dissenting in part: I have no quarrel with our prior Indian smokeshop cases and I agree that they are dispositive of the principal issue in this case.1 However, none of those cases addressed the issue of whether rental income from restricted, allotted land (hereinafter trust land) or some portion of the smokeshop income allocable to the land itself is income "derived directly” from the trust land within the meaning of Squire v. Capoeman, 351 U.S. 1 (1956), and thus exempt from tax in the hands of the individual Indian allottee.2 I think rental income to the Indian allottee or the portion of his smokeshop income allocable to the land itself is income "derived directly” from the trust land, and for that reason I dissent from the majority’s unduly restrictive reading of the Squire v. Capoeman exemption.
Here, there is no question that petitioner Silas V. Cross (Mr. Cross) is an individual Indian allottee of the class entitled to the benefit of the Squire v. Capoeman exemption.3 The only issue is whether the exemption for income "derived directly” from such trust land encompasses rental income from the trust land or a portion of the smokeshop income allocable to the trust land itself. As the Court of Appeals for the Ninth Circuit stated in Stevens v. Commissioner, 452 F.2d 741, 744 (1971):
Capoeman is not a technical or narrow decision; nor is its holding limited to capital gains taxes. Rather the Court found implicit in Section 5 and the amendment to Section 6 of the General Allotment Act a "congressional intent to subject an Indian allotment to all taxes only after a patent in fee is issued to the allottee.” 351 U.S. at 8, 76 S.Ct. at 616. [Fn. ref. omitted.]
The "derived directly” test was not newly minted in the Supreme Court’s 1956 Squire v. Capoeman decision but came instead with acknowledged historical antecedents.4
The majority’s narrow limitation of Squire v. Capoeman is unfaithful to the purpose and historical source of the "derived directly” test. In articulating the test, the Supreme Court relied upon a treatise by the noted Indian law expert, Felix S. Cohen. See F. Cohen, Handbook of Federal Indian Law 265-266 (1941). Cohen had taken the phrase from an early Solicitor’s Memorandum. See S.M. 5632, V-l C.B. 193, 196 (1926). There the Solicitor’s Memorandum, discussing Indian allottees under the Act of May 8, 1906, 34 Stat. 182, stated:
These provisions clearly indicate that before the issuance of a fee simple patent such restricted land is exempt from taxation. The land being exempt from taxation, it follows that income directly derived from such land is also exempt.* * *
See also T.D. 3570, III-l C.B. 85 (1924), and T.D. 3754, IV-2 C.B. 37 (1925), both opinions of the Attorney General adopted as Treasury decisions and cited with approval by the Supreme Court in Squire v. Capoeman, 351 U.S. at 8. These rulings, in turn, all relied on the landmark case of Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429, 581 (1895), vacated on other grounds 158 U.S. 601 (1895), holding, inter alia, that a tax on the rental income from real estate was a direct tax on the land. See also Bagby v. United States, 60 F.2d 80, 81 (10th Cir. 1932). Similarly, the predecessor of this Court recognized as early as 1928 that where the Indian allottee’s land is tax exempt, the income from that land is also tax exempt. Snell v. Commissioner, 10 B.T.A. 1081 (1928). That case pointed out that while the income from the land was exempt, the income from reinvesting that tax-exempt income (so-called "reinvestment income”) was not.
The purpose of the Supreme Court’s "derived directly” test in Squire v. Capoeman, supra, was not to narrowly circumscribe the types of income that could be considered as directly derived from the land. Rather, the purpose was "to distinguish the Court’s holding in Five Civilized Tribes,[5] sustaining taxability of income derived from investment of the proceeds of surplus income from allotted Indian land, or 'reinvestment income.’ ” F. Cohen, Handbook of Federal Indian Law, ch. 7, sec. B3, at 397 (1982 ed.). See also F. Cohen, Handbook of Federal Indian Law 266 (1941); Squire v. Capoeman, supra, 351 U.S. at 9; Snell v. Commissioner, supra.
While Snell involved income from oil and gas royalties and Squire v. Capoeman involved income from cutting timber, neither opinion restricts the types of income that can be considered as directly derived from the trust land nor superimposes any additional test of "exploitation” involving a diminution of the value of the trust land, as the majority suggests. For example, income from farming and ranching operations on trust lands is tax exempt to the individual Indian allottee on whose trust land such operations are conducted. Stevens v. Commissioner, supra. Farming and ranching, unless improperly conducted, do not damage or diminish the value of the trust land. See also United States v. Daney, 370 F.2d 791 (10th Cir. 1966), where the income from oil and gas produced and any royalty interests in oil and gas produced were taxable to the Indians under the particular act before the Court. However, the trust land in that case was still subject to the Squire v. Capoeman exemption, and the Court of Appeals for the Tenth Circuit held that the lease bonus was still income derived directly from the trust land and was still tax exempt. Citing Bagby v. United States, supra (which in turn relied on Pollock v. Farmers’ Loan & Trust Co., supra), the Tenth Circuit said that a tax on such a lease bonus was in substance a tax on the land. And it must be remembered that the very type of income involved in Pollock v. Farmers’ Loan & Trust Co., supra, was rental income from the land.
