income from federal taxation, is supported by case law and maintains congressional excise uniformity. The constitutional avoidance canon indicates that courts should prefer statutory interpretations that do not raise serious constitutional questions. Even if the General Allotment Act's exemption were applicable to federal excise taxes, King Mountain would still not succeed, as the excise tax does not impose an encumbrance on allotment land. King Mountain is not the allottee of any trust land; the land in question is held in trust for Delbert Wheeler and his estate, not King Mountain itself. The General Allotment Act does not provide tax exemptions for income derived by noncompetent Indians from trust land belonging to others. The principle established in United States v. Anderson clarifies that taxation on a taxpayer's profits from leased tribal land does not constitute a burden on the land itself. This reasoning applies equally to products manufactured by a corporation using trust land allotted to others. Since King Mountain is not liable for the excise tax on trust land, an exemption would contradict Anderson’s logic. Furthermore, the Internal Revenue Code's provision regarding property forfeiture does not pertain to allotment land, as the United States already holds title to these lands. King Mountain lacks the status of allottee or a trust relationship with the United States, meaning it has no land or rights to forfeit due to nonpayment of taxes. Any liabilities incurred by King Mountain cannot affect the trust land, as it is held in trust for Wheeler’s estate. Allotments held in trust for individual incompetent Indians, such as those used for growing tobacco for King Mountain’s products, are protected from forfeiture or tax liens under IRS regulations, specifically 26 C.F.R. 301.6321-1 (2017). These regulations exclude allotment land from being classified as "property" that can be subject to forfeiture or liens. Consequently, there is no legal authority supporting the forfeiture of allotment land under any statute, which extends to real property owned by non-Indians as well. As a result, the General Allotment Act does not exempt King Mountain from federal excise tax on manufactured tobacco products, making the company liable for the tax, including penalties and interest. The legal framework further involves the Treaty with the Yakamas, established in the 1850s, which aimed to resolve land claims in what is now Washington State. Under this treaty, the Yakama ceded certain lands while reserving others, which now form the Yakama Indian Reservation where King Mountain operates. The treaty is recognized for its spiritual and legal significance, securing basic rights for the Yakama, which are detailed in its eleven articles. Relevant to this case are Articles II, III, and VI. Article II defines the reservation's boundaries and prohibits non-Indians from residing there unless exceptions apply, ensuring the land is exclusively for the benefit of the Yakama tribes. It also provides compensation for improvements made on ceded lands. Article III protects the Yakama’s right to travel, which was essential for trade and sustenance, allowing them to access goods not available locally. This travel right encompasses public highways and natural resources like fish and game. Article III of the Treaty allows for the construction of roads through the Yakama reservation for public convenience and secures the right of way to the nearest public highway, alongside the right for Yakama people to travel on public highways. During treaty negotiations, Governor Isaac Stevens emphasized the Yakama’s right to travel off-reservation for economic activities, including accessing markets and fishing. Following the treaty's ratification, the Yakama continued to engage in off-reservation trade. Article VI authorizes the division of reservation lands into individual lots at the President's discretion, similar to provisions in the General Allotment Act. This article stipulates that assigned lands cannot be alienated or leased for more than two years and are protected from levy, sale, or forfeiture. King Mountain asserts that these provisions grant an exemption from federal excise taxes on manufactured tobacco products. However, the applicability of federal taxes to Indians hinges on the presence of express exemptive language in the treaty. The analysis indicates that the Treaty with the Yakamas lacks the necessary language to exempt King Mountain from federal excise tax liability. Consequently, the Indian canons of construction, which favor interpretations benefiting Indians in the case of ambiguities, are not applicable here due to the absence of express exemptive terms. The court clarifies that while the Capoeman case applied the Indian canon, it did so in the context of a General Allotment Act issue, not affecting the current treaty analysis. Capoeman did not create a distinct framework for treaty interpretation concerning potential exemptions under both the General Allotment Act and treaties. In Dillon, treaty and General Allotment Act issues were analyzed separately, and the Indian canons of construction were not applied to treaty claims due to the absence of “definitively expressed” exemptive language. Article II of the Treaty stipulates that land shall be reserved for the exclusive use of the confederated tribes. King Mountain’s assertion that this language exempts them from federal excise taxes is contradicted by Hoptowit, which determined that any tax exemption under Article II is limited to income derived directly from the land, which does not include the federal excise tax relevant here. King Mountain argues Hoptowit is distinguishable, but the ruling clearly limits exemptions to income from the land. Article III allows roads for public convenience through the Yakama reservation while ensuring free access to public highways. King Mountain's claim under Article III is also dismissed based on Ramsey, which held that the Yakama Treaty does not exempt them from federal excise taxes. The guarantees of access in Article III do not indicate an intent to exempt from federal taxation. The inquiry focuses on whether the treaty language reveals the federal government's intent to exempt Indians from taxation, not from specific taxes. Since Article III provides insufficient evidence of such intent, it cannot support King Mountain's claims for exemption from federal taxes. Article III does not contain any express exemption from federal taxation. The case of Ramsey, which dealt with off-reservation activities and a different federal tax, is irrelevant to this discussion. The court finds King Mountain's reliance on United States v. Smiskin misplaced, as Smiskin pertained to a criminal case involving federal cigarette trafficking laws that explicitly incorporate state law on taxation. In Smiskin, the Yakama Indians failed to notify state officials before transporting unstamped cigarettes, which was a critical factor in determining the legality of applying state pre-notification requirements to them. Furthermore, King Mountain's argument regarding an excise tax on the right to travel is rejected, as the relevant taxation concerns the privilege itself rather than the acts associated with it. Article VI of the Treaty allows the President to survey the reservation into lots under the same terms as the Treaty with the Omaha, which restricts alienation and provides exemptions from levy, sale, or forfeiture. However, King Mountain's assertion that an income tax exemption can be inferred from these alienation restrictions is unsupported, as established in Dillon v. United States. The distinction between non-taxability and restrictions on alienation is emphasized, and it is asserted that restrictions in Article VI do not affect federal taxation. King Mountain's comparison to Capoeman is deemed invalid, as the language in Article VI is not sufficiently similar to warrant the same interpretation regarding taxation. The phrase "exempt from levy, sale, or forfeiture" in Article VI of the Treaty is more specific than "charge and incumbrance" in the General Allotment Act, imposing clear restrictions on alienation. As a result, the case of Dillon prevails over Capoeman, establishing that King Mountain is not entitled to an exemption under Article VI. No express exemptive language in the Treaty with the Yakamas shields King Mountain from federal excise tax liability on manufactured tobacco products. The court reaffirms the principle that Indians are subject to federal taxation unless explicitly exempted by treaty or statute, which is not the case here. Consequently, King Mountain must pay the federal excise tax along with any penalties and interest. The ruling is affirmed.