1 5 2 T.C. No . 1 3

UNITED STATES TAX COURT

J AM ES CLAY AND AUDREY OSCEOLA, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 1 3 1 0 4 -1 1 , 7 8 70 -1 3
. Fi l edAp ri l 2 4 , 2 0 1 9
.

In th es e co ns o l i dat edcas es Ps are m em b ers o f a Nat i ve Am eri can tri be. Du ri n g th e y ears ati s s u e t h e t ri b e o p erat ed a cas i n o o n tri b al l an d , o wn edco m m u n al l y b y al l m em

b ers . Th e t ri b e m ad e reg u lar d i s tri b ut i o n s fro m cas i n o rev enu e t o each m em b er. Ps recei v edth es e d i st ri b u t i o n s an dd i dn o trep ortth em as i n co m e. R d et erm i nedthatth e d i st ri b u t i o n s are t ax ab l e t o Ps an d , th erefo re, Ps h adu n rep o rt edt ax ab l e i nco m e i n th e am o u n ts o f t h e d i s tri bu t i on s . R al s o d et erm i n ed th at Ps are l i ab l e fo r I.R.C. s ec. 6 6 6 2 (a) accu racy -rel at edp en al ti es . Hel d : Th e d is tri b u t i o n s t o Ps fro m cas in o rev en u e co n s ti tu t ed u n rep o rt edt ax ab l e i n co m e t o Ps
. Hel d , fu rt h er, fo r p u rp o s es o f I.R.C. s ec. 6 7 5 1 (b ), the Rev en ue Ag en tRep o rt(RAR) an dth e 3 0 -d ay l et t er, t o wh i ch th e (RAR) was at t ach ed , co n s t i tu t e t he i n i t i al d et erm i n at i o n t o as s es s p en al t i es .- 2
- Hel d , fu rt h er, R m

u s ts h o w th atwri tt en s up erv i s o ry ap p ro v al fo r p en al t i es was o bt ai n edb efo re t h e fi rs t fo rm al co m m u n i cat i on t o th e t ax p ay er o f the i n i t i al d et erm i nat i o n t o as s es s p en al t ies
. Hel d , fu rt h er, t h e 3 0 -d ay

l et t er was th e fi rs t fo rm al co m m u n i cat io n t o t h e t ax p ay er o f t h e i ni t i al d et erm i n at io n t o as ses s p en al t i es . Hel d , fu rt h er, R d i dn o to b t ai n wri t t en s up erv i s o ry ap pro v al b efo re th e fi rs t fo rm al co m m u n icat io n o f th e i n i t i al d et erm i nat i o n t o as s es s p en al t i es an dd i dn o tm eeth is b urd en o f p ro du ct io n fo r p en al t i es u nd er I.R.C. s ec. 7 4 9 1 (c).

Ro b ertO. Sau n o o k e, fo r p et i t i o n ers . Sarah R. Bo l en , M ari s s a R. Len i u s , an dLau ra A. Pri ce, fo r res po n d en t
.
PUGH, Ju d g e: In n o t i ces o f d efi ci en cy d at ed M arch 4 , 2 0 11 , an d J an u ary 1 0 , 2 0 1 3 , res p o n d en td et erm i n ed th e fo ll o wi n g d efi ci en ci es an dp en al t i es : 1

1 Un l es s o th erwi s e i n d i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de o f 1 98 6 , as am en d edan di n effect fo r th e y ears i n i s s u e. Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Al l m o net ary am ou n t s are ro u n dedt o t h e n eares td o l l ar.- 3
-

Year Defi ci en cy Pen al ty s ec. 6 66 2 (a) 2 0 0 4 $ 1 9 2 ,2 1 5 $ 38 ,4 4 3 2 0 0 5 3 1 0 ,1 7 1 6 2 ,0 3 4 2 0 0 6 3 8 9 ,6 1 3 7 7 ,9 2 3 Aft er co n ces s i o ns , th e i s s u es fo r d eci s i o n are wh et h er q u art erl y d i s tri b ut i o n s , Ch ri s t m as b o n u s es , an d a m i scel l an eo u s p aym en t t o p et i t i o n ers are i n co m e u n d er
s ect i on 6 1 fo r t ax y ears 2 0 0 4 th ro u g h 2 0 0 6 an dwh ether p et i t io n ers are l i ab l e fo r
accu racy -rel at edp en al ti es u n d er s ect i o n 6 6 6 2(a) fo r t ax y ears 2 0 0 4 an d2 0 0 5
. Th es e co ns o li d at edcas es are l eadcas es fo r a l arg er g ro up al l wi th th e co m m o n l eg al i ss u e o f t he t ax treat m en to f t h e d i s tri b u t i o n s an dCh ri s t m as b o n u s es (co l l ect i v el y , d i s tri b u t io n s ). 2 FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at ed fact s are i n co rp o rat edi n o u r fi nd i n g s b y th i s referen ce. Pet i t i o n ers J am es Cl ay
an d Au drey

Os ceo l a were res i d en t s o f Fl ori d a wh en th ey t i m el y fi l edthei r p et i t i o n s .

2 Si x t een rel at edcas es are b o u n d b y th e o u t co m e o f t h es e cas es wi th res p ect t o the t ax ab i l it y

o f th e d is tri b u ti o n s . Th o s e cas es h av e b een d o ck et edu nd er t h es e n u m b ers : 1 5 1 57 -1 0 , 1 1 7 2 9-1 1 , 1 1 7 5 0 -1 1 , 1 3 1 0 5 -1 1 , 2 61 9 6 -1 1, 2 8 0 5 -1 2 , 2 0 0 3 8
- 1 2 , 3 1 5 7 -1 3 , 8 0 7 5 -1 3 , 2 0 28 7 -1 3 , 2 2 9 7 6 -1 3 , 2 5 4 7 6 -1 3, 2 5 8 1 5 -1 3 , 2 6 5 1 8 -1 3 , 2 6 7 4 8 -1 3 , an d2 7 7 3 4 -1 3.- 4
-

I. Th e M i cco s uk ee Tri b e o f In d i an s o f Fl o ri d a Th e M icco s u k ee Tri b e o f In d i an s o f Fl o ri d a (Tri b e) i s a fed eral l y
reco g n izedtri b e o f In di an s . Th e Tri b e’ s m em b ers rat i fi edan dad op t edi t s
co n st i tu t io n o n Decem

b er 1 7 , 1 9 6 1 , an di twas ap p ro v ed b y th e Dep art m en to f t h e In t eri o r (DOI) o n J anu ary 1 1 , 1 9 6 2 . Th e co n st i tu t i o n v es t s p o wer an d au th o ri ty i n th e M i cco s u kee Gen eral Co u n ci l (Gen eral Co u n ci l ), wh i ch i n cl u d es al l en ro l l ed tri b al m em

b ers wh o are at l eas t 1 8 y ears o f ag e. Th e Gen eral Co u n ci l h as fo u r

“ Reg u lar Gen eral Co u n ci l M eet i n g s ” each y ear o n th e fi rs tSatu rd ay o f Feb ru ary , J u n e, Au g u s t , an dNo v em b er. M eet i n g s o f t he Gen eral Co u nci l o th er t h an Reg u l ar Gen eral Co u n ci l M eet i n g s are cal l ed“ Sp eci al Gen eral Co u n ci l M eet i n g s ”. M eet i n g s o f t h e Gen eral Co u n ci l are reco rd ed , tran s cri b ed , an dap p ro v ed b y th e Gen eral Co u n ci l atth e n ex t m eet i ng . Th e Bu s i nes s Co u n ci l co n t ro l s th e d ay -t o -d ay o p erat i on s o f t h e Tri b e,
s ub jectt o t h e Gen eral Co u nci l ’ s ap p ro v al . Th e Bu s i n es s Co u n ci l h as fi v e
m em b ers , each el ect edt o a fo ur-y ear t erm b y th e Gen eral Co u n ci l : the ch ai rm an , th e as s i s t an tch ai rm an , the s ecret ary , th e t reas urer, an dth e l awm ak er. Th e Bu s i nes s Co u n ci l m eet s reg u l arl y , an d th e ch ai rm an o n l y v o t es i n t h e cas e o f a t i e. Bi l l y Cy p res s serv ed as ch ai rm an fro m 1 9 8 7 th ro u g h 2 0 09 an dwas el ect ed ch ai rm an ag ai n i n 2 0 1 6. As a fu n ct i o n o f h i s p o si t io n as ch ai rm an o f t h e Tri b e,- 5
-

M r. Cy p res s al s o act edas th e Bu reau o f In d ian Affai rs (BIA) s uperi n t en d en to f t h e Tri b e. Th e Tri b e’ s p ri m ary o p erat i ng b an kacco u n ti s i t s g en eral acco u n t . Al l
rev en u es n o t s p eci fi cal l y al l ocat edt o an o th er t ri b al acco u ntare d ep o s i t edi n t o th i s
acco u n t , an dth e Tri b e p ay s g en eral o perat i n g ex p en s es an dcap i t al i m p ro v em en t
co s t s , am o n g o th er ex p en s es , fro m i t
. A. Tri b al Sal es Tax Th e Gen eral Co u nci l en act eda t ri b al s al es t ax o n No vem b er 7 , 1 9 8 4 . Itwas ap p ro v edb y

th e DOI o n Decem

b er 1 3 , 1 9 8 4
. Itap p l i edt o s al es o f g oo d s an d
s erv i ces o r l eas e ren t al s b y an y b us i nes s o p erat i n g o n th e Tri b e’ s res erv at i on ; th es e i ncl u d e a g as s t at i o n , a g i fts h o p , a res t au ran t, a t o u ri s t v i l l ag e, an dan ai r b o att o u r b u s in es s . Th e t ax was p as s edo n t o cu st o m ers an d was refl ect edo n th e
cu s t o m ers ’ recei p t s . Th e s m al l b u si n es s es were o nl y m o d es t l y p ro fi t ab l e, an dth e tri b al s al es t ax co l l ect edwas u sedp ri m ari l y t o p ay fo r t ras h p i ckup . Th e Tri b e d ep os i t edth e t ri b al s al es t ax rev en u e i n t o a s ep arat e t ri b al b an kacco u n t , n o ti t s g en eral acco u n t . Th e Tri be d i st ri b u t edtri b al s al es t ax rev en u e t o i t s m em b ers o n l y
o n ce; each m em

ber recei vedab o u t$ 1 0 0
. B. Th e Tri be’ s Cas i no OnAp ri l 7 , 1 9 8 9 , th e Tri b e en t eredi n t o a co n tract wi th Tam i am i Dev el o pm en tCo rp . (TDC) t o co n s tru ct , m an ag e, an do p erat e a Cl as s II g am i n g- 6
-

faci li ty fo r t h e Tri b e cal l ed M i cco s u k ee In d i an Bi ng o an dGam i n g (Cas i n o ). Th e ag reem en t , wh i ch was l at er as s i g n edt o Tam iam i Part n ers , Lt d . (TLP), was ap p ro v edb y

th e DOI. TDC b u i l tth e Cas i n o o n l an di t p u rch as ed o ut s i d e b u t ad jacen tt o th e Tri b e’ s res erv at i o n l an d . Th e p u rch as edl an dwas p laced i nt o tru s t fo r t h e Tri b e. Th e Tri be h as n ev er al l ot t edan y o f i t s l an d s t o tri bal m em bers
. Th e Tri b e h as co n du ct edg am in g act i v it i es atth e Cas in o s i n ce Sep tem b er 1 5 , 1 9 9 0 . Th e Gen eral Co u n ci l creat edth e M i cco s u k ee Tri b al Gam i n g Au th o ri ty
o n Au g u s t9 , 1 9 91 . Th e Tri b e’ s rel at i o n s h i p wi th TLP en dedam i dd i s p ut e an d l i ti g at i o n , an dth e Tri b e h as o p erat edthe Cas i n o u n d er t h e s up erv i s io n o f th e M i cco s u k ee Tri b al Gam i n g Au th o ri ty s i n ce Oct o b er 1 3 , 1 99 3
. Itn o w o wn s an d
co n tro l s th e Cas in o . Aft er recei v i ng l an dan dcas h as p arto f a 1 9 9 6 s et tl em en t wi th the St at e o f Fl o ri da, t h e Tri b e b u i l ta p ark in g l o to n a s i x-acre p o rt i o n co n ti g u ou s t o th e l an d
o n wh i ch the Cas i n o i s l ocat ed
. Th e p ark i ng l o t i s free fo r p at ro n s o f t he Cas i n o . Th e Tri b e al s o o wn s an do p erat es s ev eral en t erp ri s es rel at edt o t h e Cas in o , i n cl u d i n g a h ot el , a co n cert h al l , a fo o dco u rt , a res t au ran t , an da g i fts h o p . Th e Cas in o an di t s rel at eden t erp ri s es o perat e o n a fi s cal y ear en d i ng o n J u ne 3 0 o f each y ear.- 7
-

C. Tax at io n o f th e Cas i no Th e Tri b e ag reed t o wai ve t ax es o n the Cas i n o ’ s g ro s s rev en u e u n t i l TLP
reco up edi t s i n v es t m en t , an d th e Tri b e i m p o s edn o t ax es o n th e Cas i n o fro m i t s
o p en in g i n 1 9 9 0 u n t i l 1 9 9 5 . Effect i v e J an uary1 , 1 99 5 , th e Gen eral Co u n ci l i m p o s eda 6 .5 % g ro s s recei p t s t ax o n an y am o u n trecei v edb y the Cas i n o, i n cl u d i n g wag ers , ad m is s i o n fees , an dth e s al es rev en u e o f t h e Cas i n o ’ s rel at ed
en t erp ri ses . Th e g ro s s recei p t s t ax i s treat edas an ab o v e-t h e-l i n e ex p en s e o f t h e Cas in o an di t s rel at eden t erp ri s es . Th e Cas i n o m u s tes t i m at e i ts g ro s s recei p t s fo r each m o n th o n th e l as td ay o f each m on th an d p ay

th e Tri b e atl eas t9 0 % o f t h e t ax
o n th es e g ro s s recei p ts fo r thatm o n th u s i n g i t s es t i m at e. Th e Cas in o th enh as 1 5 d ay s aft er th e en do f t h e m o n th t o cal cu l at e t he act u al g ro s s recei p t s an d g ro s s recei p t s t ax fo r t h atm o n th ; an di f t h e actu al g ro s s recei p t s t ax ex ceed s wh atth e Cas in o p rev io us l y

p ai d , i t m

u s tp ay th at ex ces s . Th e Cas i n o recei v es a cred i t ag ai n s tfu tu re g ro s s recei p t s t ax i f i t s es t i m at e i s g reat er t h an th e act u al g ro s s recei p t s t ax . OnFeb ru ary 2 7 , 1 9 9 5, aft er o p erat i o n s o f t he Cas i n o were u nd er t h e Tri b e’ s
co n tro l , M r. Cy

p res s d irect edthe Tri b e’ s fi n an ce d i rect o r, M i k e Hern an d ez, t o
o p en a ch eck i n g acco u n t, cal l edth e n o n tax ab l e d i s tri b u t i o n rev en ue (NTDR)
acco u n t , i n t o wh i ch th e Tri be wo u l dd ep o s i tth e g ro s s recei pt s t ax rev en u e. M r.- 8
-

