Tax-time interpretation of trust laws can lead to trouble, court indicates
DENVER – A tribal chairman who interpreted Internal Revenue Service rules favorably when determining his own income tax made “incredibly minimal” efforts to accurately assess his tax liability and is therefore subject to penalty, according to a decision of the 10th Circuit Court April 6.
John A. Barrett Jr., long-time chairman of the Citizen Potawatomi Nation, Shawnee, Okla., appealed an Oklahoma District Court’s refusal to review $19,355 in additional taxes and $3,871 in penalties he paid to the IRS after the agency said his salary did not qualify as one way of developing a “strong and stable” tribal government under trust rules.
In 1996, Barrett suggested to the Potawatomi business committee that he be paid from the earnings accrued from the tribal trust fund, concluding he would be exempt from taxes on such income, the appellate court said.
“A reasonable taxpayer in Barrett’s position would not rely solely on his or her own analysis of the law to conclude his compensation was exempt,” the court said. “He was confronted with complicated legal authority, compensation was normally taxed, and he did not seek professional advice.”
Trust funds originally distributed by the Indian Claims Commission constituted per capita and program payments that were not subject to federal or state income taxes. However, although the Potawatomi business committee transferred management of the trust funds from the secretary of the interior to the tribe in 1996, the authorized programmatic purposes of acquiring real estate, developing the tribe and maintaining tribal property continued.
When Barrett suggested he be paid from trust fund earnings, he instructed the tribal accounting department not to withhold taxes from his paychecks and not to issue a W-2 form to him, according to the appellate court.
Barrett contended his tribal chairman’s pay was non-taxable because it furthered the trust-approved development of the tribe, defined as the “growth, building up, expansion, strengthening, increