Doxtator v. Comm'r

T.C. Memo. 2005-113

UNITED STATES TAX COURT

ALLEN AND MARY DOXTATOR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1508-03. Filed May 18, 2005.

Allen and Mary Doxtator, pro se.

Mark J. Miller, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: Respondent determined deficiencies in income

taxes and penalties under section 6662(a)1 with respect to

petitioners' 1997, 1999, and 2000 taxable years as follows:

1
Unless otherwise noted, 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
Procedure.
 - 2 -

Penalty
Year Deficiency Sec. 6662(a)

1997 $7,702 $363.00
1999 6,671 43.60
2000 4,926 58.40

Following concessions,2 the issues remaining for decision

are: (1) Whether $23,480, $22,450, and $13,550 received by

petitioner Mary Doxtator (Mrs. Doxtator) in 1997, 1999, and 2000,

respectively, from the Oneida Tribe of Indians of Wisconsin

(Oneida Tribe or Tribe) for services as a judicial officer are

subject to income tax and self-employment tax; (2) whether

petitioner Allen Doxtator (Mr. Doxtator) was engaged in a trade

or business in 1997 and 2000, entitling petitioners to cost of

goods sold of $225 in 1997 and trade or business deductions of

$7,580 and $7,748 for 1997 and 2000, respectively; (3) whether

petitioners received short-term capital gain of $1,000 and long-

term capital gain of $146 in 1999; (4) whether petitioners

received taxable dividends of $281 in 1999; (5) whether $3,000

petitioners received from the Oneida Tribe in 1999 is taxable;

(6) whether petitioners are entitled to charitable contribution

deductions of $5,899 and $3,969 in 1997 and 2000, respectively;

(7) whether petitioners are entitled to a casualty loss in 2000

2
Respondent conceded $1,090 of the $4,516 casualty loss
petitioners claimed in 2000. Petitioners conceded taxable
interest income of $64 and $121 for 1999 and 2000, respectively,
at trial.
 - 3 -

of $4,516, or $1,090 as conceded by respondent; (8) whether

petitioners are liable for an accuracy-related penalty under

section 6662(a) based on a substantial understatement of income

tax or on negligence for 1997 and 1999; and (9) whether

petitioners are liable for the accuracy-related penalty under

section 6662(a) based on negligence for 2000. In addition,

petitioners challenge our jurisdiction to decide certain of the

foregoing issues, as more fully discussed infra.

FINDINGS OF FACT

Some of the facts have been stipulated and are incorporated

by this reference.3

Petitioners resided in Wisconsin at the time they filed the

petition in this case. Petitioners are husband and wife and

filed joint Federal income tax returns for 1997, 1999, and 2000.

Petitioners are Native Americans and members of the Oneida Tribe.

Compensation for Services as Judicial Officer

In 1997, 1999, and 2000, Mrs. Doxtator worked for the Oneida

Tribe as a "judicial officer" of the Oneida Appeals Commission

and the Oneida Personnel Commission. The business of the Oneida

Tribe is run by a business committee. Mrs. Doxtator was

appointed to the position of judicial officer for a 3-year term

3
A portion of the transcript of the trial proceedings in
this case was lost because of errors of the reporting service.
As a consequence, the parties entered into a supplemental
stipulation of facts as an agreed substitute in lieu of any other
remedy.
 - 4 -

by the business committee of the Oneida Tribe. In her capacity

as a judicial officer, she heard disputes between the Oneida

Tribe and its employees. The hearings were conducted at various

locations to which Mrs. Doxtator traveled at her own expense.

Her decisions were binding on the Tribe and its employees. She

controlled her own schedule and heard as many or as few cases as

she chose. She received a $125 stipend per case heard,

regardless of its duration.

Mrs. Doxtator received $23,480, $22,450, and $13,550 in

1997, 1999, and 2000, respectively, as compensation for her

services as a judicial officer from the Oneida Tribe. The Oneida

Tribe issued Forms 1099-MISC, Miscellaneous Income, reporting

these payments to Mrs. Doxtator in each year. Petitioners did

not report on their 1997, 1999, or 2000 return, nor pay self-

employment taxes with respect to, the foregoing amounts received

by Mrs. Doxtator. Respondent determined that the foregoing

amounts were subject to income and self-employment tax.

Native American Finance

Petitioners attached to their 1997 and 2000 returns a

Schedule C, Profit or Loss from Business, for an undertaking

called "Native American Finance". According to Mr. Doxtator, the

Native American Finance business consisted of Mr. Doxtator's

activities in contacting Native American tribes to advise tribal

leaders of a revenue ruling that he believed eliminated liability
 - 5 -

for employment taxes for elected tribal officials. In return for

this information, Mr. Doxtator sought a "finder's fee" equal to 6

percent of the taxes recovered pursuant to the ruling. He

contacted tribes seeking meetings to present his advice and

requested that the tribes provide him with meals and lodging in

connection with his travel to the meetings. Mr. Doxtator

traveled as far as 500 miles for such meetings and made repeat

visits in some instances.

During the years at issue, Mr. Doxtator never received

payment of any finder's fees. He considered there to be oral

agreements regarding his fees with the tribes with whom he met.

After failing to receive payment, he did not seek written

contracts; instead, he sought to recover the fees by requesting

payment from newly elected members of the tribal leadership.

On the 1997 Schedule C for Native American Finance,

petitioners reported gross receipts of $613, cost of goods sold

of $225, and expenses of $7,580. On the 2000 Schedule C for

Native American Finance, petitioners reported gross receipts of

$465 and expenses of $7,748. The amount reported as gross

receipts comprised reimbursements of travel expenses to Mr.

Doxtator by the tribes he visited. Some of the expenses claimed

on the 1997 and 2000 Schedules C were Mrs. Doxtator's travel

expenses incurred in connection with her duties as a judicial

officer.
 - 6 -

Respondent determined that Native American Finance was not a

trade or business and disallowed the claimed cost of goods sold

in 1997 and the deductions for the claimed expenses for 1997 and

2000. The determination shifted the 1997 and 2000 reported gross

receipts from Schedule C to line 21, "Other Income", of the Form

1040, U.S. Individual Income Tax Return.

