STATE OF MONTANA, ET AL., APPELLANTS V. CROW TRIBE OF INDIANS, ET
AL.

   No. 87-343

   In the Supreme Court of the United States

   October Term, 1987

   On Appeal from the United States Court of Appeals for the Ninth
Circuit

   Motion to Affirm

   Pursuant to Rule 16.1 of the Rules of this Court, the Solicitor
General, on behalf of the United States, respectfully moves that the
judgment of the United States Court of Appeals for the Ninth Circuit
in this case be affirmed.

            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statement
   Argument
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (J.S. App. 1a-21a) is reported
at 819 F.2d 895.  The opinion of the district court (J.S. App.
22a-74a) is reported at 657 F. Supp. 573.  The opinion of the court of
appeals on the prior appeal (J.S. App. 79a-106a) is reported at 650
F.2d 1104, amended, 665 F.2d 1390, cert. denied, 459 U.S. 916.  The
original opinion of the district court is reported at 469 F. Supp.
154.

                             JURISDICTION

   The judgment of the court of appeals was entered on June 11, 1987,
and the notice of appeal to this Court was filed on July 24, 1987
(J.S. App. 107a-109a).  The jurisdictional statement was docketed on
August 28, 1987.  The jurisdiction of this Court is invoked under 28
U.S.C. 1254(2).

                          QUESTION PRESENTED

   Whether Montana's gross proceeds and coal severance taxes may be
applied, at the same rates that apply to the mining of coal owned by
non-Indians, to the mining of coal that was part of the original Crow
Reservation and that continues to be held by the United States in
trust for the Crow Tribe of Indians.

                               STATEMENT

   1.a. This case concerns the application of the Montana severance
and gross proceeds taxes to the mining of coal that is held by the
United States in trust for the Crow Tribe of Indians.  The Crow
Reservation was formally established by the Second Treaty of Fort
Laramie, May 7, 1868, 15 Stat. 649, which set apart the reserved lands
"for the absolute and undisturbed use and occupation" of the Indians
(art. II, 15 Stat. 650).  See Montana v. United States, 450 U.S. 544,
547-548 (1981).  In the Act of Apr. 27, 1904, ch. 1624, 33 Stat. 352
(J.S. App. 136a-157a), Congress approved an agreement under which the
Tribe ceded to the United States an area of approximately 1,137,500
acres, now called the "ceded strip." /1/ The 1904 Act obligated the
United States to continue to hold the land on the ceded strip in trust
for the Tribe pending disposition to non-Indians under various public
land laws, and it provided for the Tribe to receive the proceeds of
that disposition as they were realized.  Art. II, 33 Stat. 357 (J.S.
App. 146a-147a);  Ash Sheep Co. v. United States, 252 U.S. 159,
163-166 (1920).  The various provisions of the 1904 Act were "all
intended to secure to the Indians the fullest possible value for what
are referred to in the agreement as 'their lands' and to make use of
the proceeds for their benefit" (Ash Sheep, 252 U.S. at 165).

   On much of the ceded strip, both the surface and the underlying
mineral estate were conveyed to entrymen under the homestead laws, to
Montana for school lands, or to individual Indians as allotments.  In
the case of approximately 70,000 acres, however, when patents were
issued to non-Indians, the coal deposits were reserved to the United
States to be disposed of under the coal-land laws, with the proceeds
paid to the Tribe.  See J.S. App. 27a;  Act of Feb. 27, 1917, ch. 133,
Sections 1-4, 39 Stat. 944-945 (codified at 30 U.S.C. 86-89) (J.S.
158a-160a).  Mineral rights likewise were reserved to the Tribe in
connection with certain allotments to Indians.  See Act of May 19,
1926, ch. 338, 44 Stat. 566 (J.S. App. 164a).  Tribally owned coal
also underlies the Reservation proper.  /2/

   b. In Section 3 of the Indian Reorganization Act of 1934 (IRA), 25
U.S.C. 463, Congress authorized the Secretary of the Interior to
restore to tribal ownership the remaining surplus lands of any Indian
reservation that had been opened to entry prior to 1934.  Immediately
thereafter, the Secretary temporarily withdrew all remaining surplus
lands, pending restoration to the tribes concerned.  Restoration of
Lands Formerly Indian to Tribal Ownership, 54 Interior Dec. 559
(1934).  That withdrawal order applied to both surface lands and
mineral rights (id. at 563), and it expressly included Crow
Reservation lands that were opened under the 1904 Act (id. at 561).
Ultimately, however, the surplus lands and reserved mineral rights on
the ceded strip were not restored to full tribal ownership pursuant to
Section 3 of IRA, because the Crow Tribe voted not to accept the
provisions of the IRA.  Accordingly, by Section 1 of the Act of May
19, 1958 (1958 Act), Pub. L. No. 85-420, 72 Stat. 121 (J.S. App.
176a), Congress separately restored surplus lands to the Crow Tribe
and certain other non-IRA tribes.  Approximately 10,000 acres of
surface lands were restored to the Tribe by the 1958 Act.  At that
time, the United States also held approximately 150,000 acres of
severed mineral rights in the ceded strip in trust for the Tribe, and
The Department of the Interior has consistently interpreted the 1958
Act to have restored those rights to full tribal ownership as well.
J.S. App. 29a-32a.  Section 2 of the 1958 Act in turn provided that
lands restored to tribal ownership "shall be held by the United States
in trust for the respective tribe or tribes, and such lands are hereby
added to and made a part of the existing reservations for such tribe
or tribes." 72 Stat. 121 (J.S. App. 176a).

   c. In 1972, Westmoreland Resources, Inc., a non-Indian company,
entered into a lease with the Crow Tribe to mine the coal underlying
approximately 15,000 acres of the ceded strip in Big Horn County,
Montana.  /3/ That lease was entered into pursuant to the Indian
Mineral Leasing Act of 1938, 25 U.S.C. 396a et seq., which, with
certain exceptions not relevant here, governs the mineral leasing of
all tribally owned lands (see Montana v. Blackfeet Tribe, 471 U.S.
759, 763 (1985)), both on and off-reservation.  Section 1, 25 U.S.C.
396a (J.S. App. 172a).  /4/ Westmoreland has long-term contracts,
extending through the year 1993, to supply coal from that tract to
four midwestern utility companies.  In 1980, the Shell Oil Company
entered into an agreement to mine an area within the Crow Reservation.
 At the time of trial, however, Shell had not begun operations under
the agreement because it could not find a purchaser for the coal, and
Shell surrendered its rights under the agreement in 1958.  J.S. App.
6a, 32a-33a.

