Warren E. Burger: We will hear arguments next this morning in Oregon Department of Fish and Wildlife against the Klamath Indian Tribe. Mr. Attorney General, I think you may proceed when you are ready.
David Frohnmayer: Mr. Chief Justice, and may it please the Court, the statement of Oregon appears before this Court on a writ of certiorari to the United States Court of Appeals for the Ninth Circuit. This case presents an opportunity to avoid an unwarranted conflict between important principles of Indian treaty law and the fundamental sovereign powers of states over public lands and their regulatory dominion. That conflict would threaten important environmental and wildlife management policies of state and federal government. The question is posed by the unambiguous language of a Congressionally ratified agreement. That agreeded ceded reservation lands, and as all parties agree, diminished the physical size of the Klamath Indian Reservation. In these circumstances, can tribal members nonetheless hunt and fish on the ceded land without observing state regulation which applies to all other Oregon citizens on that public land? Language, authority, and logic, we believe, require a negative answer to this question. The Ninth Circuit decision below ignores the act of Indian reservation diminishment, and the decision below also ignores the explicit treaty language which limits the right in question to the reservation itself. We will argue today for a general rule consistent with the decisions of this Court. That rule would provide that where the reservation boundaries are diminished, and where treaty rights are defined by the reservation area, those rights may only be exercised in the reduced area unless Congress specifies its intention to preserve them. But on the contrary, if treaty hunting and fishing or other rights are not limited by the reservation boundaries, they remain unaffected by the diminishment unless the Congress clearly modifies and expresses its intent to reduce them.
Sandra Day O'Connor: Mr. Frohnmayer, do you agree that tribal hunting and fishing rights can exist outside of reservation lands?
David Frohnmayer: Yes, very clearly. Yes, very clearly they can.
Sandra Day O'Connor: Well, is it possible that the 1864 treaty can be read to preserve the tribe's hunting and fishing rights in land that was at that time included in the reservation?
David Frohnmayer: I'm sorry. I'm not sure that I follow the second part of your question, Justice O'Connor.
Sandra Day O'Connor: Well, can you read that 1864 treaty as creating hunting and fishing rights in whatever land was in the reservation at that time but not that it is forever bound to that land. It could exist separate and apart from it.
David Frohnmayer: I don't think so, and this anticipates an argument I would make in a moment, but I will reach it now, and that is that the language of the treaty is very careful to express that the hunting and fishing... or that the fishing rights are "within its limits", and then when it goes on in the same sentence to confer the gathering rights given to the tribe, those are also expressed as within the limits. So, two different phrases within the same session which creates the rights also explicitly limit those rights to the boundaries of the reservation. And if one looks to the purpose--
Sandra Day O'Connor: Do you think the better reading of the treaty language then is to tie it irrevocably to the boundaries of the reservation?
David Frohnmayer: --Yes, because it is a reservation... it is the creation of on reservation rights. Now, when Congress at this time wanted to create rights which existed off an Indian reservation, it knew how to do so. This Court in the classic case of Winans is a perfect example where fishing at the usual and accustomed places identifies geographic locations which may be removed from the meets and bounds of a specific reservation. So, a treaty may create off-reservation rights, but these rights in the specific grant by Congress are unequivocally within the limits of the reservation, and that is part of what we think are the undisputed facts here, and let me touch them briefly. In the 1864 treaty, the tribe ceded $20 million... or 20 million acres of aboriginal lands and received a reservation of some $1.9 million. The language of sale of the aboriginal lands is clear. The tribe ceded all their right, title, and claim. And as I have mentioned in my answer to your question, Justice O'Connor, the treaty provided for exclusive fishing rights in the streams and lakes included in said reservation. The gathering rights were also restricted within its limits. The language was later construed by court decision to include hunting rights, but the treaty provides on its face and by no fair reading for any off-reservation rights. Subsequently it was demonstrated that surveys erroneously had excluded some 621,000 acres from the tribal lands in the reservation, and other Poundary Commission proceedings and a new survey during which time the tribe was represented by independent legal counsel, it was agreed that the boundary dispute would be resolved. The tribes agreed to cede to the United States those disputed 621,000 acres in exchange for approximately $533,000. A 1969 Indian Claims Commission decision later awarded the Indians $4 million more for this to compensate for this transaction.
Sandra Day O'Connor: Mr. Frohnmayer, is there anything to establish whether that Claims Commission considered the value of the tribal hunting and fishing rights when it made its award?
David Frohnmayer: In the Claims Commission, counsel for both parties agreed that they should be compensated at fair market value and at the highest and best use. It was agreed by the parties in those Claims Commissions that the highest and best use was for timber and grazing, and that was the basis of the compensation. The 1906 agreement which ratified the... the 1906 cession Act which ratified the bilateral agreement provided in Article 1, and this language is particularly important, that the Klamath Indians do "hereby cede, surrender, grant, and convey to the United States. " all their claim, right, title, and interest in and to the erroneously surveyed lands. In its recitation of consideration, Article 2 of that same cession act provided that this was satisfaction "in full of all claims and demands of said Klamath or other Indians arising or growing out of the erroneous survey. " No express reservation was made in this 1906 Act for any residual hunting, fishing, or gathering rights on the ceded lands or indeed on any off-reservation areas. The federal government immediately placed most of this land in Crater Lake National Park or in national forests. The parties stipulated that the Indians continued to hunt, fish, and trap on the excluded lands without regard to state regulation, but also that they were unaware of any denial by the tribe that the state lacked this regulatory power, at least until proceedings were instituted in the instant case.
William H. Rehnquist: I am a little curious as to what that stipulation reflects. The state of Oregon didn't try to regulate the Indians in the national forest when they fished, or they thought they were regulating, but the Indians thought they weren't?
David Frohnmayer: The latter construction is probably correct, and of course the state was a stranger to the agreement between the United States government and the tribes. The state has its regulatory authority by virtue of the joint agreement with the federal government which ordinarily asks states to manage lands and manage wildlife within the national forests in their boundaries. And, of course, enforcement of game and fishing laws are a discretionary matter with the states, although we need to go somewhat beyond the record to amplify it. In 1906, this was a very sparsely inhabited area in the state of Oregon.
John Paul Stevens: Does the record tell us, General Frohnmayer, whether the state required non-Indians to have licenses to hunt and fish during this period?
David Frohnmayer: The record is silent on that point, but I am certain from everything I know about the history of enforcement of Oregon game and fish laws that seasonal limits, bag limits, and license requirements would be required uniformly of persons not of the tribe.
John Paul Stevens: So really what was happening here, they just weren't enforcing those against the Indians.
David Frohnmayer: That is apparently so. The stipulation speaks in terms of the parties being unaware of that extent. The Ninth Circuit below affirmed the summary judgment for the tribe in its action to enjoin state regulation. It found that these rights were not appurtenant to the property, and that they survived and were not inconsistent with the cession agreement. We believe that the Ninth Circuit's decision has traveled on an unnecessary collision course with three massive obstacles. The first of them is the stark and clear language of the 1864 treaty, which confines hunting and fishing rights to reservation boundaries. The second is the unambiguous language of the cession agreement, which sold and ceded the land and thereby diminished the reservation boundaries. The third analytical roadblock is the absence of any explicit regrant by Congress of a tribal right to hunt or fish on those ceded lands free of normal state regulation. Let me now expand on those points. The 1864 treaty provisions on hunting, fishing, and gathering rights specify the boundaries, and the operative words are "within said reservation" and "within its limits". The treaty does not refer to aboriginal rights. It does not refer to any off-reservation rights. It does not, as some treaties of time time would have, refer to geographically undefined usual and accustomed places of fishing, such as were found in the Antoine--
Byron R. White: Could I ask, Mr. Attorney General, before the 1864 treaty, the Indians had aboriginal title to a much larger area?
David Frohnmayer: --That is correct, Justice White.
Byron R. White: And part of the treaty was ceding all but the reservation?
David Frohnmayer: That is correct.
Byron R. White: And was there any express mention, in ceding the non-reservation lands, was there any mention of ceding fishing rights also?
David Frohnmayer: No, the cession--
Byron R. White: I take it that the Indians before the treaty had fishing rights.
David Frohnmayer: --Aboriginal fishing rights, yes.
Byron R. White: Yes, exactly.
David Frohnmayer: Yes, throughout the--
Byron R. White: How did they lose their aboriginal fishing rights in the area that was not included in the reservation?
David Frohnmayer: --By virtue of the treaty, Justice White.
Byron R. White: Just by quit claiming their right, title, and interest to all that land except the reservation?
David Frohnmayer: Yes. Well, the language--
Byron R. White: It didn't mention fishing rights, though.
David Frohnmayer: --It didn't mention any rights. It referred to the rights by geographic area.
Byron R. White: Yes, all right.
