Clay v. Comm'r

• Decision Date: 24 April 2019
• Docket Number: Docket No. 7870-13.,152 T.C. No. 13,Docket No. 13104-11
• Parties: JAMES CLAY AND AUDREY OSCEOLA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

JAMES CLAY AND AUDREY OSCEOLA, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

152 T.C. No. 13
Docket No. 13104-11
Docket No. 7870-13.

UNITED STATES TAX COURT

April 24, 2019

In these consolidated cases Ps are members of a Native American tribe. During the years at issue the tribe operated a casino on tribal land, owned communally by all members. The tribe made regular distributions from casino revenue to each member. Ps received these distributions and did not report them as income. R determined that the distributions are taxable to Ps and, therefore, Ps had unreported taxable income in the amounts of the distributions. R also determined that Ps are liable for I.R.C. sec. 6662(a) accuracy-related penalties.

Held: The distributions to Ps from casino revenue constituted unreported taxable income to Ps.

Held, further, for purposes of I.R.C. sec. 6751(b), the Revenue Agent Report (RAR) and the 30-day letter, to which the (RAR) was attached, constitute the initial determination to assess penalties.

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Held, further, R must show that written supervisory approval for penalties was obtained before the first formal communication to the taxpayer of the initial determination to assess penalties.

Held, further, the 30-day letter was the first formal communication to the taxpayer of the initial determination to assess penalties.

Held, further, R did not obtain written supervisory approval before the first formal communication of the initial determination to assess penalties and did not meet his burden of production for penalties under I.R.C. sec. 7491(c).

Robert O. Saunooke, for petitioners.

Sarah R. Bolen, Marissa R. Lenius, and Laura A. Price, for respondent.

PUGH, Judge: In notices of deficiency dated March 4, 2011, and January 10, 2013, respondent determined the following deficiencies and penalties:¹

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Year	Deficiency	Penalty; sec. 6662(a)
2004	$192,215	$38,443
2005	310,171	62,034
2006	389,613	77,923

After concessions, the issues for decision are whether quarterly distributions, Christmas bonuses, and a miscellaneous payment to petitioners are income under section 61 for tax years 2004 through 2006 and whether petitioners are liable for accuracy-related penalties under section 6662(a) for tax years 2004 and 2005. These consolidated cases are lead cases for a larger group all with the common legal issue of the tax treatment of the distributions and Christmas bonuses (collectively, distributions).²

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulated facts are incorporated in our findings by this reference. Petitioners James Clay and Audrey Osceola were residents of Florida when they timely filed their petitions.

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I. The Miccosukee Tribe of Indians of Florida

The Miccosukee Tribe of Indians of Florida (Tribe) is a federally recognized tribe of Indians. The Tribe's members ratified and adopted its constitution on December 17, 1961, and it was approved by the Department of the Interior (DOI) on January 11, 1962. The constitution vests power and authority in the Miccosukee General Council (General Council), which includes all enrolled tribal members who are at least 18 years of age. The General Council has four "Regular General Council Meetings" each year on the first Saturday of February, June, August, and November. Meetings of the General Council other than Regular General Council Meetings are called "Special General Council Meetings". Meetings of the General Council are recorded, transcribed, and approved by the General Council at the next meeting.

The Business Council controls the day-to-day operations of the Tribe, subject to the General Council's approval. The Business Council has five members, each elected to a four-year term by the General Council: the chairman, the assistant chairman, the secretary, the treasurer, and the lawmaker. The Business Council meets regularly, and the chairman only votes in the case of a tie. Billy Cypress served as chairman from 1987 through 2009 and was elected chairman again in 2016. As a function of his position as chairman of the Tribe,

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Mr. Cypress also acted as the Bureau of Indian Affairs (BIA) superintendent of the Tribe. The Tribe's primary operating bank account is its general account. All revenues not specifically allocated to another tribal account are deposited into this account, and the Tribe pays general operating expenses and capital improvement costs, among other expenses, from it.