Hern an dez o p en ed th e NTDR acco u n ts h o rt l y th ereaft er, an dth e Tri b e h as d ep os i t edth e g ro s s recei p t s t ax rev en u e i n to th atacco u n tev er s in ce. M o sto f t h e fu n d s i n th e NTDR acco u n t cam e fro m th e Cas in o al th o u g h rev en u e fro m th e Tri b e’ s s m al l b u s i n es s es an d l an dl eas es an deas em en ts was d ep o s i t edth ere as wel l . Wh atrem ai n edo f t h e Cas i n o ’ s p ro fi t s --aft er p ay i n g th e g ro s s recei p t s t ax
an d o ther ex p en ses --was d ep o s i t edi n t o th e Tri b e’ s g en eral acco u nt
. D. Di s tri bu t i o n s Th e Tri b e h as m ad e qu art erl y p er cap it a d i s tri b ut i o ns s i n ce atl eas t1 9 8 9
. Un t il 1 9 9 5 th e Tri b e d is tri b u tedfu n d s t o i t s m em b ers fro m i t s g en eral acco u n t
. Th e l arg es ts o urces o f t h i s rev en u e were t h e Tri b e’ s s m al l b u s i n es s es , l an d l eas es fo r cat t l e g razi n g, h u n t i n g cam p s , p i p el in es , an dcel l t o wers . Di st ri b u t i o n s m ad e b efo re t h e o p en i n g o f t h e Cas i n o were aro u n d$ 10 0 p er m em b er p er qu art er. Th e d i s tri b u t i o n s g rew co n si d erab l y wi th th e Cas i n o’ s s u cces s . Th e Tri b e h as m ad e qu art erl y d i st ri bu t i o n s t o i t s m em

b ers fro m th e NTDR
acco u n t si n ce i t was o p en edi n 1 9 95 . Th e d at e o f th e quart erl y d i s tri b u t io n s an d th e n u m b er o f en ro l l edm em

b ers i s s etatGen eral Co u n ci l m eet i n g s . On l y en ro l l ed
m em b ers o f t he Tri b e can p art i ci p at e i n Gen eral Co u n ci l m eet i n g s an drecei v e d i s tri b u t i o n s . On e m

u s th av e atl eas to n e M i cco s uk ee p aren tt o b e anen ro l l ed
m em b er i n th e Tri b e. Th e am o u n t o f t h e d i st ri b u t i o n s each qu art er i s d et erm i n ed- 9
-

b y d i v i d i n g the g ro s s recei p t s t ax rev en u e fo r t h at qu art er b y th e n u m b er o f
en ro l l edm em

b ers . Di s tri bu t i o n s t o m i no r ch i l dren g en eral ly g o t o th ei r t ri b al
m em b er m o th er b ecau s e t he Tri b e i s m at ri li n eal --m em b ers h ip i n a cl anwi th i n th e Tri b e i s d et erm in edb y

a t ri bal m em

ber’ s m o th er--an dth e m ot h er i s g en eral l y th e h ead of t h e h o us eh o l d . Th e fat h er g en eral l y recei ves o n l y

h i s d i s tri b u t i o n . Th e Tri b e m ay

d edu ctcert ai n am o un t s fro m a m em b er’ s qu art erl y d is tri bu t i o n up o n req u es to r i f t h e m em

b er p art i ci p at es i n o n e o f th e Tri be’ s l o an p ro g ram s . Th e qu art erl y d i s tri b u t i o n s t o a t ri b al m em b er fo r t h e y ears ati s s ue--2 0 0 4, 2 0 0 5 , an d 2 0 0 6 --were as fo l lo ws : Qu art er 20 0 4 2 00 5 2 00 6 Fi rs t $2 2 ,0 0 0 $ 2 7,5 0 0 $ 3 6,0 0 0 Seco n d 2 3 ,0 0 0 3 2 ,0 0 0 4 0 ,0 0 0 Th i rd 2 6 ,9 0 0 3 3 ,5 0 0 4 0 ,7 0 0 Fo u rt h 2 7 ,6 0 0 3 3 ,5 0 0 4 1 ,7 0 0 M em b ers co u ld cas h thei r d i s tri b u ti o n ch eck s at an y b an ko r atth e t ri b al ad m i n is trat i o n b u il d i n g fo r a 1 % fee. Atth e en co u rag em en t o f M r. Cy p res s , m os t
m em b ers ch o s e t o cas h th ei r qu art erl y d is tri b u t i o n ch eck s atth e t ri b al ad m i n is trat i o n b u il d i n g . Th e Tri be al so o p en ed i n v es t m en t acco un t s fo r i ts
m em b ers wi th Sm i th Barn ey . Th es e acco u n t s al l owedm em b ers t o av o i d cert ai n- 1 0 -

req u i rem en t s i m

p o s edo n fi n an ci al i n s ti tu t i on s wh i l e i n v es t i n g th ei r o th erwi s e i d l e
cas h an dm ad e i t eas i er t o m ak e p aym en t s o n l arg e p u rch as es , s u ch as cars . No t
ev ery m em b er ch o s e t o o p en a Sm i th Barn ey acco u nt . Th o s e wh o d i dco u l d req u es tt o h av e a p o rt i o n o f t h ei r qu art erl y d i s tri b u t i on s d ep o s i t edi n t o thei r Sm i t h Barn ey acco u nt s. Th e Tri b e al s o h as p ai d i t s m em bers Ch ri s t m as b o n u ses s i n ce atl eas t2 0 0 2
. Ch ri s t m as b o n u s es were p ai dfro m th e Tri b e’ s g en eral acco u n tth ro ug h 2 0 05 . Th e Tri b e b eg an p ay i n g Ch ri s tm as b o n u ses fro m th e NTDR acco u n ti n 2 00 6 b ecau s e i t
was co n cern edth ati two u l d h av e t o i s s u e t ax fo rm s fo r d i st ri b u t i o n s t o m em b ers fro m th e g en eral acco u n t . Th e g ro s s recei p t s t ax rat e was i n creas edt o 8 % i n 2 0 0 6 t o fu n dCh ri s t m as b o n u s es . Th e Ch ri s t m as b o n u s es fo r 2 0 0 4, 2 0 05 , an d2 0 0 6 were $ 5 ,5 0 0 , $ 6 ,0 0 0, an d$ 7,0 0 0 , res p ect i v el y . E. Th e Tri b e’ s Tax Po s i t i o n Th e Tri b e h as m ai n t ai n eds i n ce 1 9 9 5 th ati t s d i st ri b u t i o n s are n ott ax ab l e t o
m em b ers an dn eedn otb e rep o rt edo n th ei r i n co m e t ax retu rn s . Ina m em o ran du m d at edJ an u ary

2 4 , 1 9 95 , M r. Cy

p res s ad v i s edM r. Hern an d ez t h atth e tri b al at t o rn ey h as as s u red h i m

th atth e d i s tri b u t i o n s s h o ul d n otb e rep o rt edo n m em b ers ’ t ax return s . M r. Cy

p res s co n t i n u edth at“ I ex p ecty ou , an d y o u r s t aff, t o p rep are t ax return s fo r t h e m em

b ers o f t h e Tri b e i n acco rd an ce wi th , an drel y in g o n , o u r- 1 1 -

at t o rn ey ’ s o p in i o n .” Fro m 1 9 9 5 th ro u g h 2 0 0 7 M r. Cy p res s en co u rag ed tri b al
m em b ers t o cas h th ei r qu art erl y d i s tri bu t io n ch eck s atth e t ri b al ad m i n i s trat i o n
o ffi ce an d t o o m i tqu art erl y d i s tri b u ti o n s fro m

cred i tap p l i cat i o ns t o av o idi n v i ti n g
s cru t in y fro m th e In t ern al Rev enu e Serv i ce (IRS). He t o ldth e Gen eral Co u n ci l th atth e tri bal ad m i n i s trat i o n o ffi ce d en i es kn owl ed g e o f t h e qu art erl y d i s tri b u t i o n s wh en l en d ers cal l t o v eri fy th em . Duri n g a Sp eci al Gen eral Co un s el M eet i n g o n Feb ru ary 6 , 2 0 0 3 , M r. Cy

p res s was reco rd edi n m eet in g m i n ut es as s t at i n g th e fo l l o w i n g : Bu s i n es s Co u n ci l h as rep eat ed l y as k edth at th ey

d o n o tcl ai m

th e NTDR m o n ey

as i n co m e o n th e cred itap p l i cat io n s b u ttri bal m em b ers co n t in u e t o d o t h i s. By

d o in g thi s , tri b al m em

b ers ru n th e ri s ko f ev en tu al l y

h av i n g IRS p ro b l em s . Th ey (IRS) wi l l s ee t h e m o n ey rep o rt edo n thei r cred itap p li cat i on s an ds t artt o t ax them o n i t . Th e tri b e h as th i s m o n ey

cat eg o ri zedas a l icen s e t ax i tem i n o rd er t o av o i d IRS p ro bl em s fo r tri b al m em b ers . Bu twi th th e act i o ns o f t ri b al m em b ers , th i s i s b ei n g co m

p ro m is ed
. Th e m i n u t es g o o n t o s t at e t h at Ch ai rm an Cy

p res s ex p l ai n edh ow t h e d i s tri bu t io n was s etup t o av o i d th e g o v ern m en t/ IRS t ax in g u s o n th e fu nd s . Ou r p l an s fo r t h e d i s tri b u t i on were s etup wh enwe s t art edth e g am i n g o p erat i o n . Th es e p l an s were s en tt o BIA fo r t h ei r rev i ew an dwere ap pro v edb y th e Dep art m en t o f In t eri o r. If t h es e m o n i es were cl as s ifi edas p er cap i t a p aym en tt o tri b al m em

b ers th en IRS co u l d t ax u s b u t we d o n o t cl as s i fy i t as s u ch . Bu tdu e t o t h e act io n s o f m ay b e t wo o r t h ree t ri b al m em b ers , al l tri b al m em

b ers co u l d b e affect ed
.- 1 2 -

Th e m i n u t es fo r t h i s m eet in g al s o reco rdth e fo l l o w i n g co m m en t s b y an o th er t ri b al
o ffi cer, As s i s t an tCh ai rm anJ as p er Nel s o n : “ When tri b al m em b ers are as k edt o
n o td i v u l g e NTDR m o n ey , i ti s fo r t h ei r o wn g o o d
. He s t at edb y d o i n g th is , i twi l l g i v e IRS t h e o p po rtu ni ty to fi n do u tab o u tth e m o n ey an dt ax u s o n i t . Th i s wo u l d jeo p ard i ze t h e l i v el ih o o do f t ri b al m em b ers wh o d ep en d o n th i s m o n ey .” M i n ut es o f a Sp eci al Gen eral Co u n ci l M eet in g o n Feb ru ary 1 0 , 2 0 0 5 , reco rd M r. Cy p res s s t at i n g th at th ere are m em

b ers wh o s h are i n fo rm at io n wi th n on -In d ian s ab o u tth e m o n ey they recei v e fro m

th e Tri b e. Th e co n s equ en ces th es e m em b ers are faced wi th as wel l as p u t t i n g t h e res to f t h e Tri b e i n th i s p red icam en t , th ey

can n o tb l am e an y o n e b u tth em s el v es as thes e are th e reas o n wh y

we rep eat ed l y

s tres s edt o tri b al m em

b ers t o k eep i n fo rm at i o n t o th em s el v es . In s ev eral Gen eral Co u nci l m eet i n gs i n 1 99 9 , 2 0 0 3, an d2 00 6 , M r. Cy p res s
an d th e Tri b e’ s l eg al co u n s el , Dex t er Leh t i n en , al s o d i s cu s sedth e t ax treat m en to f th e n ei g h b o ri n g Sem in o l e t ri b e’ s d i s tri b u t io n s . Th ey warn edth atth e Tri be wo u l d b e req u i redt o wi th h o l dt ax o n i t s d i s tri b u ti o n s , l i k e t h e Sem i n ol es , i f t ri b al
m em b ers d i dn o t fo l l o w thei r d i rect i o ns . Bu ti n o ne Gen eral Co u nci l m eet i n g i n 2 0 0 6 , M r. Cy

p res s an dM r. Leh t i n en d i s t i ng u is h ed th e Tri b e’ s d is tri b u t i o n s ch em e fro m th e Sem i n o l es ’ , ex p lai n i n g th atth e Sem i n o l es ’ d i s tri bu t i o n s were t ax ed- 1 3 -

b ecau s e th ey

were fro m

n etp ro fi t s wh i l e t h e Tri b e’ s d i s tri b u t i o ns were n o n t ax ab l e b ecau s e th ey

were fro m

th e g ro s s recei p ts t ax . Th e Tri b e req u es t eda l eg al o p i n i o n i n 2 0 03 fro m i t s o u ts i d e co u n s el , Wh i t e & Cas e, o n th e t ax ab i l i ty o f t h e Tri b e’ s d i s tri b u t i on s t o i t s m em bers an do n th e Tri b e’ s co m