David Frohnmayer: Nor has this Court, to my knowledge, in any place when a general cession of land is made to the United States specifically required the separate itemization or valuation--
Byron R. White: I was just pointing... that they lost fishing rights by a general cession.
David Frohnmayer: --That's right, for which they were paid.
Byron R. White: And you are arguing, I suppose, that when the reservation was diminished, their fishing rights were in the diminished area or in the area that was excluded were lost for the same reason.
David Frohnmayer: That is correct. That is the argument, and that is an argument which would follow from my ambiguous language of sale and cession where in the first instance the fishing right is defined by the terms of the treaty as being within the reservation boundaries.
Thurgood Marshall: But they weren't paid for giving up their fishing rights.
David Frohnmayer: Well, they were not paid separately as an itemization, Justice Marshall.
Thurgood Marshall: I thought you said they were paid for the price of lumber... timber.
David Frohnmayer: They were paid to extinguish the--
Thurgood Marshall: So they weren't paid for the fishing rights.
David Frohnmayer: --They were not paid separately for the fishing rights, Justice Marshall, but I think that is a question of... the compensation issue is two steps removed.
Thurgood Marshall: I just can't get fishing rights over with lumber.
David Frohnmayer: I beg your pardon, sir?
Thurgood Marshall: I can't get fishing rights over with lumber. If you pay for the lumber, you are not paying for fishing rights.
David Frohnmayer: You are paying for the land and all that is appurtenant to the land. The highest and best use agreed by the parties, including by the tribe, was that that was fair market value. When a house is sold, separate valuations are not given for the attic or for the foundation.
Thurgood Marshall: It depends on the state. But you are relying on the cession language when the reservation was diminished.
David Frohnmayer: That's correct. We are relying on two things. First is the nature of the treaty right which is created in 1864, which defines it within the territorial confines of the reservation, and then we are relying on the unambiguous language of the cession agreement, which could not be more precisely suited to effective diminishment--
Byron R. White: And that is true, you say, no matter what happened later before the Indian Claims Commission.
David Frohnmayer: --I am not sure I follow, Justice--
Byron R. White: Well, they were paid... they had another proceeding before the Indian Claims Commission?
David Frohnmayer: --That's correct.
Byron R. White: So you say that the Indian Claims Commission proceeding has no bearing on this general cession language.
David Frohnmayer: The Indian Claims Commission bears only on the adequacy of the compensation that was given for the cession.
Byron R. White: Did I understand you to say earlier, Mr. Attorney General, that the additional $4 million awarded by the Indian Claims Commission was measured by lumber and something else?
David Frohnmayer: And grazing--
Byron R. White: Lumber and grazing.
David Frohnmayer: --because that was the highest and best use for the land, as agreed by counsel for both parties, the tribe and the United States. That compensation was for the land area that was taken.
Warren E. Burger: You were in the process of developing three points. You had gone over the 1864 treaty language. Now, what was the second one?
David Frohnmayer: Well, the language of the cession agreement, which is the language which is unambiguous. When Congress wanted to preserve hunting and fishing rights in the ceded areas, it knew how to do so. Page 28, Footnote 5 of our opening brief cites authority to this Court in which it was regarded at the time as the normal practice, that when the Congress of the United States wished the tribes to retain aboriginal hunting or fishing rights or earlier hunting and fishing rights within the area to be ceded, they knew how to do so and they said so, and that was something for which there was bargain and sale. And so what we have is, the very silence of the cession agreement indicates that the language of it, which is precisely suited to effect a diminishment, as this Court found in De Coteau and in Footnote 22 of De Coteau where it cites additional treaties at the time. The contemporaneous practice was perfectly clear to the Congress of the United States, and its intention to see that the reservation boundaries were diminished is, I think, unassailable. Let me return to the question on which I had a colloquy with Justice Marshall a moment ago, because the tribe's position on compensation is anomalous. Bear in mind that the fishing rights at issue here were exclusive fishing rights within the boundaries of the reservation. The tribe has conceded, apparently without much argument, that it lost exclusivity of those fishing rights, and now seeks to say that because it was not compensated for what obviously is the far lesser value, if indeed there is any value at all in being subject to state regulation, that therefore that lack of compensation shows that Congress must not have intended to do what it did in the cession language, and that is to include everything in the sale. We think the tribal argument is inconsistent, necessarily inconsistent by not complaining of the greater deprivation of the asserted right, and at the same time saying that the presence of the lesser deprivation without compensation therefore must mean that Congress must not have intended to include these rights because they were not included in the sale. We think that when the argument is pursued, it falls of its own weight. Tribes retain no beneficial interest, as this Court has found was sufficient in some cases, the Ash Sheep case, for example.
John Paul Stevens: May I just interrupt with one thought that is troubling me? Your argument is that on the valuation point, omitting the hunting and fishing isn't significant because the timber and the grazing was the highest and best use for the land, and therefore an appropriate measure of use, and therefore you don't have to worry about other uses. But does that totally meet the argument that the hunting and fishing rights might be not pertinent to the land at all, but a separate bundle of rights that wouldn't necessarily be included within the valuation. That is part of their argument, as I understand it.
David Frohnmayer: And I will confess, Justice Stevens, that we are perplexed by that argument, because the question that must be posed to the tribe, it seems to me, is what kind of right is it that is being claimed if it is not a treaty right or if it is not an occupancy right? The treaty gives two conceivable bases on which that right could be urged, the exclusive right to occupy the land or the fact that the treaty confers the right to fish, gather, and hunt within its limits. But when both of those potential theoretical bases are destroyed by a cession agreement with respect to some part of the land, then what theoretical basis is left to assert that these are not--
John Paul Stevens: In other words, perhaps, to be sure I understand your point, you are saying that although theoretically they could exist separate and apart from a piece of land, they don't in this case.
David Frohnmayer: --That's right. In many treaties, or at least in some treaties which have reached this Court, it is clear that the treaty right to hunt and fish can not only not be within the boundaries of the reservation, but it can be on the Columbia River many miles, for example, from the Akima Tribe's reservation, and this Court has held that where those conditions exist, the treaty right is protected and is not appurtenant to the... but here, the only two bases on which we can find for the assertion of hunting and fishing right in the ceded area is either that they come from the right to occupy, which no longer exists, or from the treaty language creating the rights, which says within its limits and within said reservation. But consider, if you will, this anomaly. The western part of the ceded land lies squarely within the boundaries of Crater Lake National Park. Congress has prohibited hunting altogether in national parks, and has required that fishing be done only with hooks, and yet by the reasoning that the tribe now urges on us, either the tribe has a right, because that was ceded land, to hunt and fish free of state regulation, or it does not, because the federal government can bar it. So, not only have they started from an exclusive treaty right within the reservation, the right asserted now becomes one which is nonexclusive, nonuniform, because it apparently does not apply as against the federal government or private landowners, and can be exercised only to prohibit state regulation. It is an anomalous right which is being asserted today, and one which analytically, I think, cannot be justified on the basis of the language and the law that is asserted to have created it. It is for that reason that we believe that the very analysis scheme which the tribe urges today would cause this Court to unravel all tribal cession agreements since the creation of this nation unless the Congressional language in that cession agreement explicitly extinguished hunting and fishing rights on the ceded land. We have yet to find a treaty that does so explicitly, and that presumably is one of the reasons which motivated this Court in the De Coteau decision to stay and to look to how unequivocal the language of bargain and sale is in the cession agreement to determine whether or not it was precisely suited to effect a diminishment. In this case, we believe that it was.
John Paul Stevens: Well, if the cession language in the... was it 1906?
David Frohnmayer: Yes, it was, Justice White.
John Paul Stevens: If the cession language in the 1906 agreement didn't extinguish fishing rights in the land that was ceded, I would suppose that the Indians would still retain the fishing rights in all the land they gave up in 1964.
David Frohnmayer: You mean 1864?
John Paul Stevens: Yes.
David Frohnmayer: Yes, if this is not language of extinction of rights in and to the land, it is difficult to know what language would accomplish that objective unless it is the claim of the tribe that for everything that was of value to the tribe, there must be a specific inventory in the document of bargain and sale to give some valuation to that right or show that it was conveyed. One good example of that, a right which was perhaps not important at the time except that we know that Crater Lake was a sacred place for the Klamath Tribe as it indeed is for anyone who witnesses it, but the western boundary of the claimed land was right on the rim of Crater Lake, of inestimable value now for recreational and aesthetic purposes. There was no specific recitation in the cession agreement in 1906 putting a value on this land separate and apart from fair market value. Is it to be said now, then, that because the cession agreement was silent with respect to particular items of valuation, that the language of bargain and sale of cession, of giving up all right, title, claim, and interest is to be regarded as ineffective as against that--
William H. Rehnquist: Was that the language of the 1906 agreement? They grant, bargain, and sell all right, title, and interest, or something to that effect?
