T.C. Memo. 2006-11
UNITED STATES TAX COURT
MICHAEL W. ALLEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20970-03. Filed January 25, 2006.
Michael W. Allen, pro se.
David L. Zoss, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA, Judge: Respondent determined deficiencies and
penalties with respect to petitioner’s income taxes for 1999,
2000, and 2001 (the years at issue). For 1999, respondent
determined a $12,769.70 deficiency and determined petitioner was
liable for a $2,273.94 accuracy-related penalty under section
6662.1 For 2000, respondent determined a $9,503 deficiency and
1
All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
(continued...)
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determined petitioner was liable for a $1,900.60 accuracy-related
penalty under section 6662. For 2001, respondent determined a
deficiency of $20,812.00 and determined petitioner was liable for
a $4,162.40 accuracy-related penalty under section 6662.
There are four issues for decision. The first issue is
whether compensation petitioner received from an American Indian
tribe during the years at issue is taxable to him. We hold that
it is. The second issue is whether petitioner may reduce his
income by $69,916 for 2001. We hold that he may not. The third
issue is whether petitioner is entitled to deductions beyond
those reported on his returns for the years at issue. We hold
that he is not. The fourth issue is whether petitioner is liable
for the accuracy-related penalty under section 6662 for the years
at issue. We hold that he is.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Petitioner resided in Lac Du
Flambeau, Wisconsin, at the time he filed the petition.
Petitioner’s Income During the Years at Issue
Petitioner is an enrolled member of the Lac Du Flambeau
Band, a federally recognized American Indian tribe (the tribe).
The leadership of the tribe consists of an elected tribal
council. Petitioner served as vice chairman of the tribal
1
(...continued)
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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council during the years at issue.2 He earned compensation for
his services as an elected tribal council member of $33,775 in
1999, $31,118 in 2000, and $36,337 in 2001. The tribe also paid
petitioner $2,700 of other income in 1999 and $1,500 of other
income in 2000.
Petitioner was also a board member of Simpson Electric Co.
(Simpson), an electric company owned and operated by the tribe.
The tribe paid petitioner $8,000 in 2001 for attending Simpson
board meetings.
Petitioner also served as executive director of the Great
Lakes Intertribal Council, Inc. (GLITC), a nonprofit corporation,
during the years at issue. GLITC paid petitioner weekly
compensation.
Petitioner received distributions from two IRAs during the
years at issue, one in 1999 and the other in 2001.
Petitioner’s Income Tax Returns During the Years at Issue
Petitioner did not report his compensation for serving as
vice chairman of the tribal council on his income tax returns for
1999 and 2000, nor the IRA distributions he received in 1999 and
2001. On his return for 2001, petitioner made an unexplained
adjustment that reduced his income by $69,916.
Petitioner did report, however, his compensation from GLITC
on his return for each year at issue. He also reported the other
income he received from the tribe on his returns for 1999 and
2
Petitioner also served as the tribal vice president from
October 2000 through October 2004.
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2000, and he reported his compensation from the tribe for serving
on the tribal council and the Simpson board on his return for
2001. Petitioner reported tax due of $11,392 for 1999, $13,101
for 2000 and $8,643 for 2001.
Respondent’s Examination and the Petition
Respondent examined petitioner’s returns for the years at
issue and issued petitioner a notice of deficiency (deficiency
notice) dated September 18, 2003. In the deficiency notice,
respondent determined that the compensation petitioner received
from the tribe for serving as an elected tribal council member
was taxable income for 1999 and 2000, that the IRA distributions
were includable in gross income for 1999 and 2001, that
petitioner was not entitled to a $69,916 adjustment in 2001, and
that petitioner was liable for the accuracy-related penalty.
Petitioner timely filed a petition for review with this
Court.
OPINION
Petitioner asserts that the income he received from both
GLITC and the tribe during the years at issue is exempt from
taxation,3 that he is entitled to deductions beyond those claimed
on his returns for the years at issue, and that he is not liable
3
Although petitioner reported his compensation from GLITC
for all the years at issue and for serving on the Simpson board
and the tribal council in 2001 on his returns for the relevant
years, petitioner now contends that these items are exempt from
taxation. A taxpayer’s characterization of an item on his or her
income tax return may be considered an admission against the
taxpayer’s interest. Times Tribune Co. v. Commissioner, 20 T.C.
