Cotton Petroleum Corporation v. New Mexico – Oral Argument – November 30, 1988

Media for Cotton Petroleum Corporation v. New Mexico

Audio Transcription for Opinion Announcement – April 25, 1989 in Cotton Petroleum Corporation v. New Mexico


William H. Rehnquist:

We’ll hear argument next in No. 87-1327, the Cotton Petroleum Corporation v. New Mexico.

Mr. Israel, you may proceed whenever you’re ready.

Daniel H. Israel:

Mr. Chief Justice, and may it please the Court:

I would like to begin my argument by just briefly summarizing it in outline form.

First, Cotton Petroleum as a result of its decision to be a business partner of the Jicarilla Tribe pays a 75 percent penalty in terms of severance and production taxes by producing trust minerals on the reservation vis-a-vis what its competitors do off the reservation.

Secondly, we believe this Court’s preemption and Commerce Clause cases fully support our claim.

Third, we believe the Court should in this decision give the same message it has been giving for 25 years since Warren Trading Post, and that message is to the tribes, go ahead, tribes.

Continue to develop the small economies on your reservation.

Continue to provide employment.

Continue to develop your own powers of tribal self-government, to educate your children, et cetera.

And to the states, look, states, stop taxing the reservations as if they did not exist.

Stop taxing the economies on those reservations as if there were no federal presence and no tribal government.

Sandra Day O’Connor:

Mr. Israel, the New Mexico court I believe found that the taxes here did not interfere with the tribe’s economic development or its sovereignty.

Is that right?

Daniel H. Israel:

That’s their finding.

Sandra Day O’Connor:


And do we give any deference to that finding here?

Daniel H. Israel:

I don’t think you should because I think the record contradicts the finding of the New Mexico court.

Sandra Day O’Connor:

What standard do we apply in reviewing their finding in that regard?

No deference to it?

Daniel H. Israel:

Well, I think the Court has the record to consider side by side with the court of appeals’ finding.

Sandra Day O’Connor:

De novo?

Daniel H. Israel:

Yes, Your Honor.

The fact is that in our appeal to the court of appeals, we challenged many of the district court findings.

And the court of appeals never reached those challenges on our part.

Sandra Day O’Connor:

Well, are either the royalties produced or the production rates significantly affected by the state taxes?

Daniel H. Israel:

No, Your Honor.

The record indicates as follows: that Cotton as a result of these taxes has limited its production to in-field well production only.

And that means that on a 15,000 acre lease that there are substantial oil and gas reserves left in the ground because of that decision by Cotton to… to limit its development to only in-field wells.

And the transcript at 67, 68, unrebutted, indicates, Justice O’Connor, that that decision was partly motivated by these taxes.

William H. Rehnquist:

Well, you say transcript, page such and such, unrebutted.

I mean, a trial court is free to disbelieve any witness it wants to disbelieve whether he’s rebutted or not, isn’t it?

Daniel H. Israel:

Yes, that’s true.

William H. Rehnquist:

So, so, how does that bear on it?

I mean, that’s your version of the facts, but why, why should we accept them?

Daniel H. Israel:


William H. Rehnquist:

The trial court heard the witnesses.

Daniel H. Israel:

–That’s true.

The fact is that there was no contrary evidence.

William H. Rehnquist:

Well, supposing the trial court chose to disbelieve your witness.

You don’t need a… you don’t need contrary evidence.

Daniel H. Israel:


Byron R. White:

What does the tribe… what does the tribe involved here feet about this tax?

Daniel H. Israel:

–Well, the tribal chairman–

Byron R. White:

Have they taken a position?

Daniel H. Israel:


The tribal chairman testified in the trial.

He focused on… that the imbalance between the substantial taxes imposed by New Mexico and the lack of services.

And he said if you’re going to tax at this level, let’s have some significantly greater services.

The amicus brief of the Jicarilla Tribe–

Byron R. White:

Yes, but it doesn’t… it didn’t… it didn’t… the tribe doesn’t claim that their self-government or their economy is being hurt by New Mexico’s tax.

Daniel H. Israel:

–Well, the amicus brief of the tribe say it has a chilling effect.

It said that because of these overlapping taxes… this is page 1 and page 2 of the amicus brief.

It said we are having… it’s complicating and making more difficult new… new oil and gas deals.

It also says on page 2 that it’s… it’s taking away from the attractiveness of oil and gas deals on the reservation, and it’s increasing the expenses of doing business for… not only for present operators of the tribe, but future operators.

Sandra Day O’Connor:

Do I understand correctly that from now on… I mean, after this thing arose… the tribe took the position that it would be a partner in any oil and gas deals and thereby preclude the state from having any taxes on it?

Is that right?

Is that what’s happening now?

Daniel H. Israel:


And there’s a suggestion by the New Mexico brief.

Daniel H. Israel:

It is simply incorrect.

And I think your question, Justice O’Connor, is very relevant.

In 1982 Congress enacted this joint venture statute, and under that statute tribes can now negotiate deals whereas traditionally they had lease arrangements.

Sandra Day O’Connor:


Daniel H. Israel:

The fact of the matter is… and we cited it in our reply brief on page 13… that in considering… and that’s House Report 736… in considering the Mineral Leasing Act of 1982, Congress rejected the notion of a express authorization for state taxation.

And Congress said, no, we are going to stick with the balancing test that the Court has been utilizing, and Congress expressly referenced Crow Tribe v. Montana.

Antonin Scalia:

Where, where is that in the U.S. Code?

Is that somewhere in the U.S. Code?

Daniel H. Israel:

U.S. Code Administrative News.

Antonin Scalia:

This is not a statute–

Daniel H. Israel:


Antonin Scalia:

–you’re talking about.

This is–

Daniel H. Israel:

This is the 1982 Mineral Leasing Act.

Antonin Scalia:

–It’s in the Leasing Act?