David Frohnmayer: --Let me read it precisely. It appears on Page 3 of our petition for certiorari. The Klamath Indians, and I quote, Justice Rehnquist, "do hereby cede, surrender, grant, and convey to the United States all their claim, right, title, and interest in and to. " these excluded areas.
Byron R. White: And that was very similar to the language in the 1864 treaty?
David Frohnmayer: The language in the 1864 treaty was that they cede all their right, title, and claim.
Byron R. White: Yes.
David Frohnmayer: Ironically enough, the language in the 1906 agreement is almost identical to the language used in the DeCoteau Tribe agreement, which this Court found was precisely suited to effective diminishment of the boundaries of the reservation. The tribe rests its argument so far as we can tell, other than on a somewhat self-contradictory theory of the origin of these rights, on Article 4 of the cession agreement. We believe that they have misconstrued Article 4. Article 4, by its terms, is a savings clause. It grants no new rights. It is typical of boilerplate language used in tribal agreements of that period. In reading that clause to grant off-reservation hunting and fishing rights would by its terms be inconsistent with the treaty language that establishes those rights within the reservation. Bear in mind the purpose of Article 4 is to keep the 1864 treaty and the 1906 cession consistent with each other. And yet what an inconsistency that would wreak, because instead of on-reservation exclusive rights to hunt and fish and gather, their reading of Article 4 would create off-reservation, non-exclusive, and non-universal rights, because, for example, of the national parks and because they concede that they can't hunt and fish on private land, at least without the consent of the landowner. The rights that Article 4 was meant to save are plain within the balance of any fair reading of the 1864 treaty. That treaty gave allotments in perpetuity. It gave tax exemptions to Indians. It gave family inheritance rights to Indians. It exempted the tribal annuity from individual debts. It protected the Klamath, Modoc, and Yahooskin band of the Snake Indians from forfeiture of their particularly valuable land in case other tribes were put there. That is what a savings clause is intended to give. It doesn't confer new rights. Moreover, the tribe has given us arguments which for four separate reasons we believe should fail. They acknowledge diminishment but give it no legal significance. They ask to rewrite the treaty by utterly ignoring in their briefs the limitations of "within said limits" and "within the reservation" language that is used in the treaty. They would expand the cession act to include a new off-reservation interest, and they, we believe, misread the cases, which clearly augur in favor of the state's position. The first group of their cases reserves off-reservation rights. The second group of their cases are ones in which the cession agreement actually reserves rights on the ceded land, and in the third group of cases that they cite, the cession agreement doesn't diminish the reservation boundaries. I would like to reserve the balance of my time, Mr. Chief Justice.
Warren E. Burger: Mr. Miller.
Don Brantley Miller: Mr. Chief Justice, and may it please the Court, the rights at issue here today are basic subsistence rights that continue to this day to play an extremely important role in the day to day lives of the Klamath Tribe and its members. They are treaty rights that have been exercised continuously in the ceded area since before the 1864 treaty to the present time, and they are rights that have a very direct impact on how the Indians live their lives, and affect directly their ability to provide food for themselves and their families. Indeed, the parties here have stipulated that in addition to the Indians' continuous use in this area, these rights were crucial to the survival of the Klamath Indians at the time of the 1906 cession Act, and that they continue to this day to play a highly significant role in the lives of the Klamath Indians. Now, no doubt because of this fundamental importance to the livelihood and existence of the Indians, Congress and this Court have traditionally been highly protective of treaty hunting and fishing rights. This right to hunt and fish free of state regulation has long been regarded as more than a mere jurisdictional prerogative of the Indians. Rather, it has been regarded as an important treaty right for the extinguishment of which just compensation must be paid. Now, in this case and, with all due respect, contrary to Mr. Frohnmayer's assertion, we would assert that there really is no practical reason why the 1906 Act should not be construed as preserving the tribe's treaty rights. Because the 1954 Klamath Termination Act preserved these same treaty rights to hunt and fish on lands that were subject to that Act, the Klamath Indians now possess a decreed right to hunt and fish free of state regulation over roughly two-thirds of their 1864 treaty reservation, an area of approximately one million acres, and those lands, like the lands at issue here today, were sold, purchased by the federal government, and placed in the national forest. Now, tribal law governs its members' exercise of hunting and fishing rights on those lands. The tribe has cooperative agreements with the state of Oregon, the Forest Service, U.S. Fish and Wildlife Service. It has a wildlife code that establishes seasons and taking limits. It issues ID's to its members, and it employs a wildlife biologist and four tribal enforcement officers. So, whether the tribe retained its treaty rights to hunt and fish on the additional one-third of that 1864 reservation that was ceded in 1906, and which lands are comprised of essentially similar forest lands even today, is probably not of major practical consequence to the state of Oregon, and the record in this case certainly would indicate nothing to the contrary.
William H. Rehnquist: What is your response, Mr. Miller, to your opponent's contention that it is a kind of peculiar right that has evolved? It is not good on private lands, apparently, yet it is not good against the federal government, and he says it must once have been an exclusive right. How did it become so diminished?
Don Brantley Miller: Well, I think the Court should keep in mind that the situation of the Klamath Indians is peculiar as well. Their reservation has been... the entire treaty reservation has now been terminated, and they have retained rights, non-exclusive rights on the other two-thirds of the reservation. Now, we certainly admit that when these lands were sold, when all right, title, and interest was ceded, then the exclusive right to hunt and fish on those lands passed with the title to the land, and therefore we assert no interest against the private landowner. Now, this Court has recognized--
Byron R. White: Has passed to whom?
Don Brantley Miller: --Your Honor?
Byron R. White: The title was given up to the United States, wasn't it?
Don Brantley Miller: That's correct.
Byron R. White: And it was... the land became part of national forest mostly, or parks?
Don Brantley Miller: Virtually all of it. The record indicates that about 1 percent of the land had been entered for settlement.
Byron R. White: Well, normally state hunting and fishing laws apply in national forests and parks, don't they?
Don Brantley Miller: That's entirely correct, Your Honor. Our assertion here is simply that the nature of the right that we assert is really... has two parts to it, or if... I mean, you can break it down into two part. One is the exclusive right to enter on the land and reduce fish and game to possession. The other, and, we would submit, the far more important right in this case, is the right to be free from state regulation, and those have always been considered the perhaps two important elements of Indian hunting and fishing rights. It is a hybrid right. It is not simply a regulatory right. It is not simply a property right.
William H. Rehnquist: Are there other cases in which other Indian tribes have the right broken down this way, where their right doesn't extend to going on private land, and it is simply a matter of being free from state regulation?
Don Brantley Miller: Well, we are... I am aware of only one, which was a Blackfeet cession Act in 1891, I believe. In that case, the right in the ceded lands of the tribe was retained as long... to hunt and fish in the ceded lands as long as they remained public lands, but they specifically held or specifically stated that those rights would be exercised subject to state jurisdiction. So, they did break it down. They recognized they would retain the right to go on as long as they were public lands, but applied state regulation. So Congress knew how to apply state regulations in that area if it wanted to.
John Paul Stevens: May I inquire what... I gather none of the land did go into private ownership in the disputed area here, but had it gone into private ownership... say they had settled a couple of hundred acres or something... would you claim the right to hunt and fish on that private land, hunt and fish on it?
Don Brantley Miller: No, Your Honor. Well, we would claim the right to hunt and fish free of state regulation. We would not assert any rights to enter the land over the objection of the landowner.
John Paul Stevens: So it is just a right to be free... and earlier you said you had four game wardens of your own, or enforcement personnel within the tribe.
Don Brantley Miller: Yes.
John Paul Stevens: Do they have enforcement duties in the area that is involved in this case?
Don Brantley Miller: Well, pending the resolution of this case--
John Paul Stevens: Before the case started, did they have such responsibility?
Don Brantley Miller: --I can't tell you, Your Honor. I don't know.
John Paul Stevens: The record doesn't tell us.
Don Brantley Miller: The record has nothing, and I can't tell you.
John Paul Stevens: Let me ask you another question. Supposing you win the case. What would their responsibility be in the area of this case, these four Indian game wardens or whatever the proper title is? Would they have some kind of jurisdiction over what happens in this area?
Don Brantley Miller: They would have jurisdiction over only tribal members hunting and fishing. It would be... and the state of Oregon would have jurisdiction over non-Klamath Tribe members hunting and fishing, and the Klamath Tribe issues tribal identification cards to its members, and--
John Paul Stevens: Do they have limits, too, on how much--
Don Brantley Miller: --They have limits. They open areas. They close areas.
John Paul Stevens: --So there would be two sets of rules on the limits that could be taken from this area, one that would apply to the Indians and one that would apply to the non-Indians.
Don Brantley Miller: That's correct.
