Uniband, Inc. v. Commissioner

UNIBAND, INC., PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

Docket No. 4718–06. Filed May 22, 2013.

P is a Delaware corporation, wholly owned by T, an Indian

tribe. For the years at issue P attempted to file consolidated

returns with C, another corporation wholly owned by T. P con-

tends that T is the common parent corporation of P and C and

that together they constitute an affiliated group eligible to file

a consolidated return. On the returns filed, P did not claim

Indian employment credits under I.R.C. sec. 45A even though

P was entitled to them; instead P deducted the entirety of its

employee expenses. R determined that the consolidated

returns that P joined in filing were invalid and that P was

required to claim a credit under I.R.C. sec. 45A and reduce its

wage deduction by the entire credit amount (without regard

to credit limitations for particular tax years). P now contends

that it is not subject to corporate income tax because it is an

integral part of T, which because it is an Indian tribe is

exempt from income tax. Held: P, as a State-chartered cor-

poration, is a separate and distinct entity from T and is not

exempt from the corporate income tax. Held, further, the

consolidated returns filed for the years in issue were invalid

because T, as an Indian tribe, was not eligible to join in the

230

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00001 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 231

filing of a consolidated return, and P and C alone did not con-

stitute an affiliated group. Held, further, the Indian employ-

ment credits under I.R.C. sec. 45A are not elective; and as a

result, P’s employee expense deductions for the years at issue

must be reduced by the amount of the credit as determined

under I.R.C. sec. 45A without regard to limitations on the

allowable amount of the credit.

Scott A. Taylor, for petitioner.

Jack Martin Forsberg, for respondent.

CONTENTS

FINDINGS OF FACT ............................................................................. 232

TMBCI and its corporations .................................................................. 233

Uniband, Inc. .......................................................................................... 233

TMMC ...................................................................................................... 236

The section 17 corporation ..................................................................... 237

The tax returns ....................................................................................... 239

Indian employment credit ...................................................................... 240

OPINION ................................................................................................. 241

I. Federal income tax exemption issue ............................................... 241

A. Indian tribes are not subject to Federal income tax. ................ 241

1. TMBCI has no inherent immunity from Federal taxes. ........ 241

2. No treaty exempts TMBCI from Federal income tax. ............ 242

a. An exemption must be ‘‘definitely expressed’’. .................... 243

b. The cited treaties do not express an income tax exemp-

tion. ...................................................................................... 243

3. The Code does not impose income tax liability on TMBCI. .. 244

B. Uniband does not share TMBCI’s ‘‘exemption’’ from Federal

income tax. ................................................................................ 246

1. Apart from its association with TMBCI, Uniband is tax-

able. ......................................................................................... 246

2. As a general rule, corporations are distinct from their

owners for tax purposes. ........................................................ 246

3. Uniband is not an ‘‘integral part’’ of TMBCI. ......................... 247

a. Authorities addressing integral parts of States .................. 248

b. Sovereign immunity .............................................................. 249

(1) Analysis of sovereign immunity .......................................... 250

(a) Arm of the tribe ................................................................ 251

(b) Tribal establishment ........................................................ 252

(c) Other criteria .................................................................... 253

(2) Sovereign immunity does not necessarily confer

‘‘integral part’’ status. ....................................................... 256

c. ‘‘Indian tribal organization’’ .................................................. 258

d. Similarity to section 17 corporations ................................... 259

(1) The origin of section 17 corporations ................................. 261

(2) Characteristics of section 17 corporations ......................... 261

(3) Taxation of section 17 corporations .................................... 262

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00002 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

232 140 UNITED STATES TAX COURT REPORTS (230)

(4) Uniband’s differences from a section 17 corporation ........ 263

II. Consolidated return issue ............................................................... 264

A. Uniband was not part of an affiliated group. ............................ 265

1. Body politic ................................................................................ 266

2. An entity taxed as a corporation ............................................. 266

B. The consolidated returns were not valid. ................................... 267

1. TMBCI did not make the consolidated returns. ..................... 267

2. TMBCI did not consent to the consolidated returns. ............. 267

3. TMBCI did not report its items on the consolidated

returns for 1996 or 1997. ....................................................... 269

III. Wage deduction reduction issue ...................................................... 270

IV. Conclusion ......................................................................................... 273

GUSTAFSON, Judge: In a notice of deficiency mailed to peti-

tioner Uniband, Inc. (‘‘Uniband’’), pursuant to section 6212 1

on November 28, 2005, the Internal Revenue Service (‘‘IRS’’)

determined income tax deficiencies of $220,851 for 1996,

$754,758 for 1997, and $308,498 for 1998. Uniband timely

filed a petition requesting this Court to redetermine those

deficiencies. After concessions by the parties three issues

remain for decision:

(1) Whether Uniband, as a State-chartered corporation

wholly owned by an Indian tribe, is subject to the corporate

income tax under section 11. We hold that it is subject to tax.

(2) Whether, if Uniband is subject to tax, the consolidated

returns that Uniband and its sister corporation joined in

filing for 1996, 1997, and 1998 were valid under section

1501. We hold that they were not valid.

(3) Whether section 280C(a) requires that Uniband’s sec-

tion 162 deductions for wage and employee expenses be

reduced by the entire amount of the Indian employment

credit for which Uniband was eligible under section 45A(a),

even if Uniband did not claim the credit. We hold that it does

require the reduction.

FINDINGS OF FACT

The parties submitted this case fully stipulated pursuant

to Rule 122. 2 The parties’ stipulated facts are incorporated

1 Unless

otherwise indicated, all section references are to the Internal

Revenue Code of 1986 (codified in 26 U.S.C. and referred to herein as ‘‘the

Code’’), and all Rule references are to the Tax Court Rules of Practice and

Procedure.

2 The burden of proof is generally on the taxpayer, see Rule 142(a)(1),

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00003 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 233

herein by this reference. At the time Uniband filed its peti-

tion, it maintained its principal place of business in Belcourt,

North Dakota.

TMBCI and its corporations

The Turtle Mountain Band of Chippewa Indians (‘‘TMBCI’’

or ‘‘the Band’’) is a federally recognized, unincorporated band

of Indians acting under a revised constitution and bylaws

approved by the Secretary of the Interior on June 16, 1959.

TMBCI’s reservation is approximately 68 square miles and is

in Rolette County, North Dakota. Belcourt, North Dakota, is

on the reservation. TMBCI has never filed a Federal income

tax return on its own behalf or on behalf of any other entity.

For the years in issue, TMBCI was the sole owner of three

corporations relevant in this case: (1) petitioner Uniband,

Inc., chartered in Delaware; (2) Turtle Mountain Manufac-

turing Co. (‘‘TMMC’’), chartered in North Dakota; and (3) a

federally chartered corporation that was also named Uniband

Corp. and that we refer to here as the ‘‘section 17 corpora-

tion’’ for reasons we explain below. 3

Uniband, Inc.

Petitioner Uniband, Inc., was incorporated under the laws

of Delaware on July 28, 1987. From then until September

1990, TMBCI owned 51% of Uniband’s stock, and the

remaining 49% was owned by Unibase Technologies, Inc., a

Delaware corporation in which TMBCI had no ownership

interest. Since September 1990, TMBCI has been the 100%

owner of Uniband’s stock.

The record indicates that Uniband was engaged in

commercial activities. In its brief Uniband states that it

regularly performed data entry services for several Federal

Government agencies. Uniband cites no evidence for this

proposition, but we assume it is true.

and the submission of a case fully stipulated under Rule 122 does not alter

that burden, see Borchers v. Commissioner, 95 T.C. 82, 91 (1990), aff ’d,

943 F.2d 22 (8th Cir. 1991).

3 The record indicates that TMBCI was also the sole owner of Uniband

Tribal Corp., a corporation chartered under tribal law. That tribal corpora-

tion is not relevant in this case.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00004 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

234 140 UNITED STATES TAX COURT REPORTS (230)

Uniband’s original certificate of incorporation states:

The nature of the business and the purpose to be conducted or promoted

by the corporation is to engage in any lawful act or activity for which

corporations may be organized under the General Corporation Law of

the State of Delaware.[4]

No provision in Uniband’s articles of incorporation or bylaws

further restricts the activities of the corporation. The certifi-

cate gives Uniband’s board of directors the unilateral power

to ‘‘make, alter or repeal the By-Laws of the corporation.’’

The certificate of incorporation also reserves the corporation’s

right ‘‘to amend, alter, change or repeal any provision con-

tained in this Certificate of Incorporation’’. In March 1991,

Uniband exercised that right and filed a restated certificate

of incorporation with the Delaware secretary of state. The

restated certificate added an ‘‘Article Ninth’’ entitled ‘‘Waiver

of Sovereign Immunity’’, under which Uniband is able—

To sue and to be sued in courts of competent jurisdiction within the

United States, * * * over all matters relating to the Corporation’s rela-

tionship with the United States Small Business Administration (SBA)

* * *.

With regard to Uniband’s management, Uniband’s bylaws

adopted February 28, 1991, provide:

Section 3.11 Election of Directors. At each election of Directors every

shareholder having the right to vote in that election shall be afforded the

right to vote the number of shares owned by him, either in person or

by proxy, for as many persons as there are Directors to be elected. The

candidate receiving the highest number of votes shall be deemed to be

elected. * * *

* * * * * * *

Section 4.1 Exercise of Corporate Power. The business affairs of the cor-

poration shall be managed by the Board of Directors (hereinafter, the

Board).

4 The

certificate as restated in 1991 apparently deleted words from this

provision, presumably inadvertently, so that it thereafter read: ‘‘The na-

ture of the business and the purpose to be conducted or promoted by the

corporations [apparent deletion] may be organized under the General Cor-

poration Law of the State of Delaware.’’

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00005 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 235

Section 4.2 Qualifications. Directors need not be residents of Delaware

or shareholders of the corporation. They need have no other qualifica-

tions.

* * * * * * *

Section 16.1 Waiver of Sovereign Immunity. The corporation may sue

and be sued in courts of competent jurisdiction within the United States,

including, but not limited to, United States federal courts; provided how-

ever, that the grant or exercise of such power to sue or be sued shall

not be deemed a consent by the Turtle Mountain Band of Chippewa

Indians (‘‘Tribe’’) to the levy of any judgment, lien, attachment or other

encumbrance upon any property of the Tribe other than property specifi-

cally pledge or assigned by the Tribe.

All inherent sovereign rights of the Tribe as a federally recognized

Indian tribe with respect to the existence and activities of the corpora-

tion are hereby expressly reserved, including sovereign immunity from

suit in any state, federal or tribal court. Nothing in these By-Laws nor

any action of the Board of Directors, shareholders, officers, agents or

employees of the corporation shall waive the sovereign immunity from

suit of the Tribe, or to be a consent of the Tribe to the jurisdiction of

the United States or of any state or any tribe with regard to any activi-

ties of the Tribe, or to be a consent of the Tribe to any cause of action,

case or controversy, or to the levy of any judgment, lien or attachment

upon any property of the Tribe; or a consent to suit in respect with any

land within the exterior boundries [sic] of the Tribe’s Reservation, or an

consent to any alienation, attachment or encumbrance of such lands.

