JAMES CLAY AND AUDREY OSCEOLA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 13104-11, 7870-13
UNITED STATES TAX COURT
Filed April 24, 2019
152 T.C. No. 13
In these consolidated cases Ps are members of a Native American tribe. During the years at issue the tribe operated a casino on tribal land, owned communally by all members. The tribe made regular distributions from casino revenue to each member. Ps received these distributions and did not report them as income. R determined that the distributions are taxable to Ps and, therefore, Ps had unreported taxable income in the amounts of the distributions. R also determined that Ps are liable for
Held: The distributions to Ps from casino revenue constituted unreported taxable income to Ps.
Held, further, for purposes of
Held, further, R must show that written supervisory approval for penalties was obtained before the first formal communication to the taxpayer of the initial determination to assess penalties.
Held, further, the 30-day letter was the first formal communication to the taxpayer of the initial determination to assess penalties.
Held, further, R did not obtain written supervisory approval before the first formal communication of the initial determination to assess penalties and did not meet his burden of production for penalties under
Robert O. Saunooke, for petitioners.
Sarah R. Bolen, Marissa R. Lenius, and Laura A. Price, for respondent.
PUGH, Judge: In notices of deficiency dated March 4, 2011, and January 10, 2013, respondent determined the following deficiencies and penalties:1
| Year | Deficiency | Penalty sec. 6662(a) |
|---|---|---|
| 2004 | $192,215 | $38,443 |
| 2005 | 310,171 | 62,034 |
| 2006 | 389,613 | 77,923 |
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulated facts are incorporated in our findings by this reference. Petitioners James Clay and Audrey Osceola were residents of Florida when they timely filed their petitions.
I. The Miccosukee Tribe of Indians of Florida
The Miccosukee Tribe of Indians of Florida (Tribe) is a federally recognized tribe of Indians. The Tribe‘s members ratified and adopted its constitution on December 17, 1961, and it was approved by the Department of the Interior (DOI) on January 11, 1962. The constitution vests power and authority in the Miccosukee General Council (General Council), which includes all enrolled tribal members who are at least 18 years of age. The General Council has four “Regular General Council Meetings” each year on the first Saturday of February, June, August, and November. Meetings of the General Council other than Regular General Council Meetings are called “Special General Council Meetings“. Meetings of the General Council are recorded, transcribed, and approved by the General Council at the next meeting.
Mr. Cypress also acted as the Bureau of Indian Affairs (BIA) superintendent of the Tribe. The Tribe‘s primary operating bank account is its general account. All revenues not specifically allocated to another tribal account are deposited into this account, and the Tribe pays general operating expenses and capital improvement costs, among other expenses, from it.
A. Tribal Sales Tax
The General Council enacted a tribal sales tax on November 7, 1984. It was approved by the DOI on December 13, 1984. It applied to sales of goods and services or lease rentals by any business operating on the Tribe‘s reservation; these include a gas station, a gift shop, a restaurant, a tourist village, and an air boat tour business. The tax was passed on to customers and was reflected on the customers’ receipts. The small businesses were only modestly profitable, and the tribal sales tax collected was used primarily to pay for trash pickup. The Tribe deposited the tribal sales tax revenue into a separate tribal bank account, not its general account. The Tribe distributed tribal sales tax revenue to its members only once; each member received about $100.
B. The Tribe‘s Casino
On April 7, 1989, the Tribe entered into a contract with Tamiami Development Corp. (TDC) to construct, manage, and operate a Class II gaming
facility for the Tribe called Miccosukee Indian Bingo and Gaming (Casino). The agreement, which was later assigned to Tamiami Partners, Ltd. (TLP), was approved by the DOI. TDC built the Casino on land it purchased outside but adjacent to the Tribe‘s reservation land. The purchased land was placed into trust for the
The Tribe has conducted gaming activities at the Casino since September 15, 1990. The General Council created the Miccosukee Tribal Gaming Authority on August 9, 1991. The Tribe‘s relationship with TLP ended amid dispute and litigation, and the Tribe has operated the Casino under the supervision of the Miccosukee Tribal Gaming Authority since October 13, 1993. It now owns and controls the Casino.
After receiving land and cash as part of a 1996 settlement with the State of Florida, the Tribe built a parking lot on a six-acre portion contiguous to the land on which the Casino is located. The parking lot is free for patrons of the Casino. The Tribe also owns and operates several enterprises related to the Casino, including a hotel, a concert hall, a food court, a restaurant, and a gift shop. The Casino and its related enterprises operate on a fiscal year ending on June 30 of each year.
C. Taxation of the Casino
The Tribe agreed to waive taxes on the Casino‘s gross revenue until TLP recouped its investment, and the Tribe imposed no taxes on the Casino from its opening in 1990 until 1995. Effective January 1, 1995, the General Council imposed a 6.5% gross receipts tax on any amount received by the Casino, including wagers, admission fees, and the sales revenue of the Casino‘s related enterprises. The gross receipts tax is treated as an above-the-line expense of the Casino and its related enterprises. The Casino must estimate its gross receipts for each month on the last day of each month and pay the Tribe at least 90% of the tax on these gross receipts for that month using its estimate. The Casino then has 15 days after the end of the month to calculate the actual gross receipts and gross receipts tax for that month; and if the actual gross receipts tax exceeds what the Casino previously paid, it must pay that excess. The Casino receives a credit against future gross receipts tax if its estimate is greater than the actual gross receipts tax.
On February 27, 1995, after operations of the Casino were under the Tribe‘s control, Mr. Cypress directed the Tribe‘s finance director, Mike Hernandez, to open a checking account, called the nontaxable distribution revenue (NTDR)
Hernandez opened the NTDR account shortly thereafter, and the Tribe has deposited the gross receipts tax revenue into that account ever since. Most of the funds in the NTDR account came from the Casino although revenue from the Tribe‘s small businesses and land leases and easements was deposited there as well. What remained of the Casino‘s profits--after paying the gross receipts tax and other expenses--was deposited into the Tribe‘s general account.
D. Distributions
The Tribe has made quarterly per capita distributions since at least 1989. Until 1995 the Tribe distributed funds to its members from its general account. The largest sources of this revenue were the Tribe‘s small businesses, land leases for cattle grazing, hunting camps, pipelines, and cell towers. Distributions made before the opening of the Casino were around $100 per member per quarter. The distributions grew considerably with the Casino‘s success.
The Tribe has made quarterly distributions to its members from the NTDR account since it was opened in 1995. The date of the quarterly distributions and the number of enrolled members is set at General Council meetings. Only enrolled members of the Tribe can participate in General Council meetings and receive distributions. One must have at least one Miccosukee parent to be an enrolled member in the Tribe. The amount of the distributions each quarter is determined
by dividing the gross receipts tax revenue for that quarter by the number of enrolled members. Distributions to minor children generally go to their tribal member mother because the Tribe is matrilineal--membership in a clan within the Tribe is determined by a tribal member‘s mother--and the mother is generally the head of the household. The father generally receives only his distribution. The Tribe may deduct certain amounts from a member‘s quarterly distribution upon request or if the member participates in one of the Tribe‘s loan programs. The quarterly distributions to a tribal member for the years at issue--2004, 2005, and 2006--were as follows:
| | 2004 | 2005 | 2006 |
|---|---|---|---|
| First | $22,000 | $27,500 | $36,000 |
| Second | 23,000 | 32,000 | 40,000 |
| Third | 26,900 | 33,500 | 40,700 |
| Fourth | 27,600 | 33,500 | 41,700 |
Members could cash their distribution checks at any bank or at the tribal administration building for a 1% fee. At the encouragement of Mr. Cypress, most members chose to cash their quarterly distribution checks at the tribal administration building. The Tribe also opened investment accounts for its members with Smith Barney. These accounts allowed members to avoid certain
requirements imposed on financial institutions while investing their otherwise idle cash and made it easier to make payments on large purchases, such as cars. Not every member chose to open a Smith Barney account. Those who did could request to have a portion of their quarterly distributions deposited into their Smith Barney accounts.
The Tribe also has paid its members Christmas bonuses since at least 2002. Christmas bonuses were paid from the Tribe‘s general account through 2005. The Tribe began paying Christmas bonuses from the NTDR account in 2006 because it was concerned that it would have to issue tax forms for distributions to members from the general account. The gross receipts tax rate was increased to 8% in 2006 to fund Christmas bonuses. The Christmas bonuses for 2004, 2005, and 2006 were $5,500, $6,000, and $7,000, respectively.