Daniel H. Israel:


Antonin Scalia:

It says that… that we shall continue to apply our prior law?

Daniel H. Israel:

No, it’s in the House Report, 736.

Antonin Scalia:

I see.

Congress’ inaction is what you’re referring to.

Daniel H. Israel:


What I… well, Justice, what I’m suggesting in trying to answer Justice O’Connor’s question is–

Antonin Scalia:

Congress said something, and Congress hasn’t said a thing in fact.

It did not enact any statute that provides for this.

Daniel H. Israel:

–In the Mineral Development Act, it simply authorized the tribes to develop joint ventures.

It said nothing about taxation.

It indicated in a house report that it was staying with the… with this Court’s balancing test, and they expressly referenced Crow Tribe v. Montana.

And, therefore, the fact of the matter is that there is no express barrier from taxation in that 1982 Act and, of course, there’s no express invitation to tax.

So, in that respect it’s identical with the 1938 Act.

Sandra Day O’Connor:

Well, what if it were a joint arrangement here with the tribe?

Sandra Day O’Connor:

Then presumably no tax, no state tax.


Daniel H. Israel:

I don’t see that there’s any difference.

Sandra Day O’Connor:

You don’t.

Daniel H. Israel:

If it’s… if it’s tribally owned production, if it’s a 100 percent tribal operation, clearly the ability to resist state taxation is stronger.

Under McClanahan, under a long tradition, there’s a complete barrier to state taxation of the Indian interest.

But the partnership arrangement in these leases is no different than the partnership arrangement in a joint venture.

The fact is that if taxation is not justified under either Commerce Clause doctrine or the preemption doctrine, that… that state taxation reduces the profitability of the operation.

Sandra Day O’Connor:

Well, is there authority now for… for joint arrangements?

Daniel H. Israel:

Yes, the 1982 Act.

Sandra Day O’Connor:

And the tribe is not taking advantage of that?

Daniel H. Israel:


No, I think… I think tribes typically are utilizing that vehicle although some of them continue to use the 1938 Act because if you’ll note in the 1938 Act, there’s an option.

You can negotiate a lease as well as have a bid and lease.

And the answer is they’re using both, but the tax issue is the same in both.

And this case would not be any different if, if it involved 198… ’82 joint ventures rather than 1938 Act leases.

Byron R. White:

xxx joint venture is a separate entity I take it.

Daniel H. Israel:


I just… maybe I’m not… I’m not trying to be difficult.

I just don’t see that in terms of resisting state taxation, that it matters whether it’s a joint venture or a lease.

They have common characteristics.

William H. Rehnquist:

But our cases have, as you pointed out in McClanahan and cases… impose very definite limits on the extent to which the state can tax a tribal activity denominated as a tribal activity.

I don’t think our case… our opinions have ever gone so far as you have us say and say that just because the state tax on a producer rather than on the tribe has some effect on the tribe, it’s similarly preempted.

Daniel H. Israel:

Well, Chief Justice, if as a result of a joint venture agreement you had a 100 percent Indian-owned operation, I think I have a easier case today.

I would say that this… this case is very similar to Bracker.

Bracker… you had a… you had a joint venture through a lease arrangement with a… with a non-Indian company and the White Mountain Apache Tribe case.

The fact that you had a non-Indian taxpayer there didn’t prevent this Court from saying to Arizona you cannot tax.

And, in fact, we have a stronger cases because the comprehensive federal regulatory scheme here covers the very act that’s being taxed.

Here our regulations cover the severance activity.

New Mexico is taxing the severance activity.

Daniel H. Israel:

In Bracker and in Ramah, the state was taxing an activity that was not the subject of federal regulation, and that bothered several members of this Court.

In Bracker, the tax being imposed by Arizona was a fuel use tax and a license tax on the trucks, and there was no federal regulation dealing with trucking.

The federal regulations there deal with timber.

And in Ramah… again, this caused quite concern on the Court… the federal regulations there dealt with trying to encourage Indians to build schools on the reservation, and the regulations dealt with encouraging financing.

They didn’t deal with construction, but New Mexico was trying to impose tax on the construction of a school.

And yet, in a divided opinion, the Court sustained the, the effort of the contractor to resist state taxation.

Byron R. White:

Well, what do you… what do you say about the argument that the, that the old leasing acts really kind of permit tax… taxing reservation activities like this?

Daniel H. Israel:

Well, that’s… that’s kind of the state’s attempt we think to change the rules and kind of revisit Blackfeet.

Our answer is that we think blackfeet represents a fair and sensible compromise.

The 1924 and 1927 Acts were enacted by a Congress that was bent on assimilating the Indians, getting rid of the reservation.

That was all pre-FDR Indian Reorganization Act.

And what this Court said in Blackfeet is we will allow those old statutes which have relatively little production today to be taxable.

But for the new era, the Mineral Leasing Act, which is 1938, four years after the Indian Reorganization Act, expressly designed to harmonize with the Indian Reorganization Act, we’re not going to read into that 1938 Act a power to tax because Congress didn’t read it in.

And I, I might add, for example, Congress–

Byron R. White:

Well, Congress didn’t read it out either in 1938.

Daniel H. Israel:

–That’s clear.

But, but, Justice White, Congress… for example, when it comes to federal production today, in 30 U.S.C. 189, Congress expressly authorizes state taxation.

So, Congress has, has been very actively involved in this whole area.

It’s not as if we have to rely strictly on this Court’s teachings or Congress’ from years ago.

The fact is when it comes to federal production, there’s an express authorization permitting state taxation.

When it comes to Indian production, after the Indian Reorganization Act, there is no express authorization.

And this Court found, again in a divided opinion–

Antonin Scalia:

What do you mean by federal production?

Daniel H. Israel:

–Federal oil and gas production, enormous amounts of federal oil and gas production.

Antonin Scalia:

From, from federal lands–

Daniel H. Israel:

Federal lands, yes, Justice Scalia.

