The opinion
T.C. Memo. 2001-51
UNITED STATES TAX COURT
JOSEPH B. CAMPBELL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8677-97. Filed February 28, 2001.
Lawrence H. Crosby, for petitioner.
Jonathan P. Decatorsmith and Tracy Anagnost Martinez, for
respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined the following
deficiencies and additions to tax with respect to petitioner’s
Federal income taxes:1
1
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
(continued...)
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Additions to Tax
Sec. Sec.
Year Deficiency 6651(a)(1) 6654(a)
1990 $7,447 $1,828 $480
1991 6,137 1,534 355
1993 6,934 1,734 290
1994 14,850 3,579 734
After concessions,2 the issues for decision are:
(1) Whether per capita distributions of $19,070, $40,933,
and $50,222 in 1991, 1993, and 1994, respectively, to petitioner
from the Prairie Island Indian Community of the State of
Minnesota (the tribe) arising out of the ownership and operation
of a gambling casino constitute gross income;
(2) whether petitioner may exclude $31,238 of discharge of
indebtedness income resulting from a foreclosure of mortgaged
1
(...continued)
Tax Court Rules of Practice and Procedure. Monetary amounts are
rounded to the nearest dollar.
2
Petitioner did not contest the following adjustments in his
petition: (1) Wage income of $1,754 and $2,450 in 1990 and 1994,
respectively; (2) interest income of $86, $92, $105, and $124 for
1990, 1991, 1993, and 1994, respectively; (3) patronage dividends
income of $31, $18, and $18 for 1990, 1991, and 1993,
respectively; (4) nonemployee compensation of $5,449 and $12,369
in 1990 and 1991, respectively; and (5) self-employment taxes, in
connection with the nonemployee compensation he received during
1990 and 1991, of $770 and $1,747, respectively. Petitioner did
not present evidence to dispute these adjustments at trial, and
petitioner did not present argument on these adjustments in
either his opening or reply brief. These adjustments are deemed
conceded in accordance with Rule 34(b)(4). At trial, respondent
conceded the “other income” adjustment of $16,250 determined in
his notice of deficiency for 1994.
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farm equipment during 1990 under section 108(a)(1)(C) as
qualified farm indebtedness;3
(3) whether petitioner is entitled to deduct expenses
incurred in connection with services rendered on behalf of the
tribe or the tribal council during 1993 and 1994;4
(4) whether petitioner is liable for additions to tax
pursuant to section 6651(a)(1) for failure to file returns for
1990, 1991, 1993, and 1994; and
(5) whether petitioner is liable for additions to tax
pursuant to section 6654(a) for failure to make estimated tax
payments for 1990, 1991, 1993, and 1994.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. We
incorporate the stipulation of facts into our findings by this
reference.
3
Petitioner did not contest this issue in his petition.
Petitioner contested this issue for the first time in his trial
memorandum, presented evidence on the issue at trial, and argued
in his opening brief that he was entitled to exclude the
discharge of indebtedness income. Respondent did not object to
the Court’s review of this issue. Thus, we deem this issue tried
by consent and consider it before the Court. See Rule 41(b);
Shea v. Commissioner, 112 T.C. 183, 190-191 n.11 (1999).
4
Petitioner did not contest the issue in his petition.
However, petitioner presented evidence on the issue at trial and
argued in his opening brief that he was entitled to the
deductions. Respondent did not object to the Court’s review of
this issue. Thus, we deem this issue tried by consent and
consider it before the Court. See Rule 41(b); Shea v.
Commissioner, supra.
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Petitioner resided in Welch, Minnesota, when the petition
was filed. As of the date the statutory notice of deficiency was
mailed to petitioner, he had not filed Federal income tax returns
or made any estimated tax payments for 1990, 1991, 1993, and
1994.
Petitioner is an enrolled member of the tribe and resided on
its reservation at all relevant times. Petitioner started
farming on the reservation in or around 1979. Petitioner raised
corn and soybeans on approximately 270 acres of reservation land
which he leased from the tribe until about 1992. In 1992, the
tribe reclaimed the land to expand its gambling operations.
The tribe approved its constitution and bylaws on June 20,
1936, and ratified its corporate charter on July 23, 1937.
Per Capita Distributions
The tribe owns and operates a gambling casino complex called
Treasure Island Casino & Bingo (the casino) on its reservation.
The tribe initially conducted class II gaming at the casino. On
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or about November 15, 1989, the tribe signed a compact5 with the
State of Minnesota for control of class III gaming.6
As an enrolled member of the tribe, petitioner is entitled
to receive per capita distributions attributable to income
derived from the tribe’s casino. During the years 1991, 1993,
and 1994, petitioner received per capita distributions of
$19,070, $40,933, and $50,222, respectively. No Federal income
taxes were withheld from petitioner’s per capita distributions.
Prior Litigation
Petitioner in this case was also the petitioner in Campbell
v. Commissioner, docket No. 9244-95 (Campbell I). At issue in
Campbell I was the proper Federal income tax treatment of a 1992
per capita distribution from the tribe to petitioner arising out
5
Under the Indian Gaming Regulatory Act (IGRA), Pub. L. 100-
497, secs. 1-22, 102 Stat. 2467 (1988), current version at 25
U.S.C. secs. 2701-2721 (Supp. 2000), a tribal-State compact
governing gaming activities on the Indian lands of the tribe
shall take effect only when notice of the approval of the compact
by the Secretary of the Interior is published in the Federal
Register. See 25 U.S.C. sec. 2710(d)(3)(B). The tribal-State
compact between the tribe and the State of Minnesota was approved
by the Secretary, and notice of the approval was published in the
Federal Register as required. See 55 Fed. Reg. 12292 (Apr. 2,
1990).