E. The Tribe‘s Tax Position
The Tribe has maintained since 1995 that its distributions are not taxable to members and need not be reported on their income tax returns. In a memorandum dated January 24, 1995, Mr. Cypress advised Mr. Hernandez that the tribal attorney has assured him that the distributions should not be reported on members’ tax returns. Mr. Cypress continued that “I expect you, and your staff, to prepare tax returns for the members of the Tribe in accordance with, and relying on, our
attorney‘s opinion.” From 1995 through 2007 Mr. Cypress encouraged tribal members to cash their quarterly distribution checks at the tribal administration office and to omit quarterly distributions from credit applications to avoid
Business Council has repeatedly asked that they do not claim the NTDR money as income on the credit applications but tribal members continue to do this. By doing this, tribal members run the risk of eventually having IRS problems. They (IRS) will see the money reported on their credit applications and start to tax them on it. The tribe has this money categorized as a license tax item in order to avoid IRS problems for tribal members. But with the actions of tribal members, this is being compromised.
The minutes go on to state that
Chairman Cypress explained how the distribution was set up to avoid the government/IRS taxing us on the funds. Our plans for the distribution were set up when we started the gaming operation. These plans were sent to BIA for their review and were approved by the Department of Interior. If these monies were classified as per capita payment to tribal members then IRS could tax us but we do not classify it as such. But due to the actions of maybe two or three tribal members, all tribal members could be affected.
The minutes for this meeting also record the following comments by another tribal officer, Assistant Chairman Jasper Nelson: “When tribal members are asked to not divulge NTDR money, it is for their own good. He stated by doing this, it will give IRS the opportunity to find out about the money and tax us on it. This would jeopardize the livelihood of tribal members who depend on this money.”
Minutes of a Special General Council Meeting on February 10, 2005, record Mr. Cypress stating that
there are members who share information with non-Indians about the money they receive from the Tribe. The consequences these members are faced with as well as putting the rest of the Tribe in this predicament, they cannot blame anyone but themselves as these are the reason why we repeatedly stressed to tribal members to keep information to themselves.
In several General Council meetings in 1999, 2003, and 2006, Mr. Cypress and the Tribe‘s legal counsel, Dexter Lehtinen, also discussed the tax treatment of the neighboring Seminole tribe‘s distributions. They warned that the Tribe
because they were from net profits while the Tribe‘s distributions were nontaxable because they were from the gross receipts tax.
The Tribe requested a legal opinion in 2003 from its outside counsel, White & Case, on the taxability of the Tribe‘s distributions to its members and on the Tribe‘s compliance with the
II. Petitioners’ Distributions and Income Tax Returns
Ms. Osceola grew up on the reservation and went to elementary school there but stopped attending school after fifth grade. She was employed by several businesses around the reservation but had not been employed for over 20 years as of the time of trial. Mr. Clay grew up in a village outside the reservation. He never attended school and only became an enrolled member of the Tribe in 2005
to secure medical care for his mother. Petitioners speak Miccosukee as their primary language and testified at trial with the help of an interpreter.
Petitioners received quarterly distributions for each of the years at issue determined by the number of enrolled members in their family. Ms. Osceola received her distributions as well as those of her dependent children. Her net distributions after deductions for housing and loan repayment--during the years in issue--were as follows:
| | 2004 | 2005 | 2006 |
|---|---|---|---|
| First quarter | $131,850 | $128,400 | $215,700 |
| Second quarter | 128,020 | 181,030 | 239,700 |
| Third quarter | 123,530 | 200,700 | 243,900 |
| Fourth quarter | 128,900 | 200,700 | 249,900 |
| Christmas bonus | 27,500 | 36,000 | 42,000 |
Ms. Osceola cashed her distribution checks at the tribal administration office during the years in issue. She did not give each of her children their distributions after collecting them; rather, she kept them and spent them on family expenses as she determined necessary. In addition to the distributions, Ms. Osceola received a
miscellaneous payment from the Tribe of $1,295 in 2006.3 The Tribe made this payment out of the general account.
Mr. Clay did not receive distributions until he became an enrolled member of the Tribe in the second quarter of 2005. Mr. Clay received net distributions during the years at issue in the following amounts:
| Distribution | 2005 | 2006 |
|---|---|---|
| First quarter | --- | $36,000 |
| Second quarter | $32,000 | 40,000 |
| Third quarter | 33,500 | 40,700 |
| Fourth quarter | 33,500 | 41,700 |
| Christmas bonus | 6,000 | 7,000 |
Petitioners were married during the years at issue, and they filed a joint Form 1040, U.S. Individual Income Tax Return, for each of those years. Omar Barrera, an accountant in Gainesville, Florida, prepared petitioners’ Forms 1040 for the years in issue. Petitioners reported five of their children as dependents for each of the years in issue for a total of seven exemptions. None of their dependent children filed income tax returns for the years at issue. Petitioners provided Mr.