And there the states can tax because Congress has given them an express mandate, 30 U.S.C. 189.


William H. Rehnquist:

–One might think that an express mandate was more required in the case of federal lands than in the case of Indian lands.

Daniel H. Israel:

–Well, Mr. Chief Justice, I, I guess I would, would resist that a little bit because the… there is no… there is no equivalent of an Indian Reorganization Act for federal lands.

Daniel H. Israel:

There’s no policy on federal lands to, to strengthen the federal government’s, you know, local powers in… in Wyoming or Colorado, but there is a federal mandate to strengthen the powers of the tribes and the reservations in those states.

William H. Rehnquist:

Well, don’t some of our cases hold that federal production on federal lands couldn’t be taxed without some sort of congressional approval of it?

Daniel H. Israel:

Well, that… that’s the… that is years ago, and then during the… the ’30s the breakdown of that intergovernmental immunity began in this Court’s decisions.

And that intergovernmental immunity has been reduced so that the answer is that taxation of federal oil and gas, for example, has gone on since the ’30s.

But my point is even, even in the… in the presence of a reduced intergovernmental immunity, Congress has played a role here, and Congress has said, yes, there shall be taxation of federal production.

But Congress hasn’t said that in the Indian area and–

John Paul Stevens:

Normally, normally when you rely on a preemption argument, don’t you look for something Congress said to support the notion Congress intended preemption?

Daniel H. Israel:

–Yes, and I think… I think… New Mexico complains that the preemption teachings of this Court in the Indian area are kind of… are asked with preemption elsewhere, and I think in our reply brief we pointed out that there are certain areas of the law, admiralty, sedition, and in the foreign areas where the Court… including the Indian area, where the Court has said this is presumably and presumptively a subject of federal concern and, therefore, the test for preemption is somewhat different.

And, therefore, in the Indian case, for example… and this is… we have found this through Warren Trading Post.

We’ve seen this in Bracker.

We’ve seen this in Mescalero Hunting and Fishing… the notion is if there’ going to be state tax or a state regulation… and the Court unanimously said this in Mescalero… there’s a burden because there’s a responsibility and a service being provided by the state.

So, the preemption doctrine has emerged in this area recognizing the significant federal interests here on the reservation vis-a-vis, as the Court said last term in Cabazon, the minimal state interest of taxation.

Now, in our supplemental brief… and I think this is very important… this Court decided the Cabazon case.

And that dealt with a… a reservation economic activity of, of gambling, gaming, hardly… hardly akin to oil and gas reserves which are non-renewable resources, which on the Jicarilla reservation and many reservations is their… is the main economic hope.

But even in the context of gaming, the Court upheld the position of the tribes that state laws should not apply.

And what did Congress do?

Congress passed the Indian Gaming Regulatory Act of 1988 just six weeks ago, and in that… and in that legislation, which I pointed out in the supplemental brief, the Court again… excuse me… Congress once again said we’re staying with the teachings of this Court.

States cannot tax except in the article 3 gaming area.

They said if the states, as a result of negotiation with the tribes, can demonstrate specific responsibility here, we will allow the states to have a cost reimbursement.

So, I think Congress knows what’s going on and Congress believes that the balancing test that this Court has adopted for 25 years now represents a fair resolution of these issues.

And again–

Sandra Day O’Connor:

Is there room in that balancing test to take into consideration what Congress intended?

Daniel H. Israel:


Sandra Day O’Connor:

And looking at the old leasing acts, there certainly is some room there to indicate or to find that Congress intended the states to still be able to do some taxation of non-Indian producers, isn’t there?

Daniel H. Israel:

If, if the world stopped in 1928, I would absolutely agree with you and we wouldn’t be here because we wouldn’t be wasting our time.

Nineteen twenty-four and nineteen twenty-seven… it’s a three-year period.

There were two acts of Congress.

But that was during the allotment era.

That was when the Indians were dying, and the allotments had taken the millions of acres of reservations in the West and put them into allotments and seeing those allotments… because every time an Indian received an allotment, he didn’t pay his property taxes.

There was a foreclosure, and there was a loss of land.

Daniel H. Israel:

And that’s the way Congress was going.

But in 1934 it all changed.

Now, we think we have a stronger case than… than Bracker, getting back to Bracker, simply because our regulations control the activity being taxed.

And in Bracker, this Court found that there was a chilling effect on the timber industry even in the face of a minor $34,000 tax.

There were three findings in Bracker by the Court: one, that the federal statutory scheme designed to maximize profits from timber was being interfered with; two, that the tribe and future contractors were simply were in a less attractive economic environment and therefore there would be a chilling effect on, on timber activity; and three, the state tax also deprived the tribe and its business partner of money, expense money, if you will, to comply with a comprehensive scheme.

Now, in our brief, we have gone on with, you know, pages of federal regulations, and the Jicarilla brief also has several pages of tribal ordinances.

It’s an expensive proposition doing business on the reservations.

Cotton now has three masters: the state, the tribe, the federal government.

We don’t think we… by doing business on the reservation, we should be burdened that way.

It doesn’t seem fair to us and it doesn’t seem necessary.

Now, I would like to turn for a minute, moving away from Bracker to the Mineral Leasing Act.

We focused for a minute on the traditional view, the traditional context of that Act.

I just want to remind the Court that in Crow Tribe v. Montana, the Court in a summary affirmance saw that Act as being preemptive and struck down off-reservation taxes in Montana.

We’re talking about on-reservation here.

And this Court also in Kerr-McGee v. Navajo Nation described that statute as a comprehensive statute and recognized that it was critical to many rural reservations.

Any hope of having a future homeland would be the extraction of those mineral resources in a, in a fair and balanced environment.

And we don’t think multiple taxation is a fair and balanced environment.

William H. Rehnquist:

You say a tripe should be treated just like another state then.