Capital Gains

On January 20, 1999, Mrs. Doxtator purchased 600 shares of

American Pad & Paper Co. for a total cost of $650.50 which she

sold on April 21, 1999, for net proceeds of $989.46. On February

12, 1999, Mrs. Doxtator purchased 200 shares of Williams Coal

Seam Gas for $1,850.50 which she sold on March 19, 1999, for net

proceeds of $1,986.93. On March 19, 1999, Mrs. Doxtator

purchased 400 shares of Burnham PAC PPTYS, Inc., for $4,188 which

she sold on April 23, 1999, for $4,586.84. On April 27, 1999,

Mrs. Doxtator sold 100 shares of Jevic Transportation, Inc., for

net proceeds of $899.46.4 On May 4, 1999, Mrs. Doxtator bought

200 shares of Arkansas Best Corp. Del. for $7,263 which she sold

on July 6, 1999, for net proceeds of $7,249.25. On July 12,

1999, Mrs. Doxtator sold 1 share of Patriot American Hospitality,

that was received pursuant to a cash merger on June 20, 1999, for

net proceeds of $11.61.

4
The record does not indicate the cost or acquisition date
of this stock.
 - 7 -

On February 8, 1999, a check for $5,000, payable to Mr.

Doxtator, and drawn by Melinda Doxtator, his mother, cleared her

account.

Petitioners reported no capital gains on their 1999 return.

Respondent determined that petitioners received $15,720 in 1999

from the sale of stocks in which they had a basis of $14,720,

resulting in short-term capital gain of $1,000 in 1999.

Respondent further determined that petitioners had long-term

capital gain of $146 in that year.

Dividend Income

Petitioners reported no dividend income on their 1999

return. Respondent determined that petitioners failed to report

$281 of taxable dividends in 1999.

Oneida Tribe payments

During 1999, petitioners each received $1,500 from the

Oneida Tribe and were issued Forms 1099 that reported these

payments as nonemployee compensation.

The payments constituted a distribution of the profits from

a casino owned and operated by the Oneida Tribe. The casino (and

an associated hotel) were built on land purchased by the Oneida

Tribe from "noncompetent"5 Tribe members in 1968. The Tribe

5
"A noncompetent Indian is one who holds allotted lands
only under a trust patent and may not dispose of his property
without the approval of the Secretary of the Interior. It does
not denote mental incapacity." Stevens v. Commissioner, 452 F.2d
(continued...)
 - 8 -

purchased the land using proceeds it received pursuant to a

judgment by the Indian Claims Commission in Docket No. 75 that

were distributed pursuant to the Act of September 27, 1967, Pub.

L. 90-93, 81 Stat. 229, 25 U.S.C. secs. 1141-1147 (2000).

Petitioners did not report the two payments (totaling

$3,000) on their 1999 return. Respondent determined that the

payments were taxable per capita payments in that year.

Charitable Contributions

Petitioners claimed deductions for charitable contributions

on their 1997 and 2000 returns of $5,899 and $3,969,

respectively. The notice of deficiency disallowed these

deductions for failure to substantiate.

Casualty Loss

Petitioners claimed a casualty loss of $4,516 on their 2000

return.

In April 2000, a water main adjacent to petitioners'

residence broke and their basement was flooded with 4 to 5 feet

of water. Petitioners' loss was not covered by insurance. The

notice of deficiency disallowed the claimed $4,516 casualty loss.

Accuracy-Related Penalties

Petitioners previously appeared before this Court for

redetermination of a deficiency with respect to their 1991

5
(...continued)
742 n.1 (9th Cir. 1971), affg. in part and revg. in part 52 T.C.
330 (1969).
 - 9 -

taxable year. In that case, at docket No. 6313-95S, petitioners

argued that tier II railroad retirement benefits received by Mr.

Doxtator were exempt from Federal income tax because of

petitioners' status as Native Americans. We concluded, in an

unpublished Summary Opinion that has been made part of the record

in this case, that petitioners had failed to identify any statute

or treaty that would exempt the retirement benefits from tax and

accordingly sustained the deficiency. Our opinion was filed on

March 20, 1997.

OPINION

Jurisdiction

Petitioners contend that this Court does not have

jurisdiction over that portion of their deficiencies that relates

to "Treaty rights of the Oneida, income derived from The

Sovereign Government of the Oneida, and income from an investment

made by the Oneida Government, i.e. enrolled membership."

Petitioners concede our jurisdiction with respect to the issues

involving their claimed casualty loss and their investment

income. In context, as best we can understand petitioners'

claim, we believe they are challenging our jurisdiction to

redetermine the deficiencies determined with respect to Mrs.

Doxtator's compensation as a judicial officer for the Oneida

Tribe and their receipt of the $1,500 payments from the Oneida

Tribe.
 - 10 -

We have jurisdiction to redetermine the deficiency of any

taxpayer who is issued a valid notice of deficiency in respect of

any tax imposed by subtitle A of the Internal Revenue Code and

who timely files a petition for redetermination. Secs. 6212(a),

6213(a), and 6214(a); Monge v. Commissioner, 93 T.C. 22, 27

(1989); Normac, Inc. v. Commissioner, 90 T.C. 142, 147 (1988).

The record indicates that these jurisdictional requisites have

been satisfied.6 Petitioners have not suggested or shown any

defect in the notice of deficiency.

Nor have petitioners demonstrated any other basis on which

this Court lacks jurisdiction, notwithstanding their claim that

only Congress has the authority to consider certain of the issues

in this case. Native Americans such as petitioners are U.S.

citizens and generally are subject to Federal income tax in the

same manner as other U.S. citizens, absent specific exemption by

a treaty or statute. Squire v. Capoeman, 351 U.S. 1, 6 (1956);

Estate of Poletti v. Commissioner, 99 T.C. 554, 557-558 (1992),

affd. 34 F.3d 742 (9th Cir. 1994). While citing numerous

treaties and statutes, petitioners have pointed to no provision

that would affect our jurisdiction over the items they dispute.

To the contrary, as more fully discussed hereinafter, Mrs.

Doxtator's compensation for her services to the Oneida Tribe is

6
Respondent issued a notice of deficiency for the taxable
years 1997, 1999, and 2000 to petitioners on Oct. 31, 2002, and
petitioners timely filed a petition with this Court for
redetermination on Jan. 27, 2003.
 - 11 -

subject to Federal income and self-employment tax, and the

payments made to petitioners by the Oneida Tribe from the

proceeds of its casino operations are subject to Federal income

tax, as determined by respondent.