John Paul Stevens: And how to fish. I mean, I suppose there are some regulations on how fish may be taken.
Don Brantley Miller: I assume that there are as well, Your Honor, but that is really not the major bone of contention here. Due to the number of dams on the Klamath River, there were a whole lot of fish back at the time of this agreement, and there aren't... I mean, there are, I suppose, some trout fishing or something, but it is not a major salmon fishery as it was before. Well, Mr. Frohnmayer has, I believe, correctly pointed out that this case does present the question of whether Congress intended to abrogate treaty hunting and fishing rights in the context of a combination of factors that have not before been considered by the Court. But the lower court decision here certainly doesn't represent a significant departure from the principles that have been announced in the Court's earlier treaty property rights cases and hunting and fishing rights cases.
Byron R. White: Well, could I ask you, if the cession language in the 1906 agreement didn't extinguish fishing rights in the property that was ceded, why would Indian fishing rights have been extinguished in 1864 in the property that was ceded?
Don Brantley Miller: Your Honor, this Court, I believe, has never required an express or explicit extinguishment of a treaty for hunting and fishing rights.
Byron R. White: Do you concede that Indian fishing rights on the land that was ceded in 1864 were extinguished?
Don Brantley Miller: Absolutely, and I will tell you why, because there was a clear expression of Congressional intent in that case as opposed to in this case.
Byron R. White: Well, it didn't mention fishing rights off the reservation.
Don Brantley Miller: No, it did not.
Byron R. White: And neither did the 1906.
Don Brantley Miller: That's correct.
Byron R. White: It just said... I suppose the cession language is even more specific in the 1906 agreement.
Don Brantley Miller: They are close to the same, Your Honor. I don't know if one is more specific than the other. But you have to look to the purposes of the two acts. The purpose of the 1864 treaty was specifically to provide an area in which the Indians could continue to be self-sufficient through hunting and fishing, and indeed the record here shows that the Indians specifically bargained for the inclusion of these ceded lands within their reservation because of their value for hunting and fishing, and the--
Byron R. White: In 1864?
Don Brantley Miller: --In 1864, yes. The treaty commissioner had initially proposed to lay out a reservation on the floor of the Klamath Basin and exclude the up slopes and valleys, and the Indians said, no, you can't do that. These lands must be included because they form... provide us with a major part of our subsistence. And so the government acceded, and they acceded to the Indians' request because they were aware that the Klamath Reservation was simply too high and too cold to support any meaningful agriculture, and the treaty provided for absolutely no support whatsoever of... I'm sorry. It provided for some support initially in the first few years, but it provided for no long-term support of the Indians by the government. So, the government's intent was to provide an area that would be... where the Indians could be self-sufficient through hunting and fishing, and the treaty specifically reserves fishing rights, so when the Indians voluntarily agreed to come on that reservation after having bargained for the inclusion of their hunting and fishing grounds, then that probably is a clear enough... I don't think there's any doubt that that is a clear enough expression of intent of the parties there to constitute an abrogation of those aboriginal rights. But here we are talking about treaty rights.
William H. Rehnquist: What if there hadn't been that much, Mr. Miller? Suppose that there had just been language saying, we transfer, grant, bargain, sell, and convey all of our right, title, and interest, whatever we may have, in these lands that are now being excluded from the reservation. Do you say that fishing rights wouldn't pass under that sort of cession language? Do you see what I mean?
Don Brantley Miller: Yes, Your Honor, and I think that you would have to again look at the circumstances of the particular act and what the intent of the parties and the understanding of the Indians was at the time.
William H. Rehnquist: So, if there were just nothing relevant on either side on that, that general language would not be sufficient, I take it.
Don Brantley Miller: I--
William H. Rehnquist: Let me elaborate a little bit. I think your opponent takes the position that if I as a seller... or I as a buyer come to you as a seller and say, look, I see you've got an acre of land for sale, I think it is first-rate residential property, and that would be worth $10,000, an acre of residential property, so I offer to buy that land from you, and you give me a deed to it, a grant deed. You can't come back the next day and say, well, I am starting to farm on this corner of the property, because all you bought from... all I sold you was the residential value of the property. He is saying that in effect the fact that fishing rights may not have been expressly included doesn't mean that when the Indians say we convey everything they don't convey fishing rights, too. Now, what is your response to his... as I understand his position?
Don Brantley Miller: --Well, briefly, it is that the right that we assert is not a right that is appurtenant to the land. It is not in the nature of an easement, and it does not diminish in any respect whatsoever the new landowner's interest in the property. We only maintain that we retain the right to hunt and fish with the permission of the landowner. In the case of the Forest Service lands, if hunting is permitted, then we--
William H. Rehnquist: So it is basically not a property right at all, but kind of a freedom from state regulation.
Don Brantley Miller: --It is a freedom from state regulation that has, because of its unique character as such an important right to the Indians, that has some of the characters of a property right. In other words, it is a compensable right. It is a property right within the sense of the Fifth Amendment. If it is taken away, then compensation must be paid. But it is not an interest in the property that is ceded. This Court has recognized, and I think maybe this could answer some of the concerns in terms of whether this decision is breaking tremendous new ground or not, this Court has held that the right to hunt and fish free of state regulation may survive the language of cession where all right, title, and interest is conveyed. It held that in the Winans case in 1905, and this Court's decision in the Antoine case in 1975 also held that such rights survived the all right, title, and interest cession language.
John Paul Stevens: Have we held that such rights survive where you have both the conveyance of the entire property interest and also the diminishment of the reservation?
Don Brantley Miller: No, Your Honor. This Court has held that the rights do survive the total disestablishment of the reservation. Well, if I understand... let me regroup here. Your Honor's question was, may they survive total disestablishment of the reservation and the cede, sell, convey, and relinquish?
John Paul Stevens: Well, here you have the two things combined. I don't think you contest the fact that not only was the interest in the real estate, the land conveyed, but also the boundaries of the reservation became smaller as a result of that conveyance.
Don Brantley Miller: That's correct.
John Paul Stevens: And often you might have it survive... say you conveyed land within a reservation. Why, the hunting and fishing rights might well survive within the reservation.
Don Brantley Miller: That's correct.
John Paul Stevens: But I am not aware of any cases in which you have the two factors conjoined in which the hunting and fishing rights have survived, both the conveyance of the property and the reduction in the size of the reservation.
Don Brantley Miller: Well, the Winans decision certainly represents such a case. Antoine, the Court's 1975 decision in Antoine--
John Paul Stevens: Wasn't Winans the construction of a treaty which specifically referred to the hunting and fishing rights?
Don Brantley Miller: --That's correct.
John Paul Stevens: That was my recollection.
Don Brantley Miller: That's correct. And Antoine was construction of a cession agreement that also contained... so there is... there is no case, and I don't want to be evasive, there is no case without some sort of specific preservation.
Byron R. White: If there were a specific case, you probably wouldn't be here, either one of you.
Don Brantley Miller: I hate to speculate, Your Honor. I would like to point out that the Court has held that such rights, particularly the treaty right to hunt and fish free of state regulation, that particular right, free of state regulation, has survived the total diminishment of reservation status, and that was this Court's holding in the 1968 Menominee decision. We believe that those principles control... in those cases, control the resolution of this case.
John Paul Stevens: Mr. Miller, let me interrupt you once more. Menominee kind of cuts both ways. Aren't there two parts to Menominee? In the first part they had a conveyance somewhat like this, and they said that took the hunting and fishing rights along with it, didn't they? In other words, there was both a conveyance of the land, I thought, without any reference to hunting and fishing rights, which... I don't remember the exact language, but the Court said, well, that implicitly took with it the hunting and fishing rights. And then there was the second part, on which you rely.
Don Brantley Miller: No, I--
John Paul Stevens: They cite this in one of the footnotes in their brief.
Don Brantley Miller: --I don't believe so, Your Honor. I may be misunderstanding the question, but my understanding of the Menominee case is that at the time of termination, the termination Acts specifically provided that the reservation, all federal laws would no longer apply to the reservation. Its Indian country status was totally disestablished and diminished. And there was a specific provision in the termination Act that required that all laws of the states would apply to the Indians in the same manner. But it said nothing about hunting and fishing rights.
John Paul Stevens: That's right. I'm referring to the language that created the reservation. It created the reservation by conveying the land, in effect, and it said nothing at all about hunting and fishing rights.
Don Brantley Miller: That's correct.
