UNITED STATES TAX COURT

T.C. Memo. 2006-11

UNITED STATES TAX COURT

MICHAEL W. ALLEN, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20970-03.

Filed January 25, 2006.

Michael W. Allen, pro se.

David L. Zoss, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KROUPA, Judge:

Respondent determined deficiencies and

penalties with respect to petitioner’s income taxes for 1999,

2000, and 2001 (the years at issue).

For 1999, respondent

determined a $12,769.70 deficiency and determined petitioner was

liable for a $2,273.94 accuracy-related penalty under section

6662.1

1

For 2000, respondent determined a $9,503 deficiency and

All section references are to the Internal Revenue Code in

effect for the years at issue, and all Rule references are to the

(continued...)

-2determined petitioner was liable for a $1,900.60 accuracy-related

penalty under section 6662.

For 2001, respondent determined a

deficiency of $20,812.00 and determined petitioner was liable for

a $4,162.40 accuracy-related penalty under section 6662.

There are four issues for decision.

The first issue is

whether compensation petitioner received from an American Indian

tribe during the years at issue is taxable to him.

it is.

We hold that

The second issue is whether petitioner may reduce his

income by $69,916 for 2001.

We hold that he may not.

The third

issue is whether petitioner is entitled to deductions beyond

those reported on his returns for the years at issue.

that he is not.

We hold

The fourth issue is whether petitioner is liable

for the accuracy-related penalty under section 6662 for the years

at issue.

We hold that he is.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.

Petitioner resided in Lac Du

Flambeau, Wisconsin, at the time he filed the petition.

Petitioner’s Income During the Years at Issue

Petitioner is an enrolled member of the Lac Du Flambeau

Band, a federally recognized American Indian tribe (the tribe).

The leadership of the tribe consists of an elected tribal

council.

1

Petitioner served as vice chairman of the tribal

(...continued)

Tax Court Rules of Practice and Procedure, unless otherwise

indicated.

-3council during the years at issue.2

He earned compensation for

his services as an elected tribal council member of $33,775 in

1999, $31,118 in 2000, and $36,337 in 2001.

The tribe also paid

petitioner $2,700 of other income in 1999 and $1,500 of other

income in 2000.

Petitioner was also a board member of Simpson Electric Co.

(Simpson), an electric company owned and operated by the tribe.

The tribe paid petitioner $8,000 in 2001 for attending Simpson

board meetings.

Petitioner also served as executive director of the Great

Lakes Intertribal Council, Inc. (GLITC), a nonprofit corporation,

during the years at issue.

GLITC paid petitioner weekly

compensation.

Petitioner received distributions from two IRAs during the

years at issue, one in 1999 and the other in 2001.

Petitioner’s Income Tax Returns During the Years at Issue

Petitioner did not report his compensation for serving as

vice chairman of the tribal council on his income tax returns for

1999 and 2000, nor the IRA distributions he received in 1999 and

2001.

On his return for 2001, petitioner made an unexplained

adjustment that reduced his income by $69,916.

Petitioner did report, however, his compensation from GLITC

on his return for each year at issue.

He also reported the other

income he received from the tribe on his returns for 1999 and

2

Petitioner also served as the tribal vice president from

October 2000 through October 2004.

-42000, and he reported his compensation from the tribe for serving

on the tribal council and the Simpson board on his return for

2001.

Petitioner reported tax due of $11,392 for 1999, $13,101

for 2000 and $8,643 for 2001.

Respondent’s Examination and the Petition

Respondent examined petitioner’s returns for the years at

issue and issued petitioner a notice of deficiency (deficiency

notice) dated September 18, 2003.

In the deficiency notice,

respondent determined that the compensation petitioner received

from the tribe for serving as an elected tribal council member

was taxable income for 1999 and 2000, that the IRA distributions

were includable in gross income for 1999 and 2001, that

petitioner was not entitled to a $69,916 adjustment in 2001, and

that petitioner was liable for the accuracy-related penalty.

Petitioner timely filed a petition for review with this

Court.

OPINION

Petitioner asserts that the income he received from both

GLITC and the tribe during the years at issue is exempt from

taxation,3 that he is entitled to deductions beyond those claimed

on his returns for the years at issue, and that he is not liable

3

Although petitioner reported his compensation from GLITC

for all the years at issue and for serving on the Simpson board

and the tribal council in 2001 on his returns for the relevant

years, petitioner now contends that these items are exempt from

taxation. A taxpayer’s characterization of an item on his or her

income tax return may be considered an admission against the

taxpayer’s interest. Times Tribune Co. v. Commissioner, 20 T.C.

449, 452 (1953); Doll v. Commissioner, T.C. Memo. 2005-269.

