68 T.C. 15">*16 Respondent has determined the following deficiencies in petitioner's Federal income taxes:

1977 U.S. Tax Ct. LEXIS 124">*127 There are two issues for our decision: (1) Whether petitioner, the estate of a deceased, unrestricted Osage Indian, should be taxed on income from its headright shares of the Osage tribal mineral trust; and (2) whether a certain portion of the interest element of a refund of taxes paid by the estate of decedent's mother, of which decedent was the sole residuary beneficiary, is includable in petitioner's gross income pursuant to sections 61 and 451. ¹

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Jacqueline E. Shelton (decedent) died on May 17, 1967, a resident of Wyandotte County, Kans. Donald C. Little (Little) and Johnnie Mohon (Mohon) qualified as coexecutors of 68 T.C. 15">*17 decedent's estate in the domiciliary probate proceedings in Kansas and ancillary proceedings in Oklahoma and Colorado. At the time of filing the petition herein, Little was a resident of Wyandotte County, Kans., and Mohon1977 U.S. Tax Ct. LEXIS 124">*128 was a resident of Pawhuska, Okla. Little and Mohon filed U. S. Fiduciary Income Tax Returns (Form 1041) on behalf of petitioner for the taxable years 1968, 1969, and 1970 with the Internal Revenue Service Center, Austin, Tex.

Decedent was the daughter of Mary Jacqueline Elkins (Elkins) who died testate on June 8, 1932. Elkins died a restricted Indian of the Osage tribe because she had never received a certificate of competency.

As of the date of her death, decedent owned 10.77837 shares in the Osage tribal mineral trust (headrights). Decedent had inherited 8.5 Osage headrights from her mother and she purchased an additional 2.27837 Osage headrights through the Osage Indian Agency (agency) at Pawhuska, Okla.

Decedent was an unrestricted Osage Indian at the time of her death because she had received a certificate of competency on September 29, 1950.

Under the Osage tribal mineral trust, the agency receives the gross mineral royalties from leases of the tribe's mineral interests, deducts administrative expenses for management purposes and for operation of the Osage Tribal Council, and then divides the balance according to the various headright interests. Unrestricted 1977 U.S. Tax Ct. LEXIS 124">*129 Osage Indians receive the full amount allocated to their account on a quarterly basis since the agency has no authority to withhold any part of a quarterly headright payment from an unrestricted Osage Indian. Under certain circumstances, the agency can revoke a certificate of competency.

No Osage, whether restricted or unrestricted, may sell his headright, but any Osage may by will devise his headrights to a non-Indian whether or not related by blood, marriage, or adoption, and an Osage may purchase headright shares from a non-Osage who has inherited such shares.

68 T.C. 15">*18 During the taxable years 1968, 1969, and 1970, the agency reported to the coexecutors that headright income had been paid to petitioner in the following amounts:

On the Federal income tax returns which the coexecutors filed on behalf of petitioner for the taxable years 1968 and 1969, they included, in gross income, the headright income received in those years. On November 19, 1970, however, the coexecutors filed a refund claim (Form 843) requesting the repayment of all income taxes paid on behalf of petitioner for the taxable year 1968 on the theory that1977 U.S. Tax Ct. LEXIS 124">*130 the headright income which they had included in gross income for 1968 was not taxable. Petitioner's 1968 taxes were refunded with interest on February 17, 1971, and mailed directly to the Kansas domiciliary coexecutors. On May 20, 1971, the coexecutors filed an amended Federal income tax return on behalf of petitioner for the taxable year 1969. Such amended return for 1969, as well as the return filed for the taxable year 1970, did not include headright income in petitioner's gross income for those years. ² In his statutory notice, respondent included such headright income in gross income for the years in question.

The superintendent of the agency and the executor of the estate of Mary Jacqueline Elkins, deceased (Elkins estate), filed a Federal estate tax return on which an assessment of $ 75,638.85 was made in April 1936.

In 1943, the United States Tax Court entered a stipulated decision that the total estate tax liability of the Elkins estate was $ 63,563.38 of which $ 330.19 had been paid, resulting in a deficiency of $ 63,233.19.

68 T.C. 15">*19 In March 1943, the superintendent of the agency paid under protest $ 69,408.82. Of such amount, $ 63,233.19 represented payment of the additional tax and $ 6,175.63 represented payment of interest thereon.

In 1969, there was a change in the position of the Internal Revenue Service (Service) regarding the Federal estate taxation of restricted Osage Indians and the Service announced that it would accept refund claims from those estates of restricted Indians which were affected by such change of position, regardless of when the Indians had died or when the estate tax returns for their estate had been filed. In September 1969, the agency filed a claim for refund of the estate tax paid on behalf of the Elkins estate.

