Uniband, Inc. v. Comm'r

• Decision Date: 22 May 2013
• Docket Number: Docket No. 4718-06,140 T.C. No. 13
• Parties: UNIBAND, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

UNIBAND, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

140 T.C. No. 13

Docket No. 4718-06

UNITED STATES TAX COURT

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 contends 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 corporation, 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 filing of a consolidated return, and P and C alone did not constitute an affiliated group.

Held, further, the Indian employment 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

TMBCI and its corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Uniband, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

TMMC.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

The section 17 corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

The tax returns.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Indian employment credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

OPINION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

I. Federal income tax exemption issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

A. Indian tribes are not subject to Federal income tax.............. 19

1. TMBCI has no inherent immunity from Federal taxes...... 19

2. No treaty exempts TMBCI from Federal income tax....... 21

a. An exemption must be "definitely expressed"....... 21

b. The cited treaties do not express an income tax exemption................................... 22

3. The Code does not impose income tax liability on TMBCI.. 24

B. Uniband does not share TMBCI's "exemption" from Federal income tax.................................. 26

1. Apart from its association with TMBCI, Uniband is taxable......................................... 26

2. As a general rule, corporations are distinct from their owners, for tax purposes......................... 27

3. Uniband is not an "integral part" of TMBCI............. 28

a. Authorities addressing integral parts of States...... 29

b. Sovereign immunity........................... 32

(1) Analysis of sovereign immunity............ 33

(a) Arm of the tribe.................... 34

(b) Tribal establishment................ 36

(c) Other criteria...................... 38

(2) Sovereign immunity does not necessarily confer "integral part" status................ 42

c. "Indian tribal organization"..................... 45

d. Similarity to section 17 corporations.............. 47

(1) The origin of section 17 corporations........ 49

(2) Characteristics of section 17 corporations. ... 50(3) Taxation of section 17 corporations......... 52

(4) Uniband's differences from a section 17 corporation............................. 54

II. Consolidated return issue...................................... 55

A. Uniband was not part of an affiliated group................... 56

1. Body politic...................................... 57

2. An entity taxed as a corporation....................... 58

B. The consolidated returns were not valid...................... 59

1. TMBCI did not make the consolidated returns............ 59

2. TMBCI did not consent to the consolidated returns........ 60

3. TMBCI did not report its items on the consolidated returns for 1996 or 1997............................. 62

III. Wage deduction reduction issue................................. 63

IV. Conclusion.................................................. 68

GUSTAFSON, Judge: In a notice of deficiency mailed to petitioner Uniband, Inc. ("Uniband"), pursuant to section 6212¹ 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 apetition 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 section 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 herein by this reference. At the timeUniband filed its petition, 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 Manufacturing 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 corporation" 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.

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 certificate 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 contained 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 relationship 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 ElectionofDirectors. 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 ExerciseofCorporatePower. The business affairs of the corporation shall be managed by the Board of Directors (hereinafter, the Board).

Section 4.2 Qualifications. Directors need not be residents of Delaware or shareholders of the corporation. They need have no other qualifications.

* * * * * * *

Section 16.1 WaiverofSovereignImmunity. The corporation

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