Barrera with Forms W-2G, Certain Gambling Winnings, for the years in issue for purposes of preparing their Forms 1040 and reported gaming income and losses on their Form 1040 for each year. However, petitioners did not
III. IRS Audit of Petitioners’ Returns
In 2010 the IRS audited dozens of returns filed by members of the Tribe who received distributions, in addition to petitioners.4 On or before August 4, 2010, Supervisory Revenue Agent Anita D. Gentry prepared a memorandum regarding the “Miccosukee Project” giving preliminary approval for accuracy-related penalties for substantial understatements of income tax in cases developed for members of the Tribe, to be placed behind penalty workpapers in each case file. On September 13, 2010, the agent examining petitioners’ returns sent them a revenue agent report (RAR), Form 4549-A, Income Tax Discrepancy Adjustments, containing proposed adjustments for 2004 and 2005, along with Form 872, Consent to Extend the Time to Assess Tax. While the record does not include a
final copy of what was sent to petitioners (respondent states that the RAR is included as part of the notice of deficiency), the agent‘s notes indicate that there was a “30-day letter” giving petitioners the option to file a protest and request a conference before the IRS Office of Appeals (Appeals) within 30 days.5
On October 18, 2010, the agent sent the case to Ms. Gentry for review. Ms. Gentry spent between 5 and 15 minutes reviewing the case before approving the penalties that day. A Civil Penalty Approval Form dated August 22, 2010, and bearing the typewritten initials “AG” dated October 18, 2010, indicates that “Substantial Understatement” and “Other Accuracy Related” penalties were approved for 2004 and 2005. “Negligence” penalties were not approved for those years. Ms. Gentry based her review on an August 9, 2010,
Respondent issued a notice of deficiency to petitioners on March 14, 2011, determining deficiencies and penalties for negligence and substantial
understatement of tax for tax years 2004 and 2005. Respondent issued a second notice of deficiency on January 10, 2013, determining deficiencies and penalties for negligence and substantial understatement for tax year 2006.
OPINION
I. Burden of Proof
Ordinarily, the burden of proof in cases before the Court is on the taxpayer. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under
II. Posttrial Briefing Issues6
A. Respondent‘s Motion To Strike
Rule 52 provides that the Court can strike from any brief “any insufficient claim or defense or any redundant, immaterial, impertinent, frivolous, or scandalous matter.” Respondent requests that we strike from petitioners’
simultaneous reply brief arguments relating to: (1) the “General Welfare Doctrine” because petitioners conceded this issue before trial;7 (2) the Per Capita Act of 1983, Pub. L. No.
Motions to strike are generally disfavored by Federal courts. Estate of Jephson v. Commissioner, 81 T.C. 999, 1001 (1983); Allen v. Commissioner, 71
T.C. 577, 579 (1979). “A motion to strike should be granted only when the allegations have no possible relation to the controversy. When the court is in doubt whether under any contingency the matter may raise an issue, the motion should be denied.” Estate of Jephson v. Commissioner, 81 T.C. at 1001 (quoting Samuel Goldwyn, Inc. v. United Artists Corp., 35 F. Supp. 633, 637 (S.D.N.Y. 1940)). In addition, if “the subject of the motion involves disputed and substantial questions of law, the motion should be denied and the allegations should be determined on the merits.” Id. And “a motion to strike will usually not be granted unless there is a showing of prejudice to the moving party.” Id.; see also Pony Creek Cattle Co. v. Great Atl. & Pac. Tea Co. (In re Beef Industry Antitrust Litigation), 600 F.2d 1148, 1168-1169 (5th Cir. 1979) (“[U]nnecessary evidentiary details are usually not stricken from the complaint unless prejudicial or of no consequence to the controversy[.]“).
