T.C. Memo. 2005-118
UNITED STATES TAX COURT
GLORY ALLEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20457-03. Filed May 23, 2005.
Glory Allen, pro se.
Mark J. Miller, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a deficiency in
petitioner’s 2001 Federal income tax, including tax on self-
employment income, and a penalty as follows:
Deficiency Penalty Under Sec. 6662(a)
$11,054 $2,720
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The issues for decision are: (1) Whether $57,845 petitioner
received in 2001 from an American Indian tribe constitutes
taxable income to petitioner; (2) whether $33,295 of the $57,845
petitioner received constitutes self-employment income on which
petitioner is liable for Federal self-employment tax; and
(3) whether petitioner is liable for the section 6662(a)
accuracy-related penalty for substantial understatement of income
and self-employment tax.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Under Rule 91(f)(3), some of the facts have been deemed
stipulated and are so found.1
At the time the petition was filed, petitioner was a
resident of Lac du Flambeau, Wisconsin.
1
On Aug. 31, 2004, respondent filed a Rule 91(f) motion
with regard to proposed stipulated facts. On Sept. 3, 2004, the
Court issued an order granting respondent’s Rule 91(f) motion and
directing petitioner to file a response to the motion by Oct. 4,
2004. Petitioner failed to respond to respondent’s Rule 91(f)
motion, and on Oct. 13, 2004, the Court made absolute its Sept. 3,
2004, order, and the facts set forth in the proposed stipulation
of facts were deemed stipulated, and the exhibits were admitted
for purposes of trial and opinion herein.
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Petitioner is an enrolled member of a Chippewa Indian tribe
located in Wisconsin, called the Lac du Flambeau Band of Lake
Superior Chippewa Indians, a federally recognized American Indian
tribe. The leadership of the tribe consists of an elected tribal
council.
During 2001, petitioner worked for the tribe in two
capacities. First, petitioner worked as an elected member of the
tribal council, which council enacts ordinances relating to
activities of the tribe. Second, petitioner worked as a
secretary or executive assistant to the tribal president, in
which capacity petitioner handled correspondence relating to the
tribe.
During 2001, petitioner received $24,550 for her work as a
member of the tribal council and $33,295 for her work as
secretary or executive assistant to the tribal president.
On her filed Federal income tax returns for years prior to
2001, petitioner apparently reported amounts she received from
the tribe as income.
During 2001, the tribe did not withhold any income or
employment taxes from the $24,550 and the $33,295 the tribe paid
petitioner.
On two separate Forms 1099-Misc, Miscellaneous Income, for
2001, issued by the tribe to petitioner and reported to
respondent, the $24,550 relating to petitioner’s work as a member
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of the tribal council was reflected as “other income”, and the
$33,295 relating to petitioner’s work as secretary or executive
assistant to the tribal president was reflected as “nonemployee
compensation”.
Petitioner electronically and timely filed with respondent
her 2001 individual Federal income tax return, on which
petitioner reflected zero tax liability. Thereon, petitioner did
not include as income the $57,845 she received from the tribe.
On October 14, 2003, respondent mailed to petitioner a
notice of deficiency with regard to petitioner’s 2001 tax
liability in which respondent determined that the entire $57,845
petitioner received in 2001 from the tribe constituted taxable
income, that the $33,295 petitioner received from the tribe for
her work as secretary or executive assistant constituted self-
employment income on which petitioner was liable for self-
employment tax, and that petitioner was liable for the section
6662(a) accuracy-related penalty with respect to the income and
self-employment tax underpayments relating to the $57,845 not
reported as income and the $33,295 not reported as self-
employment income.
OPINION
Section 61(a) defines gross income as “all income from
whatever source derived,” including compensation for services.
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The Supreme Court in Squire v. Capoeman, 351 U.S. 1, 6
(1956), has stated that “to be valid, exemptions to tax laws
should be clearly expressed.”
On the theory that the tribe qualifies as a sovereign
government and that petitioner has the status of a “public
official” of such government, petitioner argues that the entire
$57,845 she received from the tribe in 2001 should not be subject
to Federal income tax. According to petitioner, her performance
for the tribe of “essential government functions” precludes the
taxability of the income she received from the tribe.
Because no explicit statutory exemption exists with regard
thereto, respondent contends that the entire $57,845 petitioner
received from the tribe constituted taxable income to petitioner.
Respondent relies on Squire v. Capoeman, supra at 6, in which the
Supreme Court stated that American Indians are citizens, and “in
ordinary affairs of life, not governed by treaties or remedial
legislation, they are subject to the payment of income taxes as
are other citizens.” In that case, the taxpayers were American
Indians and the beneficial owners of lands allotted to them and
held in trust by the Federal Government under the General
Allotment Act of 1887, ch. 119, 24 Stat. 388, currently codified
at 25 U.S.C. sec. 331 (2000), and because of an explicit
exemption in the General Allotment Act of 1887, the Supreme Court
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held that the taxpayers were not taxable on income received as
the result of the sale of timber located on the trust lands.
In Cross v. Commissioner, 83 T.C. 561 (1984), affd. sub nom.