p l ian ce wi th th e In d i an Gam i n g Reg u lat o ry Acto f 1 98 8 (IGRA), Pu b
. L. No . 1 0 0 -4 9 7, 1 02 St at . 2 4 67 (co di fi ed at2 5 U.S.C. s ecs . 2 7 0 1 -2 7 2 1 (2 0 1 2 )). Th i s o pi n i o n s t at ed th at th e d i s tri b u t i o n s are t ax ab l e t o t ri b al m em b ers . Th e Tri b e
o p en eda res erv e acco u n t ato r n ear t he co m m en cem en to f an IRS au di t o f t h e Tri b e an dth e Cas i n o aro u n d2 00 5 . Th i s res erv e acco u n twas m ean tt o p rep are fo r th e p o ss i b i l i ty th atth e Tri be wo u l db e req u iredt o m ak e a p aym en tt o the IRS as p arto f a s et t lem en to n b eh al f o f t h e Tri b e rel at i n g t o co m p li an ce wi th th e IGRA o r
m em b ers rel at in g t o t ax es o n d i s tri b u t i o n s. II. Pet i t i on ers ’ Di s tri b u t i o n s an dIn co m e Tax Retu rn s M s . Os ceo l a g rew up o n th e res erv at io n an dwen tt o el em en t ary s ch o o l th ere b u ts t o p p edat t en d i n g sch oo l aft er fi ft h g rad e. Sh e was em p l o y ed b y s ev eral b u s i n es s es aro u n dth e res erv at io n b uth adn o t b een em p l o y edfo r o v er 2 0 y ears as
o f t h e t i m e o f t ri al . M r. Cl ay g rew up i n a v i l l ag e o u t s i d e th e res erv at i o n . He
n ev er at t en d eds ch o o l an do n l y b ecam e an en ro l l ed m em b er o f t h e Tri b e i n 2 0 0 5- 1 4 -

t o s ecu re m ed i cal care fo r h i s m o th er. Pet i t i o n ers s p eakM i cco su k ee as th ei r p ri m ary l an g u ag e an dt es t i fi edattri al wi th t h e h el p o f an i n t erp ret er. Pet i t i o ners recei v edqu art erl y d i s tri bu t io n s fo r each o f t h e y ears ati s s u e d et erm i n edb y

the n u m b er o f en ro l l edm em

b ers i n th ei r fam i l y . M s . Os ceo l a recei v edh er d i s tri b ut i o n s as wel l as th o s e o f h er d ep en d en tch i l dren . Her n et d i s tri b u t i o n s aft er d educt i o n s fo r h o u s in g an d l oan rep aym en t --du ri n g th e y ears i n i s su e--were as fo l lo ws : Di s tri b u t i o n 2 0 0 4 2 00 5 2 00 6 Fi rs tqu art er $ 1 3 1 ,8 5 0 $ 1 2 8 ,4 0 0 $ 2 1 5 ,7 0 0 Seco n dqu art er 1 2 8 ,0 2 0 1 8 1 ,0 3 0 2 3 9 ,7 0 0 Th i rdqu art er 1 2 3 ,5 3 0 2 0 0 ,7 0 0 2 4 3 ,9 0 0 Fo u rt h qu art er 1 2 8 ,9 0 0 2 0 0 ,7 0 0 2 4 9 ,9 0 0 Ch ri s t m as b o n u s 2 7 ,5 0 0 3 6,0 0 0 4 2,0 0 0 M s . Os ceo l a cas hedh er d i s tri b u t i o n ch eck s atth e t ri b al ad m i n i s trat i o n o ffi ce du ri n g th e y ears i n i s s u e. Sh e d i dn o tg iv e each o f h er ch i l dren th ei r d i s tri bu t i o n s aft er co l l ect i n g th em ; rat h er, s h e k ep t them an ds p en tthem

o n fam i l y

ex p en s es as
s h e d et erm i n edn eces s ary . Inad d i t i o n t o th e d is tri bu t i o n s , M s . Os ceo l a recei v eda- 1 5 -

m i s cel l an eo u s p aym en tfro m th e Tri b e o f $ 1 ,2 9 5 i n 2 0 0 6. 3 Th e Tri b e m ad e t h i s p aym en t o u to f th e g en eral acco u n t. M r. Cl ay d id n o trecei v e d i s tri b u ti on s u n t i l h e b ecam e an en ro l l edm em b er
o f t h e Tri b e i n th e s eco n dqu art er o f 2 0 0 5 . M r. Cl ay recei v ed n etd i s tri b u ti o n s du ri n g th e y ears ati s su e i n th e fo l l o w i n g am o u nt s : Di s tri b u t i o n 2 0 0 5 2 00 6 Fi rs t qu art er --- $ 3 6,0 0 0 Seco n dqu art er $ 32 ,0 0 0 4 0 ,0 0 0 Th i rdqu art er 3 3 ,5 0 0 4 0 ,7 0 0 Fo u rt h quart er 3 3 ,5 0 0 4 1 ,7 0 0 Ch ri s t m as b o n u s 6 ,0 0 0 7 ,0 0 0 Pet i t i o ners were m arri eddu ri n g t h e y ears ati s s ue, an dth ey fi l eda jo i n t Fo rm 1 0 4 0 , U.S. In d i v i du al In co m e Tax Return , fo r each o f t h o s e y ears . Om ar Barrera, an acco u n tan ti n Gai n es v i l l e, Fl o ri d a, p rep aredp et i ti o n ers ’ Fo rm s 1 0 4 0 fo r t h e y ears i n i s su e. Pet it i o n ers rep o rt edfi v e o f t h ei r ch i l dren as d ep en d en t s fo r each o f t h e y ears in i s s ue fo r a t o t al o f s ev en ex em p t i o n s . No n e o f t h ei r d ep en d en t ch i l dren fi l edi n co m e t ax retu rn s fo r t h e y ears ati s s u e. Pet it i o n ers p ro v i d edM r.

3 As a res u l t o f an erro r, res p o n d en td et erm i n edth e d efi ci en cy fo r t ax y ear 2 0 0 6 aft er i n cl u d i n g a m i s cel l an eo u s p aym en to f $ 1 ,2 0 0 i n t h e n o ti ce o f d efi ci en cy rat h er t h ano n e o f $ 1 ,2 9 5. Res p o n d en tco n ced es th e $ 9 5 thatwas o m i t t edi n th e n o t i ce o f d efi ci en cy .- 1 6 -

Barrera wi th Fo rm s W -2 G, Cert ai n Gam b l i n g W i n n i n gs , fo r t he y ears i n i s s u e fo r p u rp os es o f p rep ari ng th ei r Fo rm s 1 0 4 0 an d rep o rt edg am i n g i n co m e an dl o s s es o n th ei r Fo rm

1 0 4 0 fo r each y ear. Ho wev er, p et i t i on ers d i dn o trep o rtth ei r qu art erl y d i s tri b u t i o n s o r Ch ri s t m as b o n us es o n th ei r Fo rm s 1 0 4 0 fo r t h e y ears i n i s s u e. Pet i t io n ers n ev er d is cl os edth ei r qu art erl y d i s tri b u t i o n s o r Ch ri s t m as b o n u s es t o M r. Barrera, an dh e n ev er ad v is edth em o n th e t ax ab i l i ty o f t h ei r d is tri b u t i o n s . III. IRS Au d i t o f Pet i t i o n ers ’ Retu rn s In 2 0 1 0 th e IRS au d i t edd o zen s o f retu rn s fi l edb y m em b ers o f t h e Tri b e wh o recei v edd i s tri bu t i o n s, i n ad d i t i o n t o p et i t i o n ers . 4 Ono r b efo re Au g u s t4 , 2 0 1 0 , Sup erv i s o ry

Rev en u e Ag en tAn i t a D. Gen try p rep ared a m em o ran du m reg ard i n g th e “ M icco s u k ee Pro ject ” g i vi n g p rel i m i n ary ap pro v al fo r accu racy rel at ed p en al t i es fo r s ub s t an t i al u n d ers t at em en ts o f i n co m e t ax i n cas es d ev el o p ed fo r m em b ers o f t h e Tri b e, t o b e p l aced b eh i n d p en al ty wo rk p ap ers i n each cas e fi le. OnSep t em

b er 1 3 , 2 0 1 0 , th e ag en t ex am i n i n g p et i t i o n ers ’ retu rn s s en tth em a
rev en u e ag en trep o rt(RAR), Fo rm 4 5 4 9-A, In co m e Tax Di s crep an cy Ad ju s t m en t s , co n tai n i n g p ro p o sed ad

ju s t m en t s fo r 2 00 4 an d2 00 5 , al o n g wi th Fo rm 8 7 2 , Co n s en tt o Ex t en dth e Ti m e t o As s es s Tax . Wh il e t h e reco rdd o es n o t i n cl u d e a

4 As we ex pl ai n i nfra Sect i o n IV, we are reo p en i n g the reco rd t o i n cl u d e cert ai n ex h i b i t s rel ev an tt o res p o n d en t ’ s p en al ty d et erm i n at i o n .- 1 7 -

fi nal co p y o f wh atwas s en tt o p et it i on ers (res po n d en ts t at es th at th e RAR i s i n cl u d edas p arto f th e n ot i ce o f d efi ci en cy ), th e ag en t ’ s n o t es i nd i cat e t h atth ere
was a “ 3 0-d ay

l et ter” g i v i ng p et i t i o n ers th e o p t i o n t o fi l e a p ro t es tan d req u es ta
co n feren ce b efo re th e IRS Offi ce o f Ap p eal s (Ap p eal s) wi th i n 3 0 d ay s . 5 OnOct o b er 1 8 , 2 01 0 , th e ag en ts en tth e cas e t o M s. Gen try fo r rev i ew. M s . Gen try s p en tb etween 5 an d1 5 m i n u t es rev i ewi n g th e cas e b efo re ap p ro v i n g th e p en al t i es th atd ay . A Ci vi l Pen al ty Ap p ro v al Fo rm d at edAu g u s t2 2 , 2 0 1 0 , an d b eari n g th e t y

p ewri t t eni n i t ial s “ AG” d at edOct o ber 1 8, 2 0 10 , i n d icat es th at

“ Sub s t an t i al Un ders t at em en t ” an d“ Oth er Accu racy Rel at ed ” p en al ti es were ap p ro v edfo r 2 0 04 an d2 0 05 . “ Neg l i g en ce” p en al ti es were n o t ap pro v edfo r t h o s e y ears . M s . Gen try bas edh er rev i ew o n an Au g u st9 , 2 0 1 0, m em o ran du m an d cal cu l at io n s p rep aredb y

th e ag en treco m

m en d i n g ap p l i cat i o n o f t he s i x -y ear
s t atu te o f l i m i tat i o n s u n der s ect i o n 6 5 0 1 (e) (b ecau se p et i ti o n ers o m it t edm o re t h an 2 5 % o f t h ei r i n co m e), an dp ho to co p i es o f d is tri b u t i o n ch eck s t o p et i ti o n ers . Res p o n d en ti s su eda n o t i ce o f d efi ci en cy t o p et i t i o n ers o n M arch 1 4 , 2 0 1 1 , d et erm i n i n g d efi ci en ci es an dp en al t i es fo r n eg l i g en ce an ds ub s t an t i al

5 Th e ex am i n i ng o ffi cer’ s act i v it y reco rden try fo r Oct o b er 1 8 , 2 0 1 0 , aft er th e ex p i rat i o n o f the 3 0-d ay p eri o d , s t at es : “ Prep aredcas e t o s en dt o rev i ew. Pri n t edwo rkp ap ers , u n ag reedrep o rtan d9 0 d ay 8 8 6 A”. An dth e en try

fo r M arch 1 1 , 2 0 1 1 , s t at es i n p art : “No p ro t es t . SND n eed s t o b e p rep aredfo r 2 0 04 an d 2 0 0 5 .”- 1 8 -

u n d ers t at em en to f t ax fo r t ax y ears 2 0 0 4 an d2 0 05 . Res p o n d en ti s s u eda s eco n d
n o t i ce o f d efi ci en cy

o n J an u ary

1 0 , 2 0 1 3 , d et erm i n i n g d efi ci en ci es an dp en al t i es fo r n eg l i g en ce an ds ub s tan t i al u n d ers t at em en tfo r t ax y ear 2 0 0 6
. OPINION I. Bu rd en o f Pro o f Ord i n ari l y , th e b u rd en o f p ro o f i n cas es b efo re t h e Co u rt i s o n th e t ax p ay er. Ru l e 1 4 2 (a)(1 ); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). Un d er s ect i o n 7 4 9 1 (a), i n cert ai n ci rcu m s tan ces th e b u rd en o f p ro o f m ay s h i ft fro m

th e t ax p ay er t o the Co m

m i s s io ner. Pet i t i o n ers h av e n o tcl ai m edo r s h o wnth atthey m eetth e
s p eci fi cat i on s o f s ect i o n 7 4 9 1(a) t o s h i ftthe b u rd en o f p ro o f t o res p on d en tas t o
an y rel ev an tfact u al i s s u e. II. Po s t tri al Bri efi n g Is s u es 6 A. Res p o nd en t ’ s M o t i o n To St ri k e Ru l e 5 2 p ro v i d es th atth e Co u rtcan s tri k e fro m an y b ri ef “ an y i n s uffi ci en t cl ai m o r d efen se o r an y

redu n d an t , i m

m at eri al , i m

pert i n en t , fri v ol ou s , o r
s can d al o u s m at t er.” Res p o n d en treq ues t s th atwe s tri ke fro m p et i ti o n ers ’

6 W e ad dres s each o f p et i t i o n ers ’ an dres p o n d en t’ s m o t i o n s t o reo p enth e reco rdwi th res p ectt o o ur d eci s i o n i n Graev v . Co m m i s s i o ner (Graev III), 1 4 9 T.C. 4 8 5 (2 0 1 7 ), s up pl em en t i n g an do verru li n g i n p artGraev v . Co m m i ss i o n er (Graev II), 1 4 7 T.C. 4 6 0 (2 0 16 ) i n fra Sect i o n IV.- 1 9 -

s i m u l t an eo u s rep l y b ri ef arg u m en t s rel at i ng t o : (1 ) t h e “ Gen eral W el fare Do ct ri n e” b ecau s e p et i t i o n ers co n ced edth i s i s s ue b efo re t ri al ; 7 (2 ) t h e Per Cap i t a Acto f 1 9 8 3, Pub
. L. No . 9 8 -6 4 , 9 7 St at
. 3 6 5 (co d i fi ed at2 5 U.S.C. s ecs . 1 1 7 a1 1 7 c (2 0 1 2 )) an d t h e In d i an Lan dCo n s o l i dat i o n Act , Pub. L. No
. 9 7 -4 5 9 , s ec. 2 1 1 , 9 6 St at
. at2 5 1 9 (co d i fi edat2 5 U.S.C. s ec. 2 21 0 (2 01 2 )), b ecau s e p et it i o n ers ab an do n edth es e arg u m en t s b y o m i t t i n g th em

fro m th ei r o p en i n g b ri ef; an d(3 ) t wo d o cu m en t s p et i t i o n ers rel y o n i n s up p o rto f t h ei r p ro p o s ed fi n di n g s an darg u m en t , b ecau s e th ey

were n o ti n ev i den ce. M o t io n s t o s tri k e are g en eral l y d is fav o redb y Fed eral co u rt s . Es t at e o f J ep h so n v . Co m

m i s s i o ner, 8 1 T.C. 9 9 9 , 1 0 0 1 (1 9 8 3 ); Al l en v . Co m m i s s i on er, 7 1