Having invoked our jurisdiction by filing their petition,

petitioners may not unilaterally oust it. Estate of Ming v.

Commissioner, 62 T.C. 519 (1974). We therefore reject

petitioners’ claim that we lack jurisdiction with respect to any

aspect of this case.

Burden of Proof

Petitioners have neither claimed nor shown entitlement to a

shift in the burden of proof to respondent with regard to any

factual issue pursuant to section 7491(a). Accordingly,

petitioners bear the burdens of proof and production with respect

to all issues in this case, except as provided in section

7491(c). See Rule 142(a).

Judicial Officer Compensation

Respondent determined that the amounts Mrs. Doxtator

received as compensation for her services as a judicial officer

for the Oneida Tribe were subject to Federal income tax.

Petitioners contend that those amounts are exempt from tax.

It is well established that Native Americans, or American

Indians, as U.S. citizens are subject to the Federal income tax

unless an exemption is created by treaty or statute. Squire v.
 - 12 -

Capoeman, supra; Estate of Poletti v. Commissioner, supra. For

such an exemption to be valid, it must be based upon clearly

expressed language in a statute or treaty. Squire v. Capoeman,

supra; United States v. Anderson, 625 F.2d 910, 913 (9th Cir.

1980); Estate of Peterson v. Commissioner, 90 T.C. 249, 250

(1988).

Petitioners argue that Mrs. Doxtator's judicial officer

compensation is exempt from taxation because she was "an elected

officer of a sovereign". Petitioners persist in their argument

premised on Mrs. Doxtator's status as an elected officer even

though the evidence establishes, and they conceded at trial, that

she was not an elected official.7 Regardless, her status as

elected or appointed is not significant in determining whether

the amounts paid to her for her services as a judicial officer

are subject to income tax. A tribal official, whether elected or

appointed, is subject to income tax on the compensation received

for rendering services to the tribe unless a treaty or statute

specifically provides an exemption. See Hoptowit v.

Commissioner, 78 T.C. 137, 145-148 (1982), affd. 709 F.2d 564

7
Petitioners' emphasis on Mrs. Doxtator's status as an
elected official appears to be an attempt to invoke Rev. Rul. 59-
354, 1959-2 C.B. 24, which excludes compensation for the duties
performed by elected tribal council members from the definition
of "wages" for purposes of FICA, FUTA, and income tax
withholding. However, even if Rev. Rul 59-354, supra, applied to
Mrs. Doxtator's compensation, it would provide no exemption from
income tax. Moreover, respondent determined that Mrs. Doxtator's
compensation was income from self-employment, not wages subject
to withholding.
 - 13 -

(9th Cir. 1983); Jourdain v. Commissioner, 71 T.C. 980, 986-987

(1979), affd. 617 F.2d 507 (8th Cir. 1980). Petitioners have not

shown that either a treaty or a statute specifically exempts Mrs.

Doxtator's compensation from taxation. Accordingly, we sustain

respondent's determination that Mrs. Doxtator's judicial officer

compensation for the years in issue is subject to income tax.8

Respondent also determined that Mrs. Doxtator's judicial

officer compensation is subject to self-employment tax for the

years in issue.9 As best we understand their position,

petitioners offer no additional argument directed at the

liability for self-employment tax beyond that offered with

respect to the income tax; namely, that Mrs. Doxtator's

compensation as a judicial officer is exempt because she is an

elected officer of a sovereign.10

8
Petitioners at various points claim that Mrs. Doxtator
incurred travel expenses in connection with the performance of
her duties as a judicial officer. However, petitioners have
never identified the amounts of those expenditures, much less
substantiated them under the requirements of sec. 1.274-5T(c),
Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985),
for any year at issue.
9
In connection with that determination, respondent allowed
a corresponding deduction in each year of one-half of the self-
employment taxes imposed by sec. 1401. See sec. 164(f)(1).
10
To the extent that petitioners may again be invoking Rev.
Rul. 59-354, supra, we note that, although the ruling does not
address self-employment taxes, it does state that other salaried
employees of tribal councils (besides elected council members)
are not exempt from employment taxes.
 - 14 -

Section 1401 imposes a tax on self-employment income,

defined generally as "the net earnings from self-employment

derived by an individual". Sec. 1402(b). The net earnings from

self-employment are, in turn, defined generally as "the gross

income derived by an individual from any trade or business

carried on by such individual, less the deductions allowed by

this subtitle which are attributable to such trade or business".

Sec. 1402(a).

For purposes of self-employment income or net earnings from

self-employment, the term "trade or business" has "the same

meaning as when used in section 162 (relating to trade or

business expenses)", with certain exceptions. Sec. 1402(c).

Section 7701(a)(26) provides that, for purposes of the Internal

Revenue Code, "the term 'trade or business' includes the

performance of the functions of a public office." However, one

of the specific exceptions under section 1402(c) to the meaning

of "trade or business" for self-employment tax purposes is "the

performance of the functions of a public office" (with a further

qualification not here pertinent). Sec. 1402(c)(1). Section

1402(c)(1) thus negates, for self-employment tax purposes, the

inclusion under section 7701(a)(26) of the performance of public

office functions within the meaning of "trade or business".

Accordingly, pursuant to section 1402(c)(1), income derived by an

individual from the performance of the functions of a public
 - 15 -

office is generally not subject to self-employment tax, because

it is not derived from a "trade or business". See Ekren v.

Commissioner, T.C. Memo. 1986-509; see also Porter v.

Commissioner, 88 T.C. 548, 561 (1987), revd. 856 F.2d 1205 (8th

Cir. 1988), affd. sub nom. Adams v. Commissioner, 841 F.2d 62 (3d

Cir. 1988).

Petitioners' claim that Mrs. Doxtator's judicial officer

compensation is exempt from self-employment tax because she was

an elected officer of a sovereign could be interpreted as

invoking the exemption provided in section 1402(c)(1). For the

reasons discussed below, we conclude that section 1402(c)(1)

provides no relief for petitioners.