   2. In 1975, Montana enacted two taxes on coal production:  a gross
proceeds tax, levied at a rate equal to the county property tax (Mont.
Code Ann. Sections 15-23-701 et seq. (1986) (J.S. App. 206a-207a)),
and a severeance tax, levied at a rate of between 3% and 30% of the
contract price f.o.b. mine (Mont. Code Ann. Sections 15-35-101 et seq.
(1986) (J.S. App. 208a-226a);  see Commonwealth Edison Co. v. Montana,
453 U.S. 609, 613 (1981)).  /5/ The 30% severance tax rate for the
coal at issue here was based on the Montana Legislature's finding that
such coal --

      is in sufficient demand that at least one-third of the price it
      commands at the mine may go to the economic rents of royalties
      and production taxes * * *.

Mont. Code Ann. Section 15-35-101(e) (J.S. App. 208a).  The combined
effective rate of Montana's severance and gross proceeds taxes is the
highest in the United States.  Cf. Commonwealth Edison, 453 U.S. at
640 (Blackmun, J., dissenting).  /6/

   The revenues from the severance tax are allocated by statute as
follows:  50% is paid into a Permanent Trust Fund, the principal of
which may be appropriated only by a three-fourths vote of the
Legislature and the income from which may be appropriated annually for
general state expenditures (Mont. Code Ann Section 15-35-108(1) (J.S.
App. 216a);  Mont. Code Ann. Section 17-6-203(5);  see Commonwealth
Edison, 453 U.S. at 613);  other revenues are paid into the general
fund and into special funds for public schools, conservation
districts, water development projects, libraries, and acquisition of
art works.  Mont. Code Ann. Section 15-35-108(3) (J.S. App.
217a-218a)).  The severance tax statute also established three funds
that were to be used for coal-related expenses:  the coal area highway
reconstruction fund, the coal impact fund, and the coal counties fund.
 However, those funds were initially allocated only 31% of the
severance tax revenues, and, as of 1981, they received only 8.75% of
those revenues.  J.S. App. 16a.  The gross proceeds tax is collected
by the county and is used to meet general county and school district
expenses (id. at 49a).

   Between 1975 and 1982, Westmoreland paid $53,800,000 in severance
taxes and $8,100,000 in gross proceeds taxes as a result of its mining
operations on the ceded strip.  And since January 1983, Westmoreland
has paid an additional $20,000,000 in taxes into the registry of the
district court, pending the outcome of this case (J.S. App. 5a-6a).
By contrast, through October 1983, Westmoreland had paid only
$17,877,126 in royalties to the Tribe (id. at 56a).  Moreover, the
Tribe thus far has received no tax revenues from the mining of the
coal.  The Tribe did enact a 25% severance tax in 1976, and that tax
was approved by the Secretary for application to mining on the Crow
Reservation, such as that once planned by Shell.  The Secretary
disapproved application of the tribal tax to tribal coal mined from
the ceded strip, because the Crow Tribe's constitution disclaimed
jurisdiction in that area.  Nevertheless, in a 1982 amendment to its
lease, approved by the Secretary, Westmoreland agreed to pay the
tribal tax, subject to a credit for all state severance and gross
proceeds taxes it was required to pay.  Because of the higher taxes
imposed by the State, this offset has prevented the Tribe from
receiving any tax revenues.  Id. at 6a, 53a-55a.

   3.a. This suit was brought by the Crow Tribe in 1978 against the
State of Montana, the Counties of Big Horn, Yellowstone, and Treasure,
and various state and county officials.  The Tribe sought declaratory
and injunctive relief barring imposition of the Montana coal severance
tax and gross proceeds tax on the production of tribally owned coal
underlying the Reservation proper and the ceded strip.  The district
court dismissed the complaint for failure to state a claim.  Crow
Tribe of Indians v. Montana, 469 F. Supp. 154 (D. Mont. 1979).

   b. In an opinion dated July 13, 1981 (J.S. App. 79a-106a), the
court of appeals reversed and remanded for the district court to
determine whether imposition of the Montana taxes on the mining of the
Tribe's coal impermissibly thwarts the goal of the Indian Mineral
Leasing Act of 1938 to promote tribal self-government and economic
development.  The court found it significant that the background of
the severance tax reflected two purposes that would conflict with the
1938 Act:  to capture for the State a portion of the economic value of
the coal and to regulate the manner in which coal is mined (J.S. App.
94a-97a).  In the court's view, state taxes having such effects could
be applied to the Tribe's coal only if Montana established that it had
legitimate interests in taxing the coal and that the taxes were
carefully tailored to effectuate those interests (id. at 97a-99a).
The court of appeals also directed the district court to determine
whether the taxes impermissibly interfere with tribal sovereignty,
because they may affect the Tribe's ability to raise money for
essential tribal services and because they are derived from "a
component of the reservation land itself" (id. at 103a;  see generally
id. at 99a-104a).  /7/

   4. On remand, the district court once again sustained the Montana
taxes as applied to the mining of the Tribe's coal in the ceded strip,
although it declined to rule on the validity of the taxes as applied
to on-Reservation coal because that coal was not being mined (J.S.
App. 22a-74a).  /8/ The court first held that the Tribe retained a
beneficial interest in the mineral interests in the ceded strip after
the area was opened to settlement under the 1904 Act and that the 1958
Act restored those interests to full tribal ownership (J.S. App.
27a-32a, 60a-62a).  But although Section 2 of the 1958 Act provides
that lands restored to tribal ownership are also made part of the
existing reservation of the tribe concerned (see page 4, supra), the
court concluded that the Tribe's mineral interests in the ceded strip
were not restored to the Crow Reservation by the 1958 Act (J.S. App.
62a-63a).