In January 1970, the Internal1977 U.S. Tax Ct. LEXIS 124">*132 Revenue Service paid $ 150,241.96 to the agency as a refund of Federal estate taxes paid on behalf of the Elkins estate. Of such amount, $ 57,663.54 was allocated to principal and $ 92,578.42 to interest. The full amount of such refund was credited by the agency to the Elkins estate's account on January 12, 1970. Decedent was the sole residuary beneficiary under the will of Elkins, her mother. In a letter dated March 17, 1970, the superintendent of the agency advised petitioner's coexecutors that, upon receipt of an additional coexecutors' bond, the agency would disburse the Elkins estate's tax refund to them as coexecutors of decedent's Oklahoma ancillary probate estate. Little protested payment of the refund through the Oklahoma probate proceeding and asserted that it should be paid through the Kansas domiciliary proceeding.

On August 29, 1969, the law firms of Wilkinson, Cragun & Barker (Wilkinson) and Files & Mahan (Files) applied to the Secretary of the Interior for payment of legal fees for services rendered in obtaining Federal estate tax refunds paid to Osage Indians, including the refund to the Elkins estate, even though some of the beneficiaries of such refunds, such1977 U.S. Tax Ct. LEXIS 124">*133 as petitioner, had not entered into contracts with these firms. The Secretary rejected the claims of the Wilkinson and Files firms and these firms subsequently informed the Secretary that they intended to seek a judicial determination of their entitlement to such fees.

Pending the outcome of such suit, the superintendent of the agency withheld 20 percent of the Elkins estate's tax refund.

68 T.C. 15">*20 On August 13, 1974, pursuant to the judgment entered in the suit brought by Wilkinson and Files, the agency paid to these firms $ 378,457.72. The Elkins estate was charged $ 30,048.39 of this amount allocated to principal and $ 9,699.52 allocated to interest.

A certified copy of the additional coexecutors' bond, which the agency required prior to payment of the refund to petitioner's coexecutors, was mailed to the agency in May 1974. It is stipulated that on October 10, 1974, a check in the amount of $ 160,713.50, ³ representing the funds held by the agency arising out of the Elkins estate's tax refund, was issued to Little and Mohon as petitioner's Kansas coexecutors, pursuant to the November 27, 1973, order of the District Court of Osage County, Okla.

1977 U.S. Tax Ct. LEXIS 124">*134 In his statutory notice, respondent increased petitioner's taxable income for 1970 by $ 92,578.42, as representing the taxable interest element of the Elkins estate's tax refund which petitioner had not reported, on the theory that petitioner constructively received such refund in 1970. However, respondent concedes in his brief that the ratable portion of the refund allocable to interest (which was withheld by the agency pending judgment in the Wilkinson and Files suit) was not constructively received and reduces his prayer the requisite amount. Respondent computes this reduction as being $ 18,509.81, but we find the proper figure to be $ 18,515.68.

OPINION

Petitioner contends that the income which it received from Osage headright shares during the taxable years 1968, 1969, and 1970 ⁴1977 U.S. Tax Ct. LEXIS 124">*135 is not properly includable in its gross income pursuant to section 61. ⁵ Petitioner asserts that the Osage 68 T.C. 15">*21 Allotment Act of June 28, 1906, ch. 3572, 34 Stat. 539 (hereinafter Osage Allotment Act), as in effect during the years in issue, ⁶ exempts petitioner's headright income from the Federal income tax. We disagree.

It is fundamental that Indians are citizens and are liable1977 U.S. Tax Ct. LEXIS 124">*136 for the payment of Federal income taxes unless applicable treaties or remedial legislation provide an exemption. Squire v. Capoeman, 351 U.S. 1">351 U.S. 1 (1956). While the general rule requires tax exemptions to be clearly expressed, statutes affecting Indians are liberally construed, with all doubtful expressions resolved in their favor. 351 U.S. 1">Squire v. Capoeman, supra;Big Eagle v. United States, 300 F.2d 765">300 F.2d 765. (Ct. Cl. 1962).