6
At trial, respondent objected to the admission of Exhibits
36-J through 39-J on grounds of relevance, and we reserved final
ruling on the admission of the exhibits. The exhibits included
the constitution and bylaws of the tribe, the tribe’s corporate
charter, the tribal-State compact, and the Gaming Revenue
Allocation Ordinance discussed infra. We overrule respondent’s
objection and admit the exhibits because we conclude that the
exhibits are relevant to our discussion of the collateral
estoppel issue, infra.
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of the ownership and operation of the casino. Campbell I was
tried before Special Trial Judge D. Irvin Couvillion on October
4, 1996, in St. Paul, Minnesota. The Court issued an opinion in
Campbell I on November 6, 1997, in which it held that the per
capita distributions were taxable as ordinary income rather than
exempt farm income as asserted by petitioner. See Campbell v.
Commissioner, T.C. Memo. 1997-502. On January 8, 1999, the Court
of Appeals for the Eighth Circuit affirmed the Tax Court on this
issue and remanded the case on another issue irrelevant to this
case. See Campbell v. Commissioner, 164 F.3d 1140 (8th Cir.
1999). The U.S. Supreme Court denied a petition for writ of
certiorari. See Campbell v. Commissioner, 526 U.S. 1117 (1999).
Gaming Revenue Allocation Ordinance
On or about October 19, 1994, the tribe passed a resolution
to amend its constitutional powers and adopted a Gaming Revenue
Allocation Ordinance (the ordinance) which regulates the
distribution of tribal profits to tribe members. The ordinance
was passed and adopted in accordance with the requirements of the
Indian Gaming Regulatory Act (IGRA), Pub. L. 100-497, secs. 1-22,
102 Stat. 2467 (1988), current version at 25 U.S.C. secs. 2701-
2721 (Supp. 2000). The ordinance stated, in part:
The Tribal Council shall insure that notification of
the application of federal tax laws to tribal per
capita payments be made when such payments are made.
The Tribal Administration shall also implement a
procedure by which qualified enrolled members who
receive per capita payments can have applicable taxes
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automatically deducted from per capita payments. The
Tribal Administration shall include in the notice of
the application of federal tax laws, a notice of the
existence of the withholding procedure.
In approximately November 1994, the Department of the
Interior notified the tribe that it had determined the ordinance
was in compliance with the IGRA and had approved the ordinance.
Discharge of Indebtedness
Petitioner borrowed money from the U.S. Department of
Agriculture, Farmers Home Administration (FmHA), on at least
three different occasions for operating expenses and other uses
with respect to his farming activity. On July 25, 1983,
petitioner borrowed $32,326 from the FmHA. On May 30, 1984,
petitioner borrowed $35,500 from the FmHA for annual operating
expenses and to purchase an irrigation system. On January 8,
1987, petitioner borrowed an unknown amount from the FmHA. In
order to receive loans from the FmHA, petitioner was required to
prepare and submit a projection or “prospective plan” for each
operating year the loan was effective.7 At some point,
petitioner entered into a security agreement for each of his FmHA
loans granting the FmHA a security interest in some of his
chattel, including a tractor, a combine, a planter, a wagon, a
plow, and other farming equipment (chattel).
7
The only projection included in the record concerned the
period Jan. 1 through Dec. 31, 1990.
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Around June 1989, petitioner received a notice from the FmHA
indicating that he had defaulted on his loans and that the FmHA
intended to enforce the security agreements against his chattel
by repossessing, foreclosing on, or obtaining a court judgment
against the property. Shortly thereafter, the FmHA foreclosed on
petitioner’s chattel. On or around November 18, 1989, the
chattel was sold at auction by Schlegel Auction & Clerking Co.
(Schlegel Auction) on behalf of the FmHA. On November 27, 1989,
Schlegel Auction issued a joint check to petitioner and the FmHA
for the auction proceeds of $13,790.
On January 31, 1990, the FmHA sent petitioner a letter
indicating that petitioner had defaulted on his 1983 and 1984
loans and that he had an outstanding balance of $35,554 as of
January 31, 1990. The letter also enclosed an Application for
Settlement of Indebtedness. In 1990, the FmHA relieved
petitioner of indebtedness in the amount of $31,238.8
Tribal Council Expenses
Petitioner served on the tribe’s council from October 1983
until March 1990. While serving as a member of the tribal
council, petitioner held various positions, including vice
chairman and assistant secretary/treasurer. Petitioner held
“about 17 different jobs” at various times, including Tobacco
8
The record does not indicate the reason for the discrepancy
in petitioner’s outstanding FmHA loan balance as of Jan. 31,
1990, and the amount of indebtedness relieved by the FmHA.
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Commissioner of the tribe, game warden, environmental specialist,
and various volunteer positions on behalf of the tribal
council. From about September 1988 until June 1990, and again in
1994, petitioner earned $150 per week as Tobacco Commissioner.
Any expenses petitioner incurred in connection with services
performed on behalf of the tribal council were covered by a
reimbursement policy. Under the reimbursement policy, petitioner
was entitled to receive from the tribal council $75 for every
meeting he attended, even when there were multiple meetings in a
single day (meeting payments). The meeting payments were an
incentive to persuade people to attend meetings. Under the
reimbursement policy, petitioner was also entitled to claim
reimbursement for meals, travel mileage, lodging, airfare, and
other miscellaneous expenses. According to the reimbursement
policy, petitioner was required to submit a form detailing the
expenses he incurred, with attached receipts, and requesting the
meeting payments he was entitled to receive. Petitioner kept
track of his expenses by keeping calendars and receipts.
Sometime around February 1992, the tribal council stopped
making reimbursements to petitioner. Petitioner stopped
submitting reimbursement requests around August 1993.