Our Rules require parties “to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all matters not privileged which are relevant to the pending case, regardless of whether such matters involve fact or opinion or the application of law to fact.” Rule 91(a)(1). Before trial the parties filed a stipulation of settled issues stating that “petitioners
concede that the quarterly and Christmas distributions at issue in this case are not tax-exempt general welfare payments as described in
Petitioners have not shown any reason why we should release them from their stipulation. This is not a circumstance of a stipulated fact‘s being contradicted by other facts in the record. See, e.g., Jasionowski v. Commissioner, 66 T.C. 312 (1976). Rather this was a strategic decision before trial not to pursue an argument that then shaped the parties’ trial presentations. In fact, counsel for petitioners even used the stipulation as a basis for objecting to questions asked by respondent‘s counsel, stating at trial that “this is not a general welfare case.” It would be prejudicial to allow petitioners to duck questions at trial about an issue on the basis that they have abandoned it, only to revive the dispute on brief. However, as we discuss infra Section III.A, we are not the first court to consider this issue. The U.S. Court of Appeals for the Eleventh Circuit, to which these cases are appealable absent stipulation to the contrary, see
2. Issues Not Raised in Petitioners’ Opening Brief
We may consider an issue raised for the first time in a party‘s answering brief to be abandoned and conceded. See Dutton v. Commissioner, 122 T.C. 133, 142 (2004) (“Our practice is not to consider new issues raised for the first time in an answering brief.“); Krause v. Commissioner, 99 T.C. 132, 177 (1992), aff‘d sub nom. Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994). Petitioners did not raise the
3. Documents Not in Evidence
Petitioners rely on two documents not in evidence in their opening and reply briefs: a 1989 contract between the Tribe and TDC and a 1995 letter from the Tribe to the BIA‘s acting director, Frank Keel. Tacitly conceding that they cannot rely on facts not in evidence, petitioners counter respondent‘s motion to strike these two documents and petitioners’ arguments based on them by moving to reopen the record to admit them into evidence. They argue that these documents should be admitted to “clarify and confirm testimonial evidence received by the Court at trial” and respond to issues raised by respondent in his opening brief.
The third factor--the effect of reopening the record--is most relevant here. We will not reopen the record to admit these documents because we find that they are cumulative and would not change the outcome of the case. They do not bear on the outcome of either of the issues in this case: whether the distributions are taxable to petitioners and whether petitioners are liable for accuracy-related penalties. Therefore we will deny petitioners’ motion to reopen the record to admit these two documents and will grant respondent‘s motion to strike those portions of petitioners’ brief that rely on them.8
Petitioners also move to amend four paragraphs of the first stipulation of facts to correct what they contend are factual errors. We may amend a stipulation when “to accept * * * [the unamended stipulation] would have been manifestly unjust or if the evidence contrary to the stipulation was substantial.” Loftin & Woodard, Inc. v. United States, 577 F.2d 1206, 1232 (5th Cir. 1978); see
III. Taxability of Distributions to Tribal Members
The parties first dispute whether the distributions are made from net gaming revenues taxable under the IGRA. The IGRA provides that as a condition of making per capita payments to tribal members out of net gaming revenues from a Class II gaming facility, “the per capita payments are subject to Federal taxation and tribes notify members of such tax liability when payments are made.”
A. IGRA
We are not the first court to consider petitioners’ arguments that the distributions are not net gaming revenues and that the General Welfare Doctrine exempts them from taxation.9 The U.S. Court of Appeals for the Eleventh Circuit recently ruled on a case regarding the taxability of distributions to another member of the Miccosukee Tribe, Sally Jim. Jim, 891 F.3d 1242. In that case, the Government moved for summary judgment that the distributions to Ms. Jim, which were derived from gaming proceeds, were not exempt from taxation as general welfare payments or income from the land. United States v. Jim, No. 14-22441, 2016 WL 6995455 (S.D. Fla. Aug. 19, 2016). The Tribe intervened.
The District Court granted the Government‘s summary judgment motion in part but held that material disputes of fact remained over how much of the distribution was from nongaming revenue and whether Ms. Jim was taxable on the entire distribution, including the amounts she received that were attributable to her family members. After a bench trial, the court concluded that no exemption applied to the income. Id.
On appeal, the Court of Appeals affirmed that
We see no factual distinctions between the distributions to petitioners and to Ms. Jim and therefore hold that the distributions to petitioners are taxable under the IGRA.