-5for the accuracy-related penalty.4

We address each issue in

turn, after first considering the burden of proof.

I.

Burden of Proof

Petitioner generally has the burden of proof.

142(a).

See Rule

Petitioner asserted for the first time in his reply

brief that the burden of proof should be shifted to respondent.

Section 7491 applies to this case because the examination of

petitioner’s income tax returns for the years at issue began

after the statute’s effective date, but petitioner failed to

substantiate the claimed expenses and failed to maintain adequate

records.5

Accordingly, petitioner does not meet the requirements

4

Petitioner also asserts for the first time in his posttrial brief that he used an IRA distribution he received in 1999

to finance a first-time home purchase. Petitioner stipulated

before trial, however, that he had not reached age 59-1/2 when he

received either IRA distribution, that neither IRA distribution

was received on account of death, disability, medical expenses,

higher education expenses, or to finance a first-time home

purchase, and that both IRA distributions were taxable.

A

stipulation of fact is binding on the parties and is treated as a

conclusive admission. Rule 91(e). The Court will not permit a

party to a stipulation to qualify, change, or contradict the

stipulation except where justice requires. Id. Petitioner did

not ask to be relieved from the stipulations or present grounds

that he should not be bound to his admission. See id.; Israel v.

Commissioner, T.C. Memo. 2003-338; Said v. Commissioner, T.C.

Memo. 2003-148, affd. 112 Fed. Appx. 608 (9th Cir. 2004). We

conclude that the stipulations are binding, and, accordingly, we

need not further consider petitioner’s assertions regarding his

IRA distributions.

5

Sec. 7491(a) shifts the burden of proof to the Commissioner

under certain circumstances if the taxpayer introduces credible

evidence and satisfies the necessary substantiation and

documentation requirements. Sec. 7491 is effective with respect

to court proceedings arising in connection with examinations by

the Commissioner commencing after July 22, 1998, the date of

enactment of the Internal Revenue Service Restructuring and

Reform Act of 1998, Pub. L. 105-206, sec. 3001(a), 112 Stat. 726.

-6to shift the burden of proof under section 7491(a), and the

burden therefore remains with petitioner.

II.

Taxability of Payments Petitioner Received From the Tribe

Respondent determined that the amounts petitioner received

as compensation for his services as an elected official of the

tribal council are subject to Federal income tax.

Petitioner

contends that these amounts are exempt from tax.6

It is well established that Native Americans, or American

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

unless an exemption is created by treaty or statute.

Squire v.

Capoeman, 351 U.S. 1, 6 (1956), Estate of Poletti v.

Commissioner, 99 T.C. 554, 557-558 (1992), affd. 34 F.3d 742 (9th

Cir. 1994).

For such an exemption to be valid, it must be based

upon clearly expressed language in a statute or treaty.

Squire

v. Capoeman, supra; United States v. Anderson, 625 F.2d 910, 913

(9th Cir. 1980); Estate of Peterson v. Commissioner, 90 T.C. 249,

250 (1988).

While citing numerous treaties and statutes,

petitioner has pointed to no provision that would exempt the

compensation he received.

We address the major arguments that petitioner raises, none

of which we find exempts the compensation petitioner received.

6

We have treated petitioner as admitting that his

compensation from GLITC and Simpson is taxable. Petitioner has

not introduced any evidence with regard to this compensation to

overcome his admission. See Doll v. Commissioner, supra. The

analysis of the taxability of these payments is the same as that

relating to petitioner’s compensation for his services on the

tribal council.

-7First, petitioner argues that his income is “exempt function

income” within the meaning of section 527(c)(3) and is therefore

not taxable to him.

Section 527 taxes political organizations on

their political organization taxable income.

(b)(1).

Sec. 527(a) and

Political organization taxable income does not include

exempt function income.

Sec. 527(c)(1)(A).

Petitioner is not a

political organization.

Accordingly, section 527(c)(3) does not

exempt his income from taxation.

Petitioner also argues that his income is derived from a

fishing-rights-related activity through a qualified Indian entity

and is therefore exempt.

Sec. 7873.

Section 7873 does provide a

tax exemption for income derived from a fishing-rights-related

activity by a member of an Indian tribe directly or through a

qualified Indian entity.

Petitioner has not introduced any

evidence, however, to establish that the requirements of this

section were met during the years at issue.

Specifically,

petitioner did not show that his income was attributable to any

fishing-rights-related activity nor received from an entity that

satisfied the ownership, gross receipts, and management tests to

meet the definition of a qualified Indian entity.

7873(b)(3).

See sec.

Accordingly, petitioner has not proven that this

section applies to his compensation, and he may not rely on it to

exclude any of his income from taxation.