Daniel H. Israel:

Well, I think for purposes… I think–

William H. Rehnquist:

Have we ever held that?

Daniel H. Israel:

–In a broad sense, no, you have not.

And turning to the–

William H. Rehnquist:

So, you’re asking us to extend our doctrine then.

Daniel H. Israel:

–In the Commerce Clause question that we… I have raised and the Court has asked me to consider, in a limited sense only, Mr. Chief Justice, we say, yes, states should be treated… tribes should be treated as states in a limited sense only.

Now, Congress understands that.

For example, in recent amendments to the Internal Revenue Code, the Tax Status Act, the tribes now can issue tax-free bonds for purposes of capital improvement on the reservation.

Congress has no problem with treating tribe as states for limited purposes.

All we are saying is under the Commerce Clause, the Court has traditionally understood the purpose of the Commerce Clause was to preserve a common market and that over the years the threat to that common market, the impediment, if you will, has been parochial taxation by the states.

Multiple taxation is a typical example or discriminatory taxation.

What’s novel in this case, the Court is being asked for the first time to consider whether that common market… the preservation of that common market would be threatened by multiple taxation by a tribe and a state.

William H. Rehnquist:

A tribe which lies wholly within the geographic boundaries of the state.

Daniel H. Israel:

Correct, Mr. Chief Justice.

So, in the limited sense of whether there’s a, a discrimination on interstate commerce, whether there’s an economic impact that’s, that’s unfair and not justified, we say it is appropriate to treat a tribe as a state for that limited purpose only.

Antonin Scalia:

Well, after you… after you throw it into, into the Commerce Clause matrix, you still have to decide under the Commerce Clause which… which of the states, given conflicting state taxations, is the one that has authority to tax or how it should be apportioned.

But having thrown it in the matrix, all you do is then assume, well, it’s obviously the Indians who can’t and the state who can.

And I don’t know why that’s obvious.

Daniel H. Israel:

Well, Mr. Justice Scalia, I think there’s teachings in… in this Court’s recent case law that supports our view: Commonwealth Edison and Jicarilla Tribe v. Merrion.

Both times the Court said the act of severance of minerals is a local act, and we are going to allocate under the Commerce Clause to the local government the power to tax that local act.

Antonin Scalia:

Well, it’s local to the state as well as local to the reservation inasmuch as the reservation is in the state.

Local doesn’t help you there.

Daniel H. Israel:

Well, and I think that’s fair to say.

In Merrion, on one hand, the Court said we’re going to allocate this, and you… and you did.

We’re going to allocate this to the tribe, but then the Court dropped a footnote 26 saying, well, if… if you’ve got problems with multiple taxation, go after the state, and that’s what we have done.

So, our view is that the preferred result is an allocation of that power to the tribe where you have trust resources.

If you’ve got fee oil and gas within a reservation, for example, we would think some allocation might be appropriate.

We’ve… we’ve also offered the idea of a credit perhaps as a way of recognizing the primary power of the tribe and yet providing the state with some tax revenues in those limited situations where there is a specific state interest.

So, allocation and apportionment are both available.

We think in this case allocation is the proper way of resolving it.

And the Court could consider the idea of a credit.

It had rejected the credit in the Colville case, properly so because the Court pointed out in Colville that the only Indian commerce you had there was an exemption.

You’re bringing a cigarette tax exemption on the reservation.

A credit wouldn’t preserve that exemption, and therefore it was rejected.

I think I’ll reserve my last five minutes.

William H. Rehnquist:

Very well, Mr. Israel.

Mr. Stratton, we’ll hear from you.

Harold D. Stratton:

Mr. Chief Justice, and may it please the Court:

This is a case dealing with whether New Mexico can tax oil companies within its boundaries because those oil companies obtain their income by the purchase from Indian tribes.

It is not a case about whether the tribes can tax the oil companies.

This Court decided that in 1982 when 21 of the oil companies doing business on this same reservation sued the tribe.

And this Court has determined that they can.

Harold D. Stratton:

And New Mexico has no quarrel with that, and New Mexico had no quarrel with that back in 1982.

It’s also not a case about whether the federal government, I take it, can impose its taxes.

We talk about multiple taxation.

The federal income tax on Cotton as far as the income it receives and the windfall profits tax is just as much multiple taxation by another concentric sovereign.

The two taxes which we deal with here today… and Cotton has waived its claim to three, as I understand their brief… are first the oil and gas emergency school tax which was originally enacted in 1935, and the oil and gas severance tax was a… which is a tax on the severance and the sale of oil and gas, which was enacted in 1937.

Both of these taxes were recodified in 1959.

Now, before these taxes are imposed upon the oil company, they are allowed to deduct the royalties they pay the tribe.

So, absolutely no economic impact, whether it’s incidental or otherwise, falls upon the tribe in this case.

The royalties are deducted and they don’t bear the brunt of any of the taxes, nor do the oil companies have to pay those taxes.

Additionally, there is no agreement in this case, as there were in the other cases beginning with the White Mountain case, the Central Machinery case and the Ramah case, to refund this tax to the tribe.

This tax refund would go right back to the oil company and any future savings, if the Court struck the tax down, would go to the oil company.

Anthony M. Kennedy:

So, does the state’s authority to tax or its lack of authority to tax depend upon the particular royalty agreement, or does it depend upon the economic market for oil and gas drilling?

Harold D. Stratton:

Justice Kennedy, I believe the state’s ability to tax depends upon whose income it is.

If it’s the income of the Indian tribe, whether it’s a joint venture or otherwise or whether it’s a royalty arrangement, the State of New Mexico cannot impose any tax on that income.

However, if it’s income of a non-Indian citizen, then that tax is imposed.

Sandra Day O’Connor:

What about a joint venture?

Harold D. Stratton:

Justice O’Connor, a joint venture would work the same way.

In a joint venture, each party would obtain some benefits from that joint venture.

