FILED
United States Court of Appeals
Tenth Circuit
April 6, 2009
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
JOHN A. BARRETT, JR.; SHERYL S.
BARRETT,
Plaintiffs-Appellants,
v. No. 08-6017
UNITED STATES OF AMERICA,
Defendant-Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
(D.C. No. 5:06-CV-0968-HE)
William H. Whitehill, Jr., of Fellers, Snider, Blankenship, Bailey & Tippens,
P.C., Oklahoma City, Oklahoma, for Plaintiffs-Appellants.
Marion E. M. Erickson, (Nathan J. Hochman, Assistant Attorney General;
Jonathan S. Cohen, Attorney, Tax Division, Department of Justice; John C.
Richter, United States Attorney, of counsel, with her on the brief), Attorney, Tax
Division, Department of Justice, Washington, D.C., for Defendant-Appellee.
Before BRISCOE, HOLLOWAY, and MURPHY, Circuit Judges.
BRISCOE, Circuit Judge.
John A. Barrett, Jr. 1 (“Barrett”) filed suit under 28 U.S.C. § 1346(a) against
the United States seeking refund of the federal income taxes, penalties, and
interest paid by him pursuant to an Internal Revenue Service (“IRS”) assessment
for the tax year ending December 31, 2001. Barrett timely appeals the district
court’s grant of summary judgment in favor of the United States. We have
jurisdiction pursuant to 28 U.S.C. § 1291 and affirm the district court’s ruling that
the salary paid to Barrett as chairman of the Citizen Potawatomi Tribe (the
“Tribe”) 2 was not exempt from federal income tax. We also affirm the district
court’s ruling on the accuracy-related penalty.
I
Barrett is a member of the Tribe and has been involved in the Tribe’s
governance since 1971. In 1985, Barrett was elected chairman of the Tribe at the
annual meeting of the Tribe, and he has been re-elected to the chairmanship
through to the present time. He held the chairmanship during the 2001 tax year.
The position of tribal chairman is included within the executive branch of
the Tribe and encompasses various constitutional duties. The constitutional
duties of the chairman include acting as head of the executive branch of the Tribe,
1
Sheryl S. Barrett is also a captioned plaintiff-appellant because she and
John Barrett were married in 2001 and filed a joint income tax return. Her
identity and activities are not otherwise relevant to Barrett’s appeal.
2
The Citizen Potawatomi Tribe was formerly known as the Citizen Band
Potawatomi Indian Tribe and is a federally recognized tribe of American Indians.
2
general supervision of the daily affairs of the Tribe, seeing that the laws of the
Tribe are faithfully enforced, and presiding over meetings of the various
governmental bodies of the Tribe. The constitution of the Tribe also provides for
a separately elected judicial branch, and a legislative branch called the Business
Committee. The Business Committee is comprised of the following elected
positions: chairman, vice chairman, secretary/treasurer, and two councilmen.
Persons elected to these positions are all elected by the Tribe at its annual
meeting. The functions of the Business Committee include developing a budget
for the Tribe’s funds and appropriating funds for the day-to-day operations of the
Tribe. As regards the compensation paid to the chairman of the Tribe, the
Business Committee budgets funds and appropriates the compensation to be paid.
In the late 1940s and early 1950s, the Tribe brought various claims against
the United States before the Indian Claims Commission. These claims were
brought pursuant to the Indian Claims Commission Act, 25 U.S.C. §§ 70-70v-3
(1946) (repealed). This remedial legislation was passed to settle “claims arising
from the taking by the United States, whether as the result of a treaty of cession
or otherwise, of lands owned or occupied by the claimant without the payment for
such lands or compensation agreed to by the claimant.” 25 U.S.C. § 70a. As a
result of these claims, the Tribe was awarded judgments against the United States
in the 1970s and 1980s, which were held in trust by the Secretary of the Interior.
3
The Indian Tribal Judgment Funds Use or Distribution Act, 25 U.S.C. §§
1401 et seq. (the “Distribution Act”) governed the distribution of the judgment
awards to the Tribe. Pursuant to the Distribution Act, the Tribe and the Secretary
of the Interior developed a use and distribution plan which became final and was
published in the Federal Register on September 8, 1983 (the “1983 Plan”). 48
Fed. Reg. 40567-01 (Sept. 8, 1983).