The regulations under section 1402(c)(1) provide that a

"public office" for this purpose "includes any elective or

appointive office of the United States or any possession thereof,

of the District of Columbia, of a State or its political

subdivisions, or a wholly-owned instrumentality of any one or

more of the foregoing." Sec. 1.1402(c)-2(b), Income Tax Regs.

The examples provided in the regulation include a judge, justice

of the peace, or notary public. Id. Neither the statute nor the

regulation defining "public office" makes any reference to

Indians, Indian tribes, or Indian tribal governments.

In 1982, Congress considered the tax status of Indian tribal

governments, concluded that "it is appropriate to provide these
 - 16 -

governments with a status under the Internal Revenue Code similar

to what is now provided for the governments of the States of the

United States", S. Rept. 97-646, at 11 (1982), 1983-1 C.B. 514,

518, and enacted section 7871. That section provides numerous

instances where "Indian tribal governments"11 are treated as

States for various Internal Revenue Code purposes. Section

1402(c)(1) is not one of those instances. As Congress has

considered the issue of Indian tribal and State government

equivalence for Internal Revenue Code purposes and not seen fit

to extend equivalence in the case of a "public office" as used in

section 1402(c)(1), we conclude that it would not be appropriate

to do so by judicial interpretation.12 Accordingly, we hold that

the judicial officer position held by Mrs. Doxtator is not a

"public office" within the meaning of section 1402(c)(1). Her

compensation is therefore not exempt from self-employment tax

under that section.

11
Sec. 7701(a)(40), adding "Indian tribal government" as a
defined term in the Internal Revenue Code, was enacted at the
same time. Indian Tribal Governmental Tax Status Act of 1982,
Pub. L. 97-473, sec. 203, 96 Stat. 2611.
12
In 1988, Congress amended sec. 1402(a) as it applied to
the fishing rights of members of Indian tribes. Sec.
1402(a)(15); see Technical and Miscellaneous Revenue Act of 1988,
Pub. L. 100-647, sec. 3043(c)(1), 102 Stat. 3642. When amending
the self-employment tax statutes in a manner specifically
concerning Indian tribes, Congress again did not see fit to make
Indian tribal governments equivalent to State governments for
purposes of the "public office" exception from self-employment
tax.
 - 17 -

We are unable to discern in petitioners' arguments any other

basis for attributing error to respondent's determination that

Mrs. Doxtator's judicial officer compensation is subject to self-

employment tax. Moreover, several other factors support the

determination. Mrs. Doxtator controlled her own schedule. She

had discretion to hear as many or as few cases as she chose. She

was paid a flat stipend per case heard, regardless of its

duration. She was required to provide her own transportation to

the various hearing sites. Her decisions were binding on the

Tribe. In sum, the manner in which she performed her duties as a

judicial officer supports the conclusion that she was an

independent contractor, and the Tribe treated her as such,

issuing Forms 1099 with respect to the amounts paid to her for

each year in issue. We accordingly sustain respondent's

determination that Mrs. Doxtator's compensation as a judicial

officer in 1997, 1999, and 2000 is subject to self-employment

taxes.

Native American Finance

Respondent disallowed the expenses petitioners claimed on

Schedules C for 1997 and 2000 on the grounds that Native American

Finance was not a trade or business for purposes of section

162(a).

Section 162(a) allows deductions for ordinary and necessary

expenses paid or incurred in carrying on any trade or business.
 - 18 -

There being no statutory or regulatory definition of a trade or

business, the courts have established criteria for determining

the existence of a trade or business. See, e.g., Commissioner v.

Groetzinger, 480 U.S. 23, 27 (1987). In order to be engaged in a

trade or business, the taxpayer must be involved in the activity

with continuity and regularity, and the taxpayer's primary

purpose for the activity must be the creation of income or

profit. Id. at 35; Nickerson v. Commissioner, 700 F.2d 402, 404

(7th Cir. 1983). The taxpayer need not have a reasonable

expectation of profit for his activities to constitute a trade or

business but must conduct the enterprise with a good faith

intention of making a profit or producing income. Burger v.

Commissioner, 809 F.2d 355, 358 (7th Cir. 1987), affg. T.C. Memo.

1985-523; Intl. Trading Co. v. Commissioner, 275 F.2d 578, 584

(7th Cir. 1960), affg. T.C. Memo. 1958-104; Golanty v.

Commissioner, 72 T.C. 411, 425-426 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981).

Profit objective is a question of fact to be determined from

all of the facts and circumstances. Allen v. Commissioner, 72

T.C. 28, 34 (1979); Dunn v. Commissioner, 70 T.C. 715, 720

(1978), affd. 615 F.2d 578 (2d Cir. 1980). More weight is given

to objective facts than to the taxpayer's statement of his

intent. Burger v. Commissioner, supra at 358; Engdahl v.

Commissioner, 72 T.C. 659, 666 (1979). In determining whether a
 - 19 -

taxpayer had the requisite profit motive under section 162(a),

the factors set forth in the regulations promulgated under

section 183 are considered. Sullivan v. Commissioner, T.C. Memo.

1998-367, affd. 202 F.3d 264 (5th Cir. 1999). In addition to the

taxpayer's continuity and regularity in pursuing the activity, as

cited by the Supreme Court in Commissioner v. Groetzinger, supra,

factors listed in the section 183 regulations include whether the

activity is conducted in a businesslike manner, sec. 1.183-

2(b)(1), Income Tax Regs., and the taxpayer's history of income

or losses with respect to the activity, sec. 1.183-2(b)(6),

Income Tax Regs.

Mr. Doxtator did not conduct the Native American Finance

activity with continuity and regularity. Although petitioners'

1998 return is not in the record, their 1999 return is, and it

contains no Schedule C reporting operations of Native American

Finance in 1999. Thus, the activity was not continuous between

1997 and 2000.

Mr. Doxtator also did not conduct the activity in a

businesslike fashion. When tribal officials failed to pay his

finder's fee, he took no steps to ensure that he would be paid

for future transactions, such as switching to written contracts

instead of oral agreements. Mr. Doxtator also commingled the

expenses of Native American Finance with those of Mrs. Doxtator's

judicial officer work. Finally, petitioners reported no gross
 - 20 -

receipts, much less profits, from the enterprise during the years

at issue; Mr. Doxtator conceded that the reported gross receipts

were actually payments for travel expenses.