The Indian share would not be taxed under New Mexico law whatever that happened to be, and the oil company share would be subject to the tax, just as in this case.

Anthony M. Kennedy:

Well, if market conditions were such that the Indians could be successful in leasing their lands only it they gave a reduced royalty in order to account for a state tax, would that change the case?

Harold D. Stratton:

I don’t believe that it would change the case, Justice Kennedy.

As a matter of fact, in regard to these leases, all of which were executed back in 1953, these leases last as long as gas… oil and gas is produced in paying quantities.

So, it certainly wouldn’t affect these leases.

Anthony M. Kennedy:

So, then Dr. Parker’s findings, et cetera, are simply irrelevant here?

Harold D. Stratton:

Dr. Farker’s findings regarding the production?

Anthony M. Kennedy:

Yes, and the… and the fact that the, the ability of the tribes to develop their resources was, was not adversely affected by the tax.

That’s just irrelevant because of the structure of the transaction?

Harold D. Stratton:

I don’t believe it’s irrelevant, Your Honor.

I think in this case below they were arguing preemption and looking at the various cases that were involved.

And under the preemption test as set out in White Mountain, it might be very relevant as to whether the tribes could… whether the production of the tribes was concerned.

Harold D. Stratton:

In this particular case–

Anthony M. Kennedy:

So, then… so, then the fact that there’s a royalty arrangement is not necessarily dispositive.

It depends upon the economic impact of the particular tax on the particular transaction.

Harold D. Stratton:

–Well, Your Honor, that’s not our case.

We believe it depends upon the intent of Congress and whether Congress intended the State of New Mexico to be able to tax oil companies on reservations.

We believe that back when the 1927 Act was passed that Congress made that intention clear and specifically authorized the states to do that.

Anthony M. Kennedy:

Well, while you’re on that point, is it the 1927 Act or the 1938 Act that carries… that controls the case because if you say the 1938 Act, we have the… the Crow Tribe case to contend with, don’t you?

Harold D. Stratton:

Yes, Your Honor, we do have to contend with the Crow Tribe case.

I think, if I may explain how I think the Acts interact and how they work together.

The 1938 Act had a repealer clause in it which only repealed acts that were inconsistent with it.

There’s a long history leading up to the passage of the 1938 Act which began back with the 1927 Act.

Prior to 1927, there was a great debate in this country between the attorney general, the Indian tribes and the federal government as to whether or who owned the property under executive order reservations.

In 1922, this Court held in Gillespie v. Oklahoma that states could not tax lessees’ interests on Indian reservation.

Also, around that same time, at that time Attorney General Stone issued an opinion that said these executive order lands could not be leased under the 1920 Land Mineral Leasings Act leased federal land because the way executive order reservations were set up was that the President would set out a parcel of land for a group of Indians that did not have one and allow them to stay there.

Then in 1927, after much debate, consternation by the states, three things were decided.

Number one, the Indians receive their land.

And the 1927 Act specifically says that they get their executive order land unless Congress says otherwise.

There was a debate about whether the states should have a royalty under lands or whether they should be able to tax.

The states argued that the land should be leased under the 1920 Act in which case they would receive 37 and a half percent royalty just like they did under the federal leases at that time.

The Indian tribes didn’t believe that.

And finally, in 1927 Congress struck a compromise which allowed the Indians to have their lands and royalties, but allowed the states to go ahead and impose their taxes just like they would on any other lands.

Now, in 1938 the Congress passed the Indian Mineral Leasing Act.

The Act did nothing to change oil and gas leasing.

It had absolutely nothing to do with any changes in that area, but primarily dealt with changes in the area of metalliferous minerals.

There is no… there were no committee hearings at that time regarding the Act.

There was no record, quite frankly, except for a letter from the Acting Secretary of Interior to the Congress.

And the reasons that Act was passed was, number one, to make sure that the Indians had the authority to consent to the mineral leasing, to allow oil… or not oil companies, but to allow mining companies when they came on to the leases to follow the one, which they could not do.

And it specifically followed the terms of the 1927 Act as far as oil and gas leasing is concerned.

And the repealer clause indicated specifically that it only repealed acts that were inconsistent with it.

And the taxing power of the states was not inconsistent.

Harold D. Stratton:

One final point on the history of that Act was that just two months prior to that Act, this Court decided the case of Mountain States… or excuse me… of Mountain Producers v. Helvering in which case the Court struck down the governmental immunity doctrine and reversed the case of Gillespie v. Oklahoma which meant at that time the case this Court felt that Indian tribes… or lessees on Indian tribe’s reservations could, in fact, be taxed under state law.

We think it was highly unlikely that two months later the Court by its silence… and we think this Court has held that you do not imply immunity by silence… that this Court would have repealed somehow by implication the provisions of the 1927 Act.


Byron R. White:

Do you think the Montana v. Blackfeet is a little inconsistent with your argument or not?

Harold D. Stratton:

–Your Honor, Montana against Blackfeet is not inconsistent with my argument for the following reasons.

In that particular case, the State of Montana was not taxing oil company interests; the State of Montana was taxing the royalties of the tribe.

When the Court decided that particular case, it decided it using two canons of construction which were unique to Indian tribes.

And those were set out by Justice Powell in that opinion, and they were, number one, that you construe the language… or first of all, you cannot tax any Indian interests without specific authorization of Congress–

Byron R. White:

Well, did it talk at all about the 1938 Act?

Harold D. Stratton:

–Yes, Your Honor, it did.

Byron R. White:

What did it say about it?

Harold D. Stratton:

It said that the 1938 Act was the act under which those particular interests were leased, but that the 1938 Act under liberal canons of construction did not for the purposes of taxing Indian’s interests incorporate the provisions of the 1927 Act.

We think that… we believe and the law is that when you apply the law to other citizens that you don’t use those liberal canons of construction.