B. Petitioners’ Other Statutory Arguments
Petitioners made other arguments that were not considered (or were considered only briefly) by the Court of Appeals. Petitioners point to three Acts of Congress that they maintain exempt the Tribe‘s distributions from Federal income taxation: the
The
Petitioners also contend that
Finally, petitioners contend that the
Petitioners are correct that to the extent possible we resolve ambiguities in treaties and statutes in favor of Indians and construe Indian treaties in the sense in which the Indians understood them. See Capoeman, 351 U.S. at 6-7; Choctaw Nation of Indians v. United States, 318 U.S. 423, 432 (1943). However, this rule of construction “comes into play only if such statute or treaty contains language which can reasonably be construed to confer income exemptions.” Holt v. Commissioner, 364 F.2d at 40. This is not the case with the three provisions to which petitioners have pointed. “We are not free to create, by implication, a tax exemption for petitioner[s].” Hoptowit v. Commissioner, 78 T.C. at 142. Furthermore, we do not agree with petitioners’ contention that we must accept Mr. Cypress’ interpretation of these statutes as he was the BIA Superintendent, regardless of whether or to what extent he is a delegate of the Secretary of the Interior.15
C. Distributions Not Directly Derived From the Land
Petitioners next contend that the distributions are exempt from Federal tax because they are derived directly from tribal lands. They base this argument on Capoeman and on the
The
The U.S. Court of Appeals for the Eleventh Circuit already has concluded that the Tribe‘s distributions to members come “from ‘investment in . . . improvements’ on the land and ‘business activities related to those assets,’ namely gambling” and “therefore * * * [do] not derive directly from the land.” Jim, 891 F.3d at 1250 n.17 (citations omitted; alteration in original). And we have held that income derived from a business on reservation land was not necessarily derived directly from the land. Hoptowit v. Commissioner, 78 T.C. at 145. We have limited our definition of income derived directly from the land to income earned through “exploitation of the land itself“. Cross v. Commissioner, 83 T.C. 561, 566 (1984), aff‘d sub nom. Dillon v. United States, 792 F.2d 849 (9th Cir. 1986); see also Stevens v. Commissioner, 452 F.2d 741 (9th Cir. 1971) (holding that income from farming and ranching on taxpayer‘s allotted land is tax exempt), aff‘g in part and rev‘g in part 52 T.C. 330 (1969); Rickard v. Commissioner, 88 T.C. 188, 192 (1987) (holding that farming income on taxpayer‘s allotted land is tax exempt).
Our definition does not include income earned by use of the land along with capital assets and labor. Cross v. Commissioner, 83 T.C. at 566 (holding that income from operating a smokeshop on reservation land was not directly derived from the land); see also Critzer v. United States, 597 F.2d 708, 713-714 (Ct. Cl. 1979) (holding that neither income from operation of a motel, restaurant, gift shop, and apartment complex nor income from leases of buildings is directly derived from the land); Hoptowit v. Commissioner, 78 T.C. at 145 (holding that income from operating a smokeshop on reservation land was not directly derived from the land); Beck v. Commissioner, T.C. Memo. 1994-122 (holding that rental income from an apartment complex on tribal land is not derived directly from the land), aff‘d, 64 F.3d 655 (4th Cir. 1995); Tonasket v. Commissioner, T.C. Memo. 1985-365 (holding that income from operating a smokeshop on the taxpayer‘s allotted land was not directly derived from the land).
We also have held that per capita payments of casino revenue are not directly derived from the land merely by virtue of the casino‘s location on tribal land. Doxtator v. Commissioner, T.C. Memo. 2005-113, 2005 WL 1163978, at *9; Campbell v. Commissioner, T.C. Memo. 1997-502, 1997 WL 690178, at *4 (holding that income from the operation of a casino on tribal land was not derived directly from the land), aff‘d and remanded, 164 F.3d 1140 (8th Cir. 1999).
Petitioners argue that the distributions are directly derived from the land because they are, in substance, their share of rental payments that the Tribe receives for leasing Tribal land--owned communally by all members--to the Casino. They cite
We are not bound by a revenue ruling, but even if we found its analysis persuasive, the record does not support petitioners’ recharacterization of the gross receipts tax as rent payments that fall outside the IGRA. See Webber v. Commissioner, 144 T.C. 324, 352-353 (2015) (“We are not bound by revenue rulings; under Skidmore, the weight we afford them depends upon their persuasiveness and the consistency of the Commissioner‘s position over time.“). There is no written lease between the Tribe and the Casino, and the 1995 gross receipts tax ordinance makes no mention of a lease or the use of tribal land. Nor have we found any reference to a lease from the Tribe to the Casino in any of the General Council meeting minutes in the record.