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OPINION
Per Capita Distributions
Respondent argues that the doctrine of collateral estoppel
precludes petitioner from relitigating the issue of whether
petitioner’s per capita distributions from the tribe are taxable
as ordinary income. Respondent asserts that the legal questions
raised in Campbell I with respect to this issue are identical to
those raised by petitioner in this case, and the only differences
are the years and the amounts of tax due. Respondent contends
there has been no change in the controlling facts or the
applicable law since the resolution of Campbell I. Petitioner,
on the other hand, argues that the primary issues and legal
arguments raised in this case differ significantly from those
raised in Campbell I.
The doctrine of collateral estoppel may be applied in
Federal income tax cases. See United States v. International
Bldg. Co., 345 U.S. 502, 505 (1953); Commissioner v. Sunnen, 333
U.S. 591, 598 (1948). “Under collateral estoppel, once an issue
of fact or law is actually and necessarily determined by a court
of competent jurisdiction, that determination is conclusive in
subsequent suits based on a different cause of action involving a
party to the prior litigation.”9 Montana v. United States, 440
9
Under the principles of res judicata, on the other hand, “a
judgment on the merits in a prior suit bars a second suit
(continued...)
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U.S. 147, 153 (1979) (citing Parklane Hosiery Co. v. Shore, 439
U.S. 322, 326 n.5 (1979)); see also Commissioner v. Sunnen, supra
at 599-600; Popp Telcom v. American Sharecom, Inc., 210 F.3d 928,
939 (8th Cir. 2000); Monahan v. Commissioner, 109 T.C. 235, 240
(1997), affd. without published opinion 86 F.3d 1162 (9th Cir.
1996); Kroh v. Commissioner, 98 T.C. 383, 401 (1992); Gammill v.
Commissioner, 62 T.C. 607, 613 (1974).
In Montana v. United States, supra at 155, the Supreme Court
established a three-prong test for applying collateral estoppel
that requires a court to find: (1) The issues presented in the
subsequent litigation are in substance the same as those issues
presented in the first case; (2) the controlling facts or legal
principles have not changed significantly since the first
judgment; and (3) other special circumstances do not warrant an
exception to the normal rules of preclusion. In Peck v.
Commissioner, 90 T.C. 162, 166 (1988), affd. 904 F.2d 525 (9th
Cir. 1990), we stated that the "three-pronged rubric provided by
the Supreme Court in the Montana case embodies a number of
detailed tests developed by the courts to test the
9
(...continued)
involving the same parties or their privies based on the same
cause of action.” Parklane Hosiery Co. v. Shore, 439 U.S. 322,
326 n.5 (1979). In this case, petitioner disputes different tax
years than in Campbell I. “Each year is the origin of a new
liability and of a separate cause of action.” Commissioner v.
Sunnen, 333 U.S. 591, 598 (1948); see also Peck v. Commissioner,
904 F.2d 525, 527 n.3 (9th Cir. 1990), affg. 90 T.C. 162 (1988).
Res judicata, therefore, does not apply.
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appropriateness of collateral estoppel in essentially factual
contexts." Building on the Supreme Court's analysis in Montana,
this Court identified five requirements that must be satisfied
for collateral estoppel to apply. See Peck v. Commissioner,
supra at 166-167; see also Commissioner v. Sunnen, supra at
599-600; Popp Telcom v. American Sharecom, Inc., supra at 939;
Gammill v. Commissioner, supra at 613-615; Kersting v.
Commissioner, T.C. Memo. 1999-197.
As articulated in Peck, the following requirements must be
satisfied to invoke the doctrine of collateral estoppel: (1) The
issue in the second suit must be identical in all respects with
the one decided in the first suit; (2) there must be a final
judgment rendered by a court of competent jurisdiction; (3) the
party against whom collateral estoppel is invoked must have been
a party or in privity with a party to the prior judgment; (4) the
parties actually must have litigated the issue and its resolution
must have been essential to the prior decision; and (5) the
controlling facts and applicable legal rules must remain
unchanged from those in the prior litigation. See Peck v.
Commissioner, supra at 166-167. The party asserting collateral
estoppel as an affirmative defense, in this case respondent,
bears the burden of proof.10 See Rule 142(a).
10
As required by Rule 39, respondent affirmatively pleaded
collateral estoppel by an amendment to answer filed by leave of
(continued...)
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In both Campbell I and this case, the ultimate issue
presented is whether per capita distributions to petitioner from
the tribe arising out of the ownership and operation of a
gambling casino constitute gross income. In this case, the
parties stipulated that the primary issue in Campbell I was the
tax treatment of a per capita distribution to petitioner in 1992
from the tribe arising out of the ownership and operation of the
casino.
In Campbell I, we specifically stated that the primary issue
for decision was:
Whether per capita distributions to petitioner from the
* * * [tribe] arising out of the ownership and
operation of a gambling casino constitute gross income,
or whether such income is “derived directly” from land
owned by the * * * [tribe] and is excludable from
taxation pursuant to laws, treaties, or agreements
between Indian tribes and the United States Government
* * *. [Campbell v. Commissioner, T.C. Memo. 1997-
502.]
The only differences between the issue in this case and the issue
in Campbell I are the dollar amounts and years in controversy.
The fact that the dollar amounts in controversy and the tax years
involved in this case are different from those in Campbell I,
however, does not preclude the application of collateral
estoppel. See Union Carbide Corp. v. Commissioner, 75 T.C. 220,
10
(...continued)
the Court.
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253 (1980), affd. 671 F.2d 67 (2d Cir. 1982). The first of the
Peck requirements is satisfied.
The second of the Peck requirements is also satisfied. This
Court issued an opinion in Campbell I on November 6, 1997, see
Campbell v. Commissioner, T.C. Memo. 1997-502; on January 8,
1999, the Court of Appeals for the Eighth Circuit affirmed the
Tax Court on this issue and remanded on another issue irrelevant
to this case, see Campbell v. Commissioner, 164 F.3d 1140 (8th
Cir. 1999); and the U.S. Supreme Court denied a petition for writ
of certiorari, see Campbell v. Commissioner, 526 U.S. 1117
(1999). The decision in Campbell I is final. See sec.