And as a matter of fact, the canons of construction, when it comes to oil companies and non-Indian citizens, are exactly the opposite, and that had the Court in that case been looking at the interest of the oil company–

Byron R. White:

So, the 1938 Act did change to some extent what the prior law was with respect to taxation?

Harold D. Stratton:

–Your Honor, the 1938 Act said nothing about taxation.

Byron R. White:

Well, I know but what about the Blackfeet case?

Harold D. Stratton:

Well, the Blackfeet case… in 1985 this Court held–

Byron R. White:

That the ’38 Act did something.

Harold D. Stratton:

–It held that the ’38 Act did not incorporate the ’37 Act as applied to Indians’ interest.

It did not hold, for instance, that that Act was repealed.

It did not hold… and the Court specifically said that it was not holding… that this is the way it would apply to non-Indian interests.

And we think the only reason the Court held that way in that particular case is that because of the… and the Court said this right in the case… the two canons of construction which you apply when you’re dealing with Indian tribes.

Number one, you have to expressly tax… the Congress has to expressly indicate that it’s going to allow the states to tax Indian interests.

The rule is just the opposite when it comes to other citizens.

And number two, under any interpretation of statutes, this Court when dealing with Indians uses a liberal interpretation to the benefit of the Indians.

And we think that those are not the canons the Court should use in regard to other citizens.

In addition… and I believe I’ve pretty much completed–

So, so, the Act is a repealer in one case and not in the other case?

Harold D. Stratton:

–Your Honor, the… this Court in Blackfeet did not hold it was repealed.

Harold D. Stratton:

They specifically said they were not holding that it was repealed.

They said it was not incorporated into the 1938 Act under those liberal canons of construction.

So, it’s still on the books.

And as a matter of fact, those acts were in the same title right next to one another, 396, 97 and 98 including the 1924 Act.

And it seems to me obvious that if Congress had wanted to do something, they would have expressly repealed the taxing authority, particularly after the long battle to strike that compromise in 1927 in the Mountain Producers holding.

In addition to what we believe is congressional intent by virtue of the 1927 Act, this Court… or excuse me… Congress in 1980 passes the Crude Oil Windfall Profits Act, and that Act, of course… for tax… and that, of course, taxed the windfall profits of oil companies.

In that particular Act, Congress chose to exempt the royalties received by Indians from that particular windfall tax, but they chose in addition not to exempt, specifically not to exempt, the interests of the oil companies.

So, Congress at that time felt I believe that there was enough room in there to go ahead and tax the interests of the oil companies, and it did not hinder its policy of helping and allowing the Indian tribes to develop their resources.

Sandra Day O’Connor:

Well, Mr. Stratton, it does seem clear that the addition of state taxes over and above the tribal taxes on oil and gas production coming off the reservation does burden that production to a greater degree than it would if it were on state land alone and off the reservation.

Now, do we have to take that burden into account in determining the preemption question?

Harold D. Stratton:

Your Honor, I think you do not have to take it into account.

I think the record shows that it did not burden or hinder any production in this particular case.

Sandra Day O’Connor:

Well, does the record disclose that it may have hindered further development of production on the reservation?

Harold D. Stratton:

It does not, Your Honor.

And, in fact, when the… when Cotton’s expert witness, Mr. Wood, was testifying, as Mr. Israel previously commented to the Court, he specifically stated that a reduction of taxes would do no more for production.

At page 77 of the transcript, when he went on to testify after page 66 and 67, he specifically said under cross-examination that the lack of taxes would not create any further production, that there were other economic aspects to the production of oil and gas as far as production was concerned.

And, in fact, the record shows–

Sandra Day O’Connor:

Well, just it seems like common sense would tell you that if you had two tracts where you could produce oil and gas, one off the reservation and one on, that the producer would prefer the off-reservation because of the substantially reduced tax burden.

Harold D. Stratton:

–Your Honor, I suppose that is correct.

I can’t deny that you obviously want to make as high as a profit as you could.

However, that works with states as well.

You would certainly rather do business in a state that had, had a lower tax rate.

If you were doing… if you were operating in the State of Utah or some other state that had county taxes, you’d want to do business in a county that had lower taxes.

However, in this particular case, the record is clear and the district court found below that the profits are sufficient that the state taxes are insufficient… or excuse me… are insignificant as far as production is concerned and that they really make no difference.

As a matter of fact, as evidence of that, in 1977 there were 1,353 producing wells on the Jicarilla reservation.

In 1985 there was 2,224 wells.

Cotton in its testimony by Mr. Wood, their division production manager from Denver, indicated, notwithstanding the economic conditions nor the tax, they were going to continue to drill, were drilling 12 new wells in the year following the trial.

So, there was no evidence in the record and the court found, that these taxes in no way hindered any economic development, production and certainly not the ability of the tribe to raise its funds as well.

I’d like to talk a little bit about that because I think that it’s important to note that the tribe is not affected even though I believe Congress has spoken, that the tribe is absolutely not affected by this particular tax and, as a matter of fact, they’re doing pretty well with their tax as they should be.

They enacted a five percent tax upon… up on top of their one percent severance tax.

Harold D. Stratton:

When they did that, they have realized a rather significant amount of money, and they’re continuing to do that.

They have built up a permanent fund of $50 million that the tribe now owns, and that is higher per capita, per Jicarilla, than is the New Mexico permanent fund.

They have no tribal taxes on the members.

They have a tax-free environment.

In fact, they pay each Jicarilla member out of their royalties and out of their taxes each year $4,000 to $5,000 to supplement their income.

So, I think that’s further evidence that this particular tax has no impact on the ability of the Jicarillas to develop their own resources.

I want to talk just a little bit about the disagreement between us and the plaintiff or Cotton Petroleum as far as the benefits that New Mexico confers.

There have been a couple of statements in this Court’s cases that indicate that the states have no more responsibilities as far as Indian tribes are concerned.