John Paul Stevens: But implicitly it was assumed that that must have gone with the--
Don Brantley Miller: That's correct. And I might address that issue at this time. We do not believe that these rights are tied irrevocably to the land, so that they shrink along with the land. These rights were defined by an area of land, as necessarily they must have been, but they were the right, a very separate right to hunt and fish over these areas, and there is no reason why they should be tied irrevocably to the tribe's right to occupy and possess those lands. And indeed the numerous cessions where tribal rights have been retained is reflective of the fact that these rights are not unequivocally tied to possession of the land. I think it is very important for the Court to focus on the unique purposes of this cession Act. They distinguish this cession Act from virtually every other land cession Act, with the exception of the Blackfeet cession Act which I alluded to earlier, in that these lands were not opened for settlement by non-Indians, and the purpose of this Act was to honor treaty obligations in a manner entirely consistent with the treaty, and to benefit the Indians. It sought to promote their self-sufficiency. And when you consider what must have been the Indians' understanding at that time, here they were negotiating an agreement. The government knew full well that these lands were important to them for hunting and fishing purposes. They had specifically bargained for their inclusion earlier. And yet the agreement said nothing whatsoever about hunting and fishing rights, but it did contain an article, Article 4, which provided that all treaty rights that were consistent with the provisions of the cession would be preserved.
Byron R. White: --Could I ask, does the history show why the Indians sold or why the United States bought that land that had been erroneously surveyed as outside the reservation? They hadn't been settled to any extent. Why didn't they just include those lands in the reservation instead of having a cession and payment, things like that? You can make an argument on the other side that if the Indians decided to sell it, they didn't think this area was so important to them, if there weren't any settlements around. Why didn't they just stick to the original boundary of the reservation?
Don Brantley Miller: Well, we don't know, Your Honor, and the record doesn't reflect very much. What it does indicate is that there are some statements by Bureau of Indian Affairs people even back in the 1880s, 15 years before the land was going... or before the Boundary Commission was even appointed to investigate, there was indication that they simply thought that the easiest way out of this mess was to just have Congress buy it, and everything seemed to proceed down that track. And one of the important things to keep in mind, Your Honor, with regard to the cession agreement is that... and with regard to your inference that the Indians perhaps didn't think it was important is that this was really... the agreement that was negotiated in 1901 was really not a negotiated agreement across the board. All items weren't on the table. The inspector had told the Indians that he was adopting the Boundary Commission's detailed appraisal of those lands, and that the only negotiations they were going to have regarded what the Indians were going to do with the proceeds. So, there were no negotiations whatsoever with regard to whether the land would be ceded or retained. The tribe had nothing to do with that. Or how much money they would be paid for the land. That was preordained. It was simply--
Warren E. Burger: We will resume there at 1:00 o'clock, counsel. Mr. Miller, you may resume.
Don Brantley Miller: Thank you, Mr. Chief Justice, and may it please the Court, I would like to address first a matter that was brought up earlier regarding the question of whether the Indians were paid for the value of this right or whether it was subsumed within the fair market value and highest and best use. And I would simply point to the Joint Appendix at Page 14, Stipulation Number 19, where the state has stipulated that the Commission did not take the tribe's hunting and fishing rights into consideration in making its assessment.
Byron R. White: That may be so, but if you assume that the 1906 agreement ceded all rights, all that happened before the Indian Claim Commission was that they reevaluated whatever was ceded.
Don Brantley Miller: Well, the key is all rights or--
Byron R. White: I agree, but you have to go back to the 1906 agreement.
Don Brantley Miller: --That's correct, Your Honor.
Byron R. White: Okay.
Don Brantley Miller: Now, the state has argued that this is an anomalous, very different, almost an oddball right, that this would be the only place where it would exist. The point to be made is that this is a right, the right that we assert today is a right that was subsumed within the larger rights that the Indians before possessed. It is the same identical right that exists today on the other two-thirds of their treaty reservation, and it is a right that exists on numerous other national forest lands throughout the country. It has been recognized time and again by various courts in the country. The thing that is different about this case is not the nature of the right asserted. The thing that is different is the manner in which the right was preserved, and Article 4, which we place great reliance on, means that the rights were only extinguished to the extent necessary to accomplish the purposes of the cession, and the purposes of this cession were not to open reservation lands to settlement, as was the case in virtually every other cession Act. So, the retention of these rights on unfenced, unenclosed forest lands is consistent with the purposes of the cession, and the Indians surely must have understood that. They knew that Article 4 was in that agreement, and they knew that those lands out there were not going to be settled, that they were unenclosed, unfenced forest lands, that there was no population pressure. The exclusive nature of the right was probably unimportant to them at the time. Nobody else used those lands anyway. The important thing at the time was the right to be able to go out and continue to use those lands for their subsistence, and that is the way they would have understood it, we submit. Now, the adoption of the approach for which we have argued would simply mean that in each Indian land cession Act you would have to examine each Act in light of its own legislative history and its surrounding circumstances, and in adopting the rule that we propose, the Court should bear in mind that there really were very few cessions and diminishments that were effectuated for purposes other than opening the lands for settlement, and that is the key to the analysis of this case. This was a unique Act. Its purpose was to settle a boundary dispute, honor treaty obligations. Its purpose was not to benefit non-Indian settlers. Now, as we have suggested in our brief, it might well be in those cases where there was a diminishment as well as a cession of title and the lands were opened for settlement, in those cases, there might well be an extinguishment of the rights. The totality of those circumstances might well rise to the level of clarity that has been required by this Court for an extinguishment of the treaty rights. Thank you.
Warren E. Burger: Do you have anything further, Mr. Attorney General?
David Frohnmayer: Thank you, Mr. Chief Justice. Briefly, six points, which I believe will not require all the time that I have reserved. First, I must respectfully submit that opposing counsel has done in oral argument precisely what he has done in the briefs, and that is to confuse the language of Article 4, which does not speak to purposes of the cession agreement. It talks about provisions of the agreement. Provisions are clear, and speak for themselves, and do not require psychoanalysis of the parties or the Congress which enacted it. The second point is that we have referred in our opening argument to the anomaly created by the special situation of Crater Lake National Park, the largest part of the western cession boundaries. Federal law has since time immemorial, at least since the creation of the park, prohibited hunting altogether on that piece of ceded property, and yet it is anomalous because the right asserted is the right of subsistence to hunt and fish and the allegedly onerous nature of state regulations, which simply have bad limits and season limits. The federal government with respect to its share of those lands in the national park prohibits hunting altogether, and yet no mention of how this is to be reconciled with the theoretical position of the tribe has yet been offered by our opponents. That leads to the point that we have heard no argument about the source of this asserted right. That source can only come from one of four sources: aboriginal right, the treaty right of 1864, the 1906 cession agreement, or some other contemporaneous Act of Congress which regranted to the tribe the authority to hunt and fish as it had before on the ceded land, and in fact none of those first three sources is conceivably the source, and therefore we must look to the fourth. Justice Stevens asked our worthy opponents for authority for their proposition, a point, I believe, echoed by Justice White. Indeed, the authority cited is quite contrary. The Blackfoot treaty which was cited as an example, as counsel explained to this Court, where the cession agreement explicitly reserved hunting and fishing rights on the ceded land until such time as they were open to the public. The Winans case is a case where a treaty explicitly reserved off-reservation rights. The Antoine case is a case in which the cession agreement explicitly reserved rights to hunt and fish on the ceded land, and in fact on Page 28, Footnote 5 of our brief, we cite authority to the proposition that when Congress wanted to reserve rights on ceded land, the normal practice was for the Congress of the United States to say so, and it did. Justice Stevens in his colloquy with opposing counsel asked about the opposing interests of the state in the varieties of fish, game, and other wildlife management. Justice Stevens, that is not in the stipulations of the parties, but in the motions to stay the District Court proceedings, the opposing views of counsel and affidavits with respect to the various practices are included in the record, and that may serve to answer your question there if that is a residual issue. The point that the state raises is that the normal practice if something is other than a complete sale and cession and giving up of all rights in a cession agreement is for the Congress to have said so. The Congress knew how to say so. The Congressional language is clear and undeniable, and yet the tribe shrinks in horror at the notion that with respect to land which is admittedly no longer in tribal domain but in the public domain, that the same rules, the same regulation to enhance wildlife and to protect the environment should apply to tribal members as well as to all the members of the public. We believe that the intention of Congress is otherwise, and that the ability of the state to regulate this land with an even hand in the interests of enhancing its wildlife resource ought to be preserved as against the theory which has no true basis in analytical consistency that we can discover. Thank you very much.
Warren E. Burger: Thank you, gentlemen. The case is submitted.


Earl Warren: Number 628, United States versus Midland-Ross Inc. Mr. Goodman.