Prior to the passage of the Osage Allotment Act, ⁷ the Osage reservation, consisting of approximately 1 1/2 million acres of land with underlying valuable minerals, was held by the United States in trust for the Osage tribe. The Osage Allotment Act was designed to gradually emancipate the Osages. 300 F.2d 765">Big Eagle v. United States, supra at 768. Section 2 of this Act allowed each Osage to select three 160-acre tracts and the land remaining after such selection process was concluded was to be divided equally among the tribal members. Each 68 T.C. 15">*22 member was allowed to designate one of the three 160-acre tracts as a "homestead" to be "inalienable and nontaxable1977 U.S. Tax Ct. LEXIS 124">*137 until otherwise provided by Act of Congress." 34 Stat. 541. The remaining land allotted to each Osage was known as "surplus" land which was to be inalienable for 25 years and nontaxable for 3 years except that it would become taxable earlier upon the issuance of a certificate of competency or upon the death of the allottee. Section 3 of the Osage Allotment Act reserved the minerals underlying all of the lands to the Osage tribe for a period of 25 years (since extended indefinitely, Act of Oct. 6, 1964, Pub. L. 88-632, 78 Stat. 1008), at the end of which the minerals underlying the allotted lands will become the property of the individual owner of such land. Section 4 of the Osage Allotment Act provided that the roylaties from leases of the mineral interests be placed in trust by the United States for the Osages and each tribal member was granted a 1/2,229th share, or headright, of the distributable income from the minerals. Such mineral trust was extended to January 1, 1984, by the Act of June 24, 1938, ch. 645, 52 Stat. 1034 (hereinafter 1938 amendment). Section 4 of the Osage Allotment Act also provided that such mineral royalties, and certain other trust income, should be 1977 U.S. Tax Ct. LEXIS 124">*138 allocated on a pro rata basis and paid quarterly to the headright owners except in the case of minors. However, this provision was subsequently modified so that the Secretary of the Interior was given authority to withhold a portion of such quarterly payments to those tribe members who had not received a certificate of competency, but the Secretary was not authorized to withhold any portion of those payments due to unrestricted Osages. Act of Feb. 27, 1925, ch. 359, 43 Stat. 1008 (hereinafter 1925 amendment).

Paragraph 7 of section 2 of the Osage Allotment Act provided for the issuance of certificates of competency which authorized the holder to alienate any of the lands deeded to him under the Act, except for the homestead, 1977 U.S. Tax Ct. LEXIS 124">*139 which remained inalienable for a limited period, and the mineral interests. Subsequently, the Act of Feb. 5, 1948, ch. 46, 62 Stat. 18 (hereinafter 1948 amendment), provided that all restrictions against alienation of property, except headright shares or 68 T.C. 15">*37 interests in the Osage tribal mineral estate, were removed upon receipt of a certificate of competency.

After carefully examining the Osage Allotment Act and the amendments to it, we have concluded that the Act, even when liberally construed in favor of petitioner, does not exempt the headright income of an unrestricted Osage Indian from Federal income taxation.

In Choteau v. Burnet, 283 U.S. 691">283 U.S. 691 (1931), the Supreme Court of the United States held that the headright income of an unrestricted Osage Indian was taxable. Respondent argues that the rationale of Choteau applies, while petitioner argues that it does not in light of the subsequent amendments to the Osage Allotment Act as well as the subsequent decisions in 351 U.S. 1">Squire v. Capoeman, supra, and 300 F.2d 765">Big Eagle v. United States, supra.

In Choteau, the Supreme Court stated (283 U.S. 691">283 U.S. at 695-696):1977 U.S. Tax Ct. LEXIS 124">*140

The petitioner, then, was competent to hold and make any use (except to grant mining leases) of all his lands. All except his homestead were taxable, and were freely alienable without control or supervision of the government. His share of the royalties from oil and gas leases was payable to him without restriction upon his use of the funds so paid. It is evident that as respects his property other than his homestead his status is not different from that of any citizen of the United States. In the process of gradually changing the relation between the Indian and the government he has been, with respect to the income in question, fully emancipated. * * * It is true, as petitioner asserts, that as to his homestead he still remains a restricted Indian. But this fact is only significant as evidencing the contrast between his qualified power of disposition of that property and his untrammeled ownership of the income in controversy. The latter was clearly beyond the control of the United States. The duty to pay it into petitioner's hands, and his power to use it after it was so paid, were absolute. * * * [Emphasis supplied.]

None of the amendments to the Osage Allotment 1977 U.S. Tax Ct. LEXIS 124">*141 Act have placed any restrictions whatsoever on the use of the income received by an unrestricted Osage Indian from his headright shares. ⁸ In fact, Congress reaffirmed an unrestricted Osage Indian's "untrammeled ownership" of the headright income by passing the 1925 amendment which provided "that the Secretary of the Interior shall cause to be paid at the end of each fiscal quarter to each adult member of the Osage Tribe of 68 T.C. 15">*24 Indians in Oklahoma having a certificate of competency, his or her pro rata share" of the trust income. (Emphasis supplied.)