The record indicates here that the Jicarillas spend 85 percent of their money off the reservation.

They have to go off the reservation to obtain 85 percent of their services.

One hundred percent of Jicarilla children attend the New Mexico state school, the state-funded school, public school, in Dulce, New Mexico.

Ninety percent of the enrollment–

William H. Rehnquist:

In where New Mexico?

Harold D. Stratton:



William H. Rehnquist:


Harold D. Stratton:

–D-u-l… yes, Your Honor.

Pronounced Dulce.

John Paul Stevens:

That’s off the reservation?

Harold D. Stratton:

That is on the reservation.

John Paul Stevens:

That’s on?

How many member of the tribe are there?

Harold D. Stratton:

There are some discrepancies in the record, record, Your Honor, but according to the 1980 Census, there’s about 700… 1,750 tribal members.

There’s slightly less than 2,000 people according to the census living on the reservation.

In addition to the schools, the State of New Mexico maintains four state roads on the reservation and one United States highway on the reservation.

But I don’t want to minimize the fact and the importance of all of the roads off the reservation.

When these Jicarillas and other members living on the reservation are going places, they have to utilize state roads.

The testimony was they get most of their services from Farmington, Albuquerque and Santa Fe.

And to get there, they have to use state roads.

And each Jicarilla Apache tribal member is just as much a citizen of the State of New Mexico as is any other citizen.

Harold D. Stratton:

They’re entitled to all of the privileges, immunities and services.

So, to distinguish between the services provided by the state as to whether they’re provided on the reservation or off is clearly not the test.

They attend universities.

We have state-subsidized universities.

In-state students have an ability to go there, and have their tuition reduced because they’re in-state.

Jicarillas, being citizen of the state, benefit from that.

We have police protection, and we have cross-deputization with the Jicarillas as well.

We have a court system to which all of its citizens, including the Jicarillas and Cotton, are allowed to participate or allowed to utilize.

And finally, they’re entitled to all of the health care benefits that is provided by the State of New Mexico to all of its citizens.

I’d like to turn to the Commerce Clause, if I might, just briefly and talk about it.

There is one thing with which we and the Indian amici are in unanimity on and that is whether Indian tribes or Indian reservations should be treated as states.

I have a hard time coming up here and conceptualizing how that would actually work.

We are concentric sovereigns.

Reservations vary widely.

There are different numbers of tribal members on one reservation as on other reservations, and they are technically concentric sovereigns.

Indians have citizenship, they vote, they hold office.

The land occupied by the Jicarilla Reservation is a part of New Mexico.

How we treat the tribe as a reservation… 250 tribes… or how we treat the tribe as a state with 250 of them around the country, puzzles me as to how we would deal with it.

In fact, I think the U.S. Constitution treats them separately.

This Court, Mr. Chief Justice has repeatedly held as recently as the Ramah case that they are not states and that they are not going to be treated as states.

As far as apportionment is concerned, the… Cotton has suggested an apportionment formula whereby you apportion the tax based on the benefits received by the taxpayers.

That particular doctrine or theory has been rejected as far back as Thomas v. Gay by this Court, and we see no reason or no way that can happen.

Taxes are not an assessment of benefits.

Taxes are a way of apportioning the benefits of living in an organized society to various members.

I’d like to say just one last thing at this point and that is that this particular case is a case brought by one oil company against a state involving one reservation.

We have 26 Indian reservation in the State of New Mexico.

There are over 250 different reservations across the country.

They are all different.

Many of them do not produce resources.

Some of them do.

Harold D. Stratton:

Some have fee land in them.

A lot of non-members live in them–

Thurgood Marshall:

Mr. Attorney General, you keep emphasizing how large the Indian group is in this country.

Is it not true that every year it’s going down?

Harold D. Stratton:

–Your Honor, I’m sorry.

I do not know the answer to that question.

Thurgood Marshall:

Isn’t it going down… the Indian population?

Harold D. Stratton:

Your Honor, I’m sorry.

I do not know the answer to that.

It is not going down in the State of New Mexico.

I do not know what’s happening in the rest of the country.

Thurgood Marshall:

Well, isn’t the rest of the country… isn’t it going down?

Harold D. Stratton:

I’m sorry, Your Honor.

Thurgood Marshall:

The population?

Harold D. Stratton:

I do not know the answer to that question.

Thurgood Marshall:

Well, I mean, you keep emphasizing how big it is.

For what reason do you emphasize that?

Harold D. Stratton:

Well, Your Honor, I do not emphasize how big the Indian population is, but rather the fact that there are 250 separate independent sovereign nations, and they all have different governmental aspects to them just like many other different nations do.

And to apply blanket rules, such as the one that is proposed by Cotton in this particular case, may very well do more harm to those reservations, particularly the ones in Utah, as the amici of the counties indicate, than help.

Thurgood Marshall:

So, you’re, really doing this in favor… to help the Indians.

Harold D. Stratton:

Your Honor, I think the… upholding this tax will, in fact, help the Indians because the Indians are citizens of our state just like they are citizens of the other states that they live in, and it will allow Cotton to participate in providing the benefits of an organized society not only to themselves and the employees of Cotton, but also to the Jicarillas and other Indian people in our state.

Byron R. White:

Mr. Attorney General, what was… under that statute were these leases executed?

Harold D. Stratton:

They… the leases indicate I believe, Your Honor, that they were executed under the 1938 Indian Mineral Leasing Act.

Byron R. White:

So, that Act did have something to do with oil and gas leases.

Harold D. Stratton:

Yes, Your Honor.

The Act does have something to do with oil and gas leases.

The, the point I wanted to make is that when that Act was enacted, it was not for the purpose of providing oil and gas terms.

They are almost identical, and they are effectively identical with the terms of the 1927 Act.

That Act was primarily enacted to deal with metalliferous minerals as opposed to oil and gas, but it does include leasing provisions for oil and gas.