Nothing in there [sic] By-Laws nor any activity of the corporation shall

implicate or in any way involve the credit of the Tribe.

The corporation shall have only those assets acquired by it in the

name of the corporation. No activity of the corporation nor any indebted-

ness incurred by the corporation shall implicate or in any way involve

any assets of tribal members or the Tribe not assigned or otherwise

transferred in writing to the corporation in its corporate name.

Our record does not show who Uniband’s officers and direc-

tors were during the years at issue, nor whether they were

members of TMBCI.

Neither Uniband’s restated certificate of incorporation nor

its bylaws set forth any limitations on the alienation of

Uniband shares, and our record includes no Uniband share-

holder agreement imposing any such limitation. Uniband’s

restated certificate of incorporation and its bylaws do not

place any restrictions on when or under what circumstances

Uniband may dissolve.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00006 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

236 140 UNITED STATES TAX COURT REPORTS (230)

Apart from the fact that TMBCI is its sole shareholder,

Uniband has not offered any evidence regarding the financial

relationship between TMBCI and Uniband. In particular, the

record does not show any contributions of capital that

TMBCI made to Uniband, does not show any loan guaranties

by TMBCI, and shows no liability on TMBCI’s part for any

debt of Uniband; and section 16.1 of the bylaws (quoted

above) explicitly provides that TMBCI will not be liable for

Uniband’s debts. Uniband maintained its principal place of

business within TMBCI’s reservation, but we cannot tell

whether Uniband conducted any activity or had any assets

outside of the reservation. A portion of Uniband’s workforce

were TMBCI members; however, our record does not indicate

how many TMBCI members Uniband employed for the years

in issue. 5

Uniband uses the accrual method of accounting for both

tax and financial reporting purposes and has a taxable year

ending October 31. During the years in issue, Uniband

treated itself as a C corporation, though it now maintains

that it is not subject to corporate income tax. At no point has

Uniband owned any shares of TMMC.

TMMC

TMMC is a North Dakota corporation, incorporated in

January 1979. From TMMC’s creation through April 1989,

TMBCI indirectly owned at least 51% of TMMC. In May

1989, TMBCI became TMMC’s sole shareholder. At all times

since incorporation, TMMC has used the accrual method of

accounting for both tax and financial reporting purposes and

has had a fiscal and taxable year ending September 30.

Through the years in issue TMMC has treated itself as a C

corporation. At no point has TMMC owned any shares of

Uniband.

5 The

parties have stipulated that for Uniband’s 1998 taxable year, it

paid about $4.5 million in ‘‘qualified wages’’ and ‘‘qualified employee health

insurance costs’’ (as defined by section 45A(b)(1) and (2)) to members of

TMBCI. However, that amount appears to account for less than a quarter

of Uniband’s total employee expenses of $29 million: Uniband on its 1998

returns deducted $1.5 million for ‘‘salaries and wages’’ and included, in its

cost of goods sold, $16.7 million for ‘‘cost of labor’’ and $10.8 million for

‘‘contract labor’’. These figures suggest that Uniband employed significant

numbers of persons who were not TMBCI members.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00007 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 237

The section 17 corporation

On September 23, 1998, the Secretary of the Interior,

pursuant to section 17 of the Indian Reorganization Act of

1934 (‘‘IRA’’), ch. 576, sec. 17, 48 Stat. at 988 (codified as

amended at 25 U.S.C. sec. 477 (1994)), granted to TMBCI a

Federal charter of incorporation for a so-called section 17 cor-

poration. The charter is different in material respects from

Uniband’s certificate of incorporation and provides in perti-

nent part:

1. Issuance of Charter.

The Secretary of the Interior issues this charter of incorporation

(‘‘Charter’’) to the Turtle Mountain Band of Chippewa Indians (‘‘Tribe’’)

* * * . This Charter shall become operative when ratified by the gov-

erning body of the Tribe, its Tribal Council.

* * * * * * *

3. Tribal Ownership; Exercised by Tribal Council; No Tribal Liability.

The [section 17] Corporation shall be wholly owned by the Tribe. The

rights, duties and prerogatives of the Tribe as sole owner of the Corpora-

tion shall be exercised and performed on behalf of the Tribe by its Tribal

Council * * *.

* * * * * * *

6. Reorganization of State Corporation, Uniband, Inc., or Tribal Cor-

poration, Uniband Tribal Corporation.

As an initial matter, the [section 17] Corporation has been organized

as a vehicle for reorganization of Uniband, Inc., a Delaware corporation

[i.e., petitioner] wholly owned by the Tribe, and/or Uniband Tribal Cor-

poration, a tribally-chartered corporation wholly owned by the Tribe. To

that end, this [section 17] Corporation is authorized to acquire the assets

and liabilities of Uniband, Inc. and/or Uniband Tribal Corporation by

merger, consolidation, exchange, transfer, stock acquisition or other

means, and to thereafter carry on all or any part of the business of

Uniband, Inc. and/or Uniband Tribal Corporation, in the name of this

[section 17] Corporation.

* * * * * * *

8. Generic Powers.

a. Powers under Section 17. The [section 17] Corporation shall have

* * * the power to purchase trust or restricted Indian lands and to issue

in exchange therefor interests in Corporate property * * *, provided the

Corporation shall have no authority to sell, mortgage, or lease for a

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00008 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

238 140 UNITED STATES TAX COURT REPORTS (230)

period exceeding twenty-five years any trust or restricted lands owned

by the Corporation that are within the Reservation.

* * * * * * *

13. Board of Directors.

The business and affairs of the [section 17] Corporation shall be man-

aged by a board of directors (‘‘Board of Directors’’ or ‘‘Board’’) in accord-

ance with the following provisions:

a. Composition, Appointment and Designation of Chairman. There

shall be five Board seats. The Tribal Council shall appoint one person

(‘‘Director’’) to fill each open Board seat and shall designate one Director

as Chairman of the Board * * *

b. Qualifications.

(1) To be eligible to serve as a Director, a person must:

—not be a member of the Tribal Council; * * *

(2) At least a majority of the Directors must be enrolled members of

the Tribe.

* * * * * * *

22. By-Laws.

The Board of Directors may adopt, amend, or repeal by-laws of the

[section 17] Corporation, provided the by-laws may not contain provi-

sions inconsistent with the provisions of this Charter or applicable law.

23. Amendment.

As provided in Section 17 of the IRA, this Charter may be amended

by the Secretary of the Interior upon petition by the Tribe, provided an

amended charter shall not be effective until ratified by the Tribal

Council.

The charter also provided that TMBCI’s section 17 corpora-

tion could sue and ‘‘by explicit resolution of the Corporation’s

Board of Directors, waive the Corporation’s immunity from

suit’’. By tribal Resolution Number TMBC 1121–10–98,

TMBCI’s tribal council ratified this charter on October 2,

1998.

However, the parties stipulate that as of the filing of the

petition in this case, TMBCI’s section 17 corporation has not

merged with Uniband. Thus, the ‘‘Reorganization’’ authorized

in section 6 of the charter, quoted above, has never taken

place. 6

6 Rev. Rul. 94–65, 1994–2 C.B. 14, stated that the IRS would not chal-

lenge the exemption from tax of a tribe’s wholly owned State-chartered cor-

poration’s income earned after September 30, 1994, if the tribe could dem-

onstrate (in an application for relief under section 7805(b)) that it was in

good faith seeking to comply with Rev. Rul. 94–16, 1994–1 C.B. 19, by dis-

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00009 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 239

The tax returns

The parties have stipulated that TMBCI itself has not filed

any Federal income tax returns.

Uniband and TMMC filed the following separate Forms

1120, ‘‘U.S. Corporation Income Tax Return’’, for the years

1995 and 1996:

Separately filed returns

Form Filing corporation TYE Filed

1120 Uniband Oct. 31, 1995 July 1996

1120 Uniband Oct. 31, 1996 Feb. 1997

1120 TMMC Sept. 30, 1996 Aug. 1997

Although the return is not in our record, TMMC appears to

have also filed a nonconsolidated corporate return for its tax-

able year ended September 30, 1995. In any event, the two

corporations filed separately, with different taxable years.

Thereafter Uniband filed purported consolidated Federal

corporate income tax returns for the years 1995 through

1998, as follows:

Consolidated returns

Filing Other included

Form corporation entities TYE Filed

1120 Uniband TMMC Oct. 31, 1997 July 1998

1120X Uniband TMMC Oct. 31, 1995 Sept. 1998

1120X Uniband TMMC Oct. 31, 1996 Sept. 1998

1120 Uniband TMMC Oct. 31, 1998 July 1999

1120X Uniband TMMC and Oct. 31, 1998 Aug. 1999

TMBCI

With the exception of the 1998 Form 1120X, ‘‘Amended

U.S. Corporation Income Tax Return’’, none of the consoli-

dated returns filed for the years in issue contained informa-

tion regarding TMBCI or its tax attributes; and each return

on its respective Form 851, ‘‘Affiliations Schedule’’, reported

Uniband and not TMBCI as the common parent of TMMC. 7

solving its State-chartered corporation and organizing as a section 17 cor-

poration. Uniband filed such an application under section 7805(b) on Au-

gust 4, 2009 (more than three years after filing this suit), but after learn-

ing that the IRS intended to rule adversely on the request, Uniband with-

drew its ruling request in January 2010.

7 The affiliation schedule attached to the 1995 Form 1120X (a year not

Continued

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00010 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

240 140 UNITED STATES TAX COURT REPORTS (230)

The 1998 Form 1120X, like the filings before it, listed the

name of the taxpayer as ‘‘Uniband, Inc.’’, and it made no

changes to taxable income or tax; but it amended the Form

851 to show TMBCI as owning 100% of both Uniband and

TMMC. Also, the consolidation schedules attached to the

1998 Form 1120X were amended to include for the first time

a column for ‘‘Turtle Mountain Band of Chippewa Indians’’—

but with zeros entered on each line in the column for

TMBCI. In a statement attached to the 1998 amended

return, Uniband explained:

This amended return is being filed to report the income and deductions

of two wholly owned subsidiary corporations of the Turtle Mountain

Band of Chippewa Indians, EIN - * * *. The two corporations are

Uniband, Inc. - EIN * * * and Turtle Mountain Manufacturing Co, Inc.