Frank I. Goodman: Mr. Chief Justice may it please the Court. This case presents essentially the same issue as the last case. The respondent here is an Industrial Corporation which in 1952, 1953, and 1954 advanced large sums of money to financial institutions such as the Commercial Credit Company and CIT in exchange for notes of those Institutions. The notes, 13 in number were all payable in less than a year. While they did not in terms provide for the payment of interest, all were issued at a discount, usually, between 2.0% and 2.5%, on an annual basis, the notes were typically in face amounts of $1 million or $2 million. In each instance, the respondents sold the note to a bank a few days prior to its maturity, realizing a total gain of about $280,000, all of which was attributable to the discount at which they were originally issued. Taxpayer reported this gain on its tax returns as capital gain. Commission had determined however, that the excess of the face amount of the notes over the amount at which they were issued represented interest, and since the notes were also within the taxable year, he treated the entire gain realized on the sale of the notes as ordinary income. Now, I should note parenthetically here that Midland-Ross, like Dixon and the lot like the Dixon, petitioners in the last case, were on the accrual basis and therefore, logically, they should have been required to accrue the interest as it was earned prior to the sales, but since -- and irrespective of whether the notes were sold or not. But since in this case, the notes were all in fact sold within the tax year, the result is exactly the same whether you treat them as having accrued the interest as it was earned or simply as having realized the interest upon the sale of the notes. The respondent paid the resulting deficiencies and brought suit for refund. The District Court held that the gain was all capital gain and the Sixth Circuit affirmed per curiam, citing its earlier decision on the Caulkins case. Here as in Dixon, the taxpayer does not seriously dispute the fact that discount and stated interested are in substance identical. The taxpayer argues though that Congress intended that it nonetheless to be treated differently. The argument I think goes something like this. Prior to 1954, it was the practice of the Internal Revenue Service to treat original issued discount differently from interest and to treat it as a capital item upon the sale of the notes. That this practice was confirmed by a 1927 decision of the Board of Tax Appeal, and was impliedly ratified by Congress through its failure to enact a general statute authorizing equality of treatment or the same treatment for interest and discount and we think that this presents a holy misleading picture of the pre-1954 law. But before getting to that, I’d like to point out preliminarily, within view of the admittedly irrational results for which the respondent contends, it would require nothing less than the clearest statutory or judicial authority to justify that result. Prior to 1954, apart from the Caulkins case which I’ve already discussed, there was no decision by this Court, by any Court of Appeals or even by any Federal District Court which even dealt with the treatment of original issue discount on the lender’s side and as I’ve suggested, all of the cases on the borrower’s side treated it as interest, most of them. There are to be sure a number of administrative rulings and decisions for the Board of Tax Appeal on the treatment of discount on the lender’s side, but these are aligned on both sides of the question, some of them treating discount as interest, others treating it differently. The fact to the matter is, that prior to 1954 when Congress provided a solution for the matter, there simply was no general rule, no general administrative practice as to the treatment of original issue discount. At most, there were a number of special rules and special practices dealing with particular types of taxpayers, particular types of securities and particular aspects of the tax treatment. One commentator writing in 1940 in the North Carolina Law Review, summarized the situation as it existed then in the following terms. “Present federal practices involve on the surface at least a welter of theoretical inconsistencies. Both administrators and judges have contributed to the State of Affairs and neither the Administrators nor the Board of Tax Appeals, nor the Federal Courts have ever undertaken a complete analysis of all these inconsistent practices in an attempt to show if or how they can be justified in relation to each other.” So I don’t think it accurate to say that it was the Commissioner’s position prior to 1954 that original issue discount was a capital item to be differentiated from interest. Now, a detailed analysis of this rather complicated history doesn’t lend itself very well to oral argument and we discuss it I think fully in our brief. I would like to summarize those, some of the principle strands on the tapestry. First of all as I’ve indicated, the cases almost from the beginning held that original issue discount was deductible as interest by the borrower, the issuer. Secondly, in the case of tax exempt state and municipal securities, it was recognized again almost from the very beginning that discount at which these exempt securities were issued would tantamount to interest and therefore, it too was made tax exempt. This was not the result of statute I might underscore as it sometimes suggested, there was no federal statute dealing with the treatment of original issue discount on state and municipal securities. The same solution was adopted by statute, however, with respect to Federal Treasury notes as early as 1929, the statute providing that the discount at which these non-interest bearing notes were issued should be considered as interest. Even after that statutory exemption was removed, moreover, the Administrator continued to apply the principle that discounts was the same as interest with respect to these securities, because they issued a ruling requiring that this discount now be treated as taxable interest and amortized as such by the lending. Thirdly, the rule with respect to bond discount was that discount was equivalent to interest and was to be treated as such. That is, when a bond -- when a bank – excuse me, I said bond discount, I meant bank discount. When a bank lends money by purchasing the short-term of non-interest bearing note of a borrower, say he purchases for a $100, a $106 note from the borrower, that $6 increment has always been treated by the Commissioner as equivalent of interest and the bank has been required to accrue it as an interest if it was on the accrual basis. Now I think this is significant because the kind of short-term non-interest bearing notes which was the subject of the rulings on bank discount are very, very similar in character to the short-term non-interest bearing notes involved in this case.
Potter Stewart: Now in the example you just gave, the bank, what -- what’s the rule if the bank is not on the accrual basis?
Frank I. Goodman: If the bank is not on the accrual basis then, as any other cash basis taxpayers, it’s not required to account for the interest as it is earned over the life of the security, but (Voice Overlap) --
Potter Stewart: In the -- any year of the material note --
Frank I. Goodman: Only on the year of sale. Now in the case of a bank, the increment will of course would be treated as ordinary income because the bank is in business buying and selling --
Potter Stewart: Right.
Frank I. Goodman: -- these items.
Potter Stewart: Right.
Frank I. Goodman: There would be no question about that in any event, but that wasn’t the reason for the rulings. It’s quite clear if you read it, the 1925 ruling which is referred to and I think quoted in our brief, is simply that is an economic matter, interest and discount would be the same (Voice Overlap) -- nothing is said about the bank’s paying in business.
Potter Stewart: That reason is clear I suppose but nonetheless as you say it, it’s like a person -- the real estate dealer, he doesn’t get the ordinary event because it’s a capital gains available of a case and also as a real estate.
Frank I. Goodman: That’s right, but the ruling didn’t pertain to the treatment of the sale of a notes, whether it would be capital gain or ordinary income. It pertains to whether or not it has to be amortized. And on that question the Court said, this is the interest and like interest, it should be accrued. Now there is authority that the Commissioner took a different view, there is some evidence that the Commissioner took a different view as to bond discount. A 1920 ruling cited by Midland-Ross and also a 1927 decision of the Board of Tax Appeal held that bond discount was not required to be accrued by the lender even though it was accruable by the issuer. It’s not entirely clear from those holdings whether the Commissioner or whether the Board of Tax Appeals had in mind original issue discount or only market discount, which of course would be the most prevalent form of discount on corporate bonds. It’s also I would note, neither of these authorities says anything about question of capital gain or ordinary income upon the sale or redemption of the bond. So, that there was a differentiation in treatment apparently between the discount on corporate bonds and the discount on short-term non-interest-bearing notes. I don’t think it’s fair to say that the rule with respect to corporate bonds was the general rule, while all of the other strands of treatment that I’ve discussed represented some sort of out of the way exceptions. There simply was no general rule and if anything, the type of securities involved in the present case are much closer to the short-term notes involving the bank holding and the bank rulings than they are to corporate bonds. There is I think an explanation for the differentiation of treatment between bonds and other forms of securities, or at least between interest-bearing and short -- and the non-interest-bearing securities. Corporate bonds are typically interest-bearing in character, the discount or premium element usually is very, very small. It’s not intended as a substitute for the whole of the interest as it was in this case. Usually, it represents a last-minute adjustment to conditions on the market place on the date of issue. A second feature of bonds is the fact that they are relevantly long-term in character or long-term and therefore, change hands frequently on the marketplace before their redemption. Now, a number of implications flow from these distinctions between bonds and short-term non-interest-bearing securities such as, have been held to give rise to interest, the discount element has been held equal to interest. In the first place, since the discount is very small usually in the case of corporate bond, it may have been thought that it just wasn’t worth bothering about, it wasn’t worth requiring the burdens and computations in order to account for it as interest. It may also have been thought, that because the banks -- because the bonds change hands frequently during their life, it was unduly burdensome to require each successive holder to ascertain what the original discounts have been and to account for it. These problems didn’t arise in the case of short-term notes which bore no interest. Also, I think it quite probable that the equivalence, the economic equivalence of interest and discount was much more obvious in the case of non-interest-bearing notes than it was in the case of interest-bearing bonds which did carry a stated rate of interest and where you had to say that wasn’t the real interest. What they said was the interest, wasn’t the real interest because of the discounted premium element. I think that this goes far towards explaining also the differentiation of treatment between premium and discount. Premium is invariably associated with interest-bearing securities and the fact that the Court has been reluctant to say that the nominal interest rate wasn’t the real interest rate, doesn’t necessarily mean that it would have been -- but it would have said where you had a completely non-interest-bearing security, this security has no interest at all.
