Legal Memorandum: Federal Tax Provisions and Fee Land Profits

Issue: Are profits realized from oil and mineral sales on fee (not trust) property located on an Indian reservation subject to federal taxation?

It appears that all profits from fee land are subject to federal taxation.  The following authorities are instructive:

25 U.S.C. § 349 (“At the expiration of the trust period and when the lands have been conveyed to the Indians by patent in fee, . . . then each and every allottee shall have the benefit of and be subject to the laws, both civil and criminal, of the State or Territory in which they may reside; . . . Provided, That the Secretary of the Interior may . . . whenever he shall be satisfied that any Indian allotted is competent and capable of managing his or her affairs . . . issue[] to such allottee a patent in fee simple, and thereafter all restrictions as to sale, incumbrance, or taxation of said land shall be removed . . . .”) (emphasis added).

Squire v. Capoeman, 351 U.S. 1 (1956) (“The literal language of the proviso evinces a congressional intent to subject an Indian allotment to all taxes only after a patent in fee is issued to the allottee.  This, in turn, implies that, until such time as the patent is issued, the allotment shall be free from all taxes . . . .”).

Wynecoop v. Comm’r, 76 T.C. 101 (1981) (the tax exemption for allotted lands was not intended to benefit the taxpayer “simply because he was an Indian” or “simply because the income was derived from land located on an Indian reservation.”  Rather, the taxpayer must have a beneficial ownership interest in allotted land held in trust.).

Estate of Shelton […]