Considering all of the foregoing factors, we conclude that

petitioners have failed to show error in respondent's

determination that the Native American Finance activity was not a

trade or business within the meaning of section 162(a).

Accordingly, we sustain respondent's determination to disallow

the cost of goods sold in 1997. We also sustain respondent's

determination to disallow the claimed expense deductions in 1997

and 2000 and to reclassify the gross receipts reported on the

respective Schedules C as income from activities not engaged in

for profit.13

Capital Gains

Respondent determined that petitioners received $15,720 in

1999 from the sale of stocks in which they had a basis of

$14,720, resulting in short-term capital gain of $1,000 in 1999.

Respondent further determined that petitioners had long-term

capital gain of $146 in that year.

Petitioners concede that stocks held in Mrs. Doxtator's name

that were sold in 1999 generated the $15,720 in proceeds noted

above. They also have not challenged, in their testimony or on

13
This is the effective result of moving the gross receipts
from Schedule C to line 21, "Other Income", on the Form 1040 as
respondent did in the notice of deficiency.
 - 21 -

brief, respondent's computations of the amount of gain.14

Instead, they argue that the stocks were purchased with funds of

Mr. Doxtator's mother, Melinda Doxtator, on her behalf.

Therefore, petitioners contend, the gain on the sale of the

stocks is not taxable to them.

While the evidence establishes that Melinda Doxtator

transferred $5,000 to Mr. Doxtator in 1999, in the form of her

check made payable to him that cleared her account on February 8,

1999, we nonetheless conclude on the basis of the entire record

that petitioners have not shown that the stocks generating the

gains at issue were the property of Melinda Doxtator rather than

Mrs. Doxtator.

Petitioners' claims that these gains were Melinda Doxtator's

rather than petitioners' are inconsistent and confused. First,

Mr. Doxtator testified at trial that the stocks generating the

gains at issue were purchased with $2,000 of petitioners' money

14
The stipulated exhibits contain a worksheet that
petitioners prepared covering their 1999 stock transactions.
This worksheet indicates that petitioners' gain on the sale of
the stocks at issue was $919 (versus respondent’s determination
of $1,000 in short-term, and $146 in long-term, capital gain).
However, the worksheet indicates that the gain on the sale of
Mrs. Doxtator's Jevic Transportation, Inc. stock was $87.50,
without disclosing Mrs. Doxtator's basis in, or holding period
for, that stock. There is no evidence of the basis or holding
period anywhere else in the record. Accordingly, we are not
persuaded that petitioners' worksheet demonstrates any error in
respondent's determination. Moreover, nowhere in their testimony
or brief do petitioners contend that the worksheet proves error
in respondent's determination. Their only argument (considered
above) is that the stocks, and therefore the gains from the
stocks, belonged to Mr. Doxtator's mother.
 - 22 -

and $5,000 of Melinda Doxtator's money. For reasons that are not

clear, Mr. Doxtator contended that this arrangement resulted in

petitioners' having a 40-percent share of any gain, but then

persisted in claiming that "any gain went to her [Melinda

Doxtator]". On brief, petitioners contended for a different

version of the arrangement; namely, that the money for the

investment in the stocks was 28 percent from petitioners' funds,

14 percent from a friend (Pearl McLester, mentioned for the first

time on brief), and 71 percent from Melinda Doxtator.15 As was

true of the first version, petitioners offer no explanation

concerning why, if they contributed a share of the invested

funds, no portion of the gain was theirs. Although Mr. Doxtator

testified that all gains in 1999 were paid over to Melinda

Doxtator, he offered no evidence to corroborate this contention.

We are not required to accept Mr. Doxtator's uncorroborated,

self-serving testimony, and we do not. See Niedringhaus v.

Commissioner, 99 T.C. 202, 212 (1992); Tokarski v. Commissioner,

87 T.C. 74, 77 (1986). Second, petitioners' varying positions

regarding the source of the investment funds may reflect the fact

that their claim that Melinda Doxtator's $5,000 contribution

entitled her to "most" or "all" of the resulting gain cannot be

15
Aside from the facial contradiction in this later version
of the allocation (the portions of which total 113 percent),
unsupported statements in a brief do not constitute competent
evidence. Rule 143(b); Niedringhaus v. Commissioner, 99 T.C.
202, 214 n.7 (1992); Viehweg v. Commissioner, 90 T.C. 1248, 1255
(1988); Castro v. Commissioner, T.C. Memo. 2001-115.
 - 23 -

squared with their own worksheet covering the stock transactions,

which indicates that the aggregate acquisition price of the

stocks at issue was $14,86716 (a figure not at substantial

variance from respondent's determination that their basis was

$14,720). Finally, at least one17 of the stocks at issue was

acquired on January 25, 1999, before Melinda Doxtator transferred

$5,000 to Mr. Doxtator. That stock (American Pad & Paper Co.),

according to petitioners' own worksheet, accounted for $375 in

gain, or over one-third of the short-term capital gain determined

by respondent for 1999. In sum, petitioners' confused and

inconsistent claims regarding Melinda Doxtator's ownership of the

stocks giving rise to the capital gains determined by respondent

fail to persuade us that petitioners have demonstrated any error

in that determination. Accordingly, we sustain respondent's

determination that petitioners had $1,000 in short-term capital

gain and $146 in long-term capital gain in 1999.

16
The figure represents the acquisition prices (plus
commissions) listed by petitioner for the stocks at issue, which
is generally corroborated by the confirmation statements in the
record. In the case of the Jevic Transportation, Inc. stock,
petitioners' worksheet does not list an acquisition price, but it
can be derived by comparing the gain they list for the sale of
that stock with the (undisputed) proceeds of sale listed on the
Form 1099 issued to Mrs. Doxtator.
17
Petitioners have not alleged the date that the Jevic
Transportation, Inc. stock was acquired, except to the extent
that an inference may be drawn from their failure to list it on
their worksheet among the stocks acquired in 1999. If this stock
had been acquired before 1999, it would represent an additional
stock acquired before Melinda Doxtator transferred any funds to
Mr. Doxtator.
 - 24 -

Taxable Dividends

Dividends are taxable income. Sec. 61(a)(7). Respondent

determined that petitioners failed to report $281 in dividend

income received during 1999. Petitioners conceded receipt of

$281 in dividends but maintain that this amount is not taxable

income to them because the dividends were received with respect

to stocks that belonged to Melinda Doxtator and were paid over to

her. For the reasons discussed in connection with our

consideration of petitioners' capital gains in 1999, we conclude

that petitioners have failed to show that any of the stocks

titled in Mrs. Doxtator's name were being held on behalf of

Melinda Doxtator or that any proceeds related to those stocks

were paid over to Melinda Doxtator. Accordingly, we sustain

respondent's determination.

