Beck v. Commissioner

T.C. Memo. 1998-429

UNITED STATES TAX COURT

GEORGE S. BECK AND FRELA D. BECK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11549-96. Filed December 7, 1998.

George S. Beck and Frela D. Beck, pro sese.

Howard P. Levine and William W. Kiessling, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined deficiencies of

$1,570 and $570 in petitioners' 1992 and 1993 Federal income

taxes, respectively.1

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
(continued...)
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The issues for decision are: (1) Whether petitioners are

entitled to exclude all of their income from Federal income

taxation, and (2) whether petitioners are entitled to deduct

payments made into a reserve account.

FINDINGS OF FACT

The parties submitted this case fully stipulated. The

stipulation of facts, the supplemental stipulation of facts, and

the attached exhibits are incorporated herein by this reference.

Petitioners resided in Cherokee, North Carolina, at the time they

filed their petition.

Petitioner Frela D. Beck is an enrolled member of the

Eastern Band of the Cherokee Indians. During 1992 and 1993,

petitioners owned and operated apartment buildings located on a

Cherokee Indian Reservation in North Carolina. The legal title

to the land on which the apartment buildings sit is vested in the

United States of America and held in trust for the Eastern Band

of Cherokee Indians.

Petitioners entered into a loan agreement in the amount of

$376,000 with the Farmers Home Administration (FmHA) of the U.S.

Department of Agriculture in order to construct the apartment

buildings. The loan agreement required petitioners to deposit a

total of 10 percent of the loan amount into a reserve account.

1
(...continued)
Procedure.
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These deposits were to be made over a period of 10 years. The

primary purpose of the reserve account was to provide funds to

meet the major capital needs of the project.

During 1992 and 1993, petitioners deposited $3,873 and

$3,760, respectively, into the reserve account. During those

years, no funds were disbursed from the reserve account for

expenses.

On petitioners' 1992 and 1993 Federal income tax returns,

petitioners deducted the amounts deposited into the reserve

account during those years. In the statutory notice of

deficiency, respondent denied petitioners' claimed deductions for

these payments. Respondent also denied petitioners' claim for

refund for all taxes paid relating to their 1992 and 1993 income.

OPINION

I. Taxability of Petitioners' Income

Petitioners argue that (1) Native American Indians are not

taxable under the Constitution and its amendments, and, in the

alternative, (2) the Cherokee Treaty of 1866 (the 1866 Treaty),

14 Stat. 799, exempts their income from taxation.

A. Constitutional Arguments

There is well-established case law holding that Native

American Indians are taxable unless specifically exempted by a

Federal statute or treaty. See Squire v. Capoeman, 351 U.S. 1, 6

(1956); Dillon v. United States, 792 F.2d 849 (9th Cir. 1986),
 - 4 -

affg. Cross v. Commissioner, 83 T.C. 561 (1984); Karmun v.

Commissioner, 749 F.2d 567 (9th Cir. 1984), affg. 82 T.C. 201

(1984); Jourdain v. Commissioner, 71 T.C. 980 (1979).

Petitioners urge us to reconsider all established case law on

this point and find it in error. We decline to do so.

B. Cherokee Treaty of 1866

Petitioners alternatively argue that their income is

specifically excluded by the 1866 Treaty. As noted above, Native

American Indians are subject to Federal income taxation unless an

exemption can be found in a Federal statute or treaty. See

Squire v. Capoeman, supra. Petitioners argue that the 1866

Treaty confers such an exemption and specifically point to the

language contained in Article 10 of the 1866 Treaty as evidence

of this.

Respondent argues that petitioners should be collaterally

estopped from raising this issue because this issue has already

been considered and decided by this Court in Beck v.

Commissioner, T.C. Memo. 1994-122 (Beck I), affd. without

published opinion 64 F.3d 655 (4th Cir. 1995). The following

conditions must be met for collateral estoppel to apply:

(1) The issue in the second suit must be identical
in all respects with the one decided in the first suit.
(2) There must be a final judgment rendered by a
court of competent jurisdiction.
(3) Collateral estoppel may be invoked against
parties and their privies to the prior judgment.
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(4) The parties must actually have litigated the
issues and the resolution of these issues must have
been essential to the prior decision.
(5) The controlling facts and applicable legal
rules must remain unchanged from those in the prior
litigation. [Peck v. Commissioner, 90 T.C. 162, 166-
167 (1988); citations omitted.]