If there are no more questions, I’ll waive the rest of my time.

William H. Rehnquist:

Thank you, Mr. Stratton.

Now, Mr. Israel, you have six minutes remaining.

Let me ask you, if I may, in the New Mexico Court of Appeals’ opinion in this case at appendix 4 of your jurisdictional statement, it has this statement, about the middle of the page.

“Cotton, on the other hand, contends that this case is not a preemption case because the economic impact on the tribe is minimal and is not a primary consideration. “

Now, is that a correct statement of the position you took in the New Mexico Court of Appeals?

Daniel H. Israel:

Yes, Mr. Chief Justice.

This is a claim for refund.

This particular case will result, if we are successful, in some portion of the New Mexico taxes being refunded.

William H. Rehnquist:


Daniel H. Israel:

The impact on the tribe is not, so much in this particular refund action, but really the larger question as the Court has recognized in Bracker, in Ramah, in Mescalero, and as the tribe itself indicates in its amicus brief, the larger question is its ability to make the reservation attractive, to eliminate this penalty.

William H. Rehnquist:

–But if you said in the New Mexico Court of Appeals that it is not a preemption case–

Daniel H. Israel:

I didn’t say that, Mr. Chief Justice.

William H. Rehnquist:

–Well, but I… let me read again what the New Mexico Court of Appeals said you said, and I asked you whether that was a correct statement.

“Cotton, on the other hand, contends this is not, a preemption case because the economic impact on the tribe is minimal and is not a primary consideration. “

Now, is that a correct statement of the position you took in the New Mexico Court of Appeals?

Daniel H. Israel:

No, it is not, Mr. Chief Justice.

William H. Rehnquist:

The court was wrong then in saying it.

Daniel H. Israel:


We said… and the next sentence makes it clearer.

We said that when you have a Commerce Clause inquiry, you look at the controlling acts of Congress, Congress to see if there are any… if you see… to see if there are any, and then you look to the Commerce Clause.

We said the preemption concept was a background here.

So, we didn’t… we didn’t say it wasn’t a preemption case.

We said the preemption issues were a part and parcel of the Commerce Clause issues.

Now, I would like to rebut several, several points.

First of all, the Indian tribes… some of them are doing better today than they have been, and it’s partly because of congressional support and because of decisions of this Court.

The Jicarillas have more oil and gas reserves than most reservations, but let’s… let’s not… let’s not New Mexico overstate the case.

The record here indicates in transcript 514 that the average per… per capita income of these Indians is less than the per capita income of New Mexico citizens, let alone the per capita income of the rest of the citizens of the United States.

And I think that’s important.

The second point is, yes, New Mexico is the provider of a civilized society off the reservation, and the record indicates that the Indians here, Cotton, its employees, its contractors, when they’re off the reservation, they pay all of those taxes.

And the Court has indicated in Ramah that… that off-reservation benefits and services simply don’t answer the question about what happens on the reservation.

Daniel H. Israel:

And we think the record here indicates there is a deterrence of production.

The tribe has indicated there’s a chilling effect on terms of now it may develop resources in… in the future.

And Justice O’Connor I think makes it apparently clear that if you have a 14 percent of value tax burden on the reservation, inevitably that’s less attractive than off the reservation.

So, in Bracker, in Ramah, in Mescalero, in Cabazon, these are cases where much smaller intrusions, much smaller levels of taxes were kept off the reservation than here, and we would… we would say that those teachings suggest that when you have significant taxes here that aren’t justified, that they should be kept off the reservation too.

The tribes are developing more significant governmental services.

John Paul Stevens:

You emphasize the 14 percent, but supposing you had a case in which the tribe didn’t impose any taxes of its own.

It got all its income in the form of royalties.

It just negotiated a different arrangement.

Would the state tax still be equally preempted?

Daniel H. Israel:


John Paul Stevens:

So, really the 14 percent isn’t relevant to the legal analysis, I don’t think.

Daniel H. Israel:

Well, it gives rise to a Commerce Clause claim, that if you didn’t have the taxes, then you have only a controlling acts of Congress, a preemption claim.

But from the point of view of the tribe trying to develop a stronger economic base for its members, it doesn’t matter whether it, it draws revenues from a nonrenewable trust resource from royalties, rents or from taxes.

From its vantage point, it doesn’t matter.

John Paul Stevens:

So, from its vantage point, it would be exactly the same if it had negotiated a more favorable lease instead of added on top of it this… this tax.

Daniel H. Israel:

And that’s what the tribe has said here.

With these taxes it, it gets less money because the companies that go to the tribe now, now and put together a joint venture say, well, let’s see.

We’ve got to pay all these taxes to the state, plus we’ve got to pay your taxes, so you get less rent.

John Paul Stevens:

When… when were these leases signed again?

I can’t–

Daniel H. Israel:

These were early leases in the 1950s.

John Paul Stevens:

–And they started taxing them when?

The tribe started taxing them when?

Daniel H. Israel:

In the 1970s.


Daniel H. Israel:

Now, the final thing I’d like to say about the effort to revisit Blackfeet… and it’s a little troublesome to the Court because the 1924 and 1927 Acts… they authorized taxation of the Indian share as well as the, the producer share.

So, it the Court were to reverse itself in Blackfeet, then it seems to me it’s stuck with a… a rather anomalous situation of saying in this most important area of all for Indian economies, Congress has spoken and taxation can apply to… across the board, to Indian tribes as well as producers.

And so, we would urge the Court not to go backwards, not to upset what we think has been a consistent 25-year line of cases ever since Warren Trading Post that says taxes are a burden on Indian commerce, and they can only be justified by a specific showing of state responsibility and state services.

And that’s what Congress now agrees to.

As I said, in the Mineral Leasing Act, in the Gaming Act, they support the Court’s findings.

William H. Rehnquist:

Thank you, Mr. Israel.

The case is submitted.