7 W e wi ll u s e t h e t erm

th e “ Gen eral W el fare Do ctri n e” as s h o rt h an d fo r arg u m en t s rel at i n g t o Rev . Ru l . 2 0 0 5-4 6 , 2 0 0 5-2 C.B. 1 2 0 ; Rev . Pro c. 2 01 4 -3 5 , 2 0 1 4 -2 6 I.R.B. 1 1 1 0 (ap p l icab l e i n t ax y ears fo r wh i ch th e p eri o d o f l im i t at i o n s u n d er s ec. 6 5 1 1 h ad no tex p i red ); an dth e Tri b al Gen eral W el fare Ex cl u s i o n Acto f 2 0 1 4 , Pub . L. No
. 1 1 3-1 68 , s ec. 2 (a), 1 28 St at . at 1 8 8 3 (co d i fi edas am en d edat s ec. 1 3 9E, an dap p l i cab l e i n t ax y ears fo r wh i ch th e p eri o d o f l i m i t at io ns u n d er s ec. 6 5 11 h adn o t ex p i red .) Tri b al Gen eral W el fare Ex cl u s i on Act , s ec. 2 (d )(1 ), 1 2 8 St at . at1 8 8 4
. Sec. 1 3 9 E(a) p ro v i d es thatg ro s s i n co m e d o es n o t i n cl ud e t h e v al u e o f an y In d i an g en eral wel fare b en efi t . In d i an g en eral wel fare b en efi t s i n cl u d e p aym en t s t o an d serv i ces p ro v i d edt o o r o n b eh al f o f a m em b er o f an In d i antri be p u rs u an tt o an In d ian tri b al p ro g ram . Sec. 1 3 9 E(b ). Ho wev er, t h e i n co m e i s o n ly ex cl u d ed i f (1 ) t h e p ro gram

i s ad m i n i s t eredu n d er s p eci fi c g u id el i n es an dd o es n o t d i s cri m i n at e i n fav o r o f t ri b al l ead ers h i p an d(2 ) t h e b en efi t s are av ai l ab le t o an y m em b er wh o m eet s th e g u i d el in es , are fo r t h e p ro m o t i o n o f g en eral wel fare, are n o tl av i s h o r ex trav ag an t , an dare n otco m p en s at i o n fo r s erv i ces . Id
.- 2 0 -

T.C. 5 7 7 , 5 7 9 (1 9 7 9 ). “ Am o t i o n t o s tri k e s h o u l db e g ran t edo n l y wh en th e al l eg at i o n s h av e n o p o s si b le rel at i o n t o th e co n tro v ers y . Wh en th e co u rti s i n d o ub twh et h er u n d er an y co n t in g en cy

th e m at t er m ay

rai s e an i s s u e, th e m o t i o n
s h o u ldb e d en i ed .” Es t at e o f J ep h s o n v . Co m m i s s i o n er, 8 1 T.C. at 1 0 0 1 (qu o t i n g Sam u el Go l dwyn , In c. v . Un i t edArt i s t s Co rp ., 3 5 F. Sup p. 6 3 3 , 6 3 7 (S.D.N.Y. 1 9 4 0 )). In ad d i t i o n , i f “ th e s ubjecto f th e m o t i o n i n v o l v es d i s p u tedan ds ub s t an t i al qu es ti o n s o f l aw, th e m o t i o n s ho u l db e d en iedan dth e al l eg at i o ns s h o u l db e d et erm i n edo n t h e m eri t s .” Id . An d“ a m o t i on t o s tri k e wi l l u s u al l y n o tb e g ran ted
u n l es s th ere i s a s h owi ng o f p reju d i ce t o the m ov i n g p arty .” Id .; s ee al s o Po n y CreekCat t l e Co . v . GreatAt l . & Pac. Tea Co
. (In re Beef In du s try An t it ru s t Li t i gat i o n ), 6 0 0 F.2 d1 1 4 8 , 1 1 68 -1 1 6 9 (5 th Ci r. 1 9 79 ) (“ [U] n n eces s ary ev i d en t i ary d et ai ls are u s u al ly

n o ts tri ck en fro m

th e co m p l ai n tu n l es s p reju d i ci al o r o f n o
co n seq u en ce t o th e co n tro v ers y [.] ”).

1
. Is s ues In cl u d edi n th e St i p u l at i o n o f Set t ledIs su es Ou r Ru l es req u i re p art ies “ t o s ti p u lat e, t o th e fu l l es tex t en tt o wh i ch
co m p l et e o r qu al i fi edag reem en tcan o r fai rl y s h ou l d b e reach ed , al l m at t ers n o t p ri v i leg edwh i ch are rel ev an tt o th e p en di n g cas e, reg ard l es s o f wh ether s uch
m at t ers i n v o l v e fact o r o p i n i o n o r t h e ap p l i cat i o n o f l aw t o fact .” Ru l e 9 1 (a)(1 ). Befo re t ri al th e p art i es fi l eda s t i p ul at i o n o f s et t ledi s su es s t at i n g t h at“p et it i o n ers- 2 1 -

co n ced e t h atth e qu art erl y an dCh ri s t m as d i s tri bu t i o n s ati s s u e i n th i s cas e are n o t t ax -ex em p tg en eral wel fare p aym en ts as d es cri b edi n Rev . Ru l . 2 0 0 5 -4 6 , 2 0 0 5 -2 C.B. 1 2 0 ; Rev
. Pro c. 2 0 1 4 -3 5 , 2 0 1 4 -2 6 I.R.B. 1 1 1 0 ; o r I.R.C. § 1 3 9E.” Ou r Ru l es
are ex p l i ci tab o u tth e b i n d i n g n atu re o f s ti p ul at i o n s . “ A s t i p u l at io n s h al l b e treat ed

* * * as a co n cl us i ve ad m i s s i o n b y th e p art i es t o t h e s t i p u l at i o n , u nl es s o th erwi s e p erm i t t edb y

th e Co u rto r ag reedup o n b y th os e p art i es .” Ru l e 9 1 (e); s ee al s o En i s
v . Co m m i s s i o n er, T.C. M em o . 2 0 1 7 -2 2 2 , at* 4 , n .3
. “ Th e Co u rtwi l l n o t p erm i ta p art y t o a s t i p u l at io n t o qu al i fy , ch an g e, o r co nt rad i cta s ti p ul at i o n i n wh o l e o r i n p art , ex cep tth ati tm ay

d o s o wh ere ju s t i ce req u i res . ” Ru le 9 1 (e); Bai l Bo n d s b y M arv i n Nel s o n , In c. v . Co m m i s s i o n er, 8 2 0 F.2 d1 5 4 3 , 1 54 7 (9 th Ci r. 1 9 8 7 ) (“ A
s t ip u l at i o n wi l l g en eral l y b e en fo rced u n l es s m an i fes ti n ju s t i ce wo u l dres u l t .”), aff’ g T.C. M em o . 1 9 8 6 -2 3
. Pet i t i o ners h av e n o ts h o wn an y reas o n wh y we s h o u l d rel eas e t h em

fro m th ei r s ti p u l at i o n . Th i s i s n o ta ci rcu m s t an ce o f a s t i pu l at edfact ’ s b ei n g
co n trad i ct edb y o th er fact s i n th e reco rd . See, e.g ., J as i o n o w s k i v . Co m m i s s i o n er, 6 6 T.C. 3 1 2 (1 9 76 ). Rat h er t hi s was a s trat eg i c d eci s i o n b efo re t ri al n o tt o p u rs u e
an arg u m en tth atth en s h ap edth e p art i es ’ tri al p res en t at io n s . Infact , co u ns el fo r p et i t i o n ers ev en u s edth e s t i p u lat i o n as a b as i s fo r o b j ect i n g t o qu es t i o ns as k edb y
res p o n d en t’ s co u n s el , s t at i n g attri al th at“ th i s i s n o ta g en eral wel fare cas e.” It- 2 2 -

wo u l db e p reju d i ci al t o al lo w p et i t i o n ers t o du ckqu es ti o n s attri al ab ou tan i s s u e
o n th e b as i s th atth ey

h av e ab an d o n edi t , o n l y t o rev iv e t h e d i s pu t e o n b ri ef. Ho wev er, as we d i s cu s s i nfra Sect i o n III.A, we are n o tth e fi rs t co u rtt o co n s i d er th i s i s s u e. Th e U.S. Co urto f Ap p eal s fo r t h e El ev en th Ci rcu it , t o wh i ch th es e
cas es are ap p eal ab l e ab s en ts t ip u l at i o n t o the co n trary , s ee s ec. 7 4 8 2 (b ), h as ru l ed th ats ect i o n 1 3 9 E d o es n o tp ro vi d e a t ax ex em p t i o n fo r t h e d i s tri b u ti o n s , s ee Un i ted St at es v . J i m , 8 9 1 F.3 d1 2 4 2 (1 1 th Ci r. 2 0 1 8 ); s ee al s o Go l s en v . Co m m i s s i o n er, 5 4 T.C. 7 42 , 7 5 6 -7 5 7 (1 9 7 0 ), aff’ d , 4 4 5 F.2 d 9 8 5 (1 0 th Ci r. 1 9 7 1 ). Wh et h er we d eem

p et i t i on ers t o h av e ab an d o n edth e arg u m en t , s tri k e t h e arg u m en t , o r d eci d e i to n i t s m eri t s fo l l o wi n g th e U.S. Co u rto f Ap p eal s fo r t h e El ev en th Ci rcu i t , thei r arg u m en ti s u n av ai l in g . W e t h erefo re wi l l d en y
res p o n d en t’ s m o t i o n as t o th i s i s s u e an dreject i to n i ts m eri t s .

2
. Is s ues No tRai s edi n Pet i t i o n ers ’ Op en i n g Bri ef W e m ay co ns i d er an i s s u e rai s edfo r t h e fi rs tt i m e i n a p art y ’ s an s weri n g b ri ef t o b e ab an do n edan dco n ced ed . See Du t t o n v . Co m m is s i o n er, 1 2 2 T.C. 1 3 3 , 1 4 2 (2 00 4 ) (“ Ou r p ract i ce i s n o tt o co n si d er n ew i s s u es rai s ed fo r th e fi rs t t i m e i n
an an sweri n g b ri ef.”); Krau se v . Co m m i s si o n er, 9 9 T.C. 1 32 , 1 7 7 (1 9 92 ), aff’ ds ub
n o m . Hi l d eb ran dv . Co m m i s si o n er, 2 8 F.3 d 1 0 2 4 (1 0 th Ci r. 1 9 9 4 ). Pet i t i o ners d i d
n o trai se t h e Per Cap it a Acto f 1 9 83 i n th ei r p ret ri al m em o ran du m , attri al , o r i n- 2 3 -

th ei r o pen i n g b ri ef an d , wh il e t h ey rai s edth e In d ian Lan dCo n s ol i d at i o n Acti n th ei r p retri al m em o ran du m , they d i dn o trai s e i tag ai n u n t i l th ei r rep ly b ri ef. W e th erefo re co u l d deem

p et i t i o ners t o h av e ab an d on edarg um en t s b as edo n th e Per Cap it a Acto f 1 9 8 3 an dth e In d i an Lan dCo n s o l i d at i o n Act . See Du t t o n v . Co m m i s s i o n er, 1 2 2 T.C. at1 4 2; Krau s e v . Co m m i s s io n er, 9 9 T.C. at1 7 7
. Ho wev er, as we ex p l ai n i n fra Sect i o n III. B an d C, t h ey d o n o tp ro v i d e a t ax
ex em p t i o n fo r t h e d i s tri b ut io n s . W e t h erefo re wi l l d en y as m o otres p o n d en t ’ s
m o ti o n as t o th es e arg u m en t s .