   The district court also recognized that there was no express
congressional authorization for imposition of state taxes on the
mining of the Tribe's coal, since this Court had held in Montana v.
Blackfeet Tribe, 471 U.S. 759 (1985), that the Indian Mineral Leasing
Act of 1938 did not carry forward the taxing authorization that was
contained in the Act of May 29, 1924, ch. 25 U.S.C. 398 (1924 Act).
J.S. App. 63a.  But the court nevertheless held that Montana's
severance and gross proceeds taxes are valid because they did not
conflict with the 1938 Act's purposes of revitalizing tribal
governments and promoting economic development;  in the court's view,
the state taxes neither deprive the Tribe of control over its coal nor
"significantly" affect the rate of coal development (id. at 66a-68a).
The court further held that even if the taxes do hinder tribal
economic development to some extent, that result was justified because
the tax "perpetuate(s) the mineral wealth subject to (the State's)
general civil jurisdiction" and provides for "such unquantifiable
interests as the value of a trained workforce, an organized government
and system of laws, as well as the unquantifiable burden of future
socio-economic and environmental impacts resulting from coal mining"
(id. at 67a-68a).  /9/

   5. A unananimous panel of the court of appeals reversed, holding
that the Montana taxes, in their current form, cannot be applied to
the mining of the Tribe's coal (J.S. App. 1a-21a).  The court first
held that the district court had erred in attaching virtually
dispositive significance to its belief that the minerals underlying
the ceded strip are technically outside the Reservation.  The court
explained that its holding on the prior appeal that the coal is a
"component of the reservation land itself" (id. at 7a (quoting id. at
103a)) was the law of the case, and that in any event, Section 2 of
the 1958 Act "restored to reservation status all lands returned to
tribal ownership under (that) Act" (J.S. App. 7a).

   The court of appeals next held that application of the severance
and gross proceeds taxes to coal mined on the Reservation proper and
on the ceded strip conflicts with the 1938 Act's purposes of promoting
tribal self-government and economic development (J.S. App. 9a-17a).
The court concluded that the high tax rates interfere with the Tribe's
economic interests by reducing the coal's marketability /10/ and by
reducing the royalty the Tribe's lessees otherwise would be in a
position to pay (id. at 11a-13a).  This case therefore was found to be
different from Washington v. Confederated Tribes of the Colville
Indian Reservation, 447 U.S. 134 (1980), where the Court held that the
tribes were merely marketing an exemption from the state cigarette
tax, because here the Tribe is marketing its own property and the
lease generates value by virtue of tribal activities in which the
Tribe has a substantial interest (J.S. App. 10a).  In these respects,
the court reasoned, the Tribe's coal-leasing enterprise is similar to
the Indian-run bingo games that were held not to be subject to state
regulation in California v. Cabazon Band of Mission Indians, No.
85-1708 (Feb. 25, 1987).  J.S. App. 10a, 15a.

   The court of appeals also rejected Montana's contention that
countervailing state interests justify the taxes' interference with
the purpose of the 1938 Act (J.S. App. 13a-17a).  The court noted that
under the preemption analysis of White Mountain Apache Tribe v.
Bracker, 448 U.S. 136 (1980), and Cabazon, "the question is one of
reviewing the state, federal, and tribal interests involved and
whether, in this context, the state action is contrary to federal
action" (J.S. App. 14a).  Here, the court concluded that (i) Montana
had failed to demonstrate legitimate state interests of a sufficient
magnitude to overcome the strong presumption against the application
of state taxes to activities that are essential to tribal
self-government and economic development, and (ii) Montana's taxes are
in any event not narrowly tailored to serve the State's asserted
interests (J.S. App. 15a-17a).  The record showed, for example, that
although population growth attributable to increased mining between
1970 and 1982 had resulted in $38 million in governmental
expenditures, state and local taxes (other than the coal taxes) had
generated $42 million in additional revenues (id. at 15a-16a).  And
although the court recognized that there might be additional costs
associated with the environmental consequences of coal mining, it
found that "the state (had) failed to provide a specific figure" and
instead proposed to "charge a heavy tax for indeterminable future
costs, imposing on the Tribe the burden of the doubt" (id. at 16a).
Moreover, many of the environmental impacts relied upon by the State
were already addressed by federal and state regulation of mining
activity under the Surface Mining Control and Reclamation Act of 1977,
30 U.S.C. 1201 et seq., and air and water pollution laws (J.S. App.
16a).  For these reasons, and because the majority of the revenues
from Montana's severance taxes were dedicated to other purposes, the
court of appeals found only a "distant, rather than carefully
tailored, relationship between severance tax revenues and the
coal-related services" (id. at 16a-17a).  /11/

                               ARGUMENT

   The court of appeals correctly concluded that both Montana's 30%
severance tax and its gross proceeds tax are preempted by the Indian
Mineral Leasing Act of 1938 insofar as Montana seeks to apply those
taxes to the mining of coal held in trust by the United States for the
benefit of the Crow Tribe.  Those state taxes directly interfere with
one of the principal purposes of the 1938 Act:  "to ensure that
Indians receive 'the greatest return from their property.'" Montana v.
Blackfeet Tribe, 471 U.S. 759, 767 n.5 (1985) (citations omitted).
Moreover, under the balancing approach mandated by White Mountain
Apache Tribe v. Bracker, 448 U.S. 136 (1980), and California v.
Cabazon Band of Mission Indians, No. 85-1708 (Feb. 25, 1987), Montana
has wholly failed to carry its burden of showing that imposition of
its extraordinarily high taxes on the mining of coal held by the
United States in trust for the Tribe could be justified by state
expenditures or other state interests that have a direct relation to
the mining of the Tribe's coal or to other tribal activities or
benefits.

   Because Montana has sought to impose its severance and gross
proceeds taxes in full force to the mining of tribally owned coal,
without tailoring their application to take account of countervailing
federal and tribal interests, those taxes necessarily are preempted.
The court of appeals' decision so holding rests on the application of
settled principles and presents no issue of general importance
warranting plenary review by this Court.  The judgment of the court of
appeals therefore should be affirmed.  That course would not foreclose
the Montana Legislature from tailoring its taxes in the future to
correspond in some measure to legitimate state interests in this
setting.

