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Tribe contends money is exempt under 1990 land act; lawmakers who sponsored it say that was never its intent
The Seneca Nation of Indians is shielding its members from paying millions of dollars in federal income taxes on their personal share of tribal casino profits.
The nation claims no taxes are due because the money is tied to a tax-free lease settlement the tribe struck in Salamanca 12 years before it opened its first casino.
A newsletter to members of the tribe, along with land transaction records and Seneca filings with the Securities and Exchange Commission, spells out a complex scheme the Seneca Nation is using to avoid federal taxes on $75 million in casino bonuses individuals will receive this year and next.
The two congressmen who sponsored the 1990 Seneca Settlement Act for its Salamanca leases say the legislation was never intended to help the Senecas acquire land for casinos or avoid paying federal taxes on gambling profits.
And the Internal Revenue Service suggests the money paid to individual Senecas might very well be taxable.
At issue are the $4,500 payments that will be sent to each of the tribe's 7,200 enrolled members this year and the $6,000 they will be paid next year.
The Tribal Council earlier approved these per capita payments, which are the first tangible results to individual Senecas from their new casinos in Niagara Falls and on the Allegany Territory.
Federal law requires that taxes be paid on per capita payments to tribal members from their casinos, and IRS regulations require both tribes and their members to report this money as income.
But Seneca leaders say the nation is exempt from those requirements because the millions of dollars they are paying tribal members do not come directly from gambling revenues.
They even call these gambling bonuses annuities, not per capita payments as the federal Indian Gaming Regulatory Act refers to them.
"These annuities are derived from the Nation's Seneca Settlement Act funds," Seneca Attorney General Robert Odawi Porter told Senecas in a recent newsletter.
Because of that, Porter said, the payments are not taxable. And he said they also cannot be counted as income if a Seneca is receiving government benefits based on income.
That interpretation was news to former Reps. John J. LaFalce, a Democrat, and Amo Houghton, a Republican, who were the primary sponsors of the Salamanca settlement.
When Congress passed the Seneca act, it came with $60 million from the federal and state governments. The money was supposed to make up for a century's worth of $1-per-year leases that Congress forced the Senecas to accept from homeowners and businesses on Seneca land in Salamanca.
"The only thing we contemplated at that time was giving fair recompense to the Indians at Salamanca for the continued use of those lands," said LaFalce, now a corporate lawyer in Buffalo. "Gambling was never discussed nor contemplated."
"John is right," Houghton, a former Corning Glass executive, said from his retirement home in Massachusetts. "Honestly, the machinations that go into this thing, transferring money from one account to another, I just don't understand it."
A complicated process
Seneca leaders have never explained those machinations. They declined repeated requests to comment, saying it was an internal tribal issue of no concern to outsiders.
But the steps were pieced together through land records in three counties, as well as Securities and Exchange Commission documents the Senecas file quarterly because of the $500 million in bonds they borrowed to finance their casinos.
The money for the per capita payments does indeed come from gambling revenues, those records show, but only after it has been filtered through a small amount - $28 - of land settlement act money.
As earlier outlined by The Buffalo News, in explaining how the Senecas used a few dollars of the Salamanca settlement money to buy land for their casinos and avoid cumbersome approvals needed for off-reservation gambling, the documents show the procedure worked like this:
• First, the Seneca Gaming Corp. and its three spin-off companies, wholly owned subsidiaries of the tribe set up to run its casinos, bought the land at market prices.
Seneca Gaming paid $8.07 million in Niagara Falls for land for the Seneca Niagara Casino & Hotel, $3.5 million in Salamanca for the Seneca Allegany Casino, and $4.5 million in Buffalo for the planned Seneca Buffalo Creek Casino.
• Next, the Seneca Nation bought that land from Seneca Gaming Corp., using a small bit of Seneca Settlement Act money.
In Niagara Falls, the nation paid $14 for the land; in Buffalo, it paid $4; and in Salamanca, where the Senecas are still firming up the lease, they told the SEC, a lease document on file in Little Valley shows $10 was paid.
• Seneca Gaming then leases the land from the Seneca Nation for the three casinos and pays the rent with gambling profits.
In Niagara Falls and Salamanca, those leases mean Seneca Gaming pays the Seneca Nation $15.6 million a year for each casino's property, or $31.2 million. The Buffalo casino lease, which started in April, will initially pay $6 million a year, the SEC records show.
• And finally, that $37.2 million yearly pot of money is used by the Senecas to pay its members' annual per capita payments.
Payouts could be taxed
Porter told Senecas in the nation's newsletter that there had been a number of recent erroneous news reports on the per capita payments that needed to be corrected.
"First, the annuity payments you receive are not casino proceeds," Porter wrote. "These annuities are derived from the Nation's Seneca Settlement Act funds. This is extremely important to keep in mind since the nontaxable status of the annuities is tied to the source of the funds."
Porter declined through an e-mail and spokesmen for the Seneca Nation and Seneca Gaming to comment further on this interpretation.
"The nation and the current administration will not speak with respect to specific nation issues - financial, administrative - that pertain strictly to members of the Seneca Nation," said Susan Asquith of Travers & Collins, who frequently serves as a Seneca spokeswoman.
A past Seneca president, Rickey L. Armstrong Sr., who is running again this fall, said his administration - and previously Cyrus L. Schindler's - set up the policies for the casino land purchases.
"The Salamanca settlement act states that the use of the benefits outlined in the act cannot be denied and that benefits or income derived therefrom are nontaxable," Armstrong said. He suggested the former congressmen who sponsored the legislation re-read the act.
The Internal Revenue Service declined to directly comment on the Senecas' interpretation on the tax status of the per capita payments.
"Generally, proceeds that are directly from the sale of tribal land or from a land claim settlement are not taxable," IRS spokesman Kevin McKeon said in an opinion that would seem to agree with the Senecas' interpretation.
"However," he added, "if the Indian tribal government invests the proceeds and then distributes the earnings to the members, the distribution would be taxable."
And that would seem to make the money taxable because the Seneca Nation is using some of the land settlement money to invest in the casino properties.
Joseph M. Finnerty, an attorney representing Citizens for a Better Buffalo, which has sued to stop the Seneca Buffalo Creek Casino, said there is no question what the Senecas are doing.
Demanding oversight
"The Buffalo land the Seneca Nation of Indians bought - purportedly with Salamanca settlement act funds - is not "sovereign,' and gambling can't lawfully occur on it. Period," Finnerty said. "We are addressing this now in federal court."
By using a small portion of the settlement act funds to buy the casino land, a purpose for which they were never intended, Finnerty said, the Senecas avoided the necessary reviews mandated by federal law when Indians attempt to open off-reservation casinos.
"The fact that they may be trying to play a similar shell game using the same act on tax issues is just another reason why closer, more enlightened government oversight is urgently needed here," Finnerty said.
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