7481(a)(3)(B).
With respect to the third and fourth of the Peck
requirements, the parties do not dispute that petitioner was a
party in Campbell I, and a reading of the decisions in Campbell I
confirms the issue was actually litigated and was essential to
the resolution of the case. See Campbell v. Commissioner, T.C.
Memo. 1997-502, affd. on this issue 164 F.3d 1140 (8th Cir.
1999). Consequently, the third and fourth requirements are also
satisfied.
In deciding whether the fifth Peck requirement is satisfied,
we must analyze whether this proceeding involves “the same set of
events or documents and the same bundle of legal principles that
contributed to the rendering of” Campbell I. Commissioner v.
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Sunnen, 333 U.S. at 602. “If the legal matters determined in the
earlier case differ from those raised in the second case,
collateral estoppel has no bearing on the situation.” Id. at
599-600; see also Sydnes v. Commissioner, 647 F.2d 813, 814-815
(8th Cir. 1981), affg. 74 T.C. 864 (1980).
Petitioner’s principal argument against the application of
collateral estoppel is that the controlling facts and applicable
legal rules either have changed or differ significantly from
those considered in Campbell I. We reject petitioner’s principal
argument.11
Except for the taxable years and the amounts at issue, the
relevant facts in Campbell I and in this case are identical. The
per capita distributions made to petitioner during 1991, 1993,
11
In Commissioner v. Sunnen, 333 U.S. at 601 (fn. ref.
omitted), the Supreme Court suggested that “if the relevant facts
in the two cases are separable, even though they be similar or
identical, collateral estoppel does not govern the legal issues
which recur in the second case.” It is not clear whether
petitioner is relying on the separable facts doctrine articulated
in Sunnen; however, even if he is, we still must reject his
argument. The separable facts doctrine has been questioned and
limited by the Supreme Court in Montana v. United States, 440
U.S. 147 (1979). See also Peck v. Commissioner, 904 F.2d at 527-
528 (“The Supreme Court has rejected the separable facts doctrine
in general terms, but has implied that it might have continuing
validity in the tax context.”). In addition, two Courts of
Appeals have concluded that the separable facts doctrine is not
good law after Montana. See American Med. Intl., Inc. v.
Secretary of HEW, 677 F.2d 118, 120 (D.C. Cir. 1981) (per
curiam); Hicks v. Quaker Oats Co., 662 F.2d 1158, 1167 (5th Cir.
1981). Whether or not the separable facts doctrine has any
continued viability, we conclude that there is no basis for
applying the doctrine in this case.
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and 1994 were made in the same form and under the same
contractual agreements as the per capita distributions made in
1992 (the year at issue in Campbell I). In addition, petitioner
conceded at trial that the facts in this case, save the years in
dispute and amounts in controversy, are identical to the facts in
Campbell I.12 Because the context in which the issues of this
case arise has not changed since Campbell I, normal rules of
preclusion apply. See Montana v. United States, 440 U.S. at 161.
12
The only fact that arguably changed since Campbell I is
the fact that the Department of the Interior approved the tribe’s
“Gaming Revenue Allocation Ordinance” (ordinance) on or about
Nov. 20, 1994. Petitioner argues that before the approval of the
ordinance in 1994, the tribe “had the right to expect that its
per capita distributions could be received as tax-free per capita
distributions under its Constitution and Corporate Charter.” We
reject petitioner’s argument. Contrary to petitioner’s argument,
the clear language of 25 U.S.C. sec. 2710(b)(3), which was
enacted in 1988 (before Campbell I), provides that per capita
distributions may be made “only if--(A) the Indian tribe has
prepared a plan to allocate revenues to uses authorized by
paragraph (2)(B); (B) the plan is approved by the Secretary as
adequate, particularly with respect to uses described in clause
(i) or (iii) of paragraph (2)(B); * * *; and (D) the per capita
payments are subject to Federal taxation and tribes notify
members of such tax liability when payments are made.” In other
words, the tribe must have had an approved plan in effect in
order to make the per capita distributions in the first instance.
The statute does not allow tribes without such a plan to make
tax-free per capita distributions. Petitioner is not entitled to
rely on the tribe’s compliance, or noncompliance, with this
statute in order to escape taxation. Further, the decision in
Campbell I concerned tax year 1992, was tried in 1996, and was
decided in 1997; therefore, petitioner was aware of the fact that
the ordinance had been approved at the time of trial and could
have made an identical argument at trial in Campbell I. Based on
the above, the fact that the plan was not approved until 1994
does not alter the factual circumstances under which the per
capita distributions were made and is of no consequence to our
decision.
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The only question, therefore, is whether there has been a “change
in the legal climate” since the decision in Campbell I.
Commissioner v. Sunnen, supra at 606.
Petitioner has not referenced, and we cannot find, any
relevant change in the applicable law that warrants a second
analysis of petitioner’s case. Although the IGRA was amended
after the decision in Campbell I, none of the amendments are
relevant to the issue presented.13 Notably, petitioner does not
argue that any specific amendment to the IGRA would have had any
13
The first amendment to the IGRA was the addition of 25
U.S.C. sec. 2717a as part of the Department of the Interior and
Related Agencies Appropriations Act, 1990, Pub. L. 101-121, 103
Stat. 701, 718, current version at 25 U.S.C. sec. 2717a (Supp.