I therefore conclude that rental income from trust land is tax exempt to the individual Indian allottee under Squire v. Capoeman, supra. See also United States v. Hallam, 304 F.2d 620 (10th Cir. 1962), which held that rental income from trust land (among other types of income) was exempt under the Squire v. Capoeman "derived directly” test. See also Rev. Rul. 56-342, 1956-2 C.B. 20.
Accordingly, I also must respectfully disagree with the contrary holding of the Federal District Court in Hale v. United States, 579 F. Supp. 646 (E.D. Wash. 1984), on appeal (9th Cir., Mar. 8, 1984), which the majority cites and quotes with approval. The Hale case involved the Indian owner-lessor of allotted land, apparently the same land leased by Mr. Hoptowit, the taxpayer in our smokeshop case of Hoptowit v. Commissioner, 78 T.C. 137 (1982), affd. on a related issue 709 F.2d 564 (9th Cir. 1983). Mr. Hale’s land was held in trust for him by the United States under the General Allotment Act of 1887 just as Mr. Cross’ land was. The Federal District Court agreed that income directly derived from such trust land was exempt from Federal income tax under Squire v. Capoeman, but held that the rental income was not derived directly from the land.
I think the Hale court, like the majority here, ignores the purpose and historical source of the "derived directly” test. In my view, the Hale court fell into the same error as the majority in this case by attempting to superimpose an "exploitative” diminution of value test onto Squire v. Capoeman’s "derived directly” test.6 Rental income, in my opinion, is one of the clearest types of income directly derived from trust land.
Accepting, as I do, that actual rental income from trust land is exempt to the individual Indian allottee under Squire v. Capoeman, supra, I think there is no sound basis for treating differently the income of a noncompetent Indian from activities he himself conducts on his allotted land, to the extent that such income is attributable to the trust land itself rather than to the improvements, inventory, or personal services. See note 6. In both situations, a tax on the income derived from the land would be a direct tax upon the land itself within the meaning of Pollock v. Farmers’ Loan & Trust Co., supra. I think that the suggestion of the Court of Claims (now the Court of Appeals for the Federal Circuit) in Critzer v. United States, 220 Ct. Cl. 43, 597 F.2d 708, 714 (1979), which the majority rejects, is the proper approach. See majority opinion at note 10.
Contrary to the statement in the majority opinion and in Judge Chabot’s concurring opinion, I am not in any way imputing income to Mr. Cross from his own use of his own land. I am not creating imputed income where no income exists. Rather, I am suggesting the use of the fair rental value of Mr. Cross’ unimproved trust land, which has been stipulated by the parties, as an appropriate measure of the extent to which his smokeshop income is attributable to the raw land itself, and thus exempt from tax under Squire v. Capoeman, supra, as income derived directly from his trust land. An allocation of income among its various sources is hardly unprecedented in Federal tax law, nor even in applying the exemption of Squire v. Capoeman, supra. See Rev. Rui. 60-377, 1960-2 C.B. 13, modified by Rev. Rui. 62-16,1962-1 C.B. 7. The "difficult computational and valuation problems” prophesied by the majority, in my opinion, pose no threat and simply come within the usual factfinding chores of a trial court.
Indian taxpayers have hardly advanced their cause by persisting in their untenable claim to a general exemption from Federal income taxes simply because they are Indians. See majority opinion at note 9. See also note 2 to this dissenting opinion. While the scope of the Squire v. Capoeman exemption is not nearly as broad as the Indian claimants in this and other courts have contended over the years, nonetheless, it is not as narrow and restrictive as the majority opinion holds. In its proper sphere, where an individual Indian allottee conducting operations on his own trust land directly derives income from the land itself, that income is tax exempt. I think rental income or the portion of the smokeshop income alloca-ble to the raw land itself is within the Squire v. Capoeman exemption.