3
. Do cu m en t s No ti n Ev i d en ce Pet i t i o ners rel y

o n t wo d o cu m en t s n o ti n ev i d en ce i n th ei r o pen i n g an drep l y b ri efs : a 1 9 8 9 co n tractb et w een th e Tri b e an dTDC an da 1 9 9 5 l et t er fro m th e Tri b e t o th e BIA’ s act i n g d i rect o r, Fran kKeel . Taci t l y co n ced i n g th atth ey

can n o t rel y o n fact s n o ti n ev i den ce, p et i t i o n ers co u n t er res p o n d en t ’ s m o t io n t o s tri k e th es e t w o d o cu m en t s an dp et i t i o n ers ’ arg u m en t s b as edo n th em b y m o v i n g t o
reo p en th e reco rdt o ad m i tth em i n t o ev id en ce. Th ey

arg u e t hatth es e d o cu m en t s
s h o u ldb e ad m i t t ed t o “ cl ari fy an dco n fi rm

t es t i m o n ial ev id en ce recei v edb y th e Co u rtattri al ” an dres p o n dt o i s s u es rai sedb y res p o n d en t i n h i s o pen i n g b ri ef. Th e d eci s io n t o reo p en th e reco rdt o ad m i tad d it i o n al ev i d en ce i s wi th i n o u r b ro add i s cret i o n . Zen i th Rad i o Co rp . v . Hazel t i n e Res earch , In c., 4 0 1 U.S. 3 2 1 ,- 2 4 -

3 3 1 -3 3 2 (1 9 7 1 ); Bu t l er v . Co m m i s s i o n er, 1 1 4 T.C. 2 7 6, 2 8 6 -2 87 (2 0 0 0 ), ab ro g at edo n o ther g ro u n d s , Po rt er v . Co m m i ss i on er, 1 3 2 T.C. 2 0 3 (2 00 9 ); s ee al s o SEC v . Ro g ers , 7 9 0 F.2 d1 4 5 0 , 1 4 60 (9 th Ci r. 1 9 8 6) (ci t i n g Zen i th Rad i o Co rp ., 4 0 1 U.S. at3 3 2 ), o v erru l edo n o th er g ro u nd s , Pi n t er v . Dah l , 4 8 6 U.S. 6 2 2 (1 9 8 8). Th e Co u rto f Ap p eal s fo r t h e El ev en th Ci rcu i tco n s i d ers fo u r fact o rs i n d et erm i n i n g wh eth er t o reo p en th e reco rd : (1 ) t h e t i m el i n es s o f t h e m o ti o n t o
reo p en th e reco rd , (2 ) th e ch aract er o f t h e t es t i m o n y t o b e o ffered , (3 ) t h e effect o f g ran t i n g th e m o t i on t o reo p en t o reco rd , an d(4 ) t he reas o n ab l en es s o f t h e req u es t t o reo p en the reco rd . Un i t edSt at es v . Byrd , 4 0 3 F.3 d1 27 8 , 1 2 8 4 (1 1 th Ci r. 2 0 0 5 ); Dynam o Ho l d in g s Lt d
. P’ s h i p v . Co m m i ss i on er, 1 5 0 T.C. _

_ _ , _

_ _ -_

_ _ (s l i p o p . at 1 0 -1 1) (M ay

7 , 2 0 1 8 ). Th e t h ird fact o r--t h e effect o f reo p en in g th e reco rd --i s m o s trel ev an th ere. W e wi l l n o treo pen the reco rdt o ad m itth es e d o cu m en t s b ecau se we fi n dth atth ey
are cu m ul at i v e an d wo u l d n o tch an g e t h e o u t co m e o f t h e cas e. Th ey d o n o tb ear
o n th e o ut co m e o f ei th er o f t h e i s s u es i n th i s cas e: wh et h er th e d i s tri b u t i o n s are t ax ab l e t o p et i t i o n ers an d wh et h er p et i t i o n ers are l iab l e fo r accu racy -rel at ed p en al t i es . Th erefo re we wi l l d en y p et i t i o n ers ’ m o t i o n t o reo p en th e reco rdt o- 2 5 -

ad m i tth es e t wo d o cu m en t s an d wi l l g ran t res p o n d en t ’ s m o t i o n t o s tri k e t h o s e p o rt i on s o f p et i t io n ers ’ b ri ef t h atrel y o n them
. 8 B. Pet it i o n ers ’ M ot i o n To Am en d th e Fi rs tSt i p u l at i o n o f Fact s Pet i t i o ners al s o m o v e t o am en dfo u r p arag rap h s o f th e fi rs ts t i p u l at io n o f fact s t o co rrect wh atth ey co n t en dare fact u al erro rs . W e m ay am en da s t i p u l at i o n wh en “ t o accep t* * * [t he u n am en d eds t i p u l at i o n ] wo u l d h av e b een m an i fes t l y
u n ju s to r i f t he ev i d en ce co nt raryt o th e s t i p u l at i o n was s ub st an t i al .” Lo ft i n & W o o d ard , In c. v . Un i t edSt at es , 5 7 7 F.2 d1 20 6 , 1 2 3 2 (5 th Ci r. 1 9 7 8 ); s ee Ru l e 9 1 (e). Pet i t i on ers ’ p ro p o s edam en d m en t s are b el at edwo rd i n g tweak s t o b o l s t er th ei r p os t tri al arg u m en t s an dd o n o tch an g e o u r co n cl u si o n s o n th e l eg al i s s u es b efo re u s . Inad d i t io n, p et i t i o n ers h av e n o t i d en t i fi edan y m an i fes ti n

ju s t i ce o r

8 Inv i o lat i o n of Ru l e 1 5 1 (e)(3 ), p et it i on ers ’ o p en i n g b ri ef d o es n o tci t e, i n s up p orto f t h ei r p ro p os edfi n d i n g s o f fact , an y ev i d en ce th at was ad m it t ed . Th i s i s s u rp ri s i n g es p eci al l y

b ecau s e atth e en do f t ri al we d i s cu s sedp o s t tri al b ri efs wi t h th e p art i es . No r d i d t h ei r rep l y b ri ef co m

p ly wi th o ur Ru l es . Thu s , thes e p o s t tri al b ri efi n g i s s u es ap p ear t o b e p arto f a p at tern o f d i s reg ard i n g o u r Ru l es . Lacko f fam i l i ari ty

wi th th i s Co u rtan dl acko f res o u rces are u n ap p eal i n g ex cu s es fo r fai l u re t o read an dco m

p l y wi th o u r Ru l es an dare n o ex cu s e fo r fai l u re t o h eed d i s cu s s i o n s wi th th e Co u rto n t h e reco rdwi th a t ran s cri p t t o rem i n dthe p art i es o f th o s e d i s cu s s i on s . Brewer Qu al i ty Ho m es , In c. v . Co m

m i s si on er, T.C. M em o . 2 0 0 3 -2 0 0 , 2 0 0 3 W L 2 1 54 5 8 8 6 , at* 1 n .3 (“ [Pet i t i o n ers ’ ] co u n sel i s p u to n n o t i ce th at(1 ) th e Ru l e i s d es i g n edb o th t o faci l i t at e t h e wo rko f th e Co u rtan d al s o t o p ro v id e a ‘ l ev el p l ay i n g fi el d ’ t o th e p art i es , an d (2 ) t h e Co u rtwi l l b e i ncl i nedt o i m p o s e fo rm al s an ct i o n s i n t h e ev en to f fu tu re s i m i l ar v io l at i o n s.”), aff’ d , 1 2 2 F. Ap p ’ x 8 8 (5 th Ci r. 2 0 0 4 )

.- 2 6 -

s ub s t an t i al ev i den ce t h atco n trad i ct s th e s ti p u l at i o n s t h ey s eekt o am en d
. Th erefo re, we wi ll d en y

th ei r m o t i o n t o am en d th e fi rs ts t i p u lat i o n o f fact s . III. Tax ab i l i ty

o f Di st ri b u t i o ns t o Tri b al M em b ers Sect io n 6 1 p ro v i d es th at“ g ro s s i n co m e m ean s al l i nco m e fro m wh at ev er
s o u rce d eri v ed ” u n l es s an ex cep t i o n i s p ro v i ded . Th e Sup rem e Co u rts t at edth at g ro s s i n co m e co m

p ri s es al l “ acces si o n s t o weal th , cl earl y real ized , an do ver wh i ch th e t ax p ay ers h av e co m

pl et e d om i n i o n .” Co m

m i s s i o ner v . Gl en sh aw Gl as s Co ., 3 4 8 U.S. 4 2 6 , 4 3 1 (1 9 5 5 ). In d i v i du al tri b al m em b ers are s ub

jectt o Fed eral i n co m e t ax at i o n u n l es s a t reat y o r an Act o f Co n g res s p ro v i d es an ex em p t i on . Squ i re v . Cap o em an , 3 5 1 U.S. 1 , 6 (1 95 6 ). Anex em p ti o n fro m

i nco m e t ax m

u s t b e cl earl y ex p res s ed . Id .; Ho l tv . Co m m i s s i on er, 4 4 T.C. 6 8 6 , 6 9 0 (1 9 6 5 ), aff’ d, 3 6 4 F.2 d3 8 (8 th Ci r. 1 9 6 6 ). W e can n o tcreat e a t ax ex em p t i on b y i m p li cat i o n . Ho p t o wi tv . Co m

m i s s i o n er, 7 8 T.C. 1 3 7 , 1 4 2 (1 98 2 ), aff’ d , 7 0 9 F.2 d5 6 4 (9 th Ci r. 1 9 8 3 ); J o u rd ai n v . Co m

m i s si o ner, 7 1 T.C. 9 8 0, 9 9 0 (1 9 7 9 ), aff’ d , 6 1 7 F.2 d5 0 7 (8 th Ci r. 1 9 8 0 ). Th e p art i es fi rs t d i sp u t e wh et h er th e d i s tri bu t i o n s are m ad e fro m n etg am i n g
rev en u es t ax ab l e u n d er t h e IGRA. Th e IGRA p ro v i d es th atas a co n d i t i o n o f
m ak i n g p er cap i t a p aym en t s t o tri b al m em b ers o u t o f n etg am in g rev en u es fro m a Cl as s II g am i n g faci l i ty , “ th e p er cap i t a p aym en t s are s ub jectt o Fed eral t ax at i o n- 2 7 -

an d tri bes n o ti fy

m em b ers o f s u ch t ax l i ab i l i ty

wh en p aym en t s are m ad e.” 2 5 U.S.C. s ec. 2 7 10 (b )(3 )(D). Pet i t i o ners arg ue t h atth e d i s tri b ut i o n s are fro m l eas es
o f l an d(an d al s o , as n o tedab o ve, t h atth ey are ex em p tfro m t ax u n d er t h e Gen eral W el fare Do ct ri n e). Irres p ect iv e o f wh et her t h e d i s tri b u t io n s co m e fro m n et g am i n g rev en u es o r l eas i n g rev en u es , i f p et i t i o n ers can i d en t i fy n o ex cep ti o n fro m g ro s s i n co m e, t h en th ey

are t ax ab l e. W e d o n o tfi ndan y real d i s p u t e b et ween th e p art i es o n th e fact s , al th o u g h th e p art i es s tro ng l y d i s ag ree o v er h o w t o ch aract eri ze th e s o u rce o f t hes e d i s tri b u t i on s . A. IGRA W e are n o tth e fi rs tco u rtt o co n s i d er p et i t i o n ers ’ arg u m en t s th atth e d i s tri b u t i o n s are n o tn etg am i n g rev en u es an dthatth e Gen eral W el fare Do ct ri n e
ex em p t s th em fro m

t ax at io n. 9 Th e U.S. Co u rt o f Ap p eal s fo r t h e El ev en th Ci rcu i t
recen t l y ru l edo n a cas e reg ard i n g th e t ax ab i l i ty o f d i st ri b u t i o n s t o an ot h er m em b er
o f t h e M i cco s u k ee Tri b e, Sal l y J i m . J i m , 8 9 1 F.3 d1 2 4 2 . Inthatcas e, t h e Go v ern m en tm o v edfo r s u m m ary ju d g m en tth atth e d i s tri b ut i o n s t o M s . J i m , wh i ch were d eri v edfro m

g am i ng p ro ceed s , were n otex em p tfro m t ax at i o n as g en eral

9 As n o t edab o v e, b efo re t ri al , p et i t i o n ers co nced edthatth e d i s tri b u t i o n s were n o t g en eral wel fare p aym en t s.- 2 8 -

wel fare p aym en t s o r i n co m e fro m th e l an d. Un i t edSt at es v . J i m , No . 1 4 -2 24 4 1 , 2 0 1 6 W L 6 9 9 5 4 5 5 (S.D. Fl a. Au g . 1 9, 2 0 1 6 ). Th e Tri b e i n t erv en ed
. Th e Di s tri ctCo u rtg ran t ed th e Go v ern m en t ’ s s u m m ary ju d gm en tm o t i o n i n p artb u th el dthatm at eri al d i sp u t es o f fact rem ai nedo v er h o w m u ch o f t h e d i s tri b u t i o n was fro m

n o n g am i n g rev en u e an dwh et h er M s . J i m was t ax ab l e o n th e
en t i re d i s tri b u t i o n , i n cl u d i n g th e am o u n t s s h e recei vedth atwere at tri b u t ab l e t o h er fam i l y m em b ers . Aft er a b en ch tri al , the co u rtco n cl u ded th atn o ex em p ti o n ap p li edt o th e i n co m e. Id
. Onap p eal , th e Co u rt o f Ap p eal s affi rm edth ats ect io n 1 3 9 E d o es n o tex em p t p er cap i t a p aym en t s fro m g am i n g rev en u e d es i gn at ed as t ax ab l e b y th e IGRA. J i m , 8 9 1 F.3 d1 24 2 . Ital so reject edth e arg u m en t th atth e d i s tri b u t i on s were o u t o f g ro s s rev en u e, n o t n et rev en u e, an dth erefo re were n o ts ub j ectt o th e IGRA. 1 0 Id
. at1 2 5 0 n .1 7 . An di t qu i ck l y reject edth e arg um en tth atth e d i s tri b ut i o ns were
ex em p t edfro m t ax b y the M icco s u k ee Set t l em en tActo f 1 9 9 7 (M i cco s u kee

1 0 Ev en accep t in g p et i t i o n ers ’ cl ai m th atth e g ro ss recei p t s t ax i s a co n ti n u at i o n o f th e t ri b al s al es t ax ad o p t edi n 1 9 8 4 , as th e Co u rto f Ap p eal s co n cl u d ed , th e g ro s s recei p t s t ax s t i l l i s a m ech an i s m fo r co l l ect i ng g am in g rev en u e fro m

th e Cas i n o t o fu n dp er cap i t a d i s tri b u t i on s t o m em b ers el i g i b l e fo r n o o th er ex cep t i on t o th e d efi n i t i o n o f g ro s s i n co m e, as we ex p l ai n b el ow. See Un i ted St at es v . J i m , 8 9 1 F.3 d1 2 4 2 , 1 25 0 n .1 7 (1 1t h Ci r. 2 0 1 5 ). W e s i m i l arl y rejectp et i t i o n ers ’ arg u m en tthatd i s tri b u t i o ns are n o tt ax ab l e b ecau s e t hey were n o to u t o f n etg am i n g rev en u e b u t rat h er were o u t o f g ro s s rev en u e.- 2 9 -