Under the 1983 Plan, 70 percent of the funds were distributed pro rata to
the members of the Tribe, and 30 percent of the funds were set aside for
programming, to be held in perpetual trust by the Secretary of the Interior, with
the income from such funds to be used for real estate acquisition, development of
the Tribe, including increasing the effectiveness of the government, and the
maintenance of the property of the Tribe. As required by the Distribution Act,
see 25 U.S.C. § 1407 (stating that “none of the funds which— (1) are . . . held in
trust pursuant to a plan approved under the provisions of this chapter . . . shall be
subject to Federal or State income taxes”), the 1983 Plan states: “None of the
funds distributed per capita or made available under this plan for programing
shall be subject to Federal or State income taxes.” 1983 Plan, § 6(b).
The 1983 Plan provided that programming funds (i.e., the 30 percent trust
fund set asides) were to be used pursuant to a Ten-Year Tribal Acquisition,
4
Development, and Maintenance Plan (“Ten-Year Plan”). 3 The 1983 Plan
specified that the Ten-Year Plan should include as uses for the funds “the
acquisition of additional lands to build upon the tribal land base, the development
of the tribe’s assets and to provide for the maintenance and care of the tribal
property.” 1983 Plan, § 5(d). The 1983 Plan further provided that “[a]t the end
of the 10-year program period, the [Tribe] shall evaluate the tribal needs as
concerns the remaining balances in the program principal and interest accounts,
and any changes proposed by the [Tribe] shall be subject to approval by the
Secretary.” 1983 Plan, §5(d)(iii).
As required by the 1983 Plan, the Tribe and the Secretary of the Interior
developed the Ten-Year Plan. The Ten-Year Plan defined the terms
“acquisition,” “development” and “maintenance,” as used in the 1983 Plan.
“Development” is defined as “those activities and/or actions undertaken by the
Tribe to in some way cause growth, building up, expansion, strengthening,
increased effectiveness or other evolutionary process toward the program of the
Tribe economically and/or socially and/or governmentally.” Ten-Year Plan, §
1.4.
In 1994, the American Indian Trust Fund Management Reform Act of 1994,
25 U.S.C. §§ 4001 et seq., was passed, which, inter alia, allowed tribes to
3
The United States has referred to the Ten-Year Plan in its briefing as the
“1985 Guidelines.”
5
withdraw and manage any trust funds held by the Secretary of the Interior on their
behalf, subject to the approval of the Secretary of the Interior. In 1995, the Tribe
members voted to withdraw all trust funds from the control and management of
the Secretary of the Interior, and to place control and management of the trust
funds with the Tribe. After withdrawal, the funds maintained their status as trust
funds. In 1996, the Business Committee of the Tribe passed Resolution 96-44,
which authorized Barrett, as the chairman of the Tribe, to effectuate the transfer
of the management of the trust funds from the Secretary of the Interior to the
Tribe, pursuant to management policies and guidelines that were to be approved
by the Secretary of the Interior.
As part of the Tribe’s request for approval of self-management of the trust
funds, the Tribe also submitted for approval a detailed Investment Management
Policy for the investment and use of the trust funds. Under the Investment
Management Policy, the purposes and uses for the expenditure of the earnings
withdrawn from the trust, pursuant to the annual budget approved by the
electorate, remained the same as those in effect during the Secretary of the
Interior’s tenure as manager of the trust funds (i.e., to acquire real estate, develop
the Tribe, and maintain Tribe property).
In 1996, the Secretary of the Interior approved the transfer of the trust
funds to the Tribe, subject to the Tribe’s use and management of the funds in a
manner consistent with the Investment Management Policy. The Tribe now
6
maintains the trust fund in a separate trust account held with the First National
Bank & Trust Company. 4 The Tribe’s trust fund earnings which are to be
expended for the year are placed in the Tribe’s general fund account as a sub-
account, and accounted for separately from the Tribe’s general fund monies. Any
earnings from the trust fund that are not included in the budget, or approved for
expenditure by the general membership of the Tribe, remain in the trust fund and
become part of the principal of the trust fund. The Secretary of the Interior
requires the Tribe to hire an independent auditor to perform a yearly audit of the
trust funds. When completed, the Tribe submits the audit report to the Secretary
of the Interior.
In 1996, Barrett concluded that his salary as chairman could be paid from
the earnings on the Tribe’s trust fund, and that he would not be taxed on that
income. Barrett suggested to the Business Committee of the Tribe that he be paid
from those funds, and then he informed the accounting department of this plan.
Barrett also instructed the accounting department not to withhold taxes from his
compensation and not to issue a Form W-2 to him.
In 2001, Barrett received $48,057.64 in compensation from the Tribe for
his duties as chairman. This compensation was paid from the trust funds which
had been previously managed by the Secretary of the Interior but were now self-
4
Barrett is chairman of the board of directors of the First National Bank &
Trust Company.
7
managed by the Tribe. The Business Committee of the Tribe, with the approval
of the Tribe’s general electorate at its annual meeting, directed that the
chairman’s compensation be paid from the trust funds.
After the completion of an audit, the IRS determined that compensation
paid to Barrett by the Tribe was taxable income to Barrett. In June 2005, the IRS
issued a notice of deficiency proposing to assess Barrett for additional income
taxes for the 2001 tax year. The proposed assessment by the IRS was for income
taxes in the amount of $19,355 and penalties of $3871, pursuant to 26 U.S.C. §
6662. These amounts were ultimately assessed by the IRS, and, after payment of
all amounts assessed in September 2005, Barrett, in March 2006, requested a
refund of the amounts paid pursuant to assessments relating to the compensation
which had been paid to Barrett as chairman of the Tribe in tax year 2001. 5 In
May 2006, the IRS denied Barrett’s refund claim, and Barrett filed his complaint
in the district court in September 2006, seeking review of the IRS’ denial of his
refund claim.
On cross-motions for summary judgment, the district court denied Barrett’s
motion and granted the motion of the United States. In its order, the district court
rejected Barrett’s argument that the compensation paid by the Tribe was exempt
from income tax because it fell within the 1983 Plan’s definition of
5
Barrett’s claim for a refund was timely under 26 U.S.C. § 6511(a), which
provides a two-year limitations term, running from the date of payment of the tax.
8
“development” or that the compensation paid to Barrett was a “programming
expenditure” under the 1983 Plan. The district court also found that the penalty
should be sustained because, while there might be a factual question as to
Barrett’s subjective good faith, Barrett had not presented sufficient evidence to
create a triable issue of fact as to the objective reasonableness of his position
regarding the taxability of his salary.
II
A. Standard of Review
We review the district court’s summary judgment decision de novo,
applying the same legal standard used by the district court. ClearOne Commc’ns,
Inc. v. Nat’l Union Fire Ins. Co., 494 F.3d 1238, 1243 (10th Cir. 2007). Under
this standard, summary judgment is appropriate “if the pleadings, the discovery
and disclosure materials on file, and any affidavits show that there is no genuine
issue as to any material fact and that the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(c). “An issue of fact is ‘genuine’ if the
evidence allows a reasonable jury to resolve the issue either way and is ‘material’
when it is essential to the proper disposition of the claim.” Haynes v. Level 3
Commc’ns, LLC, 456 F.3d 1215, 1219 (10th Cir. 2006) (internal quotation
omitted). When reviewing a grant of summary judgment on appeal, we construe
all factual inferences in favor of the party against whom summary judgment was
entered. NISH v. Rumsfeld, 348 F.3d 1263, 1266 (10th Cir. 2003).
9
B. Exemption from Federal Income Tax
Barrett acknowledges that American Indians, as United States citizens,
generally are subject to the federal income tax. See Squire v. Capoeman, 351
U.S. 1, 6 (1956) (“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.”). Barrett claims, however, that his
compensation as chairman is not taxable income because the source of the funds
used to pay him was trust fund money previously awarded by the Indian Claims
Commission to the Tribe, and that funds received from that source are tax exempt.
Aplt. Br. at 15.