Oneida Tribe Payments

Respondent determined that petitioners failed to report

$3,000 in taxable per capita payments in 1999. Petitioners

contend that the payments are exempt from tax.

The payments at issue were received by petitioners from the

Oneida Tribe and constituted a distribution of the profits from a

casino operated by the Tribe. The payments were reported on

Forms 1099 by the Tribe as taxable nonemployee compensation.

Petitioners first argue that the payments are not per capita

payments because they were not distributed equally to members of
 - 25 -

the Oneida Tribe and therefore are not per capita payments under

the Indian Gaming Regulatory Act (IGRA), Pub. L. 100-497, 102

Stat. 2467 (1988), 25 U.S.C. secs. 2701-2721 (2000).

The record in this case is insufficient for us to draw a

conclusion regarding whether these payments would constitute per

capita payments as that term is used in the IGRA. Mr. Doxtator

testified at trial that all Tribe members under age 59-1/2

received identical $1,500 payments, while older Tribe members

received larger payments. There is no evidence corroborating Mr.

Doxtator's testimony that payments to Tribe members varied

according to age. Under the IGRA, revenues from Indian gaming

activities may be used to make per capita payments to tribe

members only under arrangements that have been approved by the

Secretary of the Interior. See 25 U.S.C. sec. 2710(b)(3),

(d)(1)(A)(ii); 25 C.F.R. secs. 290.2, 290.5 (2004). On this

record, we are unable to determine whether the payments were

distributed without the Secretary's approval, in contravention of

the IGRA, or whether the Secretary approved per capita payments

that varied by age. In these circumstances, we conclude that

petitioners have failed to meet their burden of showing error in

respondent's determination that the payments were per capita

payments.

In any event, these payments would be subject to Federal

income tax regardless of their status as per capita payments.
 - 26 -

Whether the casino was located on tribal land (as respondent

contends) or on allotted land18 (as petitioners at times appear

to contend), the payments, constituting distributions to Tribe

members of profits from a casino owned and operated by the Tribe,

would be taxable to the Tribe members receiving them. If on

tribal land, they would be taxable on receipt. Choteau v.

Burnet, 283 U.S. 691 (1931); Anderson v. United States, 845 F.3d

206 (9th Cir. 1988); Fry v. United States, 557 F.2d 646 (9th Cir.

1977); Holt v. Commissioner, 364 F.2d 38 (8th Cir. 1966), affg.

44 T.C. 686 (1965). If on allotted land, they would be taxable

upon receipt because not "derived directly" from the allotted

land. See Squire v. Capoeman, 351 U.S. 1 (1956); Cross v.

Commissioner, 83 T.C. 561 (1984), affd. sub nom. Dillon v. United

States, 792 F.2d 849 (9th Cir. 1986); Hoptowit v. Commissioner,

78 T.C. 137 (1982); Critzer v. United States, 220 Ct. Cl. 43, 597

F.2d 708 (1979).

18
Under the General Allotment Act of 1887, ch. 119, 24
Stat. 388, as amended, Indians were allotted shares of
reservation land, held in trust on their behalf by the United
States. See Squire v. Capoeman, 351 U.S. 1, 3 (1956). Indians
holding such allotments could not alienate or encumber the
property without consent of the U.S. Government. Id. at 4.
Indians possessing such allotments were referred to as
"noncompetent" because of their inability to alienate or encumber
the land they held. Hoptowit v. Commissioner, 709 F.2d 564, 565
n.1 (9th Cir. 1983), affg. 78 T.C. 137 (1982).
In this case, the parties agree that the Oneida Tribe
purchased the land on which the casino was located from
noncompetent Tribe members in 1968. In respondent's view, the
land became tribal land upon this purchase, whereas petitioners,
though not clear on this point, appear to take the position that
the land retained its character as allotted land.
 - 27 -

Petitioners also appear to argue that the payments at issue

are subject to a specific exemption from Federal income tax

because they are traceable to, or somehow derived from, funds

constituting the payment to the Oneida Tribe of a judgment

against the United States. On brief, as a basis for exemption,

petitioners refer to "Docket No. 75 (Indian Claims Commission

{1967})" and an exhibit in the record further clarifies that

"Docket No. 75" is often used in reference to litigation known as

the New York Emigrant Claim made on behalf of certain tribes that

left New York for Wisconsin, including the Oneida Tribe of

Wisconsin. Provision for payment of a judgment to the Oneida

Tribe (and two other tribes) was made pursuant to the Act of

September 27, 1967, codified as subchapter LVI of title 25 of the

U.S. Code (25 U.S.C. secs. 1141-1147). Since 25 U.S.C. sec. 1146

provides an exemption from Federal income taxes with respect to

certain payments made pursuant to 25 U.S.C. subchapter LVI, we

treat petitioners as having invoked the exemption of 25 U.S.C.

sec. 1146.

Petitioners contend, and stipulated exhibits in the record

corroborate their contention, that the land on which the casino

was located was purchased by the Oneida Tribe in 1968 with

$60,000 in funds from the judgment received by the Tribe pursuant

to 25 U.S.C. subchapter LVI. That subchapter, at 25 U.S.C. sec.

1145, provides: "The funds apportioned to the Oneida Tribe of
 - 28 -

Indians of Wisconsin * * * shall be placed to their credit and

may be * * * expended * * * for any purposes that are authorized

by the tribal governing bod[y] thereof and approved by the

Secretary of the Interior." Section 1146 of title 25 then

provides an exemption from Federal income taxes for the foregoing

funds, as follows: "None of the funds that may be distributed

per capita shall be subject to Federal or State income taxes."

(Emphasis added.)