   1.a. The coal owned by the Crow Tribe represents a principal
component of the economic value of the Crow Reservation that was
formally set aside for the Tribe in 1868 by the Second Treaty of Fort
Laramie.  That coal was expressly retained in reserved status for the
benefit of the Tribe when the surface estate in the ceded-strip lands
at issue here was allotted to Indians or patented to non-Indians as
part of the opening of the ceded strip.  Moreover, as Montana concedes
(J.S. 10), the district court, based on a thorough review of the
relevant materials, expressly held that the coal in the ceded strip --
not merely the surplus surface land -- was restored to full tribal
ownership by Section 1 of the 1958 Act (J.S. App. 5a, 27a-32a,
60a-62a).  The court of appeals affirmed that holding (id. at 5a), and
the State does not appear to challenge it here (see J.S. 10, 17-18).

   Thus, Montana seeks to impose its taxes on the extraction of
minerals that are unquestionably the property of the Tribe and are
held in trust by the United States for the benefit of the Tribe in the
same manner as all other trust property.  In Commonwealth Edison Co.
v. Montana, 453 U.S. 609 (1981), which involved the same severance tax
that is at issue here, the Court observed that "(i)n many respects, a
severance tax is like a real property tax" (id. at 624).  There can be
little doubt that Montana is prohibited from imposing a real property
tax on any lands, including coal deposits, that are held by the United
States in trust for the Tribe, and the disclaimer clause in the
Enabling Act by which Montana was admitted to the Union clearly bars
such a tax.  Act of Feb. 22, 1889, ch. 180, Section 4, 25 Stat. 677.
These circumstances alone suggest that application of Montana's taxes
to the mining of the Crow Tribe's coal raises a grave potential for
interference with important economic and other interests of the Tribe
and the United States.

   This conclusion is reinforced by the fact that the coal reserved
for the Tribe is a depletable resource and the mining of that coal has
the effect of diminishing the scope and value of the reservation
itself.  Thus, state taxes on the extraction of a depletable resource
have the effect of diverting to the State a portion of the value of
the reservation itself.  /12/ The Tribe has a vital interest in
realizing the maximum return from the coal as it is extracted, so that
the proceeds may be invested in a manner that will generate income or
provide essential services for the Tribe and its members after the
coal itself is gone.  By contrast, Montana does not have a substantial
interest in capturing a portion of the value of the Tribe's coal in
order to devote that portion to state purposes.

   2. Especially in light of the foregoing considerations, it is clear
that application of Montana's current severance and gross proceeds
taxes to the mining of the Tribe's coal is preempted by the Indian
Mineral Leasing Act of 1938.  The text and legislative history of the
1938 Act firmly establish that it does not leave room for state taxes
of such magnitude.

   a. Shortly before the 1938 Act was passed, this Court sustained the
application of Montana's gross production and net proceeds taxes to a
non-Indian company that produced oil and gas on lands leased from the
Blackfeet Tribe.  British-American Oil Producing Co. v. Board of
Equalization, 299 U.S. 159 (1936).  However, the Court there observed
that it was "conceded that the State is without power to apply either
(tax) to the production under this lease, save and except as Congress
may have given its assent" (id. at 161).  The Court accordingly
sustained the tax only on the basis of the express assent of Congress
contained in the Act of May 29, 1924, 25 U.S.C. 398, which provided
that "the production of oil and gas and other minerals on such lands
may be taxed by the State in which such lands are located in all
respects the same as production on unrestricted lands * * *." 299 U.S.
at 164-165, 166.  When Congress enacted the 1938 Act less than two
years later, it declined to include a similar authorization of state
taxes.  For this reason, the Court held in Montana v. Blackfeet Tribe
that Montana may not impose its severance and net proceeds taxes on a
Tribe's royalty income under oil and gas leases entered into pursuant
to the 1938 Act.

   b. Similar considerations require the conclusion that Montana's
severance and gross proceeds taxes are presumptively invalid as
applied to a non-Indian lessee under leases entered into pursuant to
the 1938 Act.

   First, as noted above, this Court made clear in British-American
that at the time the 1938 Act was passed, the express authorization in
the 1924 Act was required in order for Montana to impose its taxes on
a non-Indian producer.  Because Members of Congress, like other
citizens, are assumed to know the law, Congress's deliberate omission
of a similar authorization of state taxes in the 1938 Act -- even
though it patterned the 1938 Act after the 1924 Act in other respects
-- strongly indicates that Congress did not intend to permit a State
to tax the non-Indian producer.  Cf. Merrill Lunch, Pierce, Fenner &
Smith v. Curran, 456 U.S. 353, 378-382 (1982).  By contrast, on
federally owned lands that are not held in trust for Indians, Congress
has expressly consented to the imposition of state taxes on the output
of mines and the property of the lessee.  30 U.S.C. 189.  In
commonwealth Edison, this express authorization was critical to the
Court's sustaining of Montana's coal severance tax as applied to
mining of federally owned coal.  453 U.S. at 631-633.

   Second, as the court of appeals held (J.S. App. 91-13a),
application of Montana's severance and gross proceeds taxes to the
mining of the Crow Tribe's coal would be inconsistent with the purpose
of the 1938 Act "to ensure that Indians receive 'the greatest return
from their property'" (Montana v. Blackfeet Tribe, 471 U.S. at 767
n.5, quoting S. Rep. 985, 75th Cong., 1st Sess. 2 (1937), and H.R.
Rep. 1872, 75th Cong., 3d Sess. 2 (1938)).  If a lessee must pay state
taxes on the production of minerals from Indian lands, the amount of
revenues that the Tribe can receive necessarily is diminished.  That
effect is especially vivid in this case.  The $80 million that the
State has realized by application of the two taxes since 1975 far
exceeds the royalties received by the Tribe under the lease, which
totalled less than $18 million as of October 1983.  Moreover, although
the Tribe adopted its own 25% severance tax in 1976 and Westmoreland
agreed in a 1982 amendment to its lease to pay the tribal tax, the
Tribe thus far had been unable to realize any revenues from this
arrangement.  Under the lease amendment, Westmoreland must receive a
credit for taxes paid to the State.  See page 7, supra.  Because the
Montana taxes are imposed at a higher rate, the Montana taxes have had
the direct effect since 1982 of preventing the Crow Tribe from
receiving an additional 25% of the value of its coal.  /13/