To the contrary, the evidence in the record illustrates the Tribe‘s intention that the gross receipts tax be a tax rather than rent payments. The 1995 gross receipts tax ordinance “declared * * * the intent of the Miccosukee Tribe of Indians of Florida that the * * * Miccosukee Indian Bingo & Gaming (MIBG ) * * * shall be subject to a gross receipts tax.” And if we regard the 1995 gross receipts tax as an application of the 1984 tribal sales tax to the Casino, the 1984 ordinance states that the Tribe is imposing the tax under its authority “to levy and collect assessments“. In each the Tribe‘s financial statements for fiscal years 1995 through 2002, the gross receipts tax revenue is listed under the section “Owners Compensation Fees” rather than with the Tribe‘s leases. Finally, each of the Casino‘s financial statements from fiscal years 1995-1996 through 2005-2006 states that while the Casino is on the Tribe‘s land, “[n]o rental payment is currently required for the use of such land.”
Petitioners have not shown that they are entitled to a tax exemption with respect to their distributions. Petitioners have not introduced any evidence or made any argument concerning the inclusion of the $1,200 miscellaneous payment to Ms. Osceola in 2006 in her gross income. And none of petitioners’ arguments address the Christmas bonuses for 2004 and 2005, which were paid out of the Tribe‘s general account. Therefore, we also sustain respondent‘s determination that
Concluding that the Tribe‘s distributions are taxable to petitioners does not call into question the Tribe‘s sovereign authority to impose tax; nor does the Tribe‘s sovereign authority affect our analysis of the taxability of the distributions. That depends on the law and whether any exceptions to taxability apply.
IV. Underpayment Penalties
The Commissioner bears the burden of production with respect to an individual taxpayer‘s liability for a penalty and is required to present sufficient evidence showing that the penalty is appropriate.
Trial of this case was held, and the record was closed, before the issuance of our Opinion in Graev III. After the Court‘s decision in Graev III, we ordered respondent to file a response addressing the effect of
Petitioners did not oppose respondent‘s motion, but in their response they asked that they be “also given the opportunity to reopen the record to call witnesses who prepared and/or signed the declarations and penalty approval forms, or introduce other evidence bearing on the validity of such declarations and forms.” They also raised issues with the documents respondent proffered in support of his compliance with
We granted petitioners’ request to conduct additional discovery regarding respondent‘s compliance with
Petitioners argue that (1) the supervisory approval for the 2004 and 2005 substantial understatement penalties was not timely and (2) the supervisor‘s review itself was not meaningful.
Petitioners argue that the initial determination of a penalty is “the first time an IRS official introduced the penalty into the conversation“. See Graev III, 149 T.C. at 500, 501 (Lauber, J., concurring). They contend that the RAR contained the first suggestion of penalties, making the RAR--and not the notice of deficiency--the initial determination.
The determinations made in a notice of deficiency typically are based on the adjustments proposed in an RAR. See Branerton Corp. v. Commissioner, 64 T.C. at 194-195; Globe Tool & Die Mfg. Co. v. Commissioner, 32 T.C. 1139, 1141 (1959) (“[R]espondent sent to petitioner by registered mail a notice of deficiency determining deficiencies in income tax for the taxable years 1951 and 1952. * * * Said determination by respondent was based on the adjustments contained in the revenue agent‘s report[.]“); Fitzner v. Commissioner, 31 T.C. 1252, 1255 (1959) (“[I]t is obvious that petitioner * * * is relying upon the revenue agent‘s report of examination upon which respondent based his determination of deficiency.“). And when those proposed adjustments are communicated to the taxpayer formally as part of a communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal them with Appeals (via a 30-day letter), the issue of penalties is officially on the table. See Palmolive Bldg Inv‘rs, LLC v. Commissioner, 152 T.C. ___, ___ (slip op. at 20-23) (Feb. 28, 2019). Therefore, we conclude that the initial determination for purposes of
Next we consider when Ms. Gentry approved these penalties. Respondent does not contend that, nor do we consider whether, Ms. Gentry‘s August 4, 2010, memorandum satisfies
Because we hold that respondent did not timely obtain written supervisory approval, we need not reach petitioners’ second argument that Ms. Gentry failed to conduct a meaningful review.
Any contentions we have not addressed we deem irrelevant, moot, or meritless.
To reflect the foregoing,
Appropriate orders will be issued, and decisions will be entered under Rule 155.