To the extent petitioners may be claiming that the exemption

from Federal income taxes provided in 25 U.S.C. sec. 114619

covers the payments at issue in this case, we disagree. Section

1146 of title 25 by its terms covers only per capita

distributions of the judgment funds. The Oneida Tribe's

expenditure of $60,000 of the judgment funds to purchase the

casino land was not a per capita distribution; that is, it was

not a distribution made to all members of the Oneida Tribe.

Rather, it was a purchase of land from the Tribe members to whom

the land had been allotted. The exemption provided in 25 U.S.C.

19
On brief, petitioners also cite 25 U.S.C. sec. 1401,
which we take to be a reference to the Indian Tribal Judgment
Funds Use or Distribution Act, Pub. L. 93-134, 87 Stat. 466
(1973), codified at 25 U.S.C. secs. 1401-1408 (2000). The act
provides rules of general applicability to the payment of Indian
tribal judgments, including a provision granting exemption from
Federal and State income taxes for such payments (25 U.S.C. sec.
1407). However, these provisions, enacted in 1973, would not
apply to the distributions of the judgment funds at issue herein,
which occurred in 1968.
 - 29 -

sec. 1146 is therefore inapplicable to the distribution of casino

profits over 30 years later.

Our conclusion finds further support in the IGRA. In that

act, Congress specifically addressed the question of Federal

income taxation of the distribution of revenues from Indian

gaming activities to tribe members. Section 2710(b)(3) of title

25 provides:

(3) Net revenues from any class II [or III20]
gaming activities conducted or licensed by any Indian
tribe may be used to make per capita payments to
members of the Indian tribe only if --

* * * * * * *

(D) the per capita payments are subject to Federal
taxation and tribes notify members of such tax
liability when payments are made.

Thus, it was Congress's understanding in permitting distributions

to tribe members of revenues from gaming activities conducted by

the tribe that such distributions would be subject to Federal

taxation. Petitioners' contention that the exemption provided in

25 U.S.C. sec. 1146 reaches payments to Oneida Tribe members of

tribal gaming revenues cannot be reconciled with the

congressional intent to tax gaming revenues evidenced in 25

20
The IGRA classifies gaming into three categories: class
I, generally covering social games for prizes of minimal value;
class II, which consists of bingo and certain card games; and
class III, which covers all remaining gaming, such as that
typically conducted in casinos.
Sec. 2710(d)(1)(A) of tit. 25 makes the provisions of 25
U.S.C. sec. 2710(b) applicable to class III gaming.
 - 30 -

U.S.C. sec. 2710(b)(3)(D). We accordingly sustain respondent's

determination that petitioners failed to report $3,000 in taxable

income arising from the payments in that amount made to them by

the Oneida Tribe in 1999.

Charitable Contributions

Section 170(a) generally allows a deduction for

contributions made to certain designated entities, provided such

contributions are verified under regulations prescribed by the

Secretary. Depending upon the size of the contribution, the

verification requirement is satisfied by reliable written records

or by a written acknowledgment from the recipient entity. See

sec. 170(f)(8); sec. 1.170A-13(a)(1), Income Tax Regs.

Respondent disallowed petitioners' claimed charitable

contribution deductions of $5,899 and $3,969 for 1997 and 2000,

respectively, for failure to substantiate the deductions.

Petitioners claim to have submitted substantiation of their 1997

and 2000 charitable contribution deductions to respondent's field

office in Green Bay, Wisconsin. However, they have not produced

any evidence in support of this claim or provided any written

evidence to verify or substantiate the claimed deductions.21

In the absence of evidence to verify or substantiate

petitioners' claimed charitable contribution deductions, we

21
On the basis of his testimony, Mr. Doxtator appears to
believe that a taxpayer is entitled to a charitable contribution
deduction equal to 10 percent of his income, without regard to
verification or substantiation.
 - 31 -

sustain respondent's determination disallowing those deductions

for the 1997 and 2000 taxable years.

Casualty Loss

Respondent disallowed petitioners' claimed casualty loss of

$4,516 for 2000. Under section 165(c)(3), a taxpayer may deduct

property losses not compensated by insurance or otherwise,

arising from fire, storm, shipwreck, or other casualty or from

theft. To qualify as a casualty, the event causing the loss must

be sudden and not the result of deterioration over time. Maher

v. Commissioner, 680 F.2d 91, 92 (11th Cir. 1982), affg. 76 T.C.

593 (1981); Coleman v. Commissioner, 76 T.C. 580, 589 (1981).

Respondent conceded on brief that petitioners incurred a

casualty loss from flooding in April 2000. Respondent further

conceded $1,090 of casualty losses substantiated by petitioners

after the petition was filed.22 The remaining $3,426 in claimed

casualty losses is still in dispute, and respondent maintains

that these losses should be disallowed because petitioners have

failed to substantiate them.

Petitioners describe the unsubstantiated amounts as covering

a "box of valuables", two chainsaws, two dehumidifiers, and

approximately $3,000 in clothing and bedding damaged in the

flood. Petitioners have offered no evidence to corroborate these

additional losses claimed. Accordingly, we hold that petitioners

22
This amount covers substantiated costs of replacing a
water heater, furnace, and sump pump.
 - 32 -

have failed to substantiate casualty losses greater than the

amounts conceded by respondent, and we sustain that portion of

respondent's determination that has not been conceded.

Accuracy-Related Penalties

Respondent determined that petitioners were liable for the

accuracy-related penalty based on a substantial understatement of

income tax, or alternatively, negligence or disregard of rules or

regulations, for 1997 and 1999. Sec. 6662(a) and (b)(1) and (2).

Respondent also determined that petitioners were liable for the

accuracy-related penalty based on negligence or disregard of

rules or regulations for 2000. Sec. 6662(a) and (b)(1).