Set t l em en tAct ), Pub . L. 1 0 5 -8 3 , s ec. 7 0 7 (c), 1 1 1 St at . at1 6 2 4 (co d ifi edat2 5 U.S.C. s ecs . 1 7 50 -1 7 50 e(c) (2 0 0 6 )). J im , 8 9 1 F.3 dat1 2 50 n .1 7
. W e s ee n o fact u al d i st i n ct i o n s b et ween th e d i s tri b u t i o ns t o p et it i on ers an dt o M s . J i m an dth erefo re h o l d t h atth e d i s tri bu t i on s t o p et i ti o n ers are t ax ab l e u n d er th e IGRA. B. Pet it i o n ers ’ Oth er St atu t o ry Arg u m en t s Pet i t i o ners m ad e o th er arg u m en t s th atwere n o tco ns i d ered(o r were
co n si d eredo n ly

b ri efl y ) b y

the Co u rt o f Ap peal s . Pet i t i o ners p o i n tt o three Act s
o f Co ng res s th atthey

m ai n t ai n ex em

p tth e Tri b e’ s d i s tri b u ti o n s fro m Fed eral i n co m e t ax at i o n : the M icco s u k ee Set t l em en tAct ; th e Acto f Oct . 1 7 , 1 9 7 5 , Pub
. L. No . 9 4 -1 1 4 , s ec. 6 , 8 9 St at . at5 7 9 (co di fi ed at2 5 U.S.C. s ec. 4 59 e (2 00 6 )); 1 1
an d th e In d i an Lan d Co ns o l i dat i o n Act
. 1 2 No n e o f th es e p ro v i s i o n s wo u l dex em p t th e d i s tri b u t i o ns fro m

th e IGRA. An dev en were we t o co n cl u de t hatth e d i s tri b u t i o n s were n o t o u to f n etg am i n g rev en ue, n on e o f t h o s e p ro vi s i o n s ap p l y

1 1 2 5 U.S.C. s ec. 4 5 9e h as b een recl as s i fi edas s ec. 5 5 0 6 o f th e s am e t i t l e. 1 2 Pet i t io n ers t ak e t h e p o s i t i o n th atn o ag en cy o th er t h an th e BIA h as an y au th o ri ty t o i n t erp reto r ap pl y

Fed eral l aw, treat i es , o r o th er m at t ers ari s i n g o u to f In d i an affai rs , i n cl ud in g the t ax at i o n o f t he t ri b es an dth ei r m em b ers . Pet i t i o n ers ci t e n o cas es , n o r d i dwe fi n dan y s up p o rtfo r s u ch a b ro adi nt erp ret at io n o f t h e au th o ri ty g i v en to th e BIA b y

s t atu t e. An dcert ai n l y

a s t atu t o ry

g ran t o f au th o ri t y t o the BIA t o i nt erp ret th e s t atu t es co u l d n ots upp l an t o u r ro l e o r t h e ro l e o f o th er co u rt s t o i n t erp retan dap p l y th es e p ro v i s i o n s .- 3 0 -

t o the l an do n wh i ch th e Cas i n o i s l o cat ed an d, therefo re, n o n e ex em p tth e d i s tri b u t i o n s fro m

Fed eral i n co m e t ax . Th e M icco s u k ee Set t l em en tActi s th e co di fi cat i o n o f t h e effect s o f t h e Tri b e’ s 1 9 9 6 s et t l em en t ag reem en twi th th e St at e o f Fl o ri d a as i trel at es t o th e Fed eral Go v ern m en t . Th e M i cco s u k ee Set t l em en tActs ec. 7 07 (c)(1 )(A) ad dres s es th e t ax effect s o f t h e s et tl em en tag reem en t , p ro v i di n g i n rel ev an tp artthatn o
m o ney o r l an dp ai do r co n v ey edt o th e Tri b e “ u n d er t h i s Acto r t h e Set t l em en t Ag reem en ts h al l b e t ax ab l e u n d er Fed eral o r St at e l aw.” Pet i t i o n ers co nt en dth at M i cco s u k ee Set t l em en t Acts ec. 7 07 (c) m ak es al l o f th e Tri b e’ s l an d t ax ex em p t
. Ho wev er, th e p l ai n wo rd i n g o f t h e p ro v i s i o n l i m i t s i t s ap p l i cat io n t o “ l an d s
co n vey edt o th e M i cco s u kee Tri b e u n d er th is p arto r t h e Set t l em en tAg reem en t ”. Th e Cas i no i s n ot l o cat edo n an y o f t h e l an dth atth e Tri b e recei v edi n the
s et t l em en tag reem en t . Th erefo re, t h e M i cco su k ee Set t l em en tActd o es n o t p ro vi d e
an ex em p t io n fro m

t ax fo r p et it i o n ers ’ d i s tri b u t i o n s. 1 3 Pet i t i o ners al s o co n t en dth at2 5 U.S.C. s ec. 4 5 9 e ex em p ts th ei r d is tri b u t i o n fro m t ax at io n . Th ats ect i on p ro v i d es a t ax ex em p t i o n t o an y

l an d co nv ey ed p u rs u an t t o s ub ch ap t er IV o f t it l e 2 5 , wh i ch rel at es t o th e co n vey an ce o f

1 3 Wh i l e t h e M i cco s u k ee Set t lem en t Actm ay ap p l y t o th e l an d o n wh i ch th e p ark i n g l o ti s b u i lt , the Tri b e d o es n o tch arg e a fee fo r u se o f t h e p ark i n g l o ts o th e p ark i n g l o td o es n o tp ro v id e an o th er rev en u e s o u rce fo r t h e d i s tri b u t i o n s .- 3 1 -

s ub m arg i n al l an d t o In d ian tri b es . 2 5 U.S.C. s ecs . 4 5 9 -4 5 9 e. Itp ro v i d es th atan y l an dco n v ey edt o In d i an tri b es u n d er t h ats ub ch ap ter an d an y d i s tri b u t i o n o f g ro s s recei p t s d eri vedfro m

tho s e l an d s are ex em

p tfro m Fed eral , St at e, an dl o cal t ax at io n . Id
. s ec. 4 5 9 e. An d 2 5 U.S.C. s ec. 4 5 9 a p ro vi d es a l i s to f t h e s p eci fi c p ro p ert i es co n v ey edu n d er t h ats ub ch ap ter t o s p eci fi c t ri bes b u t th e Tri b e i s n o t i n cl u d edi n th atl i st . Thu s , 2 5 U.S.C. s ec. 4 5 9 e d o es n o tap p ly t o th e l an do n wh i ch th e Cas i n o i s l o cat edan d d oes n o tex em p tp et it i o n ers ’ d i s tri b u t io n s fro m t ax . Fi n al l y , p et i t i o n ers co n t en dth atth e In d i an Lan dCo n s o l i d at i on Actp ro v i des a t ax ex em

p ti o n fo r t h e d i s tri b ut i o n s . 1 4 Th e In d i anLan dCo n s o l i dat i o n Actal l o ws In d i an tri b es t o en t er i nt o a “ l an dco ns o l i d at i o n p l an p ro v i d i n g fo r t he s al e o r
ex ch an g e o f an y

tri b al l an d s o r i n t eres ti n l an d s fo r t h e p u rp o s e o f el i m in at i n g
u n d i v i d edfract i o n al i n t eres t s i n In d ian tru s t o r res tri ct edl an d s o r co ns o li d at i n g i t s tri b al l an dh o l d i ng s ”. Id . s ec. 2 2 0 3 (a). Ti t l e 2 5 U.S.C. s ec. 2 2 1 0 p ro v i d es th at l an do r i n t eres t s i n l an d acq u i redb y th e Fed eral Go v ern m en t fo r an In d i ano r an In d i an tri b e as p arto f a co n s o l i d at i o n p l an u nd er t h e In d i an Lan dCo n s o l i dat i o n Acti s ex em

p tfro m Fed eral , St at e, an dl o cal t ax at i o n . Th e Cas i n o i s l o cat edo n

1 4 As n o tedab o v e, p et it i o n ers rai sedth i s arg u m en to n ly i n th ei r rep l y

b ri ef, an d res p on d en t arg u es p et i t i o n ers s h o u l db e d eem edt o h av e ab an d o n edi t.- 3 2 -

l an dp urch as edb y

TDC an d pl aced i n t o t ru s tfo r t he Tri b e; th ere i s n o ev i d en ce th atth e l an do r an i n t eres ti n th e l an dwas acq u i redas p arto f a co n so l i d at i o n p l an
u n d er t h e In d i an Lan dCo n s o l i d at i o n Act . Thu s , 2 5 U.S.C. s ec. 2 21 0 d o es n o t ap p ly t o th e Tri b e’ s l an dan dd oes n o tex em p tth e d i s tri b ut i o ns fro m

t ax . Pet i t i o ners are co rrect th att o th e ex t en tp o s si b l e we res o lv e am bi g u i t i es i n treat i es an ds t atut es i n fav o r o f In d i an s an dco n s tru e In d i an treat i es i n th e s en s e i n wh i ch th e In d i an s u n ders t o odth em . See Cap o em an , 3 5 1 U.S. at6 -7 ; Ch o ct aw Nat i o n o f In d i an s v . Un i t edSt at es , 3 1 8 U.S. 4 2 3 , 4 3 2 (1 9 4 3 ). Ho wev er, t h i s ru l e
o f co n st ru ct io n “ co m es i n to p l ay o nl y i f s u ch s t atu t e o r treat y

co n t ai ns l an g u ag e wh i ch can reas o n ab l y

b e co n s tru ed t o co nfer i n co m e ex em p t i o ns .” Ho l tv . Co m m i s s i o n er, 3 6 4 F.2 dat4 0
. Th i s i s n o t th e cas e wi th th e t hree p ro vi s i o n s t o wh i ch p et i t i on ers h av e p o i n t ed . “ W e are n o tfree t o creat e, b y i m p l icat i o n, a t ax
ex em p t i o n fo r p et i t i o n er[s ] .” Ho p to wi tv . Co m m i s si on er, 7 8 T.C. at1 4 2
. Fu rt h erm o re, we d o n o tag ree wi th p et i t i o n ers ’ co n t en t i o n thatwe m u s taccep tM r. Cy p res s ’ i n t erp ret at i o n o f t h es e s t atu t es as h e was th e BIA Sup eri nt en d en t , reg ard l es s o f wh et h er o r t o wh atex t en th e i s a d el eg at e o f t h e Secret ary o f t h e In t eri o r. 1 5

1 5 Pet i t io n ers h av e n o t p res en t edan y ev i d en ce th at M r. Cy

pres s was d el eg at edan y

au tho ri ty b y th e Secret ary

o f t he In t eri o r b y v irtu e o f h i s p o s i t i o n as (co n ti n u ed ...)- 3 3 -

C. Di s tri b u t io ns No tDi rect l y Deri v ed Fro m

th e Lan d Pet i t i o ners n ex tco n t en dth atth e d is tri b u t i o n s are ex em p tfro m Fed eral t ax b ecau s e th ey

are d eri v edd i rect l y fro m tri b al l an d s . Th ey

b as e th is arg u m en to n Cap oem an an d o n the Per Cap i t a Acto f 1 9 8 3 an d/ o r t h e Lan d Co n so l i d at i o n Act (wh ich we ad dres s edab o v e). 1 6 Th e Sup rem e Co u rth el di n Cap o em an , 3 5 1 U.S. at 1 0 , th atth e Gen eral Al l o t m en tActp ro v i d edth e n o n co m pet en tIn d i an 1 7 t ax p ay er
an ex em p t io n fo r p ro ceed s d i rect l y d eri v ed fro m

h i s al l o t tedp arcel o f res erv at i o n l an d --i n th atcas e, p ro ceed s fro m th e s al e o f s t an d in g t i m

b er o n h i s al l o t m en t
. Here, t h e Tri be h as n o tm ad e an y al l o t m en t s o f l an dt o i t s m em bers . See Fryv .

1 5 (...co n t i nu ed ) s up eri n t en d en t . Ev en i f we as s u m e t h at th e Secret ary o f t h e In t eri o r h as d el eg at ed M r. Cy p res s s o m e au th o ri ty , we are n o tb o u n dt o h i s i n fo rm al i n t erp ret at i on s o f th e s t atu t es an dreg u lat i o n s co ncern i n g th e Tri b e an dIn di an s m o re g en eral l y . M o reo v er, h i s i n t erp ret at i o ns o f t h es e s t atu t es are co n trad i ct edb y th e s t atu t es ’ p l ai n m ean i n g , an d we d o n o tfi n dth em t o b e p ers uas i v e. 1 6 Ag ai n , th is i s an arg u m en tth atp et i t i o n ers rai s ed o n l y i n t h ei r rep l y

b ri ef, an d res p on d en t arg u es p et i t i o n ers s h o u l db e d eem edt o h av e ab an d o n edi t.

1 7 A n on co m

pet en t In d i an , i n th i s co n t ex t , i s a m em b er o f a t ri b e wh o recei v edan al lo tm en to f l an dth ati s h el di n tru s t fo r h i m o r h er b y th e Fed eral Go v ern m en tan dwh o , u n d er t h e t erm s o f Gen eral Al l o t m en tAct , was p ro h i b i t ed fro m al i en at i n g o r en cu m

b eri n g th e l an dwi th th e Fed eral Go v ern m en t ’ s co n s en t
. Ho p t o wi tv . Co m

m i s s i o n er, 7 8 T.C. 1 3 7 , 1 3 8 n .2 (1 9 8 2 ), aff’ d , 6 1 7 F.3 d 5 07 (8 t h Ci r. 1 9 80 ).- 3 4 -

Un i ted St at es , 5 5 7 F.2 d6 46 , 6 4 8 (9 th Ci r. 1 9 7 7); Perk in s v . Co m m i s s i o n er, 1 5 0 T.C. _

_ , (s l i p o p . at1 4 ) (M ar. 1 , 2 0 1 8 ); Ho l tv . Co m m i s s io n er, 4 4 T.C. at6 9 1
. Th e Per Cap i t a Act o f 1 9 8 3 p erm i t s tri b es t o m ak e t o m em b ers p er cap i t a p aym en t s o f fu n d s h el di n tru s tb y th e Secret ary

o f t h e In t eri o r. 2 5 U.S.C. s ec. 1 1 7 a. Per cap it a d i st ri b u t i o n s m ad e u n der t h e Per Cap it a Acto f 1 9 8 3 are ex em p t fro m Fed eral an dSt at e t ax . Id
. s ec. 1 1 7 b (a) (referen ci n g th e Acto f Oct . 1 9 , 1 9 7 3 , Pub . L. No . 9 3 -1 3 4 , s ec. 7 , 8 7 St at
. at4 6 8 ). Ho wev er, n o tal l p er cap i t a d i s tri b u t i o n s qu al i fy fo r t h e Per Cap i t a Act ’ s t ax ex em p t i o n ; th e fu n d s m

u s tco m e fro m ap pro v eds o u rces an d b e d i s tri b u t edfro m qu al i fy i n g acco u n ts
. 2 5 C.F.R.
s ecs . 1 1 5.7 0 1-7 0 3 (2 0 01 ). Pet it i o n ers arg ue t hatth e NTDR acco u nti s a qu al i fy i n g
acco u n t an d th e g ro s s recei p ts t ax rev en u e i s an ap p ro v eds o u rce, s p eci fi cal l y th at i t w as d eri v ed d i rect l y fro m tri b al l an d s . Th e U.S. Co urt of Ap p eal s fo r t h e El ev en th Ci rcu i tal read y h as co n cl u d ed th atth e Tri b e’ s d i s tri b u ti o n s t o m em b ers co m e “ fro m