2000), which provides that, in fiscal year 1990 and thereafter,
fees to be collected pursuant to 25 U.S.C. sec. 2717 (Supp. 2000)
shall be available to carry out the duties of the National Indian
Gaming Commission (NIGC). The Technical Amendments to Various
Indian Laws Act of 1991, Pub. L. 102-238, sec. 2(a) and (b), 105
Stat. 1908, current version at 25 U.S.C. sec. 2703(E) and (F)
(Supp. 2000), added subpars. (E) and (F) to 25 U.S.C. sec. 2703
and added provisions to 25 U.S.C. sec. 2718 authorizing
appropriation of necessary funds for operation of the NIGC for
fiscal years beginning Oct. 1, 1991 and 1992. In 1992, the
Federal Indian Statutes: Technical Amendments, Pub. L. 102-497,
sec. 16, 106 Stat. 3255, 3261 (1992), current version at 25
U.S.C. sec. 2703 (Supp. 2000), struck out the words “or Montana”
following the word “Wisconsin” in 25 U.S.C. sec. 2703(7)(E). In
1997, the Department of the Interior and Related Agencies
Appropriations Act, 1998, Pub. L. 105-83, sec. 123(a) and (b),
111 Stat. 1543, 1566, current version at 25 U.S.C. secs. 2717 and
2718 (Supp. 2000), made minor changes to the wording of 25 U.S.C.
sec. 2717(a)(1) and (2), made minor wording amendments to 25
U.S.C. sec. 2718(a), and rewrote 25 U.S.C. sec. 2718(b). In
addition, the Department of Commerce, Justice, and State, the
Judiciary, and Related Agencies Appropriations Act, 1998, Pub. L.
105-119, sec. 627, 111 Stat. 2440, 2522, current version at 25
U.S.C. sec. 2718 (Supp. 2000), rewrote 25 U.S.C. sec. 2718(a).
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effect on the outcome of Campbell I or has any effect on this
case. Regardless of petitioner’s failure to point to any
specific changes in the law, we find that none of the amendments
enacted after the decision in Campbell I has any bearing
whatsoever on the resolution of the issue in this case. We also
note that we specifically addressed the IGRA in our decision in
Campbell I. See Campbell v. Commissioner, T.C. Memo. 1997-502.
Petitioner sets forth several alternative arguments in this
case to support his contention that the per capita distributions
should not be subject to Federal income taxes that were not made
in Campbell I.14 One of those arguments, which petitioner
describes as his “primary argument”, is that “the United States
approved a Constitution and a Corporate Charter for the
* * * [tribe] in Minnesota. * * * These documents indicate that
14
Petitioner also reiterated an argument he made in Campbell
I based on Squire v. Capoeman, 351 U.S. 1 (1956). Petitioner
asserted that under Squire v. Capoeman, supra at 4, income
“derived directly” from the land, including per capita
distributions, is exempt from taxation. Petitioner asserted that
a portion of the per capita distributions received was from
business income earned from operations other than gaming, such as
a restaurant, a buffet, two “snack-bars”, a gift shop, a tobacco
shop, a marina, and an RV park-campground. This exact argument
was the crux of petitioner’s argument in Campbell I, and we
decline to consider the argument a second time. See Campbell v.
Commissioner, T.C. Memo. 1997-502. In Campbell I, we
specifically considered Squire v. Capoeman, supra, and held:
“Income earned through the investment of capital or labor, such
as restaurants, motels, tobacco shops, and similar improvements
to the land, fails to qualify for the exemption * * *. Under the
rationale of these cases, the income derived from the operation
of a casino would not be derived directly from the land.”
(Citations omitted.).
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the tribe had the right to earn revenue or income and then to
distribute these funds directly to the members of the tribe as
per capita payments.” As petitioner stresses in his brief, the
tribal constitution and the corporate charter predate the IGRA by
approximately 50 years.
Evidence regarding the meaning and application of the tribal
constitution and the corporate charter could have been admitted
during the trial of Campbell I. It was not. See Jones v. United
States, 466 F.2d 131, 136 (10th Cir. 1972); Monahan v.
Commissioner, 109 T.C. at 246. Petitioner’s argument is nothing
more than an alternative argument in support of his position on
the identical issue presented in Campbell I. Petitioner did not
make this argument in the earlier proceeding. As a general rule,
taxpayers are not permitted to avoid the application of
collateral estoppel simply by advancing new theories on issues
decided against them in an earlier proceeding. See Leininger v.
Commissioner, 86 F.2d 791, 792 (6th Cir. 1936), affg. 29 B.T.A.
874 (1934); Estate of Goldenberg v. Commissioner, T.C. Memo.
1964-134; Pelham Hall Co. v. Carney, 27 F. Supp. 388 (D. Mass.
1939), affd. 111 F.2d 944 (1st Cir. 1940). Indeed, had the
present case been consolidated for trial with Campbell I, “one
uniform result would necessarily have obtained”.15 Peck v.
15
It is noteworthy that, in making his argument that the
applicable legal climate has changed since the year at issue in
(continued...)
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Commissioner, 90 T.C. at 168.
If the taxpayers’ case was not effectively presented at
the first trial it was their fault; affording them a
second opportunity in which to litigate the matter,
with the benefit of hindsight, would contravene the
very principles upon which collateral estoppel is based
and should not be allowed. [Jones v. United States,
supra at 136.]
See also Peck v. Commissioner, 904 F.2d at 530.
On brief, petitioner also made another alternative argument
to the effect that the “legal relationship between the Tribe and
the United States has changed over the tax years at issue since
no one from the Tribe has questioned the constitutionality” of
the IGRA. Petitioner argued that the IGRA is unconstitutional
insofar as it affords the United States the right to claim that
per capita distributions are subject to Federal taxation, because
under California v. Cabazon Band of Mission Indians, 480 U.S. 202
(1987), and Seminole Tribe v. Butterworth, 658 F.2d 310 (5th Cir.
1981), tribes have the right to economic self-determination over
all matters (including gaming operations).