- EIN * * *. On the original 1120 income tax return, the Form 851

incorrectly reported Turtle Mountain Manufacturing as being wholly

owned by Uniband, Inc. The common owner of the two corporations is

the Turtle Mountain Band of Chippewa Indians. Enclosed is an amended

affiliations schedule, Form 851, which correctly reports the Turtle Moun-

tain Band of Chippewa Indians as the common parent and Uniband, Inc.

and Turtle Mountain Manufacturing Co., Inc. as the subsidiary corpora-

tions. [Original in all capitals.]

The consolidated returns all had one intended and claimed

effect—i.e., to largely offset Uniband’s income with TMMC’s

losses, resulting in little or no claimed tax liability for the

supposed consolidated group. The IRS determined that the

consolidated returns filed for the years in issue were not

appropriate filings and that Uniband’s tax liability should be

calculated on a separate basis from TMMC’s, resulting in

deficiencies for Uniband.

Indian employment credit

On both its original and amended returns Uniband

deducted what appears to be the entirety of its salary, wage,

and other employee expenses (not reduced by any credit

before us) showed TMBCI as the common parent of the group and Uniband

and TMMC as wholly owned subsidiaries of TMBCI. Although the expla-

nation attached to the 1996 amended return did disclose that Uniband and

TMMC were owned by TMBCI, it also stated that ‘‘[t]he Taxpayer,

Uniband, Inc. * * * is amending this 1120 tax return for the year ended

October 31, 1996 to include the taxable income of its subsidiary, Turtle

Mountain Manufacturing Co., Inc.’’

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00011 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 241

amount), and the parties have stipulated the pertinent

amounts for each relevant year. On its returns Uniband did

not claim any general business credits (in particular, the

Indian employment credit provided in section 45A). The IRS

determined, however, that Uniband was entitled to the

Indian employment credit determined under section 45A,

reduced by the credit limitations set forth in section 38(c) (in

amounts not in dispute here). To Uniband’s advantage, the

IRS applied that limited credit against Uniband’s determined

tax liability; but to Uniband’s greater disadvantage, the IRS

reduced Uniband’s deductible wages by the credit amount

determined under section 45A.

The net result of the IRS’s adjustments (i.e., the allowance

of the limited Indian employment credits and the reduction

of wage deductions) resulted in greater tax deficiencies for

Uniband. Uniband now challenges the IRS’s deficiency deter-

minations.

OPINION

I. Federal income tax exemption issue

Uniband begins by arguing that the deficiencies that the

IRS determined are incorrect because Uniband is exempt

from tax (and that Uniband itself erred by filing returns for

the years at issue as if it were a taxable C corporation).

Uniband contends that as an integral part of its owner,

TMBCI—a federally recognized Indian tribe—Uniband

shares in TMBCI’s immunity from Federal income tax. The

Commissioner agrees that TMBCI is not subject to Federal

income tax but asserts that Uniband is a separate taxable

entity that is subject to income tax.

A. Indian tribes are not subject to Federal income tax.

The parties agree that federally recognized Indian tribes

are not subject to Federal income tax; but they disagree

about why. Resolving that dispute will help us to resolve the

arguments advanced in this case.

1. TMBCI has no inherent immunity from Federal taxes.

Uniband asserts that its owner TMBCI possesses an

‘‘inherent sovereignty and immunity from the federal income

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00012 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

242 140 UNITED STATES TAX COURT REPORTS (230)

tax’’ (which Uniband contends it shares). This is incorrect. As

the Supreme Court has explained:

The sovereignty that the Indian tribes retain is of a unique and limited

character. It exists only at the sufferance of Congress and is subject to

complete defeasance. But until Congress acts, the tribes retain their

existing sovereign powers. In sum, Indian tribes still possess those

aspects of sovereignty not withdrawn by treaty or statute, or by implica-

tion as a necessary result of their dependent status. * * * [United States

v. Wheeler, 435 U.S. 313, 323 (1978).]

Thus, if and when Congress acts to subject Indian tribes to

Federal tax liability, they become liable—for example, for the

Federal excise tax on wagering under section 4401(c), see

Chickasaw Nation v. United States, 534 U.S. 84 (2001), aff ’g

208 F.3d 871, 878–879 (10th Cir. 2000); for other excise

taxes, see, e.g., Confederated Tribes of the Warm Springs Res-

ervation of Or. v. Kurtz, 691 F.2d 878 (9th Cir. 1982) (holding

a tribe subject to ‘‘(1) a tax on the use of certain highway

motor vehicles, 26 U.S.C. § 4481(a); (2) a tax on diesel fuel

used in highway vehicles, 26 U.S.C. § 4041(a); (3) a tax on

special fuels used in motor vehicles, 26 U.S.C. § 4041(b); and

(4) a tax on manufacturing, in this case a truck chassis

assembled by the Tribe, 26 U.S.C. §§ 4061(a), 4218(a)’’); or

for tax under section 511(a)(2)(b) on the unrelated business

income of tribally owned colleges or universities, see sec.

7871(a)(5). TMBCI has no ‘‘inherent’’ immunity from Federal

income tax that Uniband could share.

2. No treaty exempts TMBCI from Federal income tax.

Next Uniband asserts that TMBCI has an exemption from

income tax (which exemption Uniband contends it shares) by

virtue of treaties into which it has entered with the United

States. 8 Uniband cites six treaties 9 generally as the basis for

8 Uniband contends that ‘‘[a] close reading of those treaties shows that

* * * [TMBCI] has not consented to imposition of the federal income tax

on itself or on those entities that comprise its constituent parts.’’ (Empha-

sis added.) To the extent Uniband argues TMBCI is inherently exempt

from Federal tax unless it consents to be taxed, that argument is answered

in part I.A.1 above.

9 The treaties relied upon by Uniband are: (1) 1795 Treaty with the Wy-

andots, Etc., Aug. 3, 1795, 7 Stat. 49; (2) 1815 Treaty with the Wyandot,

Etc., Sept. 8, 1815, 7 Stat. 131; (3) Treaty with the Sioux, Etc., Aug. 19,

1825, 7 Stat. 272; (4) Treaty with the Chippewa, Aug. 5, 1826, 7 Stat. 290;

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00013 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 243

its claim for exemption from corporate income tax and points

to two particular treaty provisions. Uniband’s treaty argu-

ments have previously been rejected, as we discuss below.

a. An exemption must be ‘‘definitely expressed’’.

We generally construe statutes and treaties in favor of

Indians, see Choate v. Trapp, 224 U.S. 665, 675 (1912);

Jourdain v. Commissioner, 71 T.C. 980, 990 (1979), aff ’d, 617

F.2d 507 (8th Cir. 1980); and a tax exemption will be held

to exist where a statute or treaty contains ‘‘express exemp-

tive language’’, United States v. Anderson, 625 F.2d 910, 913

(9th Cir. 1980). However, we cannot use this canon ‘‘to create

favorable rules’’ for Indians, Jourdain v. Commissioner, 71

T.C. at 990; and in the absence of a ‘‘ ‘definitely expressed’

exemption’’, Indians are subject to taxation, Mescalero

Apache Tribe v. Jones, 411 U.S. 145, 156 (1973) (quoting

Choteau v. Burnet, 283 U.S. 691, 696–697 (1931)).

b. The cited treaties do not express an income tax exemp-

tion.

To support its treaty argument, Uniband points to two par-

ticular provisions in the treaties. Uniband first relies on the

following language from article 5 of the 1795 Treaty with the

Wyandot, Etc., Aug. 3, 1795, 7 Stat. 49, 52 (‘‘Treaty of Green-

ville’’):

To prevent any misunderstanding about the Indian lands relinquished

by the United States in the fourth article, it is now explicitly declared,

that the meaning of that relinquishment is this: The Indian tribes who

have a right to those lands, are quietly to enjoy them, hunting, planting,

and dwelling thereon so long as they please, without any molestation

from the United States * * *. [Emphasis added.]

When previously presented with the issue of whether the

‘‘molestation’’ provision in the Treaty of Greenville exempts

individual Indians from Federal income tax, we concluded:

‘‘It is apparent that the molestation the parties had in mind

was interference in the Indians’ rights to hunt, etc., not the

right to be free from taxation.’’ Jourdain v. Commissioner, 71

T.C. at 990.

(5) Treaty with the Chippewa, Red Lake and Pembina Bands, Oct. 2, 1863,

13 Stat. 667; and (6) 1892 Agreement with Turtle Mountain Band, Act of

April 21, 1904, ch. 1402, 33 Stat. 189, 194–196.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00014 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

244 140 UNITED STATES TAX COURT REPORTS (230)

Second, Uniband cites the 1892 Agreement with Turtle

Mountain Band, Act of April 21, 1904, ch. 1402, 33 Stat. 189,

194–196 (‘‘Turtle Mountain Agreement’’), which was entered

into by the United States and TMBCI on October 2, 1892,

and provides in article VII:

So long as the United States retains and holds the title to any land in

the use or occupation of any member of the Turtle Mountain [B]and of

Chippewa Indians or the title to other property in the possession of any

Indian of said band, which it may do for twenty years, there shall be no

tax or other duty levied or assessed upon the property, the title to which

is held or retained by the United States. [Emphasis added.]

Regarding the ‘‘no tax or other duty’’ clause in article VII, we

have observed that ‘‘[t]his treaty provision refers to a tax

upon the property for a 20-year period. Neither this provision

nor any of the other treaties cited by petitioner provide to the

Turtle Mountain Band of Chippewas a blanket exemption

from Federal income tax on all income.’’ LaFontaine v.

Commissioner, T.C. Memo. 1975–165, aff ’d per curiam, 533

F.2d 382 (8th Cir. 1976). The treaty precludes tax on certain

property ‘‘held or retained by the United States’’; it says

nothing about income tax or any exemption therefrom.

TMBCI thus has no treaty immunity from Federal income

tax that Uniband could share.

3. The Code does not impose income tax liability on

TMBCI.

Income tax is imposed in section 1 on ‘‘individuals’’ and in

section 11 on ‘‘corporations’’; but as an Indian tribe, TMBCI

is neither an individual nor (since it has not been incor-

porated) a corporation. See part II.A. below.

It is true that the tax law defines ‘‘corporations’’ broadly

enough that the term ‘‘includes associations’’, sec. 7701(a)(3);

but any argument that TMBCI should be taxable as a ‘‘cor-

poration’’ because it is an ‘‘association’’ would fail in view of

the Commissioner’s concession reflected in his public rulings,

see note 10 below. Moreover, the Supreme Court has rejected

the characterization of an Indian tribe as a mere association.