Under the Internal Revenue Code, gross income is “all income from
whatever source derived,” 26 U.S.C. § 61(a), and an exemption from the payment
of taxes “should be clearly expressed,” Squire, 351 U.S. at 6. See also Allen v.
Comm’r, 91 T.C.M. (CCH) 673 (2006), aff’d, 204 F. App’x 564 (7th Cir. 2006)
(unpublished) (“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. For such an exemption to be valid, it
must be based upon clearly expressed language in a statute or treaty.” (internal
citations omitted)). Barrett claims the 1983 Plan’s specification that none of the
funds “made available under this plan for programing shall be subject to Federal
10
or State income taxes,” 1983 Plan, §6(b), is an express exemption for his
compensation because his compensation was paid from the programming funds.
Specifically, Barrett argues that his compensation as the chairman of the
Tribe furthers the “development” of the Tribe, defined in the Ten-Year Plan as the
“growth, building up, expansion, strengthening, increased effectiveness or other
evolutionary process toward the progress of the Tribe,” Ten-Year Plan, § 1.4.
Barrett argues that the chairman’s oversight of the Tribe’s day-to-day operations
is one way of developing “strong and stable tribal governments,” Aplt. Br. at 17,
which helps achieve the government’s expressed goal of “promoting strong tribal
economic development, self-sufficiency, and self-governance,” id. at 18 (citing
the Indian Self-Determination and Education Assistance Act of 1975, 25 U.S.C.
§§ 450 et seq., the Indian Financing Act of 1974, 25 U.S.C. §§ 1451 et seq., Okla.
Tax Comm’n v. Citizen Band Potawatomi Indian Tribe of Okla., 498 U.S. 505,
510 (1991), and Prairie Band Potawatomi Nation v. Wagnon, 476 F.3d 818, 824
n.9 (10th Cir. 2007), as examples in support of the government’s “consistent”
stated goal of tribal self-sufficiency). Barrett contends the compensation paid to
him as chairman fits within the programming aspect of the 1983 Plan, and as
such, the express language of the 1983 Plan that exempts the programming funds
from tax also exempts his compensation from tax.
We disagree. The express exemption authorized by Congress, for funds
“made available under this plan for programing,” 1983 Plan, § 6(b), does not
11
encompass the compensation paid to Barrett as the chairman of the Tribe. The
funds available under the 1983 Plan for programming were the funds authorized
by the Ten-Year Plan. The Ten-Year Plan authorized the use of the funds for
acquisition, development and maintenance. Barrett argues his compensation falls
within the definition of development, but the Ten-Year Plan defines development
as “those activities and/or actions undertaken by the Tribe to in some way cause
growth, building up, expansion, strengthening, increased effectiveness or other
evolutionary process toward the progress of the Tribe economically and/or
socially, and/or governmentally.” Ten-Year Plan, § 1.4. Barrett’s compensation
for the oversight of day-to-day operations cannot be considered development
under the expressed definition of the term. Payment of a salary to Barrett, who
filled the long-standing and long-defined position of tribal chairman is not an
expenditure for an “evolutionary process toward the progress of the Tribe
economically and/or socially, and/or governmentally.”
In addition, even if the compensation paid to Barrett as chairman of the
Tribe would satisfy the intended-use criteria of the programming funds, the tax
exemption reference in the 1983 Plan is not sufficiently specific to exempt
Barrett’s salary from federal taxation. See Mescalero Apache Tribe v. Jones, 411
U.S. 145, 156 (1973) (noting that the Supreme Court “has repeatedly said that tax
exemptions are not granted by implication” and that if Congress intends a tax
exemption, “it should say so in plain words. Such a conclusion can not rest on
12
dubious inferences” (internal quotations omitted)). If the annual compensation
paid to a tribal chairman was to be exempt from taxation, it could have been
easily and plainly expressed.