   Third, the state taxes also conflict with the policy of the 1938
Act to "'bring all mineral-leasing matters in harmony with the Indian
Reorganization Act'" (Montana v. Blackfeet Tribe, 471 U.S. at 767 n.5
(quoting S. Rep. 985, supra, at 3, and H.R. Rep. 1872, supra, at 3)).
The proviso to the 1924 Act that permitted state taxation of a
lessee's income on production of minerals from unallotted lands was an
integral part of the policy of allotting tribal lands to individual
Indians and opening surplus lands to non-Indians.  However, "'(t)he
policy of allotment and sale of surplus reservation land was
repudiated in 1934 by the Indian Reorganization Act'" (Moe v.
Confederated Salish & Kootenai Tribes, 425 U.S. 463, 479 (1976),
quoting Mattz v. Arnett, 412 U.S. 481, 496 n.18 (1973)).  In the
Indian Reorganization Act (IRA), Congress prohibited any further
allotment of reservation lands (Section 1, 25 U.S.C. 461), extended
the trust period for existing allotments (Section 2, 25 U.S.C. 462),
and provided for the restoration to the tribe of any remaining surplus
lands (Section 3, 25 U.S.C. 463).  The effect, of course, was to
remove any expectation that unallotted and surplus tribal lands were
destined to pass into non-Indian hands and state jurisdiction, and
thereby to remove the justification for the state to tax mineral
production on those lands in the same manner as lands that are subject
to the State's jurisdiction.  Montana's attempt to impose its taxes on
the mining of coal that was restored to full tribal ownership in
conformity with the IRA's repudiation of the allotment and
surplus-land policies therefore conflicts with the 1938 Act's purpose
of furthering the goals of the IRA.

   Application of state taxes to leases under the 1938 Act also is
inconsistent with the purpose of the IRA (and therefore of the 1938
Act) "'to rehabilitate the Indian's economic life'" and "'to give the
Indians the control of their own affairs and of their own property.'"
Mescalero Apache Tribe v. Jones, 411 U.S. 145, 152 (1973) (quoting
H.R. Rep. 1804, 73d Cong., 2d Sess. 6 (1934), and 78 Cong. Rec. 11125
(1934) (remarks of Sen. Wheeler)).  The income that the Tribe realizes
from the mineral leasing of its lands, whether by royalty payments or
taxes, is an "essential instrument of self-government and territorial
management" (Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 139
(1982)).  The ability of the Tribe to obtain those revenues could be
seriously impeded if the State were permitted to siphon off a portion
of the value of the Tribe's resources.

   3. Although state taxes of the magnitude of those at issue here
plainly conflict with the Indian Mineral Leasing Act of 1938, the
court of appeals did not hold that the State is barred from imposing
any tax on the mining of coal owned by the Crow Tribe.  Rather, the
court correctly concluded that the validity of state taxes must be
determined by application of the principles applied by this Court in
White Mountain Apache Tribe v. Bracker, supra, and Cabazon, which
require a "particularized inquiry into the nature of the state,
federal, and tribal interests at stake" (Bracker, 448 U.S. at 145).
See also Ramah Navajo School Bd. v. Bureau of Revenue, 458 U.S. 832,
838-839 (1982).  Under this approach, "'(s)tate jurisdiction is
preempted . . . if it interferes or is incompatible with federal and
tribal interests reflected in federal law, unless the state interests
at stake are sufficient to justify the assertion of state authority.'
The inquiry is to proceed in light of traditional notions of Indian
sovereignty and the congressional goal of Indian self-government,
including its 'overriding goal' of encouraging tribal self-sufficiency
and economic development." Cabazon, slip op. 13 (quoting New Mexico v.
Mescalero Apache Tribe, 462 U.S. 324, 334, 335, (1983)).

   Here, as we have explained, the federal and tribal interests
reflected in the 1938 Act and the IRA weigh heavily against imposition
of Montana's severance and gross proceeds taxes.  Indeed, this
conclusion follows a fortiori from White Mountain Apache Tribe v.
Bracker, supra.  There, the Court held that the state's motor carrier
license tax and fuel use tax could not be applied to a non-Indian
contractor harvesting tribal timber.  The amount of the state taxes
assessed over a 4 1/2-year period totalled $35,000, which was less
than 1% of the White Mountain Apache Tribe's profits from timber
harvesting (448 U.S. at 158-159 (Stevens J., dissenting)).
Nevertheless, the Court held that even this minor diminution in the
revenues received by the Tribe from the exploitation of its natural
resources was prohibited, because it "threaten(ed) the overriding
federal objective of guaranteeing Indians that they 'will receive * *
* the benefit of whatever profit (the forest) is capable of yielding'"
(id. at 149, quoting 25 C.F.R. 141.3(a)(3) (1979)) and the federal
policy of promoting tribal economic development (see 448 U.S. at
143-144 & n.10, 149).  /14/ It follows that the Montana severance and
gross proceeds taxes, imposed at an effective rate of 32.9% (see note
6, supra), likewise impermissibly interfere with the federal policy of
promoting tribal economic development by ensuring that the Crow
Indians receive "'the greatest return from their property'" (Montana
v. Blackfeet Tribe, 471 U.S. at 767 n.5 (citations omitted)).  /15/

   This Court has indicated that under the balancing approach of White
Mountain Apache Tribe v. Bracker and its progeny, the application of a
state tax or other regulatory measure to non-Indians in matters
affecting Indians might be justified by functions or services
performed by the State in connection with those matters.  Cabazon,
slip op. 17-18;  New Mexico v. Mescalero Apache Tribe, 462 U.S. at
336;  Ramah Navajo, 458 U.S. at 843-845 & n.7;  Bracker, 448 U.S. at
150.  But in the area of taxes, the State "must point to more than its
general interest in raising revenues" (New Mexico v. Mescalero Apache
Tribe, 462 U.S. at 336;  accord, Ramah Navajo, 458 U.S. at 839, 845;
Bracker, 448 U.S. at 150).  That is essentially all the State has done
in this case, however, because as this Court and the Montana Supreme
Court both held when the Montana severance tax was sustained against a
Commerce Clause challenge, the severance tax is "'imposed for the
general support of the (state) government,'" and therefore U.S. at 621
(quoting 615 P.2d at 856)).  The only state expenditure uniquely
associated with Westmoreland's mine that has been identified in the
record in this case was the contribution of $500,000 to pay 25% of the
cost of constructing a road used by employees and suppliers of the
mine (the federal government paid the other 75% of the cost).  See
Exh. 42, at II-25 to II-26;  3 Tr. 417.  The State therefore has
wholly failed to carry its burden of identifying "specific, legitimate
regulatory interests" (Ramah Navajo, 458 U.S. at 843) that justify
collection of more than $80 million in state taxes on the extraction
of the Tribe's coal.