‘ in v es t m en t i n . . . i m p ro v em en t s ’ o n th e l an d an d‘ b u si n es s act i v i t i es rel at ed t o t h o se as set s ,’ n am el y g am b l in g ” an d“ th erefo re * * * [d o ] n o td eri v e d i rect l y fro m th e l an d .” J i m , 8 9 1 F.3 dat 1 25 0 n .1 7 (ci t at i o ns o m i t t ed ; al t erat i o n i n o ri g in al ). An dwe h av e h el dth at i n co m e d eri v edfro m

a b u s i n es s o n res erv at i o n l an dwas n o t n eces s ari l y d eri v ed d i rect l y fro m th e l an d. Ho p t o wi tv . Co m m i s s i o n er, 7 8 T.C. at 1 4 5 . W e h av e- 3 5 -

l i m i ted o ur d efi n i t i o n o f i n co m e d eri vedd i rect l y fro m th e l an dt o i nco m e earn ed th ro u g h “ ex p l o i t at i o n o f t h e l an di ts el f”. Cro s s v . Co m m i s s i o n er, 8 3 T.C. 5 6 1 , 5 6 6 (1 9 8 4), aff’ ds ub n o m . Di ll on v . Un i t ed St at es , 7 92 F.2 d 8 4 9 (9 th Ci r. 1 9 8 6 ); s ee al s o St ev en s v . Co m

m is s i o n er, 4 5 2 F.2 d 7 4 1 (9 th Ci r. 1 9 7 1 ) (h o l d in g th ati n co m e fro m farm i n g an d ran ch in g o n t ax p ay er’ s al l o t tedl an di s t ax ex em pt ), aff’ g i n p art
an d rev ’ g i n p art5 2 T.C. 3 3 0 (1 9 6 9 ); Ri ck ardv . Co m m i s s i o n er, 8 8 T.C. 1 8 8 , 1 9 2 (1 9 8 7) (h o l d i n g th atfarm i n g i n co m e o n t ax pay er’ s al l o t t ed l an di s t ax ex em p t ). Ou r d efi n it io n d oes n o ti n cl u d e i n co m e earn edb y u s e o f t he l an dal o n g wi t h cap i t al as s et s an d l ab or. Cro ss v . Co m m is s i o n er, 8 3 T.C. at5 6 6 (h o ld i n g th at i n co m e fro m

o p erat i n g a s m o k es h o p o n res erv at i o n l an dwas n otd i rect ly d eri v ed fro m th e l an d ); s ee al s o Cri t zer v . Un i t edSt at es , 5 9 7 F.2 d7 0 8, 7 1 3 -7 1 4 (Ct . Cl
. 1 9 7 9 ) (h o l d i n g th atn ei th er i n co m e fro m o p erat i o n o f a m o tel , res t au ran t , g i fts h o p,
an d ap art m en tco m

pl ex n o r i n co m e fro m

l eas es o f b u i l d i ng s i s d i rect l y d eri v ed fro m th e l an d ); Ho p t o wi tv . Co m m i s s i o n er, 7 8 T.C. at1 4 5 (h o l di n g thati n co m e fro m o p erat i n g a s m o k es h o p o n res erv at i o n l an dwas n o t d i rect l y d eri v edfro m

th e l an d ); Beckv . Co m

m i ss i o n er, T.C. M em o . 1 99 4 -1 2 2 (h o l d i n g th atren t al i n co m e fro m an ap art m en tco m

p l ex o n tri b al l an d i s n o td eri v edd i rect l y fro m th e l an d ), aff’ d , 6 4 F.3 d6 55 (4 th Ci r. 1 99 5 ); To n as k etv . Co m m i s s i o n er, T.C. M em o . 1 9 8 5
-- 3 6 -

3 6 5 (h ol d i n g th ati n co m e fro m o p erat i n g a s m o kes h o p o n th e t ax p ay er’ s al l o t t ed l an dwas n otd i rect l y

d eri v edfro m th e l an d ). W e al s o h av e h el dth atp er cap i t a p aym en ts o f cas i n o rev en ue are n ot d i rect l y d eri v edfro m

th e l an dm erel y

b y v i rtu e o f t h e cas i n o ’ s l o cat i o n o n tri b al l an d . Do x t at o r v . Co m

m i s s i on er, T.C. M em o . 2 0 0 5 -1 1 3 , 2 0 0 5 W L 1 1 6 39 7 8 , at
* 9 ; Cam p b el l v . Co m

m i s s i o n er, T.C. M em o . 1 9 9 7 -5 02 , 1 99 7 W L 6 9 0 1 78 , at* 4 (h o l d i n g th ati n co m e fro m th e o p erat io n o f a cas i n o o n tri b al l an dwas n o td eri v ed d i rect l y fro m th e l an d), aff’ d an drem an d ed , 1 6 4 F.3 d1 1 40 (8 th Ci r. 1 9 9 9). Pet i t i o ners arg ue t h atth e d i s tri b u ti o n s are d i rect l y d eri v edfro m

th e l an d b ecau s e th ey

are, i n s ubs t an ce, t h ei r s h are o f ren t al p aym en t s th atth e Tri b e recei v es fo r l eas i n g Tri b al l an d --o wn ed co m m u n al l y b y al l m em b ers --t o th e Cas in o . Th ey

ci t e Rev . Ru l . 5 6 -3 4 2 , 1 9 5 6 -2 C.B. 2 0 , as s up p ortfo r th ei r
co n ten t i o n th atth ei r d i s tri b u ti o n s are n on t ax ab l e. Th e rev en u e ru l i n g l is t s “ ren t al s (i ncl ud i ng cro p ren t al s )” as i nco m e t h e IRS u nd ers t an ds t o b e ex em p tas d i rect l y d eri v edfro m th e l an du n d er Cap o em an . Id . Bu twh ether p aym en t s “ ‘ were i n fact
ren ti ns t eado f s o m eth i n g el s e p ai du n d er t h e g u is e o f ren t ’ * * * i s a qu es t i o n o f fact t o be res ol v ed on th e b as i s o f al l th e fact s an dci rcu m s t an ces .” K & K Vet eri n ary

Sup p l y , In c. v . Co m

m i ss i o n er, T.C. M em o . 2 01 3 -8 4 , at * 2 6 -* 2 7- 3 7 -

(qu o ti n g Pl ace v . Co m

m i ss io n er, 1 7 T.C. 1 9 9 , 2 0 3 (1 95 1 ), aff’ d , 1 9 9 F.2 d3 7 3 (6 t h Ci r. 1 9 52 )). W e are n o tb ou n db y

a rev en u e ru li n g , b u tev en i f we fo u n d i t s an al y s i s p ers u as i v e, t h e reco rdd o es n o ts up p o rtp et i t i o ners ’ rech aract eri zat i o n o f t h e g ro s s recei p t s t ax as ren tp aym en t s th atfal l o u t s i d e th e IGRA. See W eb b er v . Co m m i s s i o n er, 1 4 4 T.C. 3 2 4 , 3 5 2 -3 5 3 (2 0 1 5) (“ W e are n otb o un db y rev en u e
ru l i n gs ; u n d er Sk i d m o re, th e wei g h t we affo rdth em d ep en d s up o n th ei r p ers u as i v en es s an d t h e co n si s t en cy o f t h e Co m

m is s i o n er’ s p o s i t i o n o v er t i m e.”). Th ere i s n o wri t ten l eas e b et w een th e Tri b e an dth e Cas i n o , an d t h e 1 9 95 g ro s s recei p t s t ax o rd i nan ce m ak es n o m en t io n o f a l eas e o r t he u s e o f t ri bal l an d. No r h av e we fo u n dan y

referen ce t o a l eas e fro m th e Tri b e t o th e Cas in o i n an y o f t h e Gen eral Co u n ci l m eet i n g m i n u t es i n th e reco rd
. To th e co n trary , th e ev i d en ce i n th e reco rdi l l u st rat es th e Tri b e’ s i n t en t i o n th atth e g ro s s recei p t s t ax b e a t ax rat h er than ren tp aym en t s. Th e 1 9 9 5 g ro s s recei p t s t ax o rd i nan ce “ d ecl ared* * * th e i n t en to f t h e M i cco s u kee Tri b e o f In d i an s o f Fl ori da t h atth e * * * M i cco s u k ee In d i an Bi n g o & Gam in g (M IBG )

* * * s h al l b e s ub

jectt o a g ro s s recei p t s t ax .” An d i f we reg ardth e 1 9 9 5 g ro s s recei p t s t ax as an ap p l i cat io n o f t h e 1 9 84 tri b al s al es t ax t o th e Cas i n o , th e 1 9 8 4
o rd i n an ce s t at es th atth e Tri b e i s i m p o s i n g th e t ax u n d er i t s au th o ri ty “ t o l ev y an d- 3 8 -

co l l ectas s es s m en t s ”. In each th e Tri b e’ s fi n an ci al s t at em en t s fo r fi s cal y ears 1 99 5 th ro u g h 2 0 0 2 , th e g ro s s recei p ts t ax rev en u e i s l i s tedu n d er t h e s ect io n “ Own ers Co m p en s at i o n Fees ” rat h er t han wi th th e Tri be’ s l eas es . Fi n al l y , each o f th e Cas in o ’ s fi n an ci al s t at em en t s fro m fi s cal y ears 1 9 9 5 -1 9 9 6 th ro u g h 2 0 0 5 -2 00 6
s t at es th atwh il e t h e Cas i n o i s o n the Tri b e’ s l an d, “ [n ] o ren t al p aym en ti s
cu rren t l y req u i redfo r th e u se o f s u ch l an d.” Pet i t i o ners h av e n o ts h o wn th atthey are en t i t l edt o a t ax ex em p t i on wi th
res p ectt o t h ei r d i s tri bu t i o n s . Pet i t i on ers h av e n o t i n tro du cedan y ev i d en ce o r
m ad e an y arg u m en tco n cern i n g th e i n cl u s io n o f t h e $ 1 ,2 0 0 m i s cel l an eo u s p aym en t t o M s . Os ceo l a i n 2 0 0 6 i n h er g ro s s i n co m e. An dn o ne o f p et i t i o n ers ’ arg u m en t s ad dres s th e Ch ri s t m as b o nu s es fo r 2 00 4 an d2 0 0 5 , wh i ch were p ai do uto f t h e Tri b e’ s g en eral acco un t . Th erefo re, we al s o s u st ai n res po n d en t ’ s d et erm i n at i o n th atth e Ch ri s t m as b o n u ses an dM s . Os ceo l a’ s m is cel l an eo u s p aym en tare t ax ab l e
u n d er s ect i o n 6 1
. Co n cl u di ng th atth e Tri b e’ s d i s tri b u t i o n s are t ax ab l e t o p et i t i o n ers d oes n o t cal l i n to qu es t i o n t h e Tri b e’ s s o v erei g n au th o ri ty t o i m p o s e t ax ; n o r d o es the Tri b e’ s s ov erei g n au th o ri ty affect o u r an al y s is o f th e t ax ab i l i ty o f t h e d i s tri b u t i o n s . Th atd ep en d s o n th e l aw an dwh et her an y ex cep t i o n s t o t ax ab il it y

ap p l y .- 3 9 -

IV. Un d erp aym en tPen al ti es Sect io n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) i m p o s es a p en al ty

equ al t o 2 0 % o f t h e p o rt i on o f an u n d erp aym en to f t ax req u i red t o b e s h o wn o n th e ret u rn thati s at tri b u t ab l e t o “ n eg l ig en ce o r d i s reg ardo f ru l es o r reg u l at i o n s ” an d/ o r a

“ s ub s t an t i al u n d ers t at em en to f i n co m e t ax .” Neg l ig en ce i n cl u des “ an y fai l u re t o
m ak e a reas o n ab l e at t em

p tt o co m p l y wi th th e p ro vi s i o n s o f t h i s t i t l e”. Sec. 6 6 6 2 (c). An u n d ers t at em en to f i n co m e t ax i s a “ s ubs t an t i al u n d ers t at em en t ” i f i t
ex ceed s t h e g reat er o f 1 0 % o f t h e t ax req u i redt o b e s h o wno n th e retu rn o r $ 5 ,0 0 0 . Sec. 6 6 6 2 (d ). In th e n o t i ces o f d efi ci en cy , res p on d en td et erm i n edb o th th e n eg l i g en ce p en al ty

an dth e s ub s t an t i al u n d ers t at em en tp en al ty . Th e Co m m is s i o n er b ears th e b u rd en o f p ro du ct i o n wi th res p ectt o an i n d i v i du al t ax pay er’ s l i ab il i ty fo r a p en al ty an di s req u ired t o p res en ts u ffi ci en t
ev i d en ce s h o wi n g thatthe p en al t y i s ap p ro p ri at e. Sec. 7 4 9 1(c); Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 -4 4 7 (2 0 0 1). To m eetth i s b urd en fo r t h e
s ub s t an t i al u n ders t at em en tp en al t y , th e Ru le 1 5 5 co m p u tat i o n s m

u s tco n fi rm

a
s ub s t an t i al u n ders t at em en t . Sec. 7 4 9 1(c). Th e Co m m i s s i on er m

us tal s o s h o w th at h e co m p l i edwi th th e p ro cedu ral req u i rem en t s o f s ect i o n 6 7 5 1(b )(1 ). See s ec. 7 4 9 1 (c); Graev v . Co m

m i ss i o n er (Graev III), 1 4 9 T.C. 4 8 5 , 4 9 2 -4 93 (2 0 1 7 ),
s up p lem en t i n g an do v erru l i n g i n p artGraev v . Co m m i s s i on er (Graev II), 1 4 7 T.C.- 4 0 -