A "substantial understatement" exists for this purpose if

the amount of tax required to be shown on the return exceeds that

shown by the greater of 10 percent of the tax required to be

shown or $5,000. Sec. 6662(d). "Negligence" for purposes of

section 6662 includes any failure to make a reasonable attempt to

comply with the provisions of the internal revenue laws or to

exercise ordinary and reasonable care in the preparation of a tax

return. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Only one accuracy-related penalty may be imposed with

respect to any given portion of an underpayment, even if that

portion is attributable to more than one of the types of

misconduct listed in section 6662(b). Jaroff v. Commissioner,

T.C. Memo. 2004-276; sec. 1.6662-2(c), Income Tax Regs.
 - 33 -

The Commissioner has the burden of production under section

7491(c) with respect to the liability of any individual for a

penalty imposed by the Internal Revenue Code and must come

forward with sufficient evidence indicating that it is

appropriate to impose the penalty. See Higbee v. Commissioner,

116 T.C. 438, 446-447 (2001). Because we have sustained, or

petitioners have conceded, every element of the deficiencies

determined for 1997 and 1999, each of which exceeds the greater

of 10 percent of the tax required to be shown on the return or

$5,000, respondent has met his burden of production with respect

to the penalties for substantial understatement in 1997 and 1999.

Once the Commissioner meets the burden of production, the

taxpayer must come forward with persuasive evidence that the

Commissioner's determination as to the penalties is incorrect or

that the taxpayer had reasonable cause or substantial authority

for his position. Id. at 447; sec. 1.6664-4, Income Tax Regs.

A penalty under section 6662(a) will not be imposed with

respect to any portion of the underpayment as to which the

taxpayer acted with reasonable cause and in good faith. Sec.

6664(c)(1); Higbee v. Commissioner, supra at 448. The decision

as to whether a taxpayer acted with reasonable cause and in good

faith is made by taking into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Relevant

factors include the taxpayer's efforts to assess his or her
 - 34 -

proper tax liability, including the taxpayer's reasonable and

good faith reliance on the advice of a tax professional. See

id.; see also sec. 1.6664-4(c), Income Tax Regs. Further, an

honest misunderstanding of fact or law that is reasonable in

light of the experience, knowledge, and education of the taxpayer

may indicate reasonable cause and good faith. See Remy v.

Commissioner, T.C. Memo. 1997-72.

Petitioners assert that they had reasonable cause for the

various positions taken on all their returns. In considering

this issue, we note that Mr. Doxtator was a well-informed

taxpayer. He was a volunteer tax return preparer for the IRS

between 1996 and 1998. In these proceedings, he has cited

taxation and Indian law authorities extensively. Moreover, in

their previous case before this Court, petitioners claimed an

exemption from tax, based on their status as Native Americans,

for tier II railroad retirement benefits, but they failed to

identify any treaty or statute providing such an exemption. Our

opinion to that effect was issued before any of the return

positions at issue herein were taken. In this context, we

address petitioners' return positions.

We find no reasonable cause for petitioners' position that

Mrs. Doxtator's judicial officer compensation is not subject to

income tax in 1997 and 1999. Petitioners disregarded information
 - 35 -

returns pertaining to this income and claimed without any basis

that Mrs. Doxtator was an elected official.

Our conclusion is different regarding petitioners' position

that Mrs. Doxtator's judicial officer compensation in 1997 and

1999 was exempt from self-employment tax. We conclude that a

taxpayer in petitioners' circumstances could have believed in

good faith that Mrs. Doxtator's duties as a judicial officer for

the Oneida Tribe were sufficiently similar to "the performance of

the functions of a public office" that she was entitled to the

exemption from self-employment tax provided in section

1402(c)(1). We note that this exemption does not depend upon the

public office's elective or appointive status. We therefore

conclude that petitioners had reasonable cause with respect to

that portion of the underpayment in 1997 and 1999 attributable to

their failure to treat Mrs. Doxtator's judicial officer

compensation as subject to self-employment tax.

We do not find reasonable cause for any other positions

taken on the 1997 and 1999 returns. Regarding Native American

Finance, petitioners provided no substantiation for the

deductions claimed in 1997 nor any persuasive reason for their

failure to do so, and Mr. Doxtator conceded that the amounts

claimed included expenses incurred by Mrs. Doxtator in the

performance of her judicial officer duties. Petitioners' claims

that the 1999 capital gains and dividend income were actually
 - 36 -

attributable to Mr. Doxtator's mother were inconsistent and

largely uncorroborated. With respect to the Oneida Tribe

payments in 1999, petitioners disregarded Forms 1099 indicating

that these amounts were taxable. Moreover, petitioners' brief

demonstrates extensive study of statutes, treaties, and caselaw

affecting Native Americans, including the IGRA, yet they

disregarded the specific IGRA provision (25 U.S.C. sec.

2710(b)(3)(D), discussed supra pp. 29-30) that addresses the

taxability of distributions of Indian gaming revenues. Regarding

claimed charitable contribution deductions in 1999, petitioners

did not offer any persuasive reason for their failure to

substantiate the substantial amounts claimed. Finally,

petitioners conceded without further explanation their failure to

report interest income in 1999.

Since we conclude that petitioners had substantial

understatements for 1997 and 1999, we address respondent's

determination of negligence for 2000 only. We are satisfied that

respondent has met his burden of production, and that the

evidence supports a finding of negligence or disregard of rules

or regulations within the meaning of section 6662(b)(1), for all

portions of the underpayment in 2000 except that attributable to

petitioners' liability for self-employment tax on Mrs. Doxtator's

judicial officer compensation in that year. For essentially the

same reasons that we found reasonable cause for petitioners'
 - 37 -

position regarding self-employment taxes in 1997 and 1999, we

conclude that they were not negligent regarding this item in

2000. Their position regarding income tax liability for this

amount, by contrast, lacks any basis. Likewise, petitioners'

failure to substantiate the claimed expenses in 2000 for Native

American Finance, and their commingling of unrelated expenses in

that claim, disregards their record-keeping obligations. See

sec. 6001; sec. 1.6001-1(a), Income Tax Regs. The foregoing

regulations were also disregarded when petitioners claimed

casualty losses that were more than $3,000 greater than what they

could substantiate. Their failure to substantiate nearly $4,000

in claimed charitable contribution deductions for 2000 disregards

the specific requirements of section 170(f)(8) and/or section

1.170A-13(a)(1), Income Tax Regs. Their failure to report

taxable interest income in 2000 is unexplained. We accordingly

conclude that petitioners' underpayment for 2000, with the

exception of the portion noted above, is attributable to

negligence or disregard of rules or regulations.

To reflect the foregoing,

Decision will be entered

under Rule 155.