Potter Stewart: Do you really think that these differentiations are explainable just in terms of the inability to get beyond the forced rate of interest because this is certainly, it doesn’t take much sophistication? I don’t know but (Voice Overlap) --
Frank I. Goodman: I agree --
Potter Stewart: -- rate of interest.
Frank I. Goodman: I’m afraid I can’t thing of any rational explanation to the differentiation treatment, and this is a pragmatic explanation which I think makes some sense in terms of a practical --
Potter Stewart: Of somebody in the second grade, it makes some sense?
Frank I. Goodman: Well, the inability to recognize bond discount for what it was namely an additional interest paid to the lender does reflect I think considerable degree of naive test, but giving way to the pragmatic considerations to which I referred, the difficulty of making the computation from the case where a discount was small in relation to the stated interest and the difficulty of requiring subsequent holders of the bonds to make these computations, I think might well have the -- it might justify (Voice Overlap) the differentiation, it might well have explained.
Potter Stewart: Unwillingness to impose this so much burden of computation on something at this -- probably --
Frank I. Goodman: Right.
Potter Stewart: -- the matters in many cases.
Frank I. Goodman: Well I think that is the most satisfactory explanation, but what I do suggest is that no one could ever have thought that corporate bonds issued without interest, 4% or 5% corporate bonds issued without stated interest but at a discount could yield the lender a capital gain treatment because if that were true, no other kind of bonds would ever have been issued. A bond with a stated rate of interest which gave rise to ordinary income upon its sale or redemption, simply couldn’t have competed in the marketplace with funds issued at a discount which conferred this tax bonanza upon the lender. If I might, I’d like to reserve the balance of my time --
Potter Stewart: Can I ask you just a question now? What business was this respondent in?
Frank I. Goodman: In our case?
Potter Stewart: Yes, that's right, in this case.
Frank I. Goodman: It was an industrial corporation, I frankly -- I forgotten --
Potter Stewart: It wasn't in the business of buying and selling.
Frank I. Goodman: No, it was not and as far as the record shows this is the only time that has happened.
Potter Stewart: I see.
Byron R. White: [Inaudible] it’s the same settle I think.
Frank I. Goodman: Yes. We make no differentiation based upon accrual basis or cash basis or anything like that.
Earl Warren: Mr. Colborn.
Theodore R. Colborn: May it please the Court. Mr. Goodman has very reasonably stated the facts of the Midland-Ross case quite fully. In response to the last question I would like to point out that the excelled taxpayer here was Industrial Rayon Corporation which subsequently was merged into Midland-Ross. It had accumulated very large funds for the purpose of building a new synthetic plant if it could figure out how to design something better than DuPont. And during the period of 1952, 1953 and 1954, they was investing these dollar funds in whatever fairly liquid and assured investments would yield at the largest return for its stockholders. And the notes in question, whereas Mr. Goodman said, mostly $1 million and $2 million notes issued by General Motors Acceptance Corporation and CIT for specific numbers of days which were picked out as a matter of negotiation between the treasurer of Industrial Rayon and the treasurer of these borrowing companies to best suit their convenience as to just when the money should first go from Industrial to GMAC and then come back. The maturities were 67 days, 209 days, 267 days up to a maximum of 325 days. And the price for the notes was negotiated having in mind what the going interest rate would be eligible. The money had been loaned on a interest rate instead of being used to purchase these discount notes, but then was negotiated into an exact dollar and cents price which Industrial paid to GMAC or CIT for the million-dollar note. Judge Kalbfleisch in the District Court wrote a very long and very careful opinion in this case including that despite the fact that this type of profit is similar to interest, it was not what Congress intended to be treated as interest, but rather was what Congress intended to be treated as capital gain. In fact, it was stipulated in the record in the case that the taxpayer here had sold capital assets resulting in a gain and this is quite exactly what Section 117 and Section 111 of the 1939 Internal Revenue Code which applies said should be capital gain. The government as we’re now hearing as taking the view now that although the treatment of this type of discount prior to 1954 has not been clear in the rulings, it should now be considered that this discount was interest as Mr. Goodman just said for the first time in all of his proceeding very clearly, that Industrial Rayon Corporation should have accrued the discount on these notes on a daily basis. This has never been suggested in the earlier consideration in these matters. The proposition was that when the bonds were sold that that gain, was not entitled to capital gains treatment, but if the interest is being accrued as you go along if there had been interest on it, there wouldn’t be any gain because if the view is that that this discount must be accrued as income day-by-day and month-by-month since it isn’t received in cash, it must be added to the basis of the property although there’s nothing in the statute that says you can add it to the basis of property and if you do add it to the basis of the property, by the time Industrial Rayon sold these notes, its cost to which would be added this theoretical interest which had never got but equal to what it gotten and would have had no gain.
Potter Stewart: If the whole transaction were within one taxable year, there wouldn’t be any practical difference from the government's point, if the government is right, would there be?
Theodore R. Colborn: In most cases, Mr. Justice Stewart not, but in certain unusual situations, the difference whether something comes in as interest income on an accrual basis or instead comes in from the gain of sale of a property which is not a capital asset does make a difference and to me, it’s extremely important in revealing that when Congress did legislate about this, that it had – as we all know many, many opportunities to legislate prior to 1954 and when it did, it did not say that this discount should be treated as interest. It did not say that the discount should be accrued. It said exactly the contrary. It said that when there is a gain from the sale of a discount obligation, a part of that gain equal to this calculated original issue discount shall be treated as gain from the sale of property which is not a capital asset, which bears very little similarity in its reasoning, no similarity on its reasoning to what the government is now arguing. Actually, Mr. Goodman has very fairly in general recognized that there were rulings in many different fields here. He has failed to mention that the most direct rulings, which though not published were widely known by businessmen and tax practitioners, the private rulings such as the two that are cited at the very end of our brief which did deal with bankers' acceptances and bills of almost exactly the nature that are here and in which the Internal Revenue Service made it very clear in 1952 that they did not consider that the discount was the same as interest and in fact, recognized that upon the sale of such bills, there would be gain which would be created, presumably as capital gain. Now --
Byron R. White: How do you distinguish between -- or do you between the discount and premium?
Theodore R. Colborn: Certainly in the proper treatment of it, I can see no reason for distinguishing the -- this Court in the --
Byron R. White: Well the service in these two rulings -- when were they issued, that you said you mentioned at the end of your brief, when were they issued?
Theodore R. Colborn: 1952, Sir.
Byron R. White: So, they were treating discount as a capital item whereas premium in at least many circumstances that that were being treated under the 42 statute as an income item. How about your -- they must --
Theodore R. Colborn: Forgive me Mr. Justice White. I don’t consider that the fact that the taxpayer has expressly given the right to write off by way of amortization of the premium in any normal sense, it would cause it to be referred to as an income item. It remains a capital item. The normal -- the most usual capital item perhaps is when a businessman pays a million dollars for a manufacturing plant and then he is permitted to write that off by way of depreciation over the life of the plant and this is to me exactly the theory in which in 1942, Congress for the first time said that this premium paid by an investor for a bond, which had previously been considered for all purposes as the capital item could be written off over its life not converting it into an income item but permitting it to have a proper effect upon its overall income.
Byron R. White: Now, what about the lender, the buyer who pays the premium?
Theodore R. Colborn: Well, the buyer of the bond or the lender of money who takes a note and receives a premium is making an investment, which he -- has denied by this Court in the earlier years, the right to apply in reduction of its interest income, Congress came along and said that you should be if the proper election is made, permitted to write it off over its life. If he doesn’t write it off over its life, or if we were talking about a period before Congress did act in 1942, when he sold it, it would have a capital loss.
Byron R. White: Well you say if -- what you’re -- you’re saying then that there really was no difference in treating the discounted premium say in 1952 when these rulings were issued?
Theodore R. Colborn: This is substantially right in 1952 and --
Byron R. White: Well do they accept the law was changed on discount in the 1954 Act of – that they are now treated differently?