   For these reasons, the court of appeals was clearly correct in
concluding that the state taxes are not "carefully tailored" to meet
legitimate state interests in the extraction of the Tribe's depletable
resource (J.S. App. 15a-17a).  As the court of appeals found, that
mining generates other taxes that meet much of the State's increased
expenditures, and the State's concerns for the potential environmental
effects of the mining are separately addressed by the Surface Mining
Control and Reclamation Act and pollution laws (J.S. App. 16a).
Moreover, coal-related purposes received only 8.75% of the severance
tax revenues as of 1981 (ibid.), and, as noted above, there was no
showing that a significant portion of even that limited share of
severance tax revenues was expended on matters affecting either the
Tribe or Westmoreland's mining.  Indeed, the State has essentially
conceded that the severance and gross proceeds taxes are not carefully
tailored in the manner that this Court's decisions require, because
the State acknowledges that they "are general revenue measures, not
fees for services rendered," and that they "are designed to fund a
broad range of present and future governmental activities," only some
of which "hav(e) particular applicability to Westmoreland's mine"
(J.S. 21 n.15).

   4. Finally, the State seeks to avoid preemption of its severance
and gross proceeds taxes as applied to Westmoreland's mining of the
Tribe's coal by contending that the coal on the ceded strip is outside
the boundaries of the Crow Reservation.  In the State's view, such
"off-reservation" taxes are automatically valid under Mescalero Apache
Tribe v. Jones, 411 U.S. 145 (1973), and should in any event be
sustained under a more relaxed version of the balancing test applied
in Bracker and Cabazon.  This contention is without merit for several
reasons.

   a. Both courts below held -- on the basis of the district court's
exhaustive review of the backgound, legislative history, and
consistent administrative interpretation of the 1958 Act -- that the
mineral interests in the ceded strip were restored to full tribal
ownership by Section 1 of the 1958 Act (J.S. App. 5a, 27a-32a,
60a-62a).  As the court of appeals further held (id. at 7a), under
Section 2 of the 1958 Act, all lands that were restored to tribal
ownership by Section 1 were "made a part of the existing reservations
for such tribe or tribes" (72 Stat. 121) -- in this case, the Crow
Reservation.  /16/ Contrary to the State's contention (J.S. 17 n.12),
this interpretation of the 1958 Act is not contradicted by the
language in the committee reports stating that in the case of the Crow
Tribe, the restored lands were outside the boundaries of the
diminished reservation.  See S. Rep. 1508, 85th Cong., 2d Sess. 3
(1958);  H.R. Rep. 1336, 85th Cong., 2d Sess 3(1958).  Rather, those
reports show that Congress, with full knowledge of the relevant
circumstances, intended to apply to the Crow Tribe's land in the ceded
strip the provision in Section 2 of the 1958 Act that made such lands
"a part of the existing reservation()."

   The State also contends (J.S. 17) that the court of appeals'
conclusion that the 1958 Act restored ceded-strip minerals to
reservation status is inconsistent with its conclusion that the Act
did not give the Tribe jurisdiction over the surface of the ceded area
(see J.S. App. 7a n.1).  However, neither the United States nor the
Tribe has contended that the reservation status of the ceded-strip
minerals operated to expand the exterior boundaries of the Crow
Reservation on the surface or to confer civil or criminal jurisdiction
on the Tribe as a general matter.  The restoration of the minerals to
reservation status is relevant in this case because it underscores
that this valuable tribal asset continues to be held for the benefit
of the Tribe and that the usual protection of a tribe's natural
resources from state taxation applies equally to the Crow Tribe's coal
underlying the ceded strip.

   b. In any event, the court of appeals' interpretation of the 1958
Act in the unique circumstances of mineral rights underlying the ceded
strip of the Crow Reservation presents no question warranting this
Court's attention, since that interpretation is not essential to the
judgment below.  The court of appeals further held that the Indian
Mineral Leasing Act of 1938 applies to tribally owned minerals
"irrespective of the location of the tribal coal on or off the
reservation" (J.S. App. 8a), /17/ and application of the State's taxes
to coal on the ceded strip therefore is preempted by the 1938 Act
whether or not the coal is technically regarded as part of the Crow
Reservation (see id. at 8a-17a).  In fact, the conclusion that the
1938 Act has a preemptive force on tribal trust lands outside the
boundaries of a reservation as well as within is required by a further
purpose of the 1938 Act that was recognized by this Court in Montana
v. Blackfeet Tribe:  "to achieve 'uniformity so far as practicable of
the law relating to the leasing of tribal lands for mining purposes'"
(471 U.S. at 767 n.5 (quoting S. Rep. 985, supra, at 2, and H.R. Rep.
1872, supra, at 1)).  Similarly, the purpose of the 1938 Act of
ensuring that Indians receive "the greatest return from their
property" (see pages 16-17, surpa) applies with equal force to
reserved mineral rights that happen to lie outside the boundaries of
the tribe's reservation for other purposes.  That is especially so
with respect to the Crow Tribe's mineral rights underlying the ceded
strip, because those rights are part of the original Crow Reservation
and because this Court long ago held that the 1904 Act was intended to
secure for the Tribe the "fullest possible value" for the ceded-strip
portion of its Reservation lands.  (Ash Sheep, 252 U.S. at 165).

