The opinion of the court was delivered by: MCNICHOLS
MCNICHOLS, District Judge:
Plaintiff Samuel E. Hale, an enrolled member of the Yakima Indian Nation, received income from leasing land located on the reservation. The issue is whether the rental income is exempt from federal income tax. There being no factual dispute, the issue is presented by cross motions for summary judgment.
Before his death in 1981, Samuel Hale owned an allotment consisting of a one-acre parcel of land on the Yakima Reservation. It was held in trust for him by the United States pursuant to the General Allotment Act of 1887, 25 U.S.C. § 331 et seq., and subsequent legislation including the Indian Reorganization Act, 25 U.S.C. § 461 et seq.
In November 1973, plaintiff leased the parcel (including a small building) to William Hoptowit, also a member of the Yakima Indian Nation. Mr. Hoptowit operated a smokeshop business on the property, consisting principally of selling cigarettes. Such shops were profitable ventures as Indian retailers were not required to pay the state excise tax, thereby enjoying a substantial pricing advantage. The rent provided for in the lease was one-third of the gross sales receipts from cigarettes.
In 1976 the rental agreement was modified. Mr. Hoptowit agreed to pay Hale $2,000.00 per month rent. Hale received $27,225 for 1976. He did not include this income on his 1976 tax return. Following an IRS audit, Hale paid the additional tax but not the nearly $5,000 in interest. This action for a refund was brought and the defendant counter-claimed for the interest.
Indians are subject to federal taxation unless an exemption is found in a treaty or Act of Congress. Commissioner v. Walker, 326 F.2d 261 (9th Cir. 1964). The Yakima treaty does not include a tax exemption, Hoptowit v. Commissioner, 78 T.C. 137 (1982), and plaintiff does not argue otherwise. The General Allotment Act, however, exempts Indian income "derived directly" from the allotted land. Squire v. Capoeman [56-1 USTC P 9474], 351 U.S. 1, 9, 100 L. Ed. 883, 76 S. Ct. 611 (1956). The issue is whether Mr. Hale's rental income from the smokeshop is "derived directly" from the land.
Plaintiff argues that due to the parcel's unique location, the income received is directly from the land. The property is located at the tip of the reservation, near the intersection of two state highways and in proximity to several communities. Plaintiff claims that Hoptowit was paying for location, and not so much that the building in which the cigarettes were sold. The Government argues that for income to be "derived directly" from the land, the allottee must exploit the land itself by mining, logging, agriculture or similar activity.
A reading of Capoeman and the cases which have applied its teachings support the government's position.
Capoeman involved capital gains from the sale of timber on allotted land. Having concluded that the Allotment Act intended a tax exemption, the court stated:
Respondent's timber constitutes the major value of his allotted land. . . . Once logged off, the land is of little value. The land no longer serves the purpose for which it was by treaty set aside to his ancestors, and for which it was allotted to him. It can no longer be adequate to his needs and serve the purpose of bringing him finally to a state of competency and independence. Unless the proceeds of the timber sale are preserved for respondent, he cannot go forward when declared competent with the necessary chance of economic survival in competition with others. This chance is guaranteed by the tax exemption afforded by the General Allotment Act, and the solemn undertaking in the patent.
The reasoning of Capoeman has been applied to farming and ranching, Stevens v. Commissioner, 452 F.2d 741 (9th Cir. 1971); bonuses for oil and gas leases, United States v. Daney, 370 F.2d 791 (10th Cir. 1966) and royalties from tribal mineral deposits, Big Eagle v. United States, 156 Ct. Cl. 665, 300 F.2d 765 (1962). Plaintiff invites an extension of Capoeman, yet cites no supporting authority.
Virtually identical issues were presented in Critzer v. United States, 597 F.2d 708 (1979), cert. denied 444 U.S. 920, 62 L. Ed. 2d 176, 100 S. Ct. 239 (1979). In Critzer, the plaintiff received income from the operation of a motel, restaurant, gift shops and building rentals all located on reservation land. A tax exemption was claimed based on ...