4 6 0 (2 01 6 ). On ce t h e Co m m i s s i o n er m eet s h i s b u rd en o f p ro du ct i o n , th e t ax p ay er b ears th e b urd en o f p ro vi ng th atthe Co m m i s si on er’ s d et erm i n at i o n i s i n co rrect
. Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. at4 4 6 -4 4 7
. A. Sect i o n 6 7 51 (b ) M o t i o ns Tri al o f t h i s cas e was h el d , an dth e reco rdwas cl o s ed , b efo re th e i s s u an ce o f
o u r Op i n i o n i n Graev III. Aft er t h e Co u rt ’ s d eci s io n i n Graev III, we o rd ered
res p o n d en t t o fi le a res p o ns e ad dres s i n g th e effect o f s ect i o n 6 7 5 1 (b ) o n th es e
cas es an dd i rect in g the Co u rt t o an y ev i d en ce o f s ect i o n 6 7 51 (b ) s uperv i s o ry ap p ro v al i n th e reco rd , an dp et i t i o n ers t o res p o n d
. Res p o n den twas u nab l e t o d i rect th e Co u rtt o an y

ev id en ce i n th e reco rdth ats at i s fi es h i s b u rd en o f p ro duct i o n wi th res pect t o s ect i o n 6 7 51 (b )(1 ) an dfi l eda m ot i o n t o reo p en th e
reco rdt o i n cl u d e t wo Ci v il Pen al ty Ap p ro v al Fo rm s acco m

pan i edb y d ecl arat i o n s fro m M s . Gen try , o n e fo r b ot h th e 2 00 4 an d2 0 05 t ax y ears an do n e fo r t h e 2 0 0 6 t ax y ear. Pet i t i o ners d i dn o to pp o s e res po n d en t ’ s m o t i o n , b u ti n th ei r res p o ns e t h ey
as k edth atth ey

b e “ al s o g iv en th e o p p o rtun i ty t o reo p enth e reco rdt o cal l wi tn es s es wh o p rep aredan d/ o r s i g n edth e d ecl arat i o n s an dp en al ty ap p ro v al fo rm s , o r i nt ro duce o th er ev i den ce b eari n g o n th e v al i di ty o f s u ch d ecl arat i o n s an d- 4 1 -

fo rm s .” Th ey

al s o rai s edi s s u es wi th th e d ocu m en t s res p o n den tp ro ffered i n
s up p orto f h i s co m

pl ian ce wi th s ect io n 6 7 5 1 (b ). W e g ran t edp et i t i o n ers ’ req u es tt o co n du ctad d i t i o n al d is co v ery reg ard i n g
res p o n d en t’ s co m

p li an ce wi th s ect i o n 6 7 51 (b ), i n cl u di n g i nt erro g at o ri es . Aft er th atd i sco v ery , p et i t i o n ers m o v edt o reo p en th e reco rdt o i n cl u d e cert ai n ad d i t i o n al d o cu m en t s rel at in g t o res po n d en t ’ s rev i ew o f t h e p en al ti es , n am el y M s . Gen try ’ s Au g u s t4 , 2 0 1 0 , m em o ran dum , th e ag en t ’ s Au g u s t9 , 2 0 1 0, m em o ran du m reg ard i n g th e s i x-y ear s t atu t e o f l i m i t at io n s, th e ag en t ’ s act i v i ty l og , an d
res p o n d en t’ s res p on s es t o p et i t i o n ers ’ i n t erro g at o ri es . Res po n den td i d n o t o p p o s e th atm o t i on . W e th erefo re wi l l g ran tth es e t w o m o t i o n s t o reo p enth e reco rdt o ad m i tev i d en ce p ert ai n i ng t o 2 0 0 4 an d 2 0 05 . Th e p art i es al s o fi leda s ti p u l at i o n o f
s et t l edi s s u es i n wh i ch res p o n d en tco nced edth ath e co u l dn o tm eeth i s b u rd en o f p ro duct i o n as t o the n eg l i g en ce p en al ty fo r 2 0 0 4 an d 2 0 0 5 , an d thatp et i ti o n ers are
n o tl i ab l e fo r t h e accu racy -rel at edp en al ty fo r 2 0 0 6. W e t h erefo re wi l l d en y
res p o n d en t’ s m o t i o n as t o ev i d en ce rel at i ng t o p en al ty ap p ro val fo r 2 0 0 6
. B. Pet it i o n ers ’ Sect i on 6 7 5 1 (b ) Arg u m en t s Pet i t i o ners arg ue t h at(1 ) t h e s up erv i s o ry ap p ro v al fo r t h e 2 0 0 4 an d2 0 0 5
s ub s t an t i al u n ders t at em en tp en al t ies was n o tt i m el y an d (2 ) t h e s up erv i so r’ s
rev i ew i t sel f was n o tm ean i n g fu l . Sect i o n 6 7 5 1 (b )(1 ) g en eral l y p ro v id es thatn o- 4 2 -

p en al ty s hal l b e as s es s ed un l es s th e Co m m i s s i o n er s h o w s th at“ th e i n i t i al d et erm i n at i o n ” o f t h e as s es s m en twas “p ers o n al l y ap p ro ved(i n wri t i n g ) b y th e i m m ed i at e s up erv i s o r o f t he i n di v i du al m ak i n g s u ch d et erm i n at i o n”. Th e U.S. Co u rto f Ap p eal s fo r t h e Seco n dCi rcu i th el di n Ch ai v . Co m m i s s i o n er, 8 51 F.3 d 1 9 0 , 2 2 1 (2 dCi r. 2 01 7 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o . 2 0 1 5 -4 2 , th at wri t ten ap p ro v al i s req u i redn o l at er t h an th e i s s u an ce o f t h e n o ti ce o f d efi ci en cy rat h er t h anth e as s es s m en t o f t h e t ax . Ins o h o l d i ng , th e co urtn o t edth e am b i g u i ty i n the s t atu t e, as th e IRS can no td et erm i n e an as s es s m en t . Id . at2 1 8 ; s ee al s o Graev II, 1 4 7 T.C. at 5 1 2 (Gu s t afs o n , J ., d is s en t i n g ) (“ O n e can d et erm i ne wh et h er t o m ak e an as ses s m en t , b u to n e can n o t‘ det erm in e’ an ‘ as ses s m en t ’ .”). Becau s e Co n g res s en act ed s ect i o n 6 7 5 1 (b ) t o en s u re t h at“p en al t i es s h o u l do n l y b e i m p o s ed wh ere ap p ro p ri at e an dn o tas a b arg ai n i ng ch i p ”, Ch ai v . Co m m i ss i o ner, 8 51 F.3 d at2 1 9 (qu o t i n g S. Rep t . No . 1 0 5 -1 7 4 , at6 5 (1 99 8 ), 1 9 98 -3 C.B. 5 3 7 , 6 0 1 ), an d b ecau s e th e t ax p ay er d eci d es wh et h er t o p et i t i o n t h e Tax Co u rtaft er recei v i n g th e
n o t i ce o f d efi ci en cy , th e co u rth el dth at the IRS m u s to b tai n s uperv i s o ry

ap p ro v al
n o l at er t h an th e d at e t h e IRS i s s u es th e n ot i ce o f d efi ci en cy , Ch ai v . Co m m i s s i o n er, 8 3 1 F.3 dat2 2 1. Bu tl efto p enwas th e qu es t i o n we face: wh et h er ap p ro v al can co m e aft er t h e ag en ts en d s th e t ax p ay er p ro po s edad ju s t m en t s th at i n cl u d e p en al t ies . Ino th er wo rd s , m u s tan ag en ts ecu re p en al ty ap p ro v al b efo re- 4 3 -

s en d in g t o th e t ax p ay er wri tt enn ot i ce t h atp en al t i es wi l l b e p ro po s ed , i n t h i s cas e i n the fo rm

o f a n o t ice o f p ro po s edad ju s t m en t thatg i v es th e t ax pay er ri g h tt o ap p eal th e p ro p o s edp en al t i es wi th Ap p eal s . Pet i t i o ners arg ue t h atth e i n i t i al d et erm i n at i on o f a p en al ty i s “ th e fi rs tt i m e
an IRS o ffi ci al i nt ro du cedth e p en al ty i n t o th e co n v ers at i o n”. See Graev III, 1 4 9 T.C. at5 0 0 , 5 0 1 (Laub er, J ., co n cu rri n g ). Th ey co nt en d thatth e RAR co nt ai n ed th e fi rs ts u g g es t io n o f p en al t i es , m ak in g th e RAR--an dn o tth e n o t ice o f d efi ci en cy --t h e i n i t i al det erm i n at i o n . Th e RAR i s th e rep o rts en tt o th e t ax p ay er “ i n d i cat i n g th e ad ju s tm en t s t o i n co m e as rep o rt edo n th e ret urn an dth e n atu re o f t he ad ju s t m en t s * * * [t h e
rev en u e ag en t ] p ro p o s es t o m ak e.” Bran ert o n Co rp . v . Co m m i s s i o n er, 6 4 T.C. 1 9 1 , 1 9 4 -1 9 5 (1 9 75 ). Wh en a 3 0 -d ay l et t er i s s en t , th e t ax p ay er m ay p ro t es tth o se ad ju s t m en t s atAp p eal s an da n o t i ce o f d efi ci en cy m ay fo l lo w i f th e t ax pay er d oes
n o tp ro t es tth e ad

j u s t m en ts (o r i f t he t ax p ay er an dAp p eal s d o n o ts et t le). See
s ecs . 6 0 1.1 0 5(d ), 6 0 1 .1 0 6 (b ), St at em en to f Pro cedu ral Ru l es . Th e n o ti ce o f d efi ci en cy

i s th e m ean s b y

wh i ch th e Co m

m i s si o n er n o t i fi es th e t ax p ay er t h ath e h as d et erm i n eda d efi ci en cy . Sec. 6 2 1 2(a). On ce t h e IRS d et erm i n es a d efi ci en cy , i n cl u d i n g an y

p en al t i es , the IRS can as s es s th atd efi ci en cy u n l es s th e t ax p ay er t i m el y pet i ti o n s th i s Co u rtfo r red et erm i n at io n o f th atl i ab i l i ty . See s ec. 6 2 1 3 (a).- 4 4 -

Th e d et erm i n at i o n s m ad e i n a n o ti ce o f d efi ci en cy ty p i cal l y are b as edo n th e ad ju s t m en t s p ro po s edi n an RAR. See Bran ert o n Co rp . v . Co m m i s s i o n er, 6 4 T.C. at1 9 4 -1 9 5 ; Gl o b e To ol & Di e M fg . Co . v . Co m m is s i o n er, 3 2 T.C. 1 1 3 9 , 1 1 4 1 (1 9 5 9) (“ [R] es p on d en t s en tt o p et i t i o n er b y reg i s tered m ai l a n o ti ce o f d efi ci en cy d et erm i n i n g d efi ci en ci es i n i n co m e t ax fo r th e t ax ab l e y ears 1 9 51 an d 1 9 5 2 . * * * Sai dd et erm i n at io n b y

res po n d en twas b as edo n t h e ad ju s t m en t s co nt ai n edi n th e
rev en u e ag en t ’ s rep o rt [.] ”); Fi tzn er v . Co m m i s s io n er, 3 1 T.C. 1 2 52 , 1 25 5 (1 9 5 9) (“ [I] ti s o b v i o u s th atp et it io n er * * * i s rel y i n g up o n th e rev en u e ag en t ’ s rep o rt o f
ex am i n at i o n up on wh i ch res po n d en tb as edh is d et erm i n at i o n o f d efi ci en cy .”). An dwh en th o s e p ro p o s edad ju s t m en t s are co m

m un i cat ed t o th e t ax p ay er fo rm al l y
as p arto f a co m

m u n i cat i o n th atad v i s es th e t ax p ay er t h at p en al t i es wi l l b e p ro p os edan dg i v i n g t h e t ax p ay er t h e ri g h tt o ap p eal th em wi th Ap p eal s (v i a a 3 0
- d ay l et t er), t h e i s s u e o f p en al t i es i s o ffi ci al l y o n th e t ab le. See Pal m ol i v e Bl d g In v ’ rs , LLC v . Co m

m i s s i on er, 1 5 2 T.C. _

_ , _

_ (s l ip o p . at2 0 -2 3) (Feb . 2 8 , 2 0 1 9 ) . Th erefo re, we co n cl ud e th atth e i n i ti al d et erm i nat i o n fo r p urp o s es o f s ect io n 6 7 5 1 (b ) was m ad e n o l at er t h an Sep t em b er 1 3 , 2 0 1 0 , wh en res po n d en ti s su edth e RAR t o p et i t i o n ers p ro p os i ng ad ju s t m en t s i n cl u d i n g p en al t i es an dg av e t h em th e ri gh t t o p ro t es tth o s e p ro p o sed ad ju s t m en t s .- 4 5 -

Nex twe co ns i der wh en M s . Gen try ap pro v edth es e p en al t i es . Res po n d en t d o es no tco n t en d t h at , n or d o we co n si d er wh et h er, M s. Gen try ’ s Au g u st4 , 2 0 1 0 , m em o ran du m

s at i s fi es h i s b u rd en ; h e d irect edu s t o t h e p en al ty ap p ro v al fo rm i n i t i al edb y

M s . Gen try

o n O ct o b er 1 8 , 2 0 1 0
. W e t h erefo re h o l dth atM s. Gen try ap p ro v edth e p en al ty

d et erm i n at i o n s fo r 2 00 4 an d2 00 5 o n Oct o b er 1 8 , 2 0 1 0 --aft er th e i n i ti al d et erm in at i o n o f p ro p o s ed p en al t i es h adb een co m m u n i cat edt o p et i t i o n ers --an d th erefo re s up erv i s o ry ap p ro v al was n o tt i m el y

u n der s ect i o n 6 7 5 1 (b ). Becau s e we h o l dth atres p o n d en td i d n o tt i m el y o b t ai n wri t t en s uperv i s o ry ap p ro v al , we n eedn o treach p et i t i on ers ’ s eco n darg u m en tth atM s . Gen try fai l edt o
co n du ct a m ean i n g fu l rev iew. An y co nt en t i o n s we h av e n o tad dres s edwe d eem i rrel ev an t , m o o t, o r
m eri t l es s . To refl ectthe fo reg o i n g , Ap p ro p ri at e o rd ers wi l l b e i s s u ed , an dd eci s i on s wi l l b e en t ered
u n der Ru l e 1 5 5
.