In United States v. Mazurie, 487 F.2d 14, 19 (10th Cir. 1973),

rev’d, 419 U.S. 544 (1975), the Court of Appeals acknowl-

edged that Indian tribes are ‘‘very important organizations

which exercise a broad tribal authority over their members’’

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00015 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 245

but observed that ‘‘[t]ribal members are citizens of the

United States’’ and had characterized the tribe as ‘‘an

association of citizens’’. The Supreme Court countered ‘‘that

Indian tribes are unique aggregations possessing attributes

of sovereignty over both their members and their territory’’

and ‘‘that Indian tribes within ‘Indian country’ are a good

deal more than ‘private, voluntary organizations’ ’’. Mazurie,

419 U.S. at 557.

Thus, the reason TMBCI is not subject to Federal income

tax is not that Indian tribes are inherently immune from

Federal income tax, nor that they have been exempted from

Federal income tax by treaty or statute, but rather simply

that Congress has never imposed the Federal income tax on

Indian tribes. For decades the Commissioner’s position has

reflected this truism. 10

However, the persistence of this circumstance of non-

liability over so many decades shows that it can hardly be

the result of congressional oversight but must instead be

deliberate. Thus, while there is no positive provision in the

Code exempting Indian tribes from the income tax,

Congress’s persistent exclusion of them from the Federal

income tax regime may be thought of as an ‘‘exemption’’, and

the Commissioner’s briefs refer to it as such. Uniband argues

that TMBCI’s ‘‘exemption’’ (however it arises) extends to

Uniband—either as an ‘‘integral part’’ of TMBCI or as the

equivalent of a section 17 corporation of TMBCI—and we

now turn to that argument.

10 See

Rev. Rul. 94–16, 1994–1 C.B. at 20 (‘‘Because an Indian tribe is

not a taxable entity, any income earned by an unincorporated tribe * * *

is not subject to federal income tax’’); Rev. Rul. 81–295, 1981–2 C.B. 15,

16 (‘‘no tax liability has been asserted against a tribe with respect to tribal

income from activities carried on within the boundaries of the reserva-

tion’’); Rev. Rul. 67–284, 1967–2 C.B. 55, 58 (‘‘Income tax statutes do not

tax Indian tribes. The tribe is not a taxable entity’’); see also H.R. Conf.

Rept. No. 97–984, at 16 (1982), 1983–1 C.B. 522, 523 (‘‘The amendment

does not change the present income tax treatment of Indian tribal govern-

ments specified in Rev. Rul. 67–284’’); Staff of J. Comm. on Taxation,

‘‘Overview of Federal Tax Provisions and Analysis of Selected Issues Relat-

ing To Native American Tribes and Their Members’’ 3–4 (J. Comm. Print

2012).

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00016 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

246 140 UNITED STATES TAX COURT REPORTS (230)

B. Uniband does not share TMBCI’s ‘‘exemption’’ from Fed-

eral income tax.

1. Apart from its association with TMBCI, Uniband is tax-

able.

TMBCI is an Indian tribe; and, as we have shown, the

income tax has not been imposed on Indian tribes. Uniband,

however, is not a tribe but a corporation; and section 11 pro-

vides: ‘‘A tax is hereby imposed for each taxable year on the

taxable income of every corporation.’’ (Emphasis added.) As

the U.S. Court of Appeals for the Ninth Circuit observed in

Commissioner v. Walker, 326 F.2d 261, 263 (9th Cir. 1964),

aff ’g in part, rev’g in part 37 T.C. 962 (1962):

A general Act of Congress applying to all persons includes Indians and

their property interests. Federal Power Commission v. Tuscarora Indian

Nation, 362 U.S. 99, 116, 80 S.Ct. 543, 553, 4 L.Ed.2d 584 (1960). Sec-

tions 1 and 61(a) of the Internal Revenue Code of 1954 subject the

income of ‘‘every individual’’ to tax, and include income ‘‘from any source

whatever’’, that is not elsewhere specifically excluded. Because the

Internal Revenue Code is a general Act of Congress, it follows that

Indians are subject to payment of federal income taxes, as are other citi-

zens, unless an exemption from taxation can be found in the language

of a Treaty or Act of Congress. * * *

We can likewise observe that sections 11 and 61(a) of the

Code are general, apply to all persons, and subject the

income of ‘‘every corporation’’ to income tax, so that corpora-

tions owned by Indians or Indian tribes are subject to pay-

ment of Federal income taxes, as are other corporations,

‘‘unless an exemption from taxation can be found in the lan-

guage of a Treaty or Act of Congress.’’ Commissioner v.

Walker, 326 F.2d at 263. We have already seen that no

treaty provides such an exemption for TMBCI (or Uniband),

and we now consider Uniband’s arguments to determine

whether an ‘‘Act of Congress’’—i.e., the Code, as properly

construed and applied—provides such an exemption for

Uniband, notwithstanding the general language of section 11.

2. As a general rule, corporations are distinct from their

owners for tax purposes.

Under any rationale, the argument that Uniband obtains

an exemption by virtue of its association with its owner

TMBCI is in tension with a basic principle of tax law—i.e.,

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00017 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 247

that a corporation is treated as distinct from its share-

holders. See Moline Props., Inc. v. Commissioner, 319 U.S.

436, 438–439 (1943). Under this general rule, Uniband as a

State-chartered corporation is a separate taxable entity and

is distinct from its sole shareholder, TMBCI.

However, this general rule admits exceptions:

An entity formed under local law is not always recognized as a separate

entity for federal tax purposes. For example, an organization wholly

owned by a State is not recognized as a separate entity for federal tax

purposes if it is an integral part of the State. Similarly, tribes incor-

porated under section 17 of the Indian Reorganization Act of 1934, as

amended, 25 U.S.C. 477, or under section 3 of the Oklahoma Indian Wel-

fare Act, as amended, 25 U.S.C. 503, are not recognized as separate enti-

ties for federal tax purposes. [26 C.F.R. sec. 301.7701–1(a)(3), Proced. &

Admin. Regs.]

This regulation mentions the twofold basis for Uniband’s

argument—‘‘integral part’’ and section 17 of the IRA.

3. Uniband is not an ‘‘integral part’’ of TMBCI.

Uniband argues that it is an ‘‘integral part’’ 11 of TMBCI

and should therefore share in TMBCI’s exemption from Fed-

eral income tax, notwithstanding its ostensibly distinct cor-

porate status. We note that the regulation quoted above

states an exception for ‘‘an integral part of the State’’

(emphasis added); but an Indian tribe is not a State. See,

e.g., Chickasaw Nation, 534 U.S. at 86 (holding Indian tribes

subject to gambling-related taxes from which States are

exempt); Lac Courte Oreilles Band of Lake Superior Chip-

pewa Indians v. United States, 845 F.2d 139, 143–144 (7th

Cir. 1988); Confederated Tribes of Warm Springs Reservation

of Or., 691 F.2d at 880 (‘‘Tribal governments, while pos-

sessing aspects of self-rule, thus are quite distinct from the

several states’’). However, Uniband contends that the same

reasoning that treats a State as including the State’s integral

parts should result in treating an Indian tribe as including

the tribe’s integral parts. Assuming this contention is cor-

11 Uniband states this contention in various ways—that it is an ‘‘integral

part’’ of TMBCI, an ‘‘integral and constituent part’’ of TMBCI, and an

‘‘arm’’ of TMBCI. But its most frequent contention is that it is an ‘‘integral

part’’, for which term there is authority, i.e., 26 C.F.R. sec. 301.7701–

1(a)(3), Proced. & Admin. Regs., that can be consulted to analyze

Uniband’s status, so we consider the argument under that rubric.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00018 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

248 140 UNITED STATES TAX COURT REPORTS (230)

rect, 12 the issue becomes whether Uniband is an integral

part of TMBCI, and Uniband’s argument cites four strands

of authority in favor of that status:

a. Authorities addressing integral parts of States

Uniband points to State-affiliated entities that have been

held not subject to tax and argues that its relation to TMBCI

makes it equivalent to those entities. In support of this argu-

ment Uniband cites Michigan v. United States, 40 F.3d 817,

823 (6th Cir. 1994), and administrative rulings cited

thereat. 13 In Michigan v. United States, the Government

argued that an education trust created by the Michigan

legislature was subject to corporate income tax. The Court of

Appeals for the Sixth Circuit rejected the Government’s argu-

ment, concluding instead that the trust was an ‘‘integral part

of the state’’. Id. at 823. In reaching this conclusion, the

Court of Appeals engaged in a fact-intensive analysis, id. at

826–827, based on criteria given in Revenue Ruling 57–128,

1957–1 C.B. 311, 312. That ruling stated:

In cases involving the status of an organization as an instrumentality

of one or more states or political subdivisions, the following factors are

taken into consideration: (1) whether it is used for a governmental pur-

pose and performs a governmental function; (2) whether performance of

its function is on behalf of one or more states or political subdivisions;

(3) whether there are any private interests involved, or whether the

states or political subdivisions involved have the powers and interests of

an owner; (4) whether control and supervision of the organization is

vested in public authority or authorities; (5) if express or implied statu-

tory or other authority is necessary for the creation and/or use of such

an instrumentality, and whether such authority exists; and (6) the

degree of financial autonomy and the source of its operating expenses.

These six criteria are largely answered in the negative in

Uniband’s situation. (1) Even though Uniband is an impor-

tant source of employment for TMBCI members, Uniband is

still a commercial venture and does not perform a ‘‘govern-

12 We assume but do not decide that a tribe may have ‘‘integral parts’’

that share the tribe’s non-liability for Federal income tax. The language

of 26 C.F.R. sec. 301.7701–1(a)(3) is exemplary and non-exclusive, making

it reasonable to argue that the situation of a State’s integral parts is anal-

ogous to the situation of an Indian tribe’s integral parts.

13 See Rev. Rul. 87–2, 1987–1 C.B. 18; Rev. Rul. 71–131, 1971–1 C.B. 29;

Rev. Rul. 71–132, 1971–1 C.B. 29; G.C.M. 14,407, 1935–1 C.B. 103.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00019 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 249

mental function’’. (2) Although one can say that Uniband, in

pursuing its business, in a sense ‘‘function[s] * * * on behalf

of ’’ TMBCI (as in the second factor listed above), one must

say more precisely that like any corporation Uniband func-

tions in its own name and on its own behalf, paying its

profits to its shareholder. (3) There are currently no ‘‘private

interests involved’’ in Uniband, since TMBCI is currently its

sole shareholder; but it was not until three years after

Uniband was incorporated that TMBCI became Uniband’s

sole shareholder, and there is nothing that prevents TMBCI

from selling some or all of its Uniband shares. (4) The ‘‘con-

trol and supervision’’ of Uniband can be said to be ‘‘vested in

public [tribal] authorities’’ only in the sense that, as sole

shareholder, the tribe has the ultimate power to name the

officers and directors of Uniband. However, there is nothing

in Uniband’s corporate charter or bylaws that gives TMBCI’s

council authority to directly manage the operations of

Uniband or supersede the action of the board of directors,

nor is there any requirement that TMBCI members be on the

board. (5) There is no ‘‘express statutory authority’’ that cre-

ated Uniband or ‘‘provided for [its] * * * management’’. On

the contrary, TMBCI’s ability to control or abolish Uniband

arises not from statute but from TMBCI’s power as

Uniband’s sole shareholder. (6) Nothing in our record sug-

gests that, in its day-to-day operations, Uniband lacks ‘‘finan-

cial autonomy’’ from TMBCI or depends on it as a ‘‘source of

its operating expenses’’.

Considering all the facts and circumstances, we find that

Uniband is readily distinguishable from the educational trust

in Michigan v. United States, 40 F.3d 817, and the other

entities that have been held to be integral parts of their

sovereigns, and conclude that Uniband is not an integral part

of TMBCI.

b. Sovereign immunity

In support of its ‘‘integral part’’ argument, Uniband con-

tends that it has sovereign immunity that it derives from

TMBCI because it is an integral part of TMBCI. However,

this argument has two flaws: (1) Uniband has failed to estab-

lish that it possesses sovereign immunity and (2) Uniband

has not established that being entitled to sovereign immunity

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00020 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

250 140 UNITED STATES TAX COURT REPORTS (230)

means it would be an integral part of TMBCI for Federal tax

purposes. First, Uniband essentially assumes that it has sov-

ereign immunity, without offering adequate analysis. It

argues:

Federal case law, however, makes it clear that a wholly owned corpora-

tion operates as an arm of the tribe and has sovereign immunity. Br. for

Pet., p. 23–24. Obviously, sovereign immunity, enjoyed only by govern-

ments, extends to Petitioner because it is an integral part of the Tribe.

Petitioner made a limited waiver of its sovereign immunity in article

nine of its restated articles of incorporation. Ex. 2–J. The waiver estab-

lishes that Petitioner, as an arm of the Tribe, had sovereign immunity.

Uniband does cite cases in which a tribally owned corpora-

tion is held to have sovereign immunity; 14 but it is clear that

not every tribal organization has sovereign immunity; 15 and

Uniband provides essentially no analysis to show that it is

the sort of entity that does. Rather, Uniband seems to

assume that its purported waiver of sovereign immunity (in

its certificate of incorporation) could establish that it pos-

sesses sovereign immunity—but that could hardly be so. We

therefore must analyze further Uniband’s entitlement to sov-

ereign immunity.

(1) Analysis of sovereign immunity

‘‘Indian tribes have long been recognized as possessing the

common-law immunity from suit traditionally enjoyed by sov-

ereign powers.’’ Santa Clara Pueblo v. Martinez, 436 U.S. 49,

58 (1978). This immunity can extend to both business and

governmental activities of the tribe, Kiowa Tribe of Okla. v.

Mfg. Techs., Inc., 523 U.S. 751, 758–760 (1998); and the

Court of Appeals for the Eighth Circuit (to which an appeal

in this case would apparently lie) has held that ‘‘a tribe’s sov-

14 We are aware of only a few cases holding that a State-chartered cor-

poration (like Uniband) is entitled to tribal sovereign immunity. See J.L.

Ward Assocs., Inc. v. Great Plains Tribal Chairmen’s Health Bd., 842 F.

Supp. 2d 1163, 1176 (D.S.D. 2012); Ransom v. St. Regis Mohawk Educ. &

Cmty. Fund, Inc., 658 N.E.2d 989, 993 (N.Y. 1995). It appears that being

incorporated under State law rather than tribal law ‘‘militate[s] against

sovereign immunity’’. J.L. Ward Assocs., 842 F. Supp. 2d at 1176.

15 See Somerlott v. Cherokee Nation Distribs., Inc., 686 F.3d 1144, 1150

(10th Cir. 2012) (‘‘a separate legal entity organized under the laws of an-

other sovereign, Oklahoma, cannot share in the Nation’s [i.e., the tribe’s]

immunity from suit’’).

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00021 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 251

ereign immunity may extend to tribal agencies’’, Hagen v.

Sisseton-Wahpeton Cmty. Coll., 205 F.3d 1040, 1043 (8th Cir.

2000) (emphasis added) (citing Dillon v. Yankton Sioux Tribe

Hous. Auth., 144 F.3d 581, 583 (8th Cir. 1998)).

Although the Court of Appeals for the Eighth Circuit has

not adopted specific criteria to determine whether an

organization is entitled to tribal sovereign immunity, it has

considered whether the organization serves as an ‘‘arm of the

tribe’’ and whether a tribal council established the organiza-

tion pursuant to the council’s power of self-government. 16 We

will therefore consider those criteria.

(a) Arm of the tribe

‘‘A subdivision of tribal government or a corporation

attached to a tribe may be so closely allied with and

dependent upon the tribe that it is effectively an arm of the

tribe. It is then actually a part of the tribe per se, and, thus,

clothed with tribal immunity.’’ Runyon ex rel. B.R. v. Ass’n

of Vill. Council Presidents, 84 P.3d 437, 439–440 (Alaska

2004) (internal quotation marks and fn. refs. omitted). In

holding that a college served as ‘‘an arm of the tribe and not

as a mere business’’, the Court of Appeals for the Eighth Cir-

cuit in Hagen relied on the facts that the college was ‘‘char-

tered, funded, and controlled by the Tribe to provide edu-

cation to tribal members on Indian land’’. Hagen, 205 F.3d

at 1043. Similarly, in the few cases that have held a State-

chartered corporation to be entitled to tribal sovereign immu-

nity, factors important to that holding were: (1) the corpora-

tion’s purpose of improving the general welfare of the tribe,

and (2) the assurance that the corporation’s governing body

could be composed only of tribal representatives. See J.L.

16 See Hagen v. Sisseton-Wahpeton Cmty. Coll., 205 F.3d 1040, 1043 (8th

Cir. 2000) (‘‘[T]he College serves as an arm of the tribe and not as a mere

business and is thus entitled to tribal sovereign immunity’’); Dillon v.

Yankton Sioux Tribe Hous. Auth., 144 F.3d 581, 583 (8th Cir. 1998) (hold-

ing that a tribal housing authority established by tribal council pursuant

to its powers of self-government was a tribal agency rather than ‘‘a sepa-

rate corporate entity created by the tribe’’); Weeks Constr., Inc. v. Oglala

Sioux Hous. Auth., 797 F.2d 668, 670–671 (8th Cir. 1986) (‘‘As an arm of

tribal government, a tribal housing authority possesses attributes of tribal

sovereignty * * * and suits against an agency like the Housing Authority

normally are barred absent a waiver of sovereign immunity’’).

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00022 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

252 140 UNITED STATES TAX COURT REPORTS (230)

Ward Assocs., Inc. v. Great Plains Tribal Chairmen’s Health

Bd., 842 F. Supp. 2d 1163, 1176 (D.S.D. 2012); Ransom v. St.

Regis Mohawk Educ. & Cmty. Fund, Inc., 658 N.E.2d 989,

993 (N.Y. 1995). Uniband’s facts are otherwise.

First, although its brief asserts that ‘‘from the beginning

[Uniband] was a means to promote economic development on

TMBCI’s disadvantaged reservation suffering from high and

chronic unemployment’’, Uniband cites no record support for

this proposition. In fact, Uniband’s certificate of incorpora-

tion states that its purpose is simply to engage in ‘‘any lawful

act or activity’’—not just activities that ‘‘promote economic

development’’.

Second, Uniband has nothing in its corporate charter or

bylaws to ensure that Uniband’s governing body is composed

of TMBCI’s tribal representatives. Rather, article IV, section

4.2 of Uniband’s bylaws sets forth the qualifications for

Uniband’s directors and states simply: ‘‘Directors need not be

residents of Delaware or shareholders of the corporation.

They need have no other qualification.’’ Thus, Uniband’s gov-

erning body may be but need not be composed of TMBCI’s

tribal representatives. Uniband’s directors may be under the

de facto control of TMBCI by virtue of TMBCI’s sole owner-

ship of Uniband, but the same can be said for any wholly

owned investment, whether or not it has any other claim to

being an ‘‘arm’’ of its owner. Moreover, nothing prevents

TMBCI from selling some or all of its shares and destroying

that de facto control.

Since Uniband’s purposes may or may not promote the

general welfare of TMBCI’s members, and since it may or

may not be managed and controlled by TMBCI’s tribal rep-

resentatives, we conclude it fails to be an ‘‘arm’’ of TMBCI.

(b) Tribal establishment

Another factor that distinguishes an organization entitled

to tribal sovereign immunity (as opposed to a mere business

interest of a tribe) is that the tribal council establishes the

organization pursuant to its powers of self-government. See

Dillon, 144 F.3d at 583 (concluding that a housing authority

‘‘established by a tribal council pursuant to its powers of self-

government’’ is a tribal agency entitled to tribal sovereign

immunity). Uniband, however, chartered not by the tribe but

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00023 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 253

by the State of Delaware, is an entity that exists by virtue

of the sovereign powers of Delaware, and Uniband’s powers

are defined and limited by Delaware law. In particular,

Uniband, like every other corporation created under title 8 of

the Delaware Code (including chapter 1 entitled ‘‘General

Corporation Law’’, pursuant to which Uniband was estab-

lished), ‘‘shall have power to: * * * [s]ue and be sued in all

courts and participate, as a party or otherwise, in any

judicial, administrative, arbitrative or other proceeding, in its

corporate name’’. Del. Code Ann. tit. 8, sec. 122 (2011)

(emphasis added). Uniband does not explain what might

trump this statutory provision.

Moreover, Uniband was established as a Delaware corpora-

tion in 1987 by TMBCI and a third party not affiliated with

TMBCI, and for three years TMBCI held only 51% of

Uniband. Thus, TMBCI did not establish Uniband by itself;

at its inception Uniband was simply a business owned in

part by TMBCI and was clearly ‘‘a separate corporate entity

created [in part] by the tribe’’. Dillon, 144 F.3d at 583; see

also Myrick v. Devils Sioux Mfg. Corp., 718 F. Supp. 753, 755

(D.N.D. 1989) (holding that a State-chartered corporation

partially owned by an Indian tribe was not a tribal agency).

Uniband has not shown us how TMBCI’s purchasing an addi-

tional 49% of Uniband transformed Uniband from a mere

business holding into a tribal agency established by a tribal

council pursuant to the tribe’s powers of self-government. See

McNally CPA’s & Consultants, S.C. v. DJ Hosts, Inc., 692

N.W.2d 247, 253 (Wis. Ct. App. 2004) (rejecting the argu-

ment that tribal immunity attaches to a corporation when a

tribe acquires 100% ownership of the corporation).