As a result, because Barrett’s compensation was not expressly exempt from
federal income tax, the district court was correct to grant summary judgment in
favor of the United States on Barrett’s claim for a refund. 6 Although Barrett cites
sources which emphasize the government’s strong desire for American Indians to
progress toward tribal self-sufficiency, this goal does not trump the long-standing
requirement that an exemption from the payment of taxes must be explicitly
stated. See Okla. Tax Comm’n, 498 U.S. at 510 (noting “Congress’ desire to
6
Providing further support, multiple decisions from the Tax Court have
held that amounts received by Native Americans for serving as tribal officials are
not exempt from tax. See Allen v. Comm’r, 91 T.C.M. (CCH) 673 (2006), aff’d,
204 F. App’x 564 (7th Cir. 2006) (unpublished) (concluding the chairman of tribe
was liable for tax on his salary and the fact that the tribe is a non-taxable entity
was irrelevant); Doxtator v. Comm’r, 89 T.C.M. (CCH) 1270 (2005) (concluding
the tribal official was subject to income tax on compensation received for
rendering services to tribe because no exemption was found); Allen v. Comm’r,
T.C. Memo 2005-118 (2005) (concluding that payments to tribal executive
assistant were taxable income because no treaty or legislation exempted the
payments); Hoptowit v. Comm’r, 78 T.C. 137, 145-48 (1982), aff’d, 709 F.2d 564
(9th Cir. 1983) (concluding that a tribal council member was liable for tax on
payments received from the tribe’s trust funds); Jourdain v. Comm’r, 71 T.C. 980,
987 (1979), aff’d, 617 F.2d 507 (8th Cir. 1980) (concluding that a tribal
chairman’s salary paid from tribal trust funds is taxable to the tribal chairman).
Although none of these cases has the same facts and purported exemption from
tax as that urged herein, see Aplt. Reply Br. at 7-9 (discussing how cases are
factually dissimilar), they provide support for our holding because they all refuse
to find an exemption where none is expressly provided.
13
promote the goal of Indian self-government, including its overriding goal of
encouraging tribal self-sufficiency and economic development” and therefore
refusing to “modify the long-established principle of tribal sovereign immunity”
(internal quotations omitted)); Squire, 351 U.S. at 6-7 (recognizing that the
United States has authority to tax American Indian U.S. citizens as long as there
is no express exemption from tax).
C. Accuracy-Related Penalty
Section 6662 of the Internal Revenue Code imposes a 20 percent accuracy-
related penalty on the portion of underpayment of tax attributable to negligence or
disregard of rules or regulations. See 26 U.S.C. §§ 6662(a) (mandating a tax
“equal to 20 percent of the portion of the underpayment”), 6662(b)(1) (applying
penalty for “[n]egligence or disregard of rules or regulations”).
The “negligence” contemplated by the statute is “any failure to make a
reasonable attempt to comply with the provisions” of the tax law. Id. § 6662(c).
“Negligence is defined as the ‘lack of due care or failure to do what a reasonable
or ordinarily prudent person would do under the circumstances.’” Van Scoten v.
Comm’r, 439 F.3d 1243, 1252 (10th Cir. 2006) (quoting Anderson v. Comm’r, 62
F.3d 1266, 1271 (10th Cir. 1995)).
The term “disregard” includes “any careless, reckless, or intentional
disregard of rules or regulations.” Treas. Reg. § 1.6662-3(b)(2). Disregard of
rules or regulations is careless if “the taxpayer does not exercise reasonable
14
diligence to determine the correctness of a return position” and is reckless if “the
taxpayer makes little or no effort to determine whether a rule or regulation exists,
under circumstances which demonstrate a substantial deviation from the standard
of conduct that a reasonable person would observe.” Treas. Reg. §
1.6662-3(b)(2); see also Neely v. Comm’r, 85 T.C. 934, 947 (1985) (stating that
negligence is lack of due care or failure to do what a reasonable person would do
under the circumstances).
Under § 6664(c)(1), however, no penalty will be imposed “if it is shown
that there was a reasonable cause for such [underpayment] and that the taxpayer
acted in good faith with respect to such [underpayment].” 26 U.S.C. § 6664(c)(1)
(emphasis added). “The determination of whether a taxpayer is entitled to [this]
exception ‘is made on a case-by-case basis, taking into account all pertinent facts
and circumstances.’” Van Scoten, 439 F.3d at 1259 (quoting Treas. Reg. §
1.6664-4(b)(1)). “Reasonable cause and good faith might be indicated by ‘an
honest misunderstanding of fact or law that is reasonable in light of the
experience, knowledge, and education of the taxpayer,’ but ‘reasonable cause and
good faith is not necessarily indicated by reliance on facts that, unknown to the
taxpayer, are incorrect.’” Id. (quoting same).
Regarding the imposition of penalties in cases commencing after July 22,
1998, § 7491(c) places the burden of production on the IRS, “in any court
proceeding with respect to the liability of any individual for any penalty.” 26
15
U.S.C. § 7491(c). As a result, the government had the burden of coming forward
in the district court with sufficient evidence to support imposition of a penalty on
Barrett. Higbee v. Comm’r, 116 T.C. 438, 446 (2001).
Barrett argues that the district court erred by not requiring the United States
to meet its burden of production under § 7491(c). Aplt. Br. at 24-26. The United
States responds that the facts stipulated by the parties were sufficient to meet the
government’s burden of production, but in its briefing points to no specific
stipulations at all, let alone stipulations which fall within the definition of
negligence outlined above. 7 See Aple. Br. at 27. The district court addressed the
summary judgment motions regarding the penalty by analyzing “whether the
plaintiffs have set out sufficient evidence to create a material fact question as to
the propriety of the accuracy-related penalty under 28 U.S.C. Sec. 6662.” Aplt.
7
At oral argument, the United States argued its burden of production was
met by merely establishing that the income received by the taxpayer was taxable
and was not disclosed, citing Allen v. Comm’r, 2005 T.C.M. 118 (RIA) (2005).
However, the penalty provision at issue in Allen was 26 U.S.C. § 6662(b)(2).
Section 6662(b)(2) provides for an accuracy-related penalty for any “substantial
understatement” of income tax. A “substantial understatement” occurs when “the
amount of the understatement for the taxable year exceeds the greater of—(i) 10
percent of the tax required to be shown on the return for the taxable year, or (ii)
$5,000.” 26 U.S.C. § 6662(d)(1)(A)(i)–(ii). Therefore, the United States met its
burden of production in Allen by showing an underpayment had occurred and by
simply pointing out the amount of the underpayment.
Here, § 6662(b)(1) negligence, not § 6662(b)(2) “substantial
understatement,” is at issue. Therefore, Allen is not persuasive authority for
concluding that Barrett’s failure to report his compensation as taxable income is
sufficient to meet the United States’ burden on § 6662(b)(1) negligence.
16
Br. Ex. A at 10. The district court then set out the legal standards for the
imposition of a penalty, but never addressed the United States’ burden of
production to show negligence. The district court simply addressed whether
Barrett had met the “reasonable cause and good faith” exception to the negligence
standard permitted by § 6664(c)(1). Id. at 11-14.
However, because we are convinced that the record adequately supports the
imposition of the accuracy-related penalty, and because the parties have had a fair
opportunity to address whether the penalty should apply, we affirm the district
court. See Thomas v. City of Blanchard, 548 F.3d 1317, 1327 n.2 (10th Cir.
2008) (holding that “we can affirm on any ground adequately supported by the
record ‘so long as the parties have had a fair opportunity to address that ground’”
(quoting Shero v. City of Grove, 510 F.3d 1196, 1201 n.2 (10th Cir. 2007))). The
parties contested the imposition of the accuracy-related penalty, and the related
burden of production, in their summary judgment briefings. E.g., ROA Vol. II at
276-79 (United States’ memorandum in support of motion for summary judgment;
recognizing burden of production on penalty and arguing that Barrett was liable
for the penalty because he intentionally failed to disclose his income despite the
lack of authority supporting his position); id. at 331-32 (Barrett’s cross-motion
for summary judgment; recognizing that the United States has the penalty burden
of production and arguing the United States’ burden had not been met); id. at 359-
61 (Barrett’s response to the United States’ motion for summary judgment;
17
arguing that United States failed to meet its burden of production); id. at 384-88
(United States’ response to the penalty portion of Barrett’s cross-motion for
summary judgment).