   c. Contrary to the State's contention (J.S. 15-16, 23), the court
of appeals' decision in this case is fully consistent with Mescalero
Apache Tribe v. Jones, 411 U.S. 145 (1973), even if the court of
appeals erred in holding that the Tribe's mineral interests in the
ceded strip are part of the Crow Reservation.  In Jones, the Court
upheld the application of a state income tax to revenue generated by
the tribe's operation of a ski lodge on leased land that was held by
the United States in trust for the tribe.  But the income being taxed
was not, as here, directly tied to the depletion of the value of the
trust land itself.  In fact, although the Court sustained the state
income tax as applied to revenues derived from the ski resort, it
invalidated the state's compensating use tax as applied to materials
used in the construction of ski lifts on the land.  The Court held
that permanent fixtures on the land are so intimately bound up with
the use of the land itself that they too must be exempt from state
taxation.  411 U.S. at 158-159.  In this case, a tax on the extraction
of tribally owned minerals likewise is effectively a tax on the trust
land itself.  Thus, the decision in Jones did not purport to announce
a per se rule approving all state taxation of off-reservation
activities affecting tribal interests, and it certainly does not
justify state taxation of the extraction of tribal mineral resources
that were part of the Crow Tribe's original reservation and have
continued at all times to be reserved for its benefit.  /18/

                              CONCLUSION

   The judgment of the court of appeals should be affirmed.

   Respectfully submitted.

   CHARLES FRIED

      Solicitor General

   ROGER J. MARZULLA

      Acting Assistant Attorney General

   EDWARD J. SHAWAKER

   LAURA E. FROSSARD

      Attorneys

   NOVEMBER 1987

   /1/ The Reservation previously had been reduced in size by several
other statutes.  Act of Apr. 11, 1882, ch. 74, 22 Stat. 42;  Act of
July 10, 1882, ch. 284, 22 Stat. 157;  Indian Appropriations Act of
Mar. 3, 1891, ch. 543, Section 31, 26 Stat. 1039-1040.  See Montana,
450 U.S. at 548.

   /2/ Although allotments were made on the Reservation under the Crow
Allotment Act of 1920, the mineral rights in allotted lands were
reserved to the Tribe for 50 years.  See Act of June 4, 1920, ch. 224,
Sections 1 and 6, 41 Stat. 751, 753 (J.S. App. 161a-163a), as amended;
 Act of May 26, 1926, ch 403, 44 Stat. 658 (J.S. App. 165a-168a), and
Act of May 2, 1928, ch. 481, 45 Stat. 482 (J.S. App. 169a).  In 1968,
Congress permanently vested title to these mineral rights in the
Tribe.  Act of May 17, 1968, Pub. L. No. 90-308, 82 Stat. 123 (J.S.
App. 183a).  Compare Northern Cheyenne Tribe v. Hollowbreast, 425 U.S.
649 (1976).

   /3/ Another lease entered into in the same year, covering an
additional 16,000 acres, was cancelled in 1982 by the consent of the
Tribe, Westmoreland, and the Secretary (J.S. App. 32a).

   /4/ The Crow Reservation, like several others, was originally
excluded from the 1938 Act. Section 6, 25 U.S.C. 396f (J.S. App.
174a).  However, in 1959, the 1938 Act was made applicable to the
leasing of reserved minerals underlying Reservation land that is
subject to allotment.  See Act of Sept. 16, 1959, Pub. L. No. 86-283,
73 Stat. 565 (J.S. App. 181a).

   /5/ Montana also imposes a resource indemnity trust tax of 0.5% of
the value of all minerals mined in the State.  The proceeds of that
tax are placed in a trust account to be used "to improve the total
environment and rectify damage thereto." Mont. Code Ann. Sections
15-38-104, 15-38-203.  Neither the Tribe nor the United States has
challenged application of that tax to the Tribe's coal.

   /6/ The combined effective rate (after allowed deductions) of these
taxes on surface mining of the Crow Tribe's coal was estimated by the
Tribe's expert witness to be 32.9% -- more than twice that of Wyoming,
the State with the next highest coal taxes.  Montana, using a
different method, calculated the rate at between 21% and 22%.  J.S.
App. 11a n.2.

   In apparent recognition of the impact of the severance tax on coal
production, the Montana Legislature in 1987 reduced the tax for coal
of the quality at issue here to 25% for fiscal year 1990 and 20% for
1991 and subsequent years;  and if statewide production exceeds 32.2
million tons (the average production for the years 1983-1986), the tax
rate will be reduced to 25% from July 1, 1988, to June 30, 1990;  to
20% from July 1, 1990, to June 30, 1991;  and to 15% thereafter.  1987
Mont. Laws 1564, amending Mont. Code Ann. Section 15-35-103 (J.S. App.
232a-235a).  The 1987 amendments also provided for certain tax credits
for new coal production (id., amending Mont. Code Ann. Section
15-35-202 (J.S. App. 237a-238a)).  See J.S. 7-8 n.5.  These amendments
were not in effect when this case was decided.

   /7/ This Court denied the State's petition for a writ of certiorari
to review the court of appeals' decision.  459 U.S. 916 (1982).

   /8/ In the proceedings on remand, the United States, which
previously had appeared as amicus curiae, intervened as a plaintiff in
support of the Tribe.

   /9/ The court also held that the severance and gross proceeds taxes
do not infringe on tribal sovereignty, because the Tribe does not
exercise governmental power over the ceded strip or provide services
there (J.S. App. 68a-71a).

   /10/ The court found that Montana had failed to rebut the evidence
presented by the Tribe that in each year since the coal taxes were
imposed, Montana's previously booming coal production had declined,
while coal production in the adjoining State of Wyoming (where coal
taxes are lower) continued to grow (J.S. App. 11a, 12a).  In the
court's view, this "(exact) correspond(ence)" showed at least some
negative impact on the highly taxed coal's marketability (id. at 12a).

   /11/ The court of appeals also held that the state taxes
impermissibly infringe upon tribal sovereignty because the revenues
now realized by the State for its general purposes could support
essential tribal services and because the state taxes interfere with
the Tribe's control over the development of its own resources (J.S.
App. 17a-19a).