Collateral estoppel is "designed to prevent repetitious

lawsuits over matters which have once been decided and which have

remained substantially static, factually and legally."

Commissioner v. Sunnen, 333 U.S. 591, 599 (1948). By denying

relitigation, judicial energy is conserved, and parties may

reasonably rely on the fact that they will not have to relitigate

issues that have already been determined by a court. See Fink v.

Commissioner, 60 T.C. 867 (1973), affd. 512 F.2d 674 (9th Cir.

1975).

In Beck I, this Court rendered a final judgment. The

parties in Beck I and this case are identical. Since the

decision in Beck I, the controlling facts and applicable legal

rules have not changed. The sole question is whether the issue

decided in Beck I is identical in all respects to the issue in

this case. If the issues are identical, then collateral estoppel

applies because the issue was fully litigated and essential to

the decision in Beck I.

In Beck I, petitioners claimed that their rental income was

exempt from taxation by article 10 of the 1866 Treaty, 14 Stat.

801. In that case, we held:
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The 1866 Treaty simply does not provide
petitioners with an express restriction on the ability
of the United States to tax income. There is no
textual support for petitioners' contention. Article
10 plainly does not refer to an exemption from income
tax, and we cannot create one by implication.
[Citation omitted.]

In the case at bar, petitioners argue that all of their income,

not only their rental income, is exempted by the same article of

the 1866 Treaty.

We find that this issue is identical in all respects to the

issue decided in Beck I. We therefore conclude that petitioners

are collaterally estopped from rearguing this issue.

Accordingly, we hold that petitioners may not exclude their

income from taxation. We have considered the remainder of

petitioners' arguments, and we find them to be irrelevant or

without merit.

II. Deductibility of Reserve Account Deposits

Pursuant to petitioners' loan agreement with the FmHA,

petitioners deposited $3,873 and $3,760 into a reserve account

during 1992 and 1993, respectively. Petitioners deducted these

amounts on their 1992 and 1993 Federal income tax returns.

Respondent argues that deposits made into a reserve account are

not deductible until withdrawn and used to pay a deductible

expense. We agree with respondent.

A cash basis taxpayer generally may deduct business expenses

in the taxable year in which the expenses are paid. Sec. 1.461-
 - 7 -

1(a)(1), Income Tax Regs. It is a well-established principle

that a contribution to a reserve account for future liabilities

is not deductible. See Sebring v. Commissioner, 93 T.C. 220

(1989); World Airways, Inc. v. Commissioner, 62 T.C. 786 (1974);

Commercial Liquidation Co. v. Commissioner, 16 B.T.A. 559 (1929).

The contribution may become deductible once it is withdrawn and

used to pay a definite liability. See Sebring v. Commissioner,

supra at 225.

None of the deposits into the reserve account were withdrawn

and used to pay deductible expenses during 1992 or 1993. We

therefore conclude that petitioners are not entitled to

deductions for their deposits into the reserve account for 1992

or 1993.

III. Section 6673 Penalty

Section 6673(a)(1) provides that, whenever it appears to the

Tax Court that proceedings have been instituted or maintained by

the taxpayer primarily for delay or that the taxpayer's position

in such proceedings is frivolous or groundless, the Court may

impose a penalty not in excess of $25,000. A petition to the Tax

Court is frivolous "if it is contrary to established law and

unsupported by a reasoned, colorable argument for change in the

law." Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986).

Based on well-established law, petitioners' positions are

frivolous and groundless.
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The circumstances in this case may merit the imposition of a

penalty under section 6673; however, we shall not now impose such

a penalty. We take this opportunity to caution petitioners that

we will strongly consider imposing such a penalty if they return

to this Court in the future with similar arguments; i.e., that

Native American Indians are not taxable under the Constitution.

To reflect the foregoing,

Decision will be entered

for respondent.