449, 452 (1953); Doll v. Commissioner, T.C. Memo. 2005-269.
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for the accuracy-related penalty.4 We address each issue in
turn, after first considering the burden of proof.
I. Burden of Proof
Petitioner generally has the burden of proof. See Rule
142(a). Petitioner asserted for the first time in his reply
brief that the burden of proof should be shifted to respondent.
Section 7491 applies to this case because the examination of
petitioner’s income tax returns for the years at issue began
after the statute’s effective date, but petitioner failed to
substantiate the claimed expenses and failed to maintain adequate
records.5 Accordingly, petitioner does not meet the requirements
4
Petitioner also asserts for the first time in his post-
trial brief that he used an IRA distribution he received in 1999
to finance a first-time home purchase. Petitioner stipulated
before trial, however, that he had not reached age 59-1/2 when he
received either IRA distribution, that neither IRA distribution
was received on account of death, disability, medical expenses,
higher education expenses, or to finance a first-time home
purchase, and that both IRA distributions were taxable. A
stipulation of fact is binding on the parties and is treated as a
conclusive admission. Rule 91(e). The Court will not permit a
party to a stipulation to qualify, change, or contradict the
stipulation except where justice requires. Id. Petitioner did
not ask to be relieved from the stipulations or present grounds
that he should not be bound to his admission. See id.; Israel v.
Commissioner, T.C. Memo. 2003-338; Said v. Commissioner, T.C.
Memo. 2003-148, affd. 112 Fed. Appx. 608 (9th Cir. 2004). We
conclude that the stipulations are binding, and, accordingly, we
need not further consider petitioner’s assertions regarding his
IRA distributions.
5
Sec. 7491(a) shifts the burden of proof to the Commissioner
under certain circumstances if the taxpayer introduces credible
evidence and satisfies the necessary substantiation and
documentation requirements. Sec. 7491 is effective with respect
to court proceedings arising in connection with examinations by
the Commissioner commencing after July 22, 1998, the date of
enactment of the Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206, sec. 3001(a), 112 Stat. 726.
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to shift the burden of proof under section 7491(a), and the
burden therefore remains with petitioner.
II. Taxability of Payments Petitioner Received From the Tribe
Respondent determined that the amounts petitioner received
as compensation for his services as an elected official of the
tribal council are subject to Federal income tax. Petitioner
contends that these amounts are exempt from tax.6
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.
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). 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). While citing numerous treaties and statutes,
petitioner has pointed to no provision that would exempt the
compensation he received.
We address the major arguments that petitioner raises, none
of which we find exempts the compensation petitioner received.
6
We have treated petitioner as admitting that his
compensation from GLITC and Simpson is taxable. Petitioner has
not introduced any evidence with regard to this compensation to
overcome his admission. See Doll v. Commissioner, supra. The
analysis of the taxability of these payments is the same as that
relating to petitioner’s compensation for his services on the
tribal council.
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First, petitioner argues that his income is “exempt function
income” within the meaning of section 527(c)(3) and is therefore
not taxable to him. Section 527 taxes political organizations on
their political organization taxable income. Sec. 527(a) and
(b)(1). Political organization taxable income does not include
exempt function income. Sec. 527(c)(1)(A). Petitioner is not a
political organization. Accordingly, section 527(c)(3) does not
exempt his income from taxation.
Petitioner also argues that his income is derived from a
fishing-rights-related activity through a qualified Indian entity
and is therefore exempt. Sec. 7873. Section 7873 does provide a
tax exemption for income derived from a fishing-rights-related
activity by a member of an Indian tribe directly or through a
qualified Indian entity. Petitioner has not introduced any
evidence, however, to establish that the requirements of this
section were met during the years at issue. Specifically,
petitioner did not show that his income was attributable to any
fishing-rights-related activity nor received from an entity that
satisfied the ownership, gross receipts, and management tests to
meet the definition of a qualified Indian entity. See sec.
7873(b)(3). Accordingly, petitioner has not proven that this
section applies to his compensation, and he may not rely on it to
exclude any of his income from taxation.
Petitioner also argues that his income is not taxable under
Rev. Rul. 59-354, 1959-2 C.B. 24. Rev. Rul. 59-354, supra,
excludes compensation for the duties performed by elected tribal
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council members from the definition of “wages” for the purposes
of FICA, FUTA, and income tax withholding. Petitioner
misconstrues the revenue ruling and its relevance. The revenue
ruling does not exempt petitioner’s income from tax. See Allen
v. Commissioner, T.C. Memo. 2005-118; Doxtator v. Commissioner,
T.C. Memo. 2005-113.