   /12/ A comparable situation was presented in Squire v. Capoeman,
351 U.S. 1 (1956), in which the Court held that the income an allottee
realized from the sale of timber was not subject to federal taxation.
The Court explained that the Indian's "timber constitutes the major
value of his alloted land" and that "(o)nce logged off, the land is of
little value." The Court therefore concluded that the allotment would
not serve the congressional purposes of bringing the Indian to a state
of competency and independence unless the entire proceeds of the sale
of its timber were preserved for him.  351 U.S. at 10.  See also White
Mountain Apache Tribe v. Bracker, 448 U.S. at 138 (cutting of timber
on tribal land generated 90% of tribe's income for governmental
programs).

   /13/ The court of appeals also concluded that the high rate of the
Montana taxes had at least some negative impact on the marketability
of the Tribe's coal (J.S. App. 11a-13a).  The court noted that in
1975, Montana accounted for 40.6% and Wyoming accounted for 43.8% of
coal production in the Northern Great Plains;  by 1982, Montana's
share had dropped to 18.2% and Wyoming's share had risen to 69.5% (id.
at 11a).  The State contends (J.S. n.8, 20-21) that the court of
appeals improperly disregarded district court findings that the taxes
did not affect the coal's marketability.  However, the district court
did not find that Montana's taxes had no effect on the marketing of
the Tribe's coal;  it expressly stated that the cumulative effect of
those taxes is one factor that affects marketability, although it
concluded that the tax rate, "at least at present," was overshadowed
by other factors (J.S. App. at 56a).  Nor did the court of appeals
disregard the district court's findings;  it correctly noted that
"(t)he district court did not find the impact of taxes to be
negligible" (id. at 12a).

   Moreover, since the district court rendered its decision, Montana
has essentially admitted that the severance tax has an impact on the
marketability of coal, because the Legislature has established a
system of tax credits to provide an incentive for the purchase of "new
coal" and has reduced the tax rate at least to 20% by the year 1991.
See note 6, supra.  Similarly, when the severance tax was sustained
against a Commerce Clause challenge, the Montana Supreme Court
recognized that the tax might have an effect on marketability unless
it was at least partially absorbed by producers, "because Montana does
not have a monopoly in the production of coal" and "must compete in
the market with coal produced in Wyoming, North Dakota, and other
sources of supply" (Commonwealth Edison Co. v. State, 189 Mont. 191,
209, 615 P.2d 847, 856-857 (1980), aff'd, 453 U.S. 609 (1981)).

   In any event, in view of the fact (discussed in the text) that the
State's taxes have deprived the Tribe of an additional 25% of the
value of the coal under existing contracts, the invalidity of the
state taxes for present purposes does not depend on whether the taxes
also have an impact on the ability of the Tribe to market its coal
under future contracts.

   /14/ The Secretary's regulations at issue in Bracker involved the
Bureau of Indian Affairs in all aspects of the contractual
relationship between the tribes and the non-Indian timber harvesting
companies (448 U.S. at 145-148), just as the leasing of Indian lands
for mining purposes is subject to regulation by the Secretary (see 25
C.F.R. Pt. 211;  cf. Poafpybitty v. Skelly Oil Co., 390 U.S. 365, 373
(1968)).

   /15/ Montana attempts (J.S. 20, 23-24) to dismiss the relevance of
the impact of the coal taxes on tribal revenues by analogizing the
coal taxes to the state cigarette tax that was held to be applicable
to on-reservation sales to non-Indians in Colville.  However, Colville
did not hold that a state tax's effect on tribal revenues is always
irrelevant to preemption analysis.  To the contrary, diminishment of
tribal revenues as a result of state taxation is a key factor in
preemption analysis where, as in Bracker and the instant case,
Congress has chosen to regulate the tribal activity for the purpose of
assuring that the Tribe receives the maximum revenues from that
activity.  See also Cabazon, slip op. 12-15.  In Colville, by
contrast, the Court found that Congress had not sought to regulate
on-reservation cigarette sales to non-members and had manifested no
intent that the tribe obtain revenues from such sales (447 U.S. at
155-156).

   /16/ The 1958 Act provided (72 Stat. 121 (J.S. App. 176a)):

   An Act (t)o provide for the restoration to tribal ownership of all
vacant and undisposed-of ceded lands on certain Indian reservations,
and for other purposes.

                            * * * * *

   (Section 1.) All lands now or hereafter classified as vacant and
undisposed-of ceded lands (including townsite lots) on the following
named Indian reservations are hereby restored to tribal ownership,
subject to valid existing rights:

   Reservation and State ............ Approximate Acreage

                            * * * * *

   Crow, Montana. . . . . . . . . . . . . . . . . . . . . . .10,260.95

                            * * * * *

   Sec. 2. Title to the lands restored to tribal ownership by this Act
shall be held by the United States in trust for the respective tribe
or tribes, and such lands are hereby added to and made a part of the
existing reservations for such tribe or tribes.

   The Act's reference to approximately 10,260 acres in connection
with the Crow Reservation described only the surface estate, without
limiting the operation of the Act to mineral interests underlying
other surface lands that previously had been allotted or patented.
See J.S. App. 61a-62a.

   /17/ The 1938 Act applies to mineral leasing both of "unallotted
lands within any Indian reservation" and of other "lands owned by any
tribe * * * of Indians under Federal jurisdiction" (Section 1, 25
U.S.C. 396a).

   /18/ The State also contends (J.S. 24-25) that the court of appeals
erred in invalidating the state taxes as applied to mining on the Crow
Reservation proper (J.S. App. 19a-20a).  Whether an issue is ripe for
review turns on "'the fitness of the issues for judicial decision' and
'the hardship of the parties of withholding court consideration.'"
Pacific Gas & Electric Co. v. State Energy Resources Conservation &
Dev. Comm'n, 461 U.S. 190, 201 (1983) (quoting Abbott Laboratories v.
Gardner, 387 U.S. 136, 148-149 (1967)).  Here, the court of appeals
correctly concluded that the potential impact of the state taxes on
the Tribe's ability to market its coal justified a determination
regarding the application of the state taxes to on-reservation mining.
 Moreover, the legal issue was manifestly fit for judicial resolution:
 if, as we have shown, the court correctly concluded that the taxes
are preempted as applied to mining on the ceded strip, it follows a
fortiori that they are preempted within the boundaries of the
Reservation.