Petitioner also argues that his income is not taxable under

Rev. Rul. 59-354, 1959-2 C.B. 24.

Rev. Rul. 59-354, supra,

excludes compensation for the duties performed by elected tribal

-8council members from the definition of “wages” for the purposes

of FICA, FUTA, and income tax withholding.

Petitioner

misconstrues the revenue ruling and its relevance.

The revenue

ruling does not exempt petitioner’s income from tax.

See Allen

v. Commissioner, T.C. Memo. 2005-118; Doxtator v. Commissioner,

T.C. Memo. 2005-113.

A tribal official, whether elected or appointed, is subject

to income tax on the compensation received for rendering services

to the tribe unless a treaty or statute specifically provides an

exemption.

See Hoptowit v. Commissioner, 78 T.C. 137, 145-148

(1982), affd. 709 F.2d 564 (9th Cir. 1983); Jourdain v.

Commissioner, 71 T.C. 980, 986-987 (1979), affd. 617 F.2d 507

(8th Cir. 1980).

Petitioner has not shown that either a treaty

or a statute specifically exempts any of his compensation.

Accordingly, we sustain respondent’s determination that the

compensation petitioner received is subject to tax.

III. Petitioner’s Unexplained 2001 Adjustment

Petitioner claimed an unexplained adjustment to gross income

of $69,916 on his return for 2001.

Petitioner did not provide

any evidence concerning this adjustment.

This amount does not

correspond to any items of income he reported on his return for

2001, and it is unclear from the record how petitioner arrived at

this amount.

Presumably petitioner adjusted his gross income to

subtract the income he believed was not taxable.

As explained

previously, payments that petitioner received from the tribe and

other entities are taxable because no explicit statutory

-9exemption applies.

See Hoptowit v. Commissioner, supra at 145-

148; Jourdain v. Commissioner, supra.

Moreover, petitioner has

introduced no evidence to prove this adjustment was appropriate.

Accordingly, we sustain respondent’s disallowance of this

adjustment.

IV.

Additional Deductions

Petitioner claims on brief, despite not having any documents

to substantiate his expenses, that he is entitled to certain

deductions beyond those he originally reported on his returns for

the years at issue.

For example, petitioner claims he lives in

an empowerment zone and/or an enterprise community and is

therefore entitled to additional or increased deductions, such as

increased depreciation deductions.

Petitioner also claims that

he is entitled to deduct certain expenses, such as depreciation,

insurance, mileage on his car, house expenses, office expenses,

and miscellaneous expenses for items such as clothing and

cleaning, and personal deductions.

We are thus asked to decide

whether petitioner is entitled to deductions in excess of those

reported on his returns.

We begin with two fundamental principles of tax litigation.

First, as a general rule, the Commissioner’s determinations are

presumed correct, and the taxpayer bears the burden of proving

that these determinations are erroneous.7

7

Rule 142(a); see

This principle is not affected by sec. 7491(a), because, as

described previously, petitioner failed to substantiate claimed

expenses and failed to maintain required records. See sec.

7491(a)(2)(A) and (B). Accordingly, the burden of proof remains

(continued...)

-10INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

Second, deductions are a matter of legislative grace, and

the taxpayer must show that he or she is entitled to any

deduction claimed.

Rule 142(a); Deputy v. duPont, 308 U.S. 488,

493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934); Welch v. Helvering, supra.

substantiation.

This includes the burden of

Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976).

A taxpayer must substantiate amounts claimed as deductions

by maintaining the records necessary to establish he or she is

entitled to the deductions.

supra.

Sec. 6001; Hradesky v. Commissioner,

A taxpayer shall keep such permanent records or books of

account as are sufficient to establish the amount of deductions

claimed on the return.

Tax Regs.

Sec. 6001; sec. 1.6001-1(a), (e), Income

The Court need not accept a taxpayer’s self-serving

testimony when the taxpayer fails to present corroborative

evidence.

Beam v. Commissioner, T.C. Memo. 1990-304 (citing

Tokarski v. Commissioner, 87 T.C. 74,77 (1986)), affd. without

published opinion 956 F.2d 1166 (9th Cir. 1992).

If a taxpayer establishes that he or she paid or incurred a

deductible business expense but does not establish the amount of

the deduction, this Court may approximate the amount of the

allowable deduction, bearing heavily against the taxpayer whose

7

(...continued)

with petitioner.

-11inexactitude is of his or her own making.

39 F.2d 540, 543-544 (2d Cir. 1930).

Cohan v. Commissioner,

For the Cohan rule to

apply, however, a basis must exist on which this Court can make

an approximation.

(1985).