A taxpayer is not collaterally estopped from challenging a
position on constitutional grounds not raised in the earlier
proceeding. See Jaggard v. Commissioner, 76 T.C. 222, 224-225
(1981); Neeman v. Commissioner, 26 T.C. 864, 866-877 (1956),
15
(...continued)
Campbell I (1992), petitioner makes no distinction between the
years at issue in this case that occurred before 1992 and the
years at issue in this case that occurred after 1992.
- 21 -
affd. 255 F.2d 841 (2d Cir. 1958); Travers v. Commissioner, T.C.
Memo. 1982-498. In this case, however, petitioner’s
“constitutional” challenge is merely a bare assertion unsupported
by any references to the U.S. Constitution or by any evidence at
trial and in no way raises a valid constitutional claim. See
Morrow v. Commissioner, T.C. Memo. 1983-186. In addition, the
argument could have been raised in Campbell I. See Leininger v.
Commissioner, supra; Estate of Goldenberg v. Commissioner, supra;
Pelham Hall Co. v. Carney, supra. Both California v. Cabazon
Band of Mission Indians, supra, and Seminole Tribe v.
Butterworth, supra, were decided before the enactment of the
IGRA. Indeed, the IGRA was a congressional response to the
Supreme Court’s decision in California v. Cabazon Band of Mission
Indians, supra, which followed a long line of cases that began
with Seminole Tribe v. Butterworth, supra. See S. Rept. 100-446,
at 3071 (1988).
We hold that each of the requirements for applying the
doctrine of collateral estoppel in this case has been satisfied
and that collateral estoppel applies to preclude relitigation of
the proper tax treatment of the per capita distributions paid to
petitioner during the years at issue. We sustain respondent’s
determination that petitioner’s 1991, 1993, and 1994 per capita
distributions of $19,070, $40,933, and $50,222, respectively, are
subject to Federal income tax.
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Discharge of Indebtedness
Gross income means all income from whatever source derived,
including income from discharge of indebtedness. See sec.
61(a)(12); sec. 1.61-12(a), Income Tax Regs. Section
108(a)(1)(C) excludes from gross income discharge of indebtedness
income if the indebtedness discharged is qualified farm
indebtedness. Petitioner bears the burden of proof with respect
to whether he is entitled to an exclusion. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933).
In order for income to be excluded under section
108(a)(1)(C), petitioner must prove: (1) The discharge was made
by a qualified person, see sec. 108(g)(1); (2) the indebtedness
was incurred directly in connection with the taxpayer’s operation
of the trade or business of farming, see sec. 108(g)(2)(A); and
(3) 50 percent or more of the taxpayer’s aggregate gross receipts
for the 3 taxable years preceding the taxable year in which the
discharge of such indebtedness occurs is attributable to the
trade or business of farming, see sec. 108(g)(2)(B). The
exclusion does not apply to a discharge to the extent the
taxpayer is insolvent. See sec. 108(a)(2)(B). Exclusions from
taxable income should be construed narrowly, and taxpayers must
bring themselves within the clear scope of the exclusion. See
Dobra v. Commissioner, 111 T.C. 339, 349 n.16 (1998) (citing
- 23 -
Graves v. Commissioner, 89 T.C. 49, 51 (1987), supplementing 88
T.C. 28 (1987)).
Respondent contends that petitioner realized $31,238 in
gross income as a result of the FmHA’s discharge of petitioner’s
indebtedness during 1990. Respondent does not dispute, for
purposes of the section 108(a)(1)(C) exclusion, (1) that the FmHA
is a qualified person, see sec. 108(g)(1); (2) that petitioner’s
indebtedness was incurred directly in connection with
petitioner’s operation of the trade or business of farming, see
sec. 108(g)(2)(A); or (3) that petitioner was solvent, see sec.
108(a)(2)(B). Respondent argues, however, that petitioner fails
to satisfy the test in section 108(g)(2)(B). See Lawinger v.
Commissioner, 103 T.C. 428 (1994).
Petitioner testified that for 1987, 1988, and 1989 he earned
gross income of approximately $250 per acre multiplied by 270
acres of farmed land, totaling approximately $65,000 per year.
According to petitioner, he earned “somewhere in the neighborhood
of around $250 an acre for corn” and “just a little less than
that” for soybeans. On cross-examination, however, petitioner
testified that only 110 acres of that land were “under the
irrigator” and the remaining acres were not producing.
Petitioner testified further that he kept annual production
records as required by the FmHA in order to borrow money but that
he could not produce these records at trial because the FmHA had
- 24 -
destroyed the documents. As evidence of his income, petitioner
did present a projection or “prospective plan” he had prepared
for the FmHA covering the period from January 1 through December
31, 1990, which was signed on March 5, 1990. The projection
estimated, among other things, production and sales of
petitioner’s crops, cash farm operating expenses, debt repayment,
and a summary of the year’s business. Petitioner, however,
introduced no credible evidence to prove his gross receipts from
farming in 1987, 1988, and 1989.
Petitioner’s income during 1987, 1988, and 1989 was not
derived solely from farming. Petitioner served on the tribal
council from October 1983 until March 1990. By his own
admission, petitioner held “about 17 different jobs” at various
times, besides the positions he held at the tribal council,
including Tobacco Commissioner, game warden, environmental
specialist, and various volunteer positions on behalf of the
tribal council. Petitioner testified that from about September
1988 until June 1990, he earned $150 per week as Tobacco
Commissioner. Petitioner did not testify about or produce any
evidence of his income from any other jobs he held for any of the
years at issue.
We are not required to accept petitioner’s self-serving
testimony as evidence of his income, particularly in the absence
of corroborating evidence. See Tokarski v. Commissioner, 87 T.C.
- 25 -
74, 77 (1986); Peterman v. Commissioner, T.C. Memo. 1993-129
(citing Geiger v. Commissioner, 440 F.2d 688, 689 (9th Cir.
1971), affg. per curiam T.C. Memo. 1969-159, and Urban Redev.