(c) Other criteria

Other courts have used several additional factors to deter-

mine whether tribal sovereign immunity is possessed by a

tribal business, which, if so, is sometimes referred to as a

‘‘subordinate economic entity’’, 17 and those factors do not

17 The

subordinate economic entity doctrine was initially articulated by

Arizona State courts, see, e.g., Dixon v. Picopa Constr. Co., 772 P.2d 1104,

1108 (Ariz. 1989); White Mountain Apache Indian Tribe v. Shelley, 480

P.2d 654, 657 (Ariz. 1971), and has been adopted by the Court of Appeals

for the Tenth Circuit, see, e.g., Somerlott v. Cherokee Nation Distribs., Inc.,

Continued

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00024 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

254 140 UNITED STATES TAX COURT REPORTS (230)

support Uniband’s claim. Courts have considered some or all

of the following factors:

(1) the announced purpose for which the entity was formed; (2) whether

the entity was formed to manage or exploit specific tribal resources; (3)

whether federal policy designed to protect Indian assets and tribal cul-

tural autonomy is furthered by the extension of sovereign immunity to

the entity; (4) whether the entity is organized under the tribe’s laws or

constitution rather than federal law; (5) whether the entity’s purposes

are similar to or serve those of the tribal government; (6) whether the

entity’s governing body is comprised mainly of tribal officials; (7)

whether the tribe has legal title or ownership of property used by the

entity; (8) whether tribal officials exercise control over the administra-

tion or accounting activities of the organization; (9) whether the tribe’s

governing body has power to dismiss members of the organization’s gov-

erning body, and (10) whether the entity generates its own revenue,

whether a suit against the entity would impact the tribe’s fiscal

resources, and whether it may bind or obligate tribal funds. [Johnson v.

Harrah’s Kan. Casino Corp., No. 5:04–CV–04142–JAR, 2006 WL 463138,

at *4–*6 (D. Kan. Feb. 23, 2006); fn. ref. omitted.18]

While several of these factors overlap with the Court of

Appeals for the Eighth Circuit’s analysis and therefore are

adequately addressed above, the remainder—in particular,

the promotion of tribal autonomy, the financial relationship

between the entity and the tribe, and whether the entity was

created under State law—bear further analysis here.

Promotion of tribal autonomy. In Allen v. Gold Country

Casino, 464 F.3d 1044 (9th Cir. 2006), the Court of Appeals

for the Ninth Circuit held that a tribe’s casino was ‘‘no ordi-

nary business’’ and was entitled to tribal immunity because

686 F.3d at 1148–1150.

18 In the following cases, courts have considered some or all of the factors

listed in Johnson v. Harrah’s Kan. Casino Corp., No. 5:04–CV–04142–JAR,

2006 WL 463138, at *4–*6 (D. Kan. Feb. 23, 2006): Somerlott v. Cherokee

Nation Distribs., Inc., 686 F.3d at 1148–1150; Breakthrough Mgmt. Grp.,

Inc. v. Chukchansi Econ. Dev. Auth., 629 F.3d 1173 (10th Cir. 2010); Allen

v. Gold Country Casino, 464 F.3d 1044, 1046–1047 (9th Cir. 2006); J.L.

Ward Assocs., 842 F. Supp. 2d at 1176; Bucher v. Dakota Fin. Corp. (In

re Whitaker), 474 B.R. 687, 696–697 (B.A.P. 8th Cir. 2012); Runyon ex rel.

B.R. v. Ass’n of Vill. Council Presidents, 84 P.3d 437, 440 (Alaska 2004);

Am. Prop. Mgmt. Corp. v. Superior Court, 141 Cal. Rptr. 3d 802, 809 (Ct.

App. 2012); Cash Advance & Preferred Cash Loans v. Colo. ex rel. Suthers,

242 P.3d 1099, 1109 (Colo. 2010); Gavle v. Little Six, Inc., 555 N.W.2d 284,

294 (Minn. 1996); Airvator, Inc. v. Turtle Mountain Mfg. Co., 329 N.W.2d

596, 604 (N.D. 1983); Wright v. Prairie Chicken, 579 N.W.2d 7, 10 (S.D.

1998).

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00025 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 255

the casino’s ‘‘creation was dependent upon [tribal] govern-

ment approval at numerous levels’’, and the Federal statute

under which the casino was created intended that creation

and operation of Indian casinos promote ‘‘ ‘tribal economic

development, self-sufficiency, and strong tribal govern-

ments’ ’’. Id. at 1046–1047 (quoting 25 U.S.C. sec. 2702(1)

(1994)); see also J.L. Ward Assocs., 842 F. Supp. 2d at 1177;

Cash Advance & Preferred Cash Loans v. Colo. ex rel.

Suthers, 242 P.3d 1099, 1109 (Colo. 2010); Gavle v. Little Six,

Inc., 555 N.W.2d 284, 294 (Minn. 1996). While Uniband

appears to have employed TMBCI members to perform its

data entry services, it has not shown the extent of its

employment of TMBCI members nor demonstrated that it

was established to promote TMBCI’s economic development,

as opposed to simply generating revenue. Uniband has not

shown that its operation promotes tribal ‘‘self-sufficiency’’ or

‘‘strong tribal government’’, nor that extending tribal immu-

nity to such an operation would ‘‘protect Indian assets and

tribal cultural autonomy’’. Moreover, as we have already dis-

cussed above, Uniband’s creation did not depend only on

TMBCI’s approval.

Financial relationship. A related and critical factor for

some courts in extending tribal sovereign immunity to tribal

businesses is the business entity’s financial relationship with

the tribe. See Ransom v. St. Regis Mohawk Educ. & Cmty.

Fund, Inc., 658 N.E.2d at 992–993. ‘‘[I]f a judgment against

* * * [an entity] will not reach the tribe’s assets or if it lacks

the ‘power to bind or obligate the funds of the [tribe],’ it is

unlikely that the tribe is the real party in interest. If, on the

other hand, the tribe would be legally responsible for the

entity’s obligations, it may be an arm of the tribe.’’ Runyon

ex rel. B.R. v. Ass’n of Vill. Council Presidents, 84 P.3d at

440–441 (quoting Ransom, 658 N.E.2d at 992). Uniband has

not shown that it is funded by TMBCI or that its actions

would ‘‘expos[e] the tribal treasury’’, id., and the record

shows otherwise.

Creation under State law. Another crucial factor for many

courts that has weighed against the extension of sovereign

immunity has been the tribe’s creating an entity under State

law. Somerlott v. Cherokee Nation Distribs., Inc., 686 F.3d at

1148–1150 (10th Cir. 2012) (‘‘the subordinate economic entity

test is inapplicable to entities which are legally distinct from

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00026 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

256 140 UNITED STATES TAX COURT REPORTS (230)

their members and which voluntarily subject themselves to

the authority of another sovereign’’); see also Am. Prop.

Mgmt. Corp. v. Superior Court, 141 Cal. Rptr. 3d 802, 810

(Ct. App. 2012); Airvator, Inc. v. Turtle Mountain Mfg. Co.,

329 N.W.2d 596, 602–604 (N.D. 1983); Wright v. Prairie

Chicken, 579 N.W.2d 7, 10 (S.D. 1998). Thus, Uniband’s

incorporation under Delaware law weighs heavily against

tribal sovereign immunity.

Even under more expansive standards, Uniband has failed

to establish that it would be entitled to sovereign immunity.

(2) Sovereign immunity does not necessarily confer ‘‘integral

part’’ status.

Uniband’s sovereign immunity argument assumes that if

an organization is entitled to tribal sovereign immunity, then

the organization is therefore an integral part of the tribe.

While the two concepts are not unrelated, the question

whether the sovereign immunity of a tribe extends to an

organization is distinct from the question whether an

organization is an integral part of a sovereign entity for tax

purposes. The entity classification regulation that Uniband

relies on here is not the only instance in which ‘‘integral

part’’ status arises in tax law, but we find no analogous

provision in which sovereign immunity assures that status.

Under section 501(c)(3), governance is not a tax-exempt

purpose, so that while a mere ‘‘instrumentality’’ of a State

may be exempt from tax under that provision, an ‘‘integral

part’’ is not. See Rev. Rul. 60–384, 1960–2 C.B. 172. Under

this analysis, an ‘‘integral part’’ of a State government is an

‘‘integral governmental instrumentalit[y] exercising ‘sov-

ereign’ powers’’. Old Colony Trust Co. v. United States, 438

F.2d 684, 687 (1st Cir. 1971); see also Tex. Learning Tech.

Grp. v. Commissioner, 958 F.2d 122, 126–127 (5th Cir. 1992),

aff ’g 96 T.C. 686 (1991). Such ‘‘sovereign powers’’ might

include sovereign immunity, see Breakthrough Mgmt. Grp.,

Inc. v. Chukchansi Econ. Dev. Auth., 629 F.3d 1173, 1182–

1183 (10th Cir. 2010); but in fact the three powers usually

examined in this context are ‘‘[t]he power to tax, the power

of eminent domain, and the police power’’, Tex. Learning

Tech. Grp. v. Commissioner, 958 F.2d at 124—none of which

Uniband claims to possess.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00027 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 257

Similarly, section 892 exempts from tax U.S.-source income

earned by ‘‘foreign governments’’, and the temporary regula-

tions define ‘‘foreign government’’ to mean ‘‘only the integral

parts * * * of a foreign sovereign.’’ 26 C.F.R. sec. 1.892–

2T(a)(1), Temporary Income Tax Regs., 53 Fed. Reg. 24061

(June 27, 1988). However, the definition of ‘‘integral part’’ in

the temporary regulations makes no mention of sovereign

immunity. Id. sec. 1.892–2T(a)(2) (‘‘An ‘integral part’ of a for-

eign sovereign is any person, body of persons, organization,

agency, bureau, fund, instrumentality, or other body, how-

ever designated, that constitutes a governing authority of a

foreign country. The net earnings of the governing authority

must be credited to its own account or to other accounts of

the foreign sovereign, with no portion inuring to the benefit

of any private person’’). Under that definition, though it is

not controlling in this case, even if Uniband had sovereign

immunity, it could not be an ‘‘integral part’’ of TMBCI,

because it is not ‘‘a governing authority’’.

Uniband relies on G.C.M. 38,853 (May 17, 1982) as the

foundation for its sovereign immunity argument, since that

memorandum does relate sovereign immunity to tax exemp-

tion. However, a general counsel memorandum is merely a

legal opinion from one division of the Commissioner’s Office

of Chief Counsel to another, and is not precedential. Old

Harbor Native Corp. v. Commissioner, 104 T.C. 191, 206–207

(1995). But even if G.C.M. 38,853 were binding authority, it

does not support Uniband’s conclusion. G.C.M. 38,853 lists

sovereign immunity as one of several factors 19 to support the

IRS’s conclusion that a section 17 corporation is not subject

to the corporate income tax. It does not state whether a sec-

tion 17 corporation is an integral part of a tribe, or discuss

what factors to consider to determine if an entity is an

integral part of a tribe. Therefore, even if Uniband had

established that it possesses sovereign immunity, it would

19 In

addition, G.C.M. 38,853 (May 17, 1982) relied on ‘‘the traditional

federal income tax immunity of Indian tribes, the Congressional purpose

in enacting section 17 of the [Indian Reorganization] Act, the lack of any

indication that such immunity would be waived by incorporation, [and] the

implication in the legislation that the tribe and the corporation are one’’.

