Ute Distribution Corp. v. US

• Decision Date: 27 July 1989
• Docket Number: Civ. No. 88-C-0023G.
• Citation: 721 F. Supp. 1202
• Parties: UTE DISTRIBUTION CORPORATION, a Utah corporation, Floyd and Helen Wilkerson, Henry Wopsock, Sam N. and Sandra K. Aloia, and Chris H. Denver, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Utah

721 F. Supp. 1202

UTE DISTRIBUTION CORPORATION, a Utah corporation, Floyd and Helen Wilkerson, Henry Wopsock, Sam N. and Sandra K. Aloia, and Chris H. Denver, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. No. 88-C-0023G.

United States District Court, D. Utah, C.D.

July 27, 1989.

Max D. Wheeler, Michael D. Blackburn and David Steffensen, Salt Lake City, Utah, for plaintiffs.

Kirk C. Lusty, Washington, D.C., for defendant.

MEMORANDUM DECISION AND ORDER

J. THOMAS GREENE, District Judge.

This matter came on regularly for trial before the court sitting without a jury on November 7 and 8, 1988. Max D. Wheeler, Michael D. Blackburn and David W. Steffensen represented the plaintiffs, and Kirk C. Lusty represented the defendant. The parties presented evidence and the court heard arguments of counsel. The court took the matter under advisement, but the parties were granted leave to file supplemental memoranda, with the understanding that upon filing thereof the case was to be submitted for decision by the court without further argument. Such further memorandums have been filed, and now being fully advised, the court enters its memorandum decision and order.

NATURE OF THE ACTION

This is an action instigated by the Ute Distribution Corporation (hereinafter "UDC") and four of its stockholders. Plaintiffs Helen Wilkerson and Sandra Aloia are original mixed-blood stockholders of UDC; Henry Wopsock is a full-blood Ute Indian and an original stockholder of UDC who elected to be terminated from the tribe pursuant to the Act. He also acquired five additional shares of UDC stock by inheritance; Chris Denver is a non-Indian who purchased three shares of UDC stock. These individual plaintiffs seek a refund of federal income taxes assessed against them on income distributions received from UDC for the tax year 1984. Plaintiff UDC seeks an order from this court which would require the IRS to refund monies assessed against UDC under 26 U.S.C. §§ 6652(a) and 6678(b)(1) for its failure to file Form 1099 in tax years 1984 and 1985. Plaintiff UDC also seeks a declaratory judgment that it has no obligation under 26 U.S.C. §§ 6041(a) and 6042(c) to file Form 1099 for payments to be made in the future.¹

I. FACTUAL BACKGROUND

A. Assets Not Susceptible to Equitable and Practicable Distribution under the Management of Ute Distribution Corporation (UDC)

During the 1950s federal Indian policy underwent significant reform when Congress passed legislation to reduce federal involvement in Indian affairs.² In this regard, in 1954, Congress passed the Ute Partition Act (hereinafter the "Act"), codified as amended at 25 U.S.C. §§ 677-677aa (1982).³ The purposes of the Act were (1) to partition and distribute the Ute Indian Tribal assets of the Uintah and Ouray Reservation in Utah between the mixed-blood and full-blood groups; (2) to terminate federal supervision of the mixed-blood members' property; and (3) to assist the full-blood members to prepare for termination of federal supervision over their property. Id. § 677. On August 27, 1961, federal supervisory relationship over the mixed-bloods was ended, and the Ute Indian Tribe consisted only of those classified as full-blood members.⁴ However, federal supervision over the mixed-blood members and their property was not terminated "as to their remaining interest in ... tribal assets not susceptible to equitable and practicable distribution." Id. § 677o(a).⁵ Those assets were to be managed jointly by the Tribal Business Committee on behalf of the full-bloods and the authorized representative of the mixed-blood group, and the proceeds therefrom were to be "divided between the full-blood and mixed-blood groups in direct proportion to the number of persons comprising the final membership roll of each group...." Id. § 677i.