Dillon v. United States, 792 F.2d 849 (9th Cir. 1986), because no
explicit exemption existed under the General Allotment Act of
1887 for income from operating a retail store, income from a
smoke shop located on an Indian reservation was held to
constitute taxable income, and the wages paid to the employee of
the smoke shop were held to constitute taxable income to the
employee.
In Jourdain v. Commissioner, 71 T.C. 980 (1979), affd. 617
F.2d 507 (8th Cir. 1980), salary paid to a tribal official was
held to be taxable because no explicit statutory exemption with
regard thereto existed.
Petitioner has not cited any treaty or any legislation, and
we have found none, that sets forth an explicit exemption from
Federal income taxes for the type of income petitioner received
for her work as a member of the tribal council or for her work as
secretary or executive assistant to the tribal president.
We conclude that the entire $57,845 petitioner received in
2001 from the tribe constitutes taxable income to petitioner and
is subject to Federal income tax.
Apparently under the authority of Rev. Rul. 59-354, 1959-2
C.B. 24, and Priv. Ltr. Rul. 94-10-006 (Nov. 23, 1993),
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respondent treated the $24,550 in compensation that petitioner
received for her work as an elected official of the tribal
council as exempt from employment taxes for both wage withholding
and self-employment tax purposes. Respondent, however, concluded
that petitioner’s work as secretary or executive assistant to the
tribal president did not qualify as work by an elected official
of the tribe, that petitioner in that capacity was acting as an
independent contractor, and that petitioner was subject to self-
employment tax on the $33,295 she received with regard thereto.
Under section 1401, individuals are liable for tax on self-
employment income. Self-employment income is defined as “gross
income derived by an individual from any trade or business
carried on by such individual”. Sec. 1402(a). In general, an
individual’s performance of services as an employee does not give
rise to self-employment income. Sec. 1402(c)(2); Robinson v.
Commissioner, 117 T.C. 308, 320 (2001).
The presumption of correctness under Rule 142(a) generally
applies to respondent’s classification of a taxpayer’s employment
status for Federal tax purposes, and the burden is on the
taxpayer to prove otherwise. Boles Trucking, Inc. v. United
States, 77 F.3d 236, 240 (8th Cir. 1996); Feivor v. Commissioner,
T.C. Memo. 1995-107.2
2
Because petitioner submitted no credible evidence with
regard to her employment status, the burden of proof on this fact
(continued...)
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The tribe treated petitioner as an independent contractor
with regard to the $33,295 petitioner received for her work as
secretary or executive assistant to the tribal president, did not
withhold any employment taxes thereon, and issued to petitioner a
Form 1099-Misc with regard thereto. Beyond those facts,
petitioner does not provide us with any evidence as to the
details of her work as secretary or executive assistant to the
tribal president that would bear upon her status as an employee
or independent contractor with regard thereto. See secs.
31.3121(d)-1(c)(2), 31.3306(i)-1(b), Employment Tax Regs.
Petitioner has failed to demonstrate that she was an
employee and not an independent contractor with regard to her
work as secretary or executive assistant to the tribal president.
The $33,295 that petitioner received in 2001 for her work as
secretary or executive assistant to the tribal president is to be
treated as self-employment income subject to Federal self-
employment tax under section 1401. See also Doxtator v.
Commissioner, T.C. Memo. 2005-113, for an explanation as to why
the “public office” exception of section 1402(c)(1) apparently
would not qualify petitioner for exemption from self-employment
tax with regard to her work as secretary or executive assistant
to the tribal president.
2
(...continued)
issue does not shift to respondent under sec. 7491.
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Under section 6662, among other things, a 20-percent
accuracy-related penalty is to be added to the portion of an
underpayment of tax attributable to a substantial understatement
of income tax.
A substantial understatement of income tax and of self-
employment tax is defined as an understatement constituting the
greater of 10 percent of the tax required to be shown on a
Federal income tax return or $5,000. Sec. 6662(d)(1)(A). An
understatement may be reduced by that portion of the
understatement which is attributable to: (1) Substantial
authority for the claimed tax treatment of the item; (2) adequate
disclosure combined with a reasonable basis for the claimed tax
treatment of the item; or (3) reasonable cause and good faith
with regard to the unpaid tax. Secs. 6662(d)(2)(B), 6664(c)(1).
Under section 7491(c), respondent has the burden of
production with respect to a section 6662 accuracy-related
penalty. Once respondent meets that burden of production,
however, the taxpayer continues to have the burden of proof with
regard to whether respondent’s determination of the penalty is
correct. Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446
(2001).
By establishing the taxability of the $57,845 petitioner
received from the tribe in 2001 and as to the self-employment tax
due on the $33,295 that petitioner received for her work as
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secretary or executive assistant to the tribal president,
respondent has met his section 7491(c) burden of production with
respect to the accuracy-related penalty at issue herein.
Petitioner has not cited any legal authority that would
constitute substantial authority for her understatement of income
including self-employment income; petitioner did not disclose on
her 2001 individual Federal income tax return the $57,845 she in
2001 received from the tribe; and petitioner has not established
reasonable cause for her failure to pay income taxes on the
$57,845 she received from the tribe and self-employment taxes on
the $33,295 she received for her work as secretary or executive
assistant to the tribal president.
Petitioner is liable for the section 6662(a) accuracy-
related penalty.
Decision will be entered
for respondent.