Vanicek v. Commissioner, 85 T.C. 731, 742-743

Without such a basis, any allowance would amount to

unguided largesse.

Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957).

Certain business expenses may not be estimated because of

the strict substantiation requirements of section 274(d).

See

sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827

(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).

For such

expenses, only documentary evidence will suffice.

We now address whether petitioner is allowed to deduct any

amounts beyond those he reported on his returns.

may not.

We find that he

Petitioner has not introduced evidence to substantiate

the additional deductions he claims.

He has simply stated in his

brief that he is entitled to these deductions.

Statements in

briefs and exhibits attached to briefs are not evidence.8

See

Rule 143(b); Shepherd v. Commissioner, 115 T.C. 376, 399 n.22

(2000), affd. 283 F.3d 1258 (11th Cir. 2002).

As petitioner has

introduced no evidence regarding these claimed deductions, we

cannot estimate the amounts of the deductions under the Cohan

rule.

8

See Cohan v. Commissioner, supra.

Accordingly, petitioner

In his reply brief, petitioner also requests additional

time to supply information regarding the lease of equipment.

Evidence pertaining to petitioner’s claims should have been

introduced at trial. See Rule 143. Petitioner may not introduce

any further evidence. See id.

-12is not entitled to deduct any expenses beyond those originally

reported on his returns for the years at issue.

V.

Accuracy-Related Penalty

We turn now to respondent’s determination in the deficiency

notice that petitioner is liable for the accuracy-related penalty

under section 6662 for each of the years at issue.

Respondent

has the burden of production under section 7491(c) and must come

forward with sufficient evidence that it is appropriate to impose

the penalty.

See Higbee v. Commissioner, 116 T.C. 438, 446-447

(2001).

A taxpayer is liable for an accuracy-related penalty in the

amount of 20 percent of any part of an underpayment attributable

to, among other things, a substantial understatement of income

tax.

There is a substantial understatement of income tax under

section 6662(b)(2) if the amount of the understatement exceeds

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

on the return, or $5,000.

Sec. 6662(a), (b)(1) and (2),

(d)(1)(A); sec. 1.6662-4(a), Income Tax Regs.

Respondent has met

his burden of production with respect to petitioner’s substantial

understatement of income tax for the years at issue.9

The

following table demonstrates that petitioner understated his

income tax for each year at issue in an amount greater than

9

Respondent determined in the alternative that petitioner

was liable for the accuracy-related penalty for negligence or

disregard of rules or regulations under sec. 6662(b)(1) for the

years at issue. Because respondent has proven that petitioner

substantially understated his income tax for the years at issue,

we need not consider whether petitioner was negligent or

disregarded rules or regulations.

-13$5,000 or 10 percent of the tax required to be shown on his

return.

Year

Tax Reported

Required Tax

Understatement

1999

$11,392

$24,161

$12,769

2000

13,101

22,604

9,503

2001

8,643

29,455

20,812

The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment, however, if it is shown

that there was reasonable cause for the taxpayer’s position and

that the taxpayer acted in good faith with respect to that

portion.

Sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs.

The determination of whether a taxpayer acted with reasonable

cause and good faith is made on a case-by-case basis, taking into

account all the pertinent facts and circumstances, including the

taxpayer’s efforts to assess his or her proper tax liability and

the knowledge and experience of the taxpayer.

Sec. 1.6664-

4(b)(1), Income Tax Regs.

While the Commissioner bears the burden of production under

section 7491(c), the taxpayer bears the burden of proof with

respect to reasonable cause.

Higbee v. Commissioner, supra at

446.

Petitioner failed to report his income from the tribe for

his services as a tribal council member in 1999 and 2000, claimed

an unexplained adjustment to gross income in 2001, and failed to

substantiate deductions he claimed on brief.

Petitioner also

failed to present any evidence showing that his substantial

-14understatement for each of the years at issue was due to

reasonable cause and that he acted in good faith.10

Accordingly, we sustain respondent’s determination that

petitioner is liable for the accuracy-related penalty under

section 6662(b)(2) for each of the years at issue.

We have considered all remaining arguments the parties made

and, to the extent not addressed, we find them to be irrelevant,

moot, or meritless.

To reflect the foregoing,

Decision will be entered

for respondent.

10

Petitioner argues that the complexity of issues in this

case gave him reasonable cause for his substantial

understatements. See Dillin v. Commissioner, 56 T.C. 228, 248

(1971). We disagree. There is no uncertainty as to petitioner’s

legal obligation here. See, e.g., Pessin v. Commissioner, 59

T.C. 473, 489 (1972); Rosanova v. Commissioner, T.C. Memo. 1985306; Grant v. Commissioner, T.C. Memo. 1980-242.