Fay, Sterrett, Whitaker, and Kórner, JJ., agree with this dissent.Hoptowit v. Commissioner, 78 T.C. 137 (1982), affd. on a related issue 709 F.2d 564 (9th Cir. 1983); Swiger v. Commissioner, T.C. Memo. 1984-228; Comenout v. Commissioner, T.C. Memo. 1982-40, on appeal (9th Cir., Dec. 10, 1982). While I might have decided the Hoptowit case on a more narrow ground since the taxpayer in that case was merely the lessee of another noncompetent Indian’s allotted land (see note 2 below),, I would have reached the same result. The Swiger, and Comenout, cases, however, did involve noncompetent Indians using their own allotted land for the operation of a commercial business, and I agree with the holdings in those cases. See also Critzer v. United States, 220 Ct. Cl. 43, 597 F.2d 708 (1979), cert. denied 444 U.S. 920 (1979).
The benefit of the exemption under Squire v. Capoeman, 351 U.S. 1 (1956), flows only to the individual Indian allottee and then only as to income derived from his own allotted land. United States v. Anderson, 625 F.2d 910, 914-915 (9th Cir. 1980), cert. denied 450 U.S. 920 (1981); Fry v. United States, 557 F.2d 646, 648 (9th Cir. 1977), cert. denied 434 U.S. 1011 (1978); Holt v. Commissioner, 364 F.2d 38,41 (8th Cir. 1966), cert. denied 386 U.S. 931 (1967). See also Wynecoop v. Commissioner, 76 T.C. 101, 105-107 (1981). For this reason, I of course agree with the majority that the son’s wages from working in his father’s smokeshop are taxable. Even where income is "derived directly” from the trust land within the meaning of Squire v. Capoeman so as to be tax exempt in the hands of the tribe (a nontaxable entity) or in the hands of the individual Indian allottee himself, the income would not retain its tax-exempt character in the hands of an employee whose wages are paid out of such tax-exempt income. See Hoptowit v. Commissioner, 709 F.2d 564 (9th Cir. 1983), affg. 78 T.C. 137 (1982) (services as member of tribal council); Commissioner v. Walker, 326 F.2d 261 (9th Cir. 1964) (services as an elected tribal treasurer); Jourdain v. Commissioner, 71 T.C. 980 (1979), affd. 617 F.2d 507 (8th Cir. 1980), cert. denied 449 U.S. 839 (1980) (services as chairman of Indian tribe).
See note 2. The General Allotment Act of 1887, 24 Stat. 388, 25 U.S.C. sec. 331 et seq. (1982), provides that the United States is to hold in trust title to lands allotted to Indians under various treaties until the Secretary of the Interior determines the allottees competent to hold fee simple title to their allotted lands. The 1887 Act initially provided for a trusteeship of only 25 years, but this trusteeship was periodically extended by various Executive orders and finally was extended indefinitely by the Indian Reorganization Act of 1934, 48 Stat. 984, 25 U.S.C. sec. 462 (1982). See Squire v. Capoeman, 351 U.S. at 3-4.
See Stevens v. Commissioner, 452 F.2d 741 (9th Cir. 1971), where the court pointed out (452 F.2d at 744 n. 7) that:
"The [Supreme] Court also quoted with approval from Cohen, Handbook of Federal Indian Law, 265, where 'Felix S. Cohen, an acknowledged expert in Indian law,’ said 'that "it is clear that the exemption accorded tribal and restricted Indian lands extends to the income derived directly therefrom.” ’ The Court noted also that Mr. Cohen "distinguished cases permitting the imposition of income taxes upon income derived from unrestricted lands, and upon reinvestment income.” 351 U.S. at 8-9, 76 S.Ct. at 616.”
Superintendent of Five Civilized Tribes v. Commissioner, 295 U.S. 418 (1935).
I do not suggest that Squire v. Capoeman, supra, exempts the income from the individual Indian allottee’s improvements on his trust land. The Court of Appeals for the Ninth Circuit in United States v. Anderson, 625 F.2d at 913 n. 3, has drawn a distinction between income from a "non-land-based” business conducted on trust lands, such as a law practice, which is taxable, and income from other presumably "land-based” operations on trust land, which are not taxable. Some of the accepted tax-exempt activities that can be carried on include mining, agriculture, grazing one’s own cattle on one’s trust land, and licensing or leasing grazing rights to another. 625 F.2d at 913 n. 3. I agree with Critzer v. United States, supra, that income derived from improvements to trust land, inventory, and personal services are not tax exempt. However, renting out property, even a single piece of property, can constitute a trade or business carried on by a taxpayer. Curphey v. Commissioner, 73 T.C. 766,774-775 (1980). Actually, renting out one’s trust land to another, as Mr. Hale did, would seem to be quintessentially a "land-based” business and the rental income therefrom to be directly derived from the land within the meaning of Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895), vacated on other grounds 158 U.S. 601 (1895), and Squire v. Capoeman, supra.