Corp. v. Commissioner, 294 F.2d 328, 332 (4th Cir. 1961), affg.
34 T.C. 845 (1960)). Petitioner has not presented any
documentary evidence to prove his gross receipts from farming for
1987, 1988, and 1989. Petitioner’s testimony regarding the
income he estimated he earned from farming during the years at
issue was contradictory and inconsistent. On this record, we
cannot estimate, nor are we required to estimate, petitioner’s
income from farming. See Cohan v. Commissioner, 39 F.2d 540,
543-544 (2d Cir. 1930). In addition, we are not able to
ascertain what income he earned from other sources during the
years at issue. Petitioner has not met his burden of proving he
received gross receipts of 50 percent or more from farming as
required under section 108(g)(2)(B). Thus, we hold that
petitioner is not entitled to the exclusion under section
108(a)(1)(C), and he must include $31,238 in gross income by
reason of the discharge of his indebtedness.
Tribal Council Expenses
Petitioner claims he is entitled to deduct unreimbursed
business expenses, travel costs, and mileage incurred while
performing activities on behalf of the tribal council, or, in the
alternative, that he is entitled to deduct such expenses as a
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charitable deduction under sections 170 and 7871. In his brief,
petitioner claims that, for 1993, he has not been reimbursed by
the tribe for $7,072 in direct expenses and $4,950 in meeting
payments (66 meetings charged at $75 each)16 and, for 1994, he
has not been reimbursed for $9,089 in direct expenses and $7,725
in meeting payments (103 meetings charged at $75 each).
Respondent argues that in order to claim a deduction under
section 162(a), petitioner must have incurred and paid the
expenses he seeks to deduct, and, therefore, petitioner cannot
deduct the meeting payments. Respondent further argues that
petitioner has not presented credible evidence to substantiate
the deductions for direct expenses.
Section 162(a) Deduction
Section 162(a) permits a taxpayer to deduct the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. See Commissioner v. Lincoln
Sav. & Loan Association, 403 U.S. 345, 352 (1971). In order for
a taxpayer “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 engaging in the
activity must be for income or profit.” Groetzinger v.
Commissioner, 480 U.S. 23, 35 (1987). An expense is ordinary if
16
Petitioner actually claimed in his brief that he was owed
$5,050 in meeting payments.
- 27 -
it is normal, usual, or customary within a particular trade,
business, or industry or arises from a transaction “of common or
frequent occurrence in the type of business involved.” Deputy v.
du Pont, 308 U.S. 488, 495 (1940). An expense is necessary if it
is appropriate and helpful for the development of the business.
See Commissioner v. Lincoln Sav. & Loan Association, supra at
353; Commissioner v. Heininger, 320 U.S. 467, 471 (1943).
Section 262(a) disallows deductions for personal, living, or
family expenses. See also sec. 1.162-17(a), Income Tax Regs.
Section 162 also allows a taxpayer to deduct ordinary and
necessary business expenses in excess of reimbursements from the
taxpayer’s employer. See sec. 1.162-17(b)(3), Income Tax Regs.
If the employee’s ordinary and necessary business
expenses exceed the total of the amounts charged
directly or indirectly to the employer and received
from the employer as advances, reimbursements, or
otherwise, and the employee is required to and does
account to his employer for such expenses, the taxpayer
may * * * claim a deduction for such excess. [Id.]
If the taxpayer wishes to secure a deduction for such
excess, he must submit a statement with his return showing: (1)
“The total of any charges paid or borne by the employer and of
any other amounts received from the employer for payment of
expenses whether by means of advances, reimbursements or
otherwise”, sec. 1.162-17(b)(3)(i), Income Tax Regs.; and (2)
“The nature of his occupation, the number of days away from home
on business, and the total amount of ordinary and necessary
- 28 -
business expenses paid and incurred by him * * * broken down into
such broad categories as transportation, meals and lodging while
away from home overnight, entertainment expenses, and other
business expenses”, sec. 1.162-17(b)(3)(ii), Income Tax Regs. To
account to his employer, within the meaning of section 1.162-
17(b)(3), Income Tax Regs., means to submit an expense account or
other written statement to the employer showing the business
nature and the amount of business expenses. See sec. 1.162-
17(b)(4), Income Tax Regs.
Section 274(d) generally provides that no deduction or
credit shall be allowed for travel, entertainment, or a gift
unless the taxpayer substantiates such expenditures by adequate
records or by sufficient evidence corroborating the taxpayer’s
own statement. See sec. 1.274-5(a), (c), Income Tax Regs.
“Ordinarily, documentary evidence will be considered adequate to
support an expenditure if it includes sufficient information to
establish the amount, date, place, and the essential character of
the expenditure.” Sec. 1.274-5(c)(2)(iii)(b), Income Tax Regs.
Section 274(d) prohibits deductions for expenditures based on
approximations or unsupported testimony of the taxpayer. See
sec. 1.274-5(a), Income Tax Regs.
Deductions are a matter of legislative grace, and the burden
of clearly showing the right to the claimed deduction is on
petitioner. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503
- 29 -
U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S.
435, 440 (1934).
Petitioner has not met his burden of proving that the
expenses he allegedly incurred in 1993 and 1994 were incurred in
connection with a trade or business of petitioner. Petitioner
testified that he served on the tribal council from October 1983
until March 1990. Although the expenses he incurred were for
activities performed on behalf of the tribal council in 1993 and
1994, there is no evidence that he was performing services for
the tribal council “with continuity and regularity” or that his
primary purpose for performing the services was “for income and
profit”. Groetzinger v. Commissioner, supra at 35.