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 (9th Cir. 1983); Jourdain v.
Commissioner, 71 T.C. 980, 986-987 (1979), affd. 617 F.2d 507
(8th Cir. 1980). Petitioner has not shown that either a treaty
or a statute specifically exempts any of his compensation.
Accordingly, we sustain respondent’s determination that the
compensation petitioner received is subject to tax.
III. Petitioner’s Unexplained 2001 Adjustment
Petitioner claimed an unexplained adjustment to gross income
of $69,916 on his return for 2001. Petitioner did not provide
any evidence concerning this adjustment. This amount does not
correspond to any items of income he reported on his return for
2001, and it is unclear from the record how petitioner arrived at
this amount. Presumably petitioner adjusted his gross income to
subtract the income he believed was not taxable. As explained
previously, payments that petitioner received from the tribe and
other entities are taxable because no explicit statutory
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exemption applies. See Hoptowit v. Commissioner, supra at 145-
148; Jourdain v. Commissioner, supra. Moreover, petitioner has
introduced no evidence to prove this adjustment was appropriate.
Accordingly, we sustain respondent’s disallowance of this
adjustment.
IV. Additional Deductions
Petitioner claims on brief, despite not having any documents
to substantiate his expenses, that he is entitled to certain
deductions beyond those he originally reported on his returns for
the years at issue. For example, petitioner claims he lives in
an empowerment zone and/or an enterprise community and is
therefore entitled to additional or increased deductions, such as
increased depreciation deductions. Petitioner also claims that
he is entitled to deduct certain expenses, such as depreciation,
insurance, mileage on his car, house expenses, office expenses,
and miscellaneous expenses for items such as clothing and
cleaning, and personal deductions. We are thus asked to decide
whether petitioner is entitled to deductions in excess of those
reported on his returns.
We begin with two fundamental principles of tax litigation.
First, as a general rule, the Commissioner’s determinations are
presumed correct, and the taxpayer bears the burden of proving
that these determinations are erroneous.7 Rule 142(a); see
7
This principle is not affected by sec. 7491(a), because, as
described previously, petitioner failed to substantiate claimed
expenses and failed to maintain required records. See sec.
7491(a)(2)(A) and (B). Accordingly, the burden of proof remains
(continued...)
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INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
Second, deductions are a matter of legislative grace, and
the taxpayer must show that he or she is entitled to any
deduction claimed. Rule 142(a); Deputy v. duPont, 308 U.S. 488,
493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934); Welch v. Helvering, supra. This includes the burden of
substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),
affd. per curiam 540 F.2d 821 (5th Cir. 1976).
A taxpayer must substantiate amounts claimed as deductions
by maintaining the records necessary to establish he or she is
entitled to the deductions. Sec. 6001; Hradesky v. Commissioner,
supra. A taxpayer shall keep such permanent records or books of
account as are sufficient to establish the amount of deductions
claimed on the return. Sec. 6001; sec. 1.6001-1(a), (e), Income
Tax Regs. The Court need not accept a taxpayer’s self-serving
testimony when the taxpayer fails to present corroborative
evidence. Beam v. Commissioner, T.C. Memo. 1990-304 (citing
Tokarski v. Commissioner, 87 T.C. 74,77 (1986)), affd. without
published opinion 956 F.2d 1166 (9th Cir. 1992).
If a taxpayer establishes that he or she paid or incurred a
deductible business expense but does not establish the amount of
the deduction, this Court may approximate the amount of the
allowable deduction, bearing heavily against the taxpayer whose
7
(...continued)
with petitioner.
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inexactitude is of his or her own making. Cohan v. Commissioner,
39 F.2d 540, 543-544 (2d Cir. 1930). For the Cohan rule to
apply, however, a basis must exist on which this Court can make
an approximation. Vanicek v. Commissioner, 85 T.C. 731, 742-743
(1985). Without such a basis, any allowance would amount to
unguided largesse. Williams v. United States, 245 F.2d 559, 560
(5th Cir. 1957).
Certain business expenses may not be estimated because of
the strict substantiation requirements of section 274(d). See
sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827
(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969). For such
expenses, only documentary evidence will suffice.