While petitioner relies heavily on the fact that decedent1977 U.S. Tax Ct. LEXIS 124">*142 could not sell her headrights, we do not believe that restrictions on alienation of the headrights dictate nontaxability of headright income. In Choteau, the Court stressed Choteau's "untrammeled ownership" of the income, not the underlying headrights. Moreover, "Nontaxability and restriction upon alienation are distinct things." Superintendent of Five Civilized Tribes v. Commissioner, 295 U.S. 418">295 U.S. 418, 295 U.S. 418">421 (1935). This distinction is demonstrated in the Osage Allotment Act itself which provides that the "surplus" lands be inalienable for 25 years, but nontaxable for only 3 years.

Petitioner's reliance on 351 U.S. 1">Squire v. Capoeman, supra, and 300 F.2d 765">Big Eagle v. United States, supra, is misplaced. In Squire, the Supreme Court of the United States held income received by a restricted Quinaielt Indian from the sale by the United States Government of standing timber on allotted lands was exempt from Federal income taxation pursuant to the Quinaielt Treaty, the trust patent, and the General Allotment Act of 1887, 24 Stat. 388, 25 U.S.C., sec. 331 et seq.1977 U.S. Tax Ct. LEXIS 124">*143 (hereinafter General Allotment Act). The courts below had held that imposition of a tax on income derived directly from the restricted lands would be inconsistent with the statutory provision of the General Allotment Act requiring the Government to transfer the fee to such lands "free of all charge or incumbrance whatsoever" at the end of the trust period. Although the Supreme Court agreed that "the general words 'charge or incumbrance' might well be sufficient to include taxation" (351 U.S. 1">351 U.S. at 7), it found that an amendment to the General Allotment Act gave additional force to the argument for nontaxability, since it implied that the allotment should be free of all taxes until a patent in fee was issued.

In 300 F.2d 765">Big Eagle v. United States, supra, the United States Court of Claims held that the headright income of a restricted Osage Indian was tax exempt pursuant to the Osage Allotment Act. The court implied such exemption from the Act of Mar. 2, 1929, ch. 493, sec. 1, 45 Stat. 1478, 1479 68 T.C. 15">*25 (hereinafter 1929 amendment), as well as section 3 of the 1938 amendment, both of which state --

all royalties and bonuses arising1977 U.S. Tax Ct. LEXIS 124">*144 therefrom shall belong to the Osage Tribe of Indians, and shall be disbursed to members of the Osage Tribe or their heirs or assigns as now provided by law. * * *

The court reasoned (300 F.2d 765">300 F.2d at 771) that this language obligated the United States --

to transfer at the end of the trust or declaration of competency, the lands and cash received for oil and gas undiminished by any deductions levied thereon by the guardian or trustee. If the General Allotment Act implied nontaxability when it directed that trust property be turned over to the Indian after the trust period free of ALL charges, etc., certainly the implication is just the same in the Osage Allotment Act decreeing that ALL royalties and bonuses shall be turned over. If Federal income taxes are first withheld, ALL will not be turned over to the plaintiffs. [Emphasis supplied.]

Both Squire and Big Eagle dealt with restricted Indians while decedent was unrestricted. Both cases reasoned that taxation of the income in question would conflict with "the purpose of bringing [the Indian] finally to a state of competency and independence" and would "limit or undermine the Government's 1977 U.S. Tax Ct. LEXIS 124">*145 undertaking." Squire v. Capoeman, 351 U.S. 1">351 U.S. at 10. Since decedent in the instant case had been declared competent before her death, the Government's undertaking was successfully concluded so that taxation of petitioner's headright income would no longer undermine such undertaking. It follows that the rationale of Squire and Big Eagle does not apply to the instant case.

Accordingly, we hold that the rationale of 283 U.S. 691">Choteau v. Burnet, supra, applies, ⁹ so that the headright income received by petitioner during the years in question is taxable.

Petitioner presents three theories in support of its position that the entire interest element ¹⁰ of the Elkins estate's tax refund is not includable in its gross income for the taxable year 1970. Petitioner argues (1) that if the refund generated any 1970 taxable income, such income is taxable to the Elkins estate rather than petitioner, (2) that all of the refund is excluded from petitioner's gross income as a bequest pursuant to section 102, and (3) that the refund was not constructively received by petitioner during 1970 so that no part of it is includable in gross income for that year under section 451.

Section 641 provides:

SEC. 641. IMPOSITION OF TAX.

(a) Application of Tax. -- The tax imposed 1977 U.S. Tax Ct. LEXIS 124">*147 by section 1(d) shall apply to the taxable income of estates or of any kind of property held in trust, including --

* * *

(3) income received by estates of deceased persons during the period of administration or settlement of the estate * * *