Even if we were to assume that the expenses allegedly
incurred by petitioner were in connection with a trade or
business, petitioner failed to prove that he did not, and would
not, receive the reimbursement to which he claimed he was
entitled under tribal council reimbursement policies. Moreover,
petitioner failed to substantiate the expenses he claimed he was
entitled to deduct. Although petitioner maintained some records
and offered those records into evidence at trial, the
documentation was inconsistent, incoherent, and insufficient to
enable us to determine which of the expenses, if any, were
deductible and which were not. Petitioner submitted three types
of proof to substantiate his expenses: (1) An “account of
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expenses”, (2) personal date books for 1993 and 1994, and (3)
photocopied receipts and correspondence for 1993 and 1994. The
“account of expenses” appears to have been prepared in
preparation for this proceeding, and we give it no weight other
than as a summary of items allegedly substantiated by other
documentary evidence. The personal date books contain
handwritten notes with a few numbers that do not appear to
correlate with the numbers in petitioner’s account of expenses.
The receipts and correspondence are incomplete and insufficient
to satisfy the requirements of section 162 and, where applicable,
section 274. For example, most of the documents dealing with
expenses that seem to be covered by section 274 do not provide
the date, amount, place, and essential character of the
expenditure as required by section 1.274-5(c)(2)(iii), Income Tax
Regs.
For the reasons described above, we are unable to discern
any adequate factual or legal basis for allowing petitioner a
deduction for any of the expenses claimed under these
circumstances. Accordingly, we hold that petitioner has not
proven he was entitled to deduct either the meeting payments or
his claimed unreimbursed direct expenses as ordinary and
necessary business expenses under section 162(a).
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Section 170 Deduction
Section 170 allows a deduction for any charitable
contribution payment made within the taxable year. For purposes
of section 170, the definition of charitable contribution
includes a contribution or gift to or for the use of a State,
among other things, if the contribution is made for exclusively
public purposes. See sec. 170(c)(1). Section 7871(a)(1)(A)
treats Indian tribal governments as States for purposes of
determining whether and in what amount any contribution or
transfer to or for the use of such States is deductible under
section 170. Petitioner bears the burden of demonstrating he is
entitled to the claimed deduction. See Rule 142(a); INDOPCO,
Inc. v. Commissioner, supra; New Colonial Ice Co. v. Helvering,
supra.
The only evidence presented on this issue at trial was
petitioner’s own affirmative response to his attorney’s question
of whether it is possible for individuals to give gifts or make
donations to the tribe. Further, petitioner’s overall testimony
regarding his expenses reflects that his intent was to be paid
$75 per meeting and to be reimbursed for his expenses, not to
donate his time and money to the tribal council.17 See
Commissioner v. Duberstein, 363 U.S. 278 (1960). Petitioner’s
17
For example, on direct examination, petitioner
characterized the unreimbursed expenses as “lost income” or a
“loss”.
- 32 -
entire argument on brief in support of a deduction under section
170 consisted of the following sentence: “[Section] 7871 of the
Code treats tribes as States for charitable donation purposes.”
Petitioner has failed to meet his burden of proving he is
entitled to a deduction under section 170 for expenses he
allegedly incurred in connection with his activities for the
tribe, and, therefore, petitioner is not entitled to a deduction
under section 170.
Section 6651(a)(1) Additions to Tax
Section 6651(a) imposes an addition to tax for failure to
file a return, in the amount of 5 percent of the tax liability
required to be shown on the return for each month during which
such failure continues, but not exceeding 25 percent in the
aggregate, unless it is shown that such failure is due to
reasonable cause and not due to willful neglect. See sec.
6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985);
United States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994);
Harris v. Commissioner, T.C. Memo. 1998-332. A failure to file a
timely Federal income tax return is due to reasonable cause if
the taxpayer exercised ordinary business care and prudence and,
nevertheless, was unable to file the return within the prescribed
time. See sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful
neglect means a conscious, intentional failure to file or
reckless indifference. See United States v. Boyle, supra.
- 33 -
Petitioner conceded that, as of the date that respondent
mailed the statutory notice of deficiency to petitioner,
petitioner had not filed Federal income tax returns for 1990,
1991, 1993, or 1994. Petitioner failed to produce any evidence
that his failure to file returns was due to reasonable cause. We
also note that petitioner did not make an argument on this issue,
except for a subject heading in his reply brief, which states:
“Campbell should not be obligated to pay additions to tax based
on his per capita income.” We, therefore, sustain respondent’s
determination.
Section 6654(a) Additions to Tax
Section 6654(a) provides for an addition to tax in the case
of any underpayment of estimated tax by an individual. The
addition to tax under section 6654(a) is mandatory in the absence
of statutory exceptions. See sec. 6654(a), (e); Recklitis v.
Commissioner, 91 T.C. 874, 913 (1988); Grosshandler v.
Commissioner, 75 T.C. 1, 20-21 (1980). With one limited
exception,18 “this section has no provision relating to
reasonable cause and lack of willful neglect. It is mandatory
18
Sec. 6654(e)(3)(B) provides for an exception for newly
retired or disabled individuals where the taxpayer (1) either is
retired after having attained the age of 62 or became disabled in
the taxable year or the preceding taxable year in which the
estimated payments were required to be made, and (2) can
demonstrate that such underpayment was due to reasonable cause
and not to willful neglect. Sec. 6654(e)(3)(B) does not apply in
this case.
- 34 -
and extenuating circumstances are irrelevant.” Estate of Ruben
v. Commissioner, 33 T.C. 1071, 1072 (1960); see also Grosshandler
v. Commissioner, supra at 21. None of the statutory exceptions
under section 6654(e) applies in this case.
Petitioner concedes that as of the date the statutory
notice of deficiency was mailed to him, he had not made any
estimated tax payments for 1990, 1991, 1993, and 1994.
Petitioner did not present any argument on this issue; therefore,
the issue is deemed conceded. Respondent’s determination is
sustained.
We have carefully considered the remaining arguments of both
parties for results contrary to those expressed herein, and, to
the extent not discussed above, find those arguments to be
irrelevant, moot, or without merit.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.