Theodore R. Colborn: Well, there is a difference for example in the case of a non-registered bond without coupons as to which for a brief period there was no amortization of the premium allowed. That has since been changed, so that in most circumstances at the present time, there has developed a general consistency of treatment. I think it maybe worthwhile only very briefly to refer to the situation in 1929 when in the sense this matter of discount came -- first came firstly to Congress’ attention and I think Congress made very clear that they did intend discount of this sort to be treated as a capital item. The Treasury Department in the Spring of 1929 indicated very strongly to Congress that it wanted the authority to issue discount bills of this sort very much like we are here talking about in this case except they were to be issued by the United States government instead of by General Motors Acceptance Corporation. They -- Ogden Mills, the Undersecretary of the Treasury emphasized that from a financial market standpoint, this would be a different sort of thing which would permit the government to handle its financing in some ways more efficiently and therefore, better than to the ordinary interest-bearing certificates. And, the Treasury Department proposed that as a statutory matter, since the statute already provided that interest on interest-bearing certificate should be exempt from tax, it should put in further language that the gain from the sale or other disposition of the discount obligations should also be exempt from tax. And advise the Senate Finance Committee, as Senator Cousins and other senators said in the debate that this is because the -- when the gain was realized, this would be treated as gain under the existing practice gained from the sale and that some special language needed to cover the -- our brief said, I’m afraid much -- too much of trying to analyze the details that debate -- our appendix to our brief has 20 pages of it and all I think worth adding is that I think any careful reading either of the statements specifically by Senator Smoot and Senator Cousins and Senator Reid separately, or a continuous reading of all of it inevitably indicates that the senators did consider that although the effect of this discount was very much the same as interest, it would not be treated the same under established tax practices and the general provisions of the Revenue Acts. So, they put in the explicit provision that discount on this Treasury bills shall be considered interest, which as Mr. Goodman said is a foundation for the many government rulings, Internal Revenue Service rulings as the treatment -- as a treatment of Treasury bills. Perhaps even more dramatically demonstrating what -- that Congress recognized that under the general provisions, discount on corporate notes would be capitaliting -- it is their special provision for treating such discount differently in certain special cases. Each of the briefs discusses of the treatment that Congress provided under the 1939 Code for insurance companies and this special treatment explicitly said that in the case of certain specified types of insurance companies, premium on bonds and discount should both be amortized by the insurance company and the Treasury Department’s regulations under these sections expressly recognized that this was a different treatment from taxpayers generally. Now this meant -- this provision was continued into the 1954 Code and this meant that as to these particular taxpayers, these insurance companies, Section 1232, which treated generally whether original issue discount had no application because as I have indicated before, if you are accruing the discount as you go along, you never get to Section 1232. Just last year, Congress indicated again the same understanding of these principles when it decided that as to certain of the insurance companies, they should change the treatment and make -- and have their handling of discount bonds the same as corporations generally. So, they said expressly. In Revised Code Section 820 (d), that this provision requiring the amortization into income of the discount should not apply to bonds issued after 1962 and said in the Committee report, “This provision has the effect of postponing until disposition of the bond, any recognition of income attributable to bond discount”, at which time, the provisions of Section of 1232 maybe applicable. Thus, Congress is recognizing that where Section 1232 is applicable, the idea of accruing the discount as though where interest is not appropriate. The same treatment was clearly recognized as to Congress’ point of view or thought it -- of what it thought it had provided when in 1938, the sub-committee in its brief report that's set forth at page 11 of our appendix, indicated that the capital gains tax generally should not be removed because among other difficulties, this would permit some sort of avoidance by taxpayers who would, instead of taking interest-bearing obligations, on which they would pay an ordinary tax, would take discount obligations on which they would pay no tax because the discount was a gain item and the sub-committee said, “We shouldn’t do that.” Now, the sub-committee clearly thought that there was an advantage in leaving the capital gain tax on the discount obligations to avoid an incentive to taxpayers, to avoid tax by converting their debt into that type of instrument, but they indicated very clearly that they were not concerned that taxpayers might perhaps setup their obligations, their loans in that fashion in order to get a capital gain treatment instead of an ordinary income treatment. Congress recognized in 1938 that there would be the capital gain treatment from this and we’re not concerned about it. When -- in 1954, they did become concerned let us say, that this type of income which was similar to interest was being taxed as capital gain instead of ordinary income, they went to great length and details in Section 1232 in providing just under what circumstances the discount should be treated otherwise in this capital gain. This was limited as has been noted to situations where the issuer was a corporation or a governmental body rather than an individual. My -- our only guess really as to the reason for that is the historical one that way back before the income tax was adopted there had been an issue tax on certain types of corporate obligations and that some of these statutes in 1942, the provision for permitting amortizing of bond premium and then again in 1954, they have followed the pattern of that -- of the type of obligations that were originally subject to that tax and they broadened it somewhat, but have not extended it to individuals and I suppose where the general feeling that there are relatively few such individual obligations. It's further limited to such obligations held only six months, it’s specifically recognizes the situation that was discussed earlier that the discount may not be big enough to bother with and Congress certainly has the right to say that despite the logic of it, we’ll give one treatment if the discount is only a quarter of a percent per year and another if it’s more than that. But I do not believe that in construing the 1939 Code, where there was not any statutory provision, it would be sensible for the Internal Revenue Service to say, we’ll treat a big discount as ordinary income and required to be accrued but we won’t require our little discount to be accrued because it isn’t worth bothering with, that sort of decision is Congress’. We pointed out the method that Congress adopted was entirely different from the government’s present proposal. Mr. Justice Stewart specifically asked about a case where there was a change in the discount rate so that someone having a -- let us say, a $103 note that they’d paid a hundred dollars for, just before it was ready to accrue could only sell it for, say a $102 and Mr. Goodman answered that in that situation, there would be ordinary income of $2.97 and a capital loss. Now, Section 1232 doesn’t say that, it says very clearly that to the extent there was a gains to what -- $2, that much gain will be taxable if it is not more than the computed original issue discount. So the computed original issue discount might be $2.95, but the gain is only $2, only that is taxable and there is no capital loss in such a situation. When Congress got around to taking care of what can well be considered a logical problem, they studied it and they did it in detail and they did it by methods which it’s not practical for the Internal Revenue Service to try and work out for transactions that took place many years ago. Now, a number of questions both yesterday and today have been directed at whether we were talking about discount or yield, they -- this Court in the earlier cases has talked about the effective rate of interest or the effective rate of return which was as this Court said in accounting term, which had the same significance as yield. But each time it has come up, this Court has held that that is not what the tax law is following, that in construing the tax law, it must follow the usual meaning of the words as the Court pointed out in the Old Colony Railroad case which discussed bond premium. Mr. Goodman has referred to the Old Colony case in which this Court held that premium that was paid does not affect the real interest to be taken into account for tax purposes although it does affect the yield or the effective rate of return, Mr. Goodman considered that a criticized case. Actually it’s been cited a number of times including many citations by the government in some of the litigation. This matter, it’s been criticized by economist let us say, who say that it may not be making theoretical economic sense to talk about an interest rate without also carrying in mind the arithmetic of the premium of the discount and accountants who have to certify the financial statements for accounting purposes wanted, adjusted and treated differently. But, this is not at all to say that this Court was wrong that in saying when Congress used the words interest, that Congress talked about what the cost of a bond that had been purchased that the premium was, Congress was using those words in their ordinary sense and not in the theoretical accounting sense. It was after this Court had held that premium should not be adjusted for as though it were part of the interest that Congress for the first time in 1942 provided by amending the 1939 Code as we have said, that if the investor and corporate bond as that he purchased at a premium, wish to, he could write that off affecting his net income although not directly affecting his interest income and when they did it, they did it by very express language and led a number of conditions put on. But it was not until 1954 that Congress determined to apply that same principle or a similar principle to discount by enacting as it did in Section 1232. Now, the bond premium amortization sections have come before this Court twice since Congress put them in, and in each case as I read them, the Rail case in 339 U.S. and the Hanover Bank case in 369 U.S., they’re cited in all of our briefs, this Court simply tried to find out what Congress meant when it referred to bond premium when it referred to the premium at which the taxpayer had purchased a bond rather than at an economic analysis to find out what an economist would say, the effective rate of interest was. In the Carell case, it was very clear that the premium which the taxpayer was allowed to amortize under this section had almost nothing to do with interest. It was largely attributable that the right to convert the bond in the common stock of American Telephone and Telegraph Company and this Court said that since Congress said a premium paid for a bond can be written off, then it could be written off and it wasn’t up to the Internal Revenue Service to say that, “Well, this didn’t effect to rate of interest and therefore it shouldn’t be written off.” Similarly in the Hanover Bank case, Congress had said that the premium that was paid could be written off over the period from the time the bond was purchased until the earliest date at which it might be called and this resulted on the peculiar facts of that case because they were utility bonds that were callable but nobody expected them to be called. If you wrote the premium off over the period in which theoretically they might be called, if you ended up with I think a negative interest. You ended up with a investor taking in certain interest in the income, but taking a ride off which is considerably more than that. Certainly not reflecting the real yield or the effective rate of interest, but this Court said that this is what Congress provided and it should be a vow. Actually, what Mr. Chief Justice Warren said in that Hanover Bank case in the very conclusion, I think is very appropriate to this case as to what the decision of this Court should be when the government is now urging that in construing the old 1939 Code, we now apply these economic theories rather than what Congress said should be done. The Court said in that case, “Nevertheless, the government urges this Court to do what the legislative branch of the government failed to do or elected not to do.” This of course is not within our province. I thank Your Honors.