Uniband argues that it achieves the same purposes that Congress had for

section 17 corporations, but as we discuss below in part I.B.3.d., Uniband

is clearly not a section 17 corporation.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00028 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

258 140 UNITED STATES TAX COURT REPORTS (230)

not necessarily have thereby established that it is an

‘‘integral part’’ of TMBCI for purposes of entity classification

in 26 C.F.R. section 301.7701–1(a)(2), Proced. & Admin.

Regs.

c. ‘‘Indian tribal organization’’

Uniband lays great stress on the fact that it is an ‘‘Indian

tribal organization’’ (‘‘ITO’’) for purposes of 18 U.S.C. section

1163 (1994) and argues that it is therefore an integral part

of TMBCI. It appears that a State-chartered corporation can

be an ITO, 20 and we assume that Uniband is an ITO; 21 but

it does not follow that Uniband is therefore an integral part

of TMBCI for Federal tax purposes.

Section 1163 of title 18 makes it a Federal crime to

embezzle money or other property ‘‘belonging to any Indian

tribal organization’’. Section 1163 provides that ‘‘the term

‘Indian tribal organization’ means any tribe, band, or commu-

nity of Indians which is subject to the laws of the United

States relating to Indian affairs or any corporation, associa-

tion, or group which is organized under any of such laws’’—

and it states that the term is so defined ‘‘[a]s used in this

section’’. The statute thus includes nothing to support the

suggestion that ITO status has legal implications outside of

the crime defined in section 1163. Uniband has not cited and

we have not found any authority to support its contention

that if an organization is an ITO for purposes of 18 U.S.C.

section 1163, it should, therefore, be treated as an integral

part of the tribe for purposes of the Internal Revenue Code.

This lack of authority is not surprising, since the criminal-

law purposes of 18 U.S.C. section 1163 have no resonance

with the taxation-law principles at issue here. There is no

20 See United States v. Logan, 641 F.2d 860, 862 (10th Cir. 1981) (a

State-chartered corporation established under the guidelines of the Indian

Financing Act of 1974 is a ‘‘corporation organized under the laws of the

United States relating to Indian affairs within the meaning of [18 U.S.C.]

section 1163’’).

21 The Commissioner disputes Uniband’s ITO status, but Uniband points

to an instance in which the United States prosecuted (and entered into a

plea agreement with) an individual who had embezzled funds from

Uniband; and in that instance the individual was charged with violating

18 U.S.C. section 1163 (among other provisions), and the plea agreement

included the assertion that Uniband is an ITO.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00029 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 259

apparent reason the criminal statute should reach only enti-

ties that share the tax attributes of a tribe. Moreover, if

every ITO were by definition an ‘‘integral part’’ of an Indian

tribe, then every ‘‘corporation, association, or group which is

organized’’ under ‘‘the laws of the United States relating to

Indian affairs’’ would be exempt from income tax—a broad

proposition that cannot be justified. The Commissioner aptly

states that Uniband’s ITO status ‘‘is at best peripheral to the

issue of whether the Petitioner is subject to the corporate

income tax’’.

d. Similarity to section 17 corporations

The fourth strain of Uniband’s argument that it is an

integral part of TMBCI and therefore shares its exemption

starts with the proposition that corporations established

pursuant to section 17 of the IRA, codified at 25 U.S.C. sec-

tion 477—referred to as ‘‘section 17 corporations’’—are not

subject to the corporate income tax, as is stated in 26 C.F.R.

section 301.7701–1(a)(3) (effective January 1, 1997), and as

the IRS previously held in Revenue Ruling 94–16, 1994–1

C.B. 19. 22 Uniband asserts that ‘‘the logic behind Rev. Rul.

22 Uniband’s

argument for its pre-1997 status (before the regulation be-

came effective) appears to be based solely on ‘‘the logic behind Rev. Rul.

94–16’’. A revenue ruling is not a regulation issued after notice and com-

ment, PBS Holdings, Inc. v. Commissioner, 129 T.C. 131, 144–145 (2007);

and this Court has held that such a ruling can be invoked by a taxpayer

and will be enforced only as a concession by the Commissioner, Rauenhorst

v. Commissioner, 119 T.C. 157, 171 (2002), and that such a concession will

be limited to its specific facts and holding. That is, a taxpayer can rely on

a revenue ruling only to the extent that the taxpayer’s facts are ‘‘substan-

tially the same as’’ those in the ruling and only as to the issue addressed

in the ruling. See 26 C.F.R. sec. 601.601(d)(2)(v)(e), Statement of Proce-

dural Rules. In this instance, Uniband’s facts are not substantially the

same as those in Rev. Rul. 94–16 (rather, Uniband is not a section 17 cor-

poration), and one of the holdings in the ruling (i.e., that a State-chartered

corporation does not share a tribe’s exemption) flatly contradicts the posi-

tion that Uniband advances. Accordingly, the ruling clearly cannot be con-

strued as a concession by the Commissioner that Uniband should be ex-

empt from tax. However, Uniband nonetheless takes the (somewhat awk-

ward) position that the holding of Rev. Rul. 94–16 regarding section 17

corporations should be regarded as persuasive and should be extended to

this case, see United States v. Mead Corp., 533 U.S. 218, 234–235 (2001)

(an agency’s interpretation may merit deference under Skidmore v. Swift

Continued

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00030 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

260 140 UNITED STATES TAX COURT REPORTS (230)

94–16’’ that exempts section 17 corporations from Federal

income tax applies equally to tribal corporations chartered

under State law. Uniband thus argues that a State-chartered

corporation wholly owned by an Indian tribe and a section 17

corporation are essentially the same, and that they should

therefore obtain the same tax treatment. 23

To apply the ‘‘logic of Rev. Rul. 94–16’’ and the regulation

to Uniband’s facts, we must ask: Why are section 17 corpora-

tions not subject to the corporate income tax? The parties

articulate that logic differently: Uniband states that ‘‘tax-

exempt status is appropriate for a section 17 corporation

because the tribe and its corporation are the same govern-

mental entity, even though the sole purpose of the section 17

corporation may be primarily commercial * * * [and] federal

cases involving tribal sovereign immunity justify a parallel

treatment for federal income tax purposes’’, while the

Commissioner states that ‘‘a section 17 corporation * * * is

a form of the tribe. It is part of the organizational structure

of the tribe just as much as is a tribal government formed

under section 16’’.

Uniband’s rationale actually works against it, since, as we

held above, Uniband has failed to show that it possesses

TMBCI’s sovereign immunity. Moreover, Uniband’s rationale

is faulty because it mistakes the effect (sharing TMBCI’s sov-

ereign immunity) for the cause (being a manifestation or, in

the Commissioner’s word, a ‘‘form’’) of TMBCI. See Memphis

Biofuels, LLC v. Chickasaw Nation Indus., Inc., 585 F.3d

917, 921 (6th Cir. 2009) (‘‘the language of Section 17 itself—

by calling the entity an ‘incorporated tribe’—suggests that

the entity is an arm of the tribe * * * that do[es] not auto-

& Co., 323 U.S. 134 (1944)), but that second holding of Rev. Rul. 94–16

regarding State-chartered corporations was incorrect. Even so, since the

regulation effectively established the position in the ruling, and since we

hold that Uniband is materially distinguishable from a section 17 corpora-

tion, the same analysis suffices for both its pre- and post-regulation years.

23 Uniband argues that giving it tax treatment different from that of a

section 17 corporation would yield ‘‘inequitable results’’, citing the uni-

formity clause of the United States Constitution. See U.S. Const. art. I,

sec. 8, cl. 1. This constitutional argument fails because the ‘‘constitutional

requirement of uniformity is not intrinsic, but geographic’’. Poe v. Seaborn,

282 U.S. 101, 117 (1930). Because Uniband is materially different from

section 17 corporations, for the reasons we explain below, it is not entitled

to the same treatment they receive.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00031 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 261

matically forfeit tribal-sovereign immunity’’). If we simply

examine the nature of a section 17 corporation, we see that

Uniband differs radically from a section 17 corporation in

ways that mark it as distinct from TMBCI.

(1) The origin of section 17 corporations

Before the enactment of the IRA, both the governmental

and business functions of a tribe were conducted in the same

unincorporated entity. In 1934 Congress enacted the IRA,

which allows a tribe to operate its governmental affairs and

commercial matters through separate mechanisms. Section

16 of the IRA (codified at 25 U.S.C. sec. 476) permits a tribe

to adopt a constitution and bylaws under which it conducts

its governmental affairs; and section 17 of the IRA allows a

tribe to operate its commercial enterprises through a feder-

ally chartered corporation.

According to its legislative history, the purpose of section

17 was to ‘‘permit Indian tribes to equip themselves with the

devices of modern business organization, through forming

themselves into business corporations.’’ S. Rept. No. 1080,

73d Cong., 2d Sess. 1 (1934). One feature of a section 17 cor-

poration is that it gives a tribe the ability to waive tribal sov-

ereign immunity for a business operated by a section 17 cor-

poration without having to waive the tribe’s immunity for

nonbusiness liability. This waiver removes a major market

hurdle for a tribal business (because third parties generally

do not want to enter into contracts with parties they cannot

sue to enforce agreements or to seek tort damages) and puts

a tribal business on equal footing with nontribal businesses.

(2) Characteristics of section 17 corporations

Section 17 corporations have several distinguishing

characteristics, all of which are reflected in the organizing

documents of TMBCI’s section 17 corporation, as quoted

above pages 237–238. The first is that the establishment of

a section 17 corporation is within the discretion of the Sec-

retary of the Interior. A petitioning tribe has the power only

to adopt or to veto the corporate charter issued by the Sec-

retary of the Interior. See 25 U.S.C. sec. 477 (‘‘The Secretary

of the Interior may, upon petition by any tribe, issue a

charter of incorporation to such tribe’’). Consequently, a sec-

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00032 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

262 140 UNITED STATES TAX COURT REPORTS (230)

tion 17 charter will confer only powers that the Secretary of

the Interior is willing for the corporation to possess. See Md.

Cas. Co. v. Citizen Nat’l Bank of W. Hollywood, 361 F.2d 517,

520 (5th Cir. 1966) (‘‘the powers granted to the corporation

were only those which the Secretary of the Interior, by the

terms of the charter, conveyed to them’’).

Second, ‘‘Any charter so issued shall not be revoked or

surrendered except by Act of Congress.’’ 25 U.S.C. sec. 477.

Third, 25 U.S.C. section 477 gives a section 17 corporation

‘‘the power to purchase restricted Indian lands’’, a right that

is otherwise exclusively held by tribes. See id. sec. 464.