We now address whether petitioner is allowed to deduct any
amounts beyond those he reported on his returns. We find that he
may not. Petitioner has not introduced evidence to substantiate
the additional deductions he claims. He has simply stated in his
brief that he is entitled to these deductions. Statements in
briefs and exhibits attached to briefs are not evidence.8 See
Rule 143(b); Shepherd v. Commissioner, 115 T.C. 376, 399 n.22
(2000), affd. 283 F.3d 1258 (11th Cir. 2002). As petitioner has
introduced no evidence regarding these claimed deductions, we
cannot estimate the amounts of the deductions under the Cohan
rule. See Cohan v. Commissioner, supra. Accordingly, petitioner
8
In his reply brief, petitioner also requests additional
time to supply information regarding the lease of equipment.
Evidence pertaining to petitioner’s claims should have been
introduced at trial. See Rule 143. Petitioner may not introduce
any further evidence. See id.
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is not entitled to deduct any expenses beyond those originally
reported on his returns for the years at issue.
V. Accuracy-Related Penalty
We turn now to respondent’s determination in the deficiency
notice that petitioner is liable for the accuracy-related penalty
under section 6662 for each of the years at issue. Respondent
has the burden of production under section 7491(c) and must come
forward with sufficient evidence that it is appropriate to impose
the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446-447
(2001).
A taxpayer is liable for an accuracy-related penalty in the
amount of 20 percent of any part of an underpayment attributable
to, among other things, a substantial understatement of income
tax. There is a substantial understatement of income tax under
section 6662(b)(2) if the amount of the understatement exceeds
the greater of either 10 percent of the tax required to be shown
on the return, or $5,000. Sec. 6662(a), (b)(1) and (2),
(d)(1)(A); sec. 1.6662-4(a), Income Tax Regs. Respondent has met
his burden of production with respect to petitioner’s substantial
understatement of income tax for the years at issue.9 The
following table demonstrates that petitioner understated his
income tax for each year at issue in an amount greater than
9
Respondent determined in the alternative that petitioner
was liable for the accuracy-related penalty for negligence or
disregard of rules or regulations under sec. 6662(b)(1) for the
years at issue. Because respondent has proven that petitioner
substantially understated his income tax for the years at issue,
we need not consider whether petitioner was negligent or
disregarded rules or regulations.
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$5,000 or 10 percent of the tax required to be shown on his
return.
Year Tax Reported Required Tax Understatement
1999 $11,392 $24,161 $12,769
2000 13,101 22,604 9,503
2001 8,643 29,455 20,812
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment, however, if it is shown
that there was reasonable cause for the taxpayer’s position and
that the taxpayer acted in good faith with respect to that
portion. Sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs.
The determination of whether a taxpayer acted with reasonable
cause and good faith is made on a case-by-case basis, taking into
account all the pertinent facts and circumstances, including the
taxpayer’s efforts to assess his or her proper tax liability and
the knowledge and experience of the taxpayer. Sec. 1.6664-
4(b)(1), Income Tax Regs.
While the Commissioner bears the burden of production under
section 7491(c), the taxpayer bears the burden of proof with
respect to reasonable cause. Higbee v. Commissioner, supra at
446.
Petitioner failed to report his income from the tribe for
his services as a tribal council member in 1999 and 2000, claimed
an unexplained adjustment to gross income in 2001, and failed to
substantiate deductions he claimed on brief. Petitioner also
failed to present any evidence showing that his substantial
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understatement for each of the years at issue was due to
reasonable cause and that he acted in good faith.10
Accordingly, we sustain respondent’s determination that
petitioner is liable for the accuracy-related penalty under
section 6662(b)(2) for each of the years at issue.
We have considered all remaining arguments the parties made
and, to the extent not addressed, we find them to be irrelevant,
moot, or meritless.
To reflect the foregoing,
Decision will be entered
for respondent.
10
Petitioner argues that the complexity of issues in this
case gave him reasonable cause for his substantial
understatements. See Dillin v. Commissioner, 56 T.C. 228, 248
(1971). We disagree. There is no uncertainty as to petitioner’s
legal obligation here. See, e.g., Pessin v. Commissioner, 59
T.C. 473, 489 (1972); Rosanova v. Commissioner, T.C. Memo. 1985-
306; Grant v. Commissioner, T.C. Memo. 1980-242.