We may infer from the parties’ stipulation of facts that Barrett relied only
on his personal reading of the law to form the conclusion that his compensation
was nontaxable. See ROA Vol. I at 28, ¶ 37 (“On or after 1993, Barrett became
aware of certain rulings of the Internal Revenue Service, including Revenue
Ruling 59-354 regarding the taxability of amounts paid to tribal council members
or otherwise exempt by statute or treaty. In 1996, Barrett concluded that he could
be paid from the earnings accrued from the Tribe’s trust fund and that he would
be exempt from taxes from such income, so he suggested to the Business
Committee that he be paid from the trust fund.”). A reasonable taxpayer in
Barrett’s position would not rely solely on his or her own analysis of the law to
conclude his compensation was exempt. He was confronted with complicated
legal authority, compensation is normally taxed, and he did not seek professional
advice. The evidence was sufficient to sustain the United States’ burden of
production.
We also affirm the district court’s finding that Barrett had not shown
reasonable cause for the underpayment of his taxes, and therefore did not rebut
18
the United States’ showing on the accuracy-related penalty. 8 The district court
found:
The only authority to which the plaintiffs point in
justifying the reasonableness of their filing was their
reading of Revenue Ruling 59-384, particularly its
reference to income potentially being exempt due to
treaties or statutes, and their reading of the various statutes
and plans adopted pursuant to them. However, the
referenced revenue ruling clearly points out the general
principles of law applicable in this area: that payments to
tribal members are includable in the member’s gross
income unless an exemption “derive[s] plainly” from a
statute or treaty. The relatively convoluted argument upon
which the plaintiffs rely to trace their theory of non-
taxability cannot be said to be “plain” by any stretch. Not
only is it contrary to the general principles of taxability of
payments to tribal members, but it also substantially
misreads the statutes in question, taking provisions of
them which are directed to taxation of the Tribe and
applying them instead to taxation of the recipients of tribal
funds. It applies various tax exemption provisions in ways
and contexts outside their proper scope. In any event, the
court concludes that the plaintiffs’ position as to the tax
treatment of Barrett’s salary, though inventive, is outside
the bounds of what can be termed objectively reasonable.
Under these circumstances, the court concludes that the
underpayment was attributable to negligence or disregard
and the penalty was therefore properly imposed.
8
The district court stated that if the penalty question turned only on
Barrett’s subjective good faith, it would likely conclude that this would create a
fact issue. ROA Vol. II at 407-08. Because we affirm the district court on the
“reasonable cause” prong, we need not reach the “good faith” prong of the 26
U.S.C. § 6664(c)(1) exception to the imposition of an accuracy-related penalty.
See 26 U.S.C. § 6664(c)(1) (stating that no penalty will be imposed “if it is shown
that there was a reasonable cause for such [underpayment] and that the taxpayer
acted in good faith with respect to such [underpayment]” (emphasis added)).
19
ROA Vol. II at 408-09 (internal footnotes omitted).
The determination of reasonable cause and good faith is made on a
case-by-case basis, taking into account all pertinent facts and circumstances.
Treas. Reg. § 1.6664-4(b)(1). The most important factor is the extent of the
taxpayer’s effort to assess the proper tax liability. Id. “Circumstances that may
indicate reasonable cause and good faith include an honest misunderstanding of
fact or law that is reasonable in light of the experience, knowledge, and education
of the taxpayer.” Id.
For substantially the same reasons expressed by the district court, we
conclude that Barrett did not establish reasonable cause for the underpayment of
taxes, and therefore did not rebut the United States’ showing on the accuracy-
related penalty. Barrett’s determination that the salary paid to him as chairman of
the Tribe was exempt from federal income tax is not reasonable in light of
Barrett’s experience, knowledge, and education. Barrett made no effort to
ascertain his tax status beyond his own interpretation of the convoluted, historical
legislation, revenue regulations, and tribal treaties. Barrett’s efforts to assess his
proper tax liability for his salary as chairman were incredibly minimal—almost
non-existent. As a result, Barrett has raised no genuine issue of material fact with
respect to reasonable cause for his tax underpayment, and the district court was
correct to grant summary judgment in favor of the United States on the accuracy-
related penalty.
20
III
We AFFIRM the district court’s order granting summary judgment to the
United States.
21
Barrett v. United States
Court: Court of Appeals for the Tenth Circuit
Date filed: 2009-04-06
Citations: 561 F.3d 1140
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