Fourth, the IRA places restrictions on the alienation of cor-

porate stock and of certain corporate-owned land. See id. (‘‘no

sale, devise, gift, exchange, or other transfer of restricted

Indian lands or of shares in the assets of any Indian tribe

or corporation organized under this Act shall be made or

approved’’, subject to provisos); id. sec. 477 (‘‘no authority

shall be granted to sell, mortgage, or lease for a period

exceeding twenty-five years any trust or restricted lands

included in the limits of the reservation’’).

These limitations are obviously aimed at preserving the

tribe’s assets and existence—suggesting that the tribe exists,

at least in part, through its section 17 corporation, notwith-

standing the fact that the corporation is a distinct legal

entity.

(3) Taxation of section 17 corporations

The IRA makes no provision as to tax liability of section

17 corporations, but in 1973 the Supreme Court, in Mescalero

Apache Tribe, 411 U.S. at 157–158, shed some light on the

issue. In Mescalero Apache Tribe the Supreme Court faced

the question whether a tribally owned ski resort was exempt

from State tax 24 when it was unclear whether the resort was

an unincorporated entity operating under section 16 (i.e., as

a governmental organization) or was a section 17 corporation.

Id. at 157 n.13. The Court concluded that under either form

the ski resort would be subject to State tax, since the activity

24 The

exemption at issue in Mescalero Apache Tribe v. Jones, 411 U.S.

145 (1973), arose under the provision that ‘‘any lands or rights acquired’’

pursuant to any provision of the IRA ‘‘shall be exempt from State and local

taxation.’’ 25 U.S.C. sec. 465 (1968).

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00033 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 263

was conducted outside of the borders of the Indian reserva-

tion. Id. at 157–158. In so concluding, the Supreme Court

stated that ‘‘the question of tax immunity cannot be made to

turn on the particular form in which the Tribe chooses to

conduct its business.’’ Id. at 157 n.13.

In 1981 the Commissioner, relying on this statement in

Mescalero Apache Tribe, concluded that a ‘‘federally char-

tered Indian tribal corporation shares the same tax status as

the Indian tribe and is not taxable on income from activities

carried on within the boundaries of the reservation.’’ Rev.

Rul. 81–295, 1981–2 C.B. 15. Revenue Ruling 81–295 did not

address State-chartered corporations owned by Indian tribes.

In 1994 the Commissioner clarified Revenue Ruling 81–295

in Revenue Ruling 94–16, 1994–1 C.B. at 20, in which he

stated:

An Indian tribal corporation organized under section 17 of the IRA

shares the same tax status as the tribe. Therefore, any income earned

by such a corporation, regardless of the location of the business activities

that produced the income, is not subject to federal income tax. * * * [A]

corporation organized by an Indian tribe under state law does not share

the same tax status as the tribe for federal income tax purposes and is

subject to federal income tax on any income earned, regardless of the

location of the business activities that produced the income.

The ‘‘check-the-box’’ regulations, effective January 1, 1997,

followed the approach of Revenue Ruling 94–16. The regula-

tion addressed the classification of section 17 corporations for

tax purposes by providing that ‘‘tribes incorporated under

section 17 of the Indian Reorganization Act of 1934 * * * are

not recognized as separate entities for federal tax purposes.’’

26 C.F.R. sec. 301.7701–1(a)(3). Under this regulation, a sec-

tion 17 corporation is not regarded as separate from the tribe

for tax purposes and, as a result, is not subject to Federal

income tax.

(4) Uniband’s differences from a section 17 corporation

Uniband does not have the distinctive characteristics of a

section 17 corporation, as outlined above. First, unlike a sec-

tion 17 corporation that is established at the discretion of the

Secretary of the Interior and that is given only the powers

that the Secretary of the Interior approves, Uniband was

established by the decision of TMBCI and its co-shareholder

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00034 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

264 140 UNITED STATES TAX COURT REPORTS (230)

and was given by them all the lawful powers that a Dela-

ware corporation may possess.

Second, unlike a section 17 charter, which ‘‘shall not be

revoked or surrendered except by Act of Congress’’, Uniband

exists at the pleasure of its owner, TMBCI, and its charter

can be revoked by the State of Delaware. See Del. Code Ann.

tit. 8, sec. 284(a) (2011) (‘‘The Court of Chancery shall have

jurisdiction to revoke or forfeit the charter of any corporation

for abuse, misuse or nonuse of its corporate powers, privi-

leges or franchises’’).

Third, Uniband does not possess the special power to pur-

chase restricted Indian lands, a power that a section 17 cor-

poration is given by statute.

Fourth, Uniband is not bound by the restrictions the IRA

places on the alienation of section 17 corporate stock and of

certain corporate-owned land. TMBCI is free to sell all or

part of its Uniband stock, as it could any investment.

In sum, Uniband lacks the special character of a section 17

corporation and its special relationship to an Indian tribe. As

a State-chartered corporation, it is an investment of TMBCI;

its stock is property owned by TMBCI. It is not an integral

part of TMBCI but is a distinct corporate entity with its own

tax character. Accordingly, unlike TMBCI, Uniband is sub-

ject to Federal income tax.

II. Consolidated return issue

We now turn to Uniband’s alternative claim that for tax

years 1996, 1997, and 1998 it was entitled to and did prop-

erly file consolidated returns with its sister corporation

TMMC. The filing of a consolidated return is a ‘‘privilege’’,

sec. 1501, as to which the Secretary is explicitly authorized

to promulgate regulations, 25 sec. 1502. To prevail with this

claim, Uniband must show that Uniband and TMMC were

part of an affiliated group of corporations and that the group

filed valid consolidated returns for the years in issue. 26

Uniband’s claim fails for multiple reasons.

25 The consolidated return regulations are legislative in character and

have the force and effect of law. Salem Packing Co. v. Commissioner, 56

T.C. 131, 141 (1971).

26 Because we hold against Uniband on both these grounds, we need not

address the Commissioner’s further contention that the 1996 consolidated

return, even if otherwise valid, was untimely.

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00035 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

(230) UNIBAND, INC. v. COMMISSIONER 265

A. Uniband was not part of an affiliated group.

Section 1501 provides that ‘‘[a]n affiliated group of corpora-

tions shall * * * have the privilege of making a consolidated

return’’. An affiliated group is one or more chains of ‘‘includ-

ible corporations’’ connected through the requisite stock

ownership by a common parent corporation which is also an

‘‘includible corporation’’. Sec. 1504(a). An ‘‘includible corpora-

tion’’ is any corporation, except those specifically excluded in

section 1504(b). See sec. 1504(b)(1)–(8).

Uniband contends that itself, TMMC, and TMBCI are all

corporations within the meaning of section 7701(a) and 26

C.F.R. section 301.7701–2(b), Proced. & Admin. Regs., and

therefore are ‘‘includible corporations’’ in an ‘‘affiliated

group’’, eligible to make a consolidated return. With regard

to TMBCI, Uniband argues that it is a corporation, first,

because it is a ‘‘body politic’’ described in 26 C.F.R. section

301.7701–2(b)(1), and, second, because it is treated as a cor-

poration for purposes of the wagering tax imposed by section

4401. 27 We disagree with both of Uniband’s arguments. 28

27 Uniband in its briefing appears to ask us to reconsider our order strik-

ing Uniband’s third contention that TMBCI is a corporation because it is

an ‘‘association’’ for tax purposes. We will not do so, since in response to

a request for admissions, Uniband explicitly admitted that during the peri-

ods at issue it was not ‘‘an entity of the type described in Treas. Reg. §

301.7701–2(b)(2)’’ (i.e., an ‘‘association’’) and then agreed to the same as-

sertion in the parties’ joint stipulation. See order of Dec. 10, 2010; see also

United States v. Mazurie, 419 U.S. 544, 557 (1975) (‘‘Indian tribes are

unique aggregations possessing attributes of sovereignty over both their

members and their territory’’; and ‘‘Indian tribes within ‘Indian country’

are a good deal more than ‘private, voluntary organizations’ ’’), discussed

above in part I.A.3. Uniband’s ‘‘association’’ argument addresses whether

Uniband and TMMC were in an affiliated group (discussed in this part

II.A.), and if this argument prevailed, it would, by itself, still be unavailing

given our conclusion, see part II.B., that even if Uniband and TMMC were

in an affiliated group, the consolidated returns that were filed are still in-

valid.

28 The Commissioner argues in the alternative that since TMBCI is an

Indian tribe and the Code ‘‘provides for special treatment of that organiza-

tion’’, 26 C.F.R. sec. 301.7701–1(b), the entity classification regulations do

not apply to TMBCI. Given our conclusion that TMBCI is not described

within the definition of a ‘‘corporation’’ as provided in 26 C.F.R. sec.

301.7701–2(b), Proced. & Admin. Regs., we do not need to address whether

the Code ‘‘provides for special treatment’’ of TMBCI for purposes of 26

Continued

VerDate Nov 24 2008 12:39 Jul 03, 2014 Jkt 372897 PO 20012 Frm 00036 Fmt 3857 Sfmt 3857 V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.140\UNIBAND JAMIE

266 140 UNITED STATES TAX COURT REPORTS (230)

1. Body politic

For tax purposes, the term ‘‘corporation’’ includes ‘‘[a] busi-

ness entity organized under a Federal or State statute, or

under a statute of a federally recognized Indian tribe, if the

statute describes or refers to the entity as incorporated or as

a corporation, body corporate, or body politic’’. 26 C.F.R. sec.

301.7701–2(b)(1). TMBCI is an unincorporated band of

Indians organized under a revised constitution and by-laws

approved by the Secretary of the Interior pursuant to 25

U.S.C. section 476. Nothing in TMBCI’s organizing statute,

25 U.S.C. section 476, or even TMBCI’s constitution ‘‘refers

to [TMBCI] * * * as * * * [a] body politic’’. Accordingly,

TMBCI can not be considered a corporation under the defini-

tion provided in 26 C.F.R. section 301.7701–2(b)(1).

2. An entity taxed as a corporation

The term ‘‘corporation’’ also includes ‘‘[a] business entity

that is taxable as a corporation under a provision of the

Internal Revenue Code other than section 7701(a)(3)’’. 26

C.F.R. sec. 301.7701–2(b)(7). Uniband argues that TMBCI is

taxed as a corporation for purposes of the wagering tax

imposed by section 4401 and that it is therefore a corporation

under 26 C.F.R. section 301.7701–2(b)(7). It is true that

Indian tribes, including TMBCI, are subject to tax under sec-

tion 4401, see Chickasaw Nation, 534 U.S. at 95, but not

because tribes are corporations. Rather, section 4401 imposes

an excise tax on certain wagers and provides that ‘‘[e]ach per-

son who is engaged in the business of accepting wagers shall

This text is long and has been trimmed here. Open the source document for the complete record.