A. Tribal Sales Tax

The General Council enacted a tribal sales tax on November 7, 1984. It was approved by the DOI on December 13, 1984. It applied to sales of goods and services or lease rentals by any business operating on the Tribe's reservation; these include a gas station, a gift shop, a restaurant, a tourist village, and an air boat tour business. The tax was passed on to customers and was reflected on the customers' receipts. The small businesses were only modestly profitable, and the tribal sales tax collected was used primarily to pay for trash pickup. The Tribe deposited the tribal sales tax revenue into a separate tribal bank account, not its general account. The Tribe distributed tribal sales tax revenue to its members only once; each member received about $100.

B. The Tribe's Casino

On April 7, 1989, the Tribe entered into a contract with Tamiami Development Corp. (TDC) to construct, manage, and operate a Class II gaming

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facility for the Tribe called Miccosukee Indian Bingo and Gaming (Casino). The agreement, which was later assigned to Tamiami Partners, Ltd. (TLP), was approved by the DOI. TDC built the Casino on land it purchased outside but adjacent to the Tribe's reservation land. The purchased land was placed into trust for the Tribe. The Tribe has never allotted any of its lands to tribal members.

The Tribe has conducted gaming activities at the Casino since September 15, 1990. The General Council created the Miccosukee Tribal Gaming Authority on August 9, 1991. The Tribe's relationship with TLP ended amid dispute and litigation, and the Tribe has operated the Casino under the supervision of the Miccosukee Tribal Gaming Authority since October 13, 1993. It now owns and controls the Casino.

After receiving land and cash as part of a 1996 settlement with the State of Florida, the Tribe built a parking lot on a six-acre portion contiguous to the land on which the Casino is located. The parking lot is free for patrons of the Casino. The Tribe also owns and operates several enterprises related to the Casino, including a hotel, a concert hall, a food court, a restaurant, and a gift shop. The Casino and its related enterprises operate on a fiscal year ending on June 30 of each year.

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C. Taxation of the Casino

The Tribe agreed to waive taxes on the Casino's gross revenue until TLP recouped its investment, and the Tribe imposed no taxes on the Casino from its opening in 1990 until 1995. Effective January 1, 1995, the General Council imposed a 6.5% gross receipts tax on any amount received by the Casino, including wagers, admission fees, and the sales revenue of the Casino's related enterprises. The gross receipts tax is treated as an above-the-line expense of the Casino and its related enterprises. The Casino must estimate its gross receipts for each month on the last day of each month and pay the Tribe at least 90% of the tax on these gross receipts for that month using its estimate. The Casino then has 15 days after the end of the month to calculate the actual gross receipts and gross receipts tax for that month; and if the actual gross receipts tax exceeds what the Casino previously paid, it must pay that excess. The Casino receives a credit against future gross receipts tax if its estimate is greater than the actual gross receipts tax.

On February 27, 1995, after operations of the Casino were under the Tribe's control, Mr. Cypress directed the Tribe's finance director, Mike Hernandez, to open a checking account, called the nontaxable distribution revenue (NTDR) account, into which the Tribe would deposit the gross receipts tax revenue. Mr.

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Hernandez opened the NTDR account shortly thereafter, and the Tribe has deposited the gross receipts tax revenue into that account ever since. Most of the funds in the NTDR account came from the Casino although revenue from the Tribe's small businesses and land leases and easements was deposited there as well. What remained of the Casino's profits--after paying the gross receipts tax and other expenses--was deposited into the Tribe's general account.

D. Distributions

The Tribe has made quarterly per capita distributions since at least 1989. Until 1995 the Tribe distributed funds to its members from its general account. The largest sources of this revenue were the Tribe's small businesses, land leases for cattle grazing, hunting camps, pipelines, and cell towers. Distributions made before the opening of the Casino were around $100 per member per quarter. The distributions grew considerably with the Casino's success.

The Tribe has made quarterly distributions to its members from the NTDR account since it was opened in 1995. The date of the quarterly distributions and the number of enrolled members is set at General Council meetings. Only enrolled members of the Tribe can participate in General Council meetings and receive distributions. One must have at least one Miccosukee parent to be an enrolled member in the Tribe. The amount of the distributions each quarter is determined

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by dividing the gross receipts tax revenue for that quarter by the number of enrolled members. Distributions to minor children generally go to their tribal member mother because the Tribe is matrilineal--membership in a clan within the Tribe is determined by a tribal member's mother--and the mother is generally the head of the household. The father generally receives only his distribution. The Tribe may deduct certain amounts from a member's...