A plan for the division and distribution of assets which were distributable i.e., real and personal property, was adopted by both groups and approved by the Secretary of Interior. Id. § 677l. UDC was to receive all income belonging to the mixed-bloods from all other assets not "susceptible to an equitable and practicable distribution," as well as all income from unadjudicated or unliquidated claims against the United States, and all income from oil, gas and mineral rights.⁶ As part of the distribution plan, each mixed-blood was to receive ten shares of stock which entitled the holder to vote for mixed-blood delegates and to share in the proceeds of the jointly managed assets. However, when a mixed-blood sold his or her shares that person no longer would have a voice in management of the undivided assets or any rights therein.⁷

B. Taxation of UDC Distributions Which Were Derived From Tribal Assets Not Susceptible to Equitable and Practicable Distribution

Department of Interior policy over the years has been to regard UDC distributions as tax-exempt.⁸ The Internal Revenue Service has asserted a different position, but none of the plaintiffs or persons similarly situated have ever paid taxes on their UDC distributions, except under protest in connection with this current litigation. In the fall of 1982, Mr. Juan Bailli, an IRS field agent, asserted for the first time the probable taxable status of UDC distributions in the hands of stockholders and that UDC might have to file informational returns. This position was later formalized in an opinion letter dated March 3, 1983, by Randal G. Durfee, an IRS attorney who was assigned to investigate the tax consequences surrounding UDC distributions. In that opinion letter, Mr. Durfee determined:

There is no basis for distinguishing distributable and nondistributable assets or property for the purposes of this exemption and that it was the intent of Congress in terminating federal supervision over the mixed-blood trust assets to treat the mixed-bloods as non-Indians. Therefore, we believe that any distribution made to a mixed-blood after August 27, 1961 was and is subject to income tax.⁹

C. Filing of Tax Returns or Forms by UDC

Agent Durfee also held in his written opinion that UDC was required to file 1099 returns under Treasury Regulation § 1.6041-1(b). During cross examination at trial, however, Mr. Durfee admitted that UDC did not qualify under any of the enumerated provisions of that regulation, nor was it a corporation engaged in the pursuit of gain or profit.¹⁰ Further, when Mr. Durfee was presented with a "1099 DIV" form he agreed that UDC distributions could not properly be classified as "dividends" nor could its distributions accurately be recorded on any portion of the "1099 MIS" form.¹¹ Mr. Durfee agreed that UDC is a totally unique corporation unlike any in the United States.¹²

UDC advisors met several times with the IRS, culminating in a meeting on June 21, 1984 with John Oys, then Acting District Director for the IRS, who told UDC advisors that the IRS would consider dropping further attempts to assess taxes on UDC distributions. However, in August 1986, the IRS began audits of UDC and its stockholders.

II. ANALYSIS

A. Taxation of Distributions by UDC

The Ute Partition Act governs the taxable status of distributions by UDC. Section 677p of the Act provides:

No distribution of the assets made under the provisions of this subchapter shall be subject to any Federal or State income tax: Provided; That so much of any cash distribution made under this subchapter as consists of a share of any interest earned on funds deposited in the Treasury of the United States shall not by virtue of this subchapter be exempt from individual income tax in the hands of the recipients for the year in which paid. Property distributed to the mixed-blood group pursuant to the terms of this subchapter shall be exempt from property taxes for a period of seven years from August 27, 1954, unless the original distributee parts with title thereto, either by deed, descent, succession, foreclosure of mortgage, sheriff's sale or other conveyance: Provided; That the mortgage, hypothecation, granting of right-of-way, or other similar encumbrance of said property shall not be construed as a conveyance subjecting said property to taxation under the provisions of this section. After seven years from August 27, 1954, all property distributed to the mixed-blood members of the tribe under the provisions of this subchapter and all income derived therefrom by the individual, corporation, or other legal entity, shall be subject to the same taxes, State and Federal, as in the case of non-Indians; except that any corporation organized by the mixed-blood members for the purpose of aiding in the joint management with the tribe and in the distribution of unadjudicated or unliquidated claims against the United States, all gas, oil, and mineral rights of every kind, and all other assets not susceptible to equitable and practicable distribution shall not be subject to corporate income taxes.

(Emphasis added.)

Plaintiffs contend that the language of section 677p grants any UDC stockholder, whether a full-blood, mixed-blood or non-Indian, a complete tax exemption on distributions of income generated by undivided tribal assets not susceptible to equitable and practicable distribution, which assets continue to be held in trust by the United States government.¹³ Plaintiffs urge that only property which is actually distributed by transfer of title to the mixed-bloods, and the income directly derived from such property, is susceptible to taxation. The express language of section 677p provides for an exemption from property taxes on assets distributed by transfer of title during the period 1954-1961. Plaintiffs admit that the said property tax exemption does not apply to property distributed by passage of title after 1961. However, plaintiffs submit that the general exemption granted by the statute in the first sentence of section 677p is not modified or removed by any subsequent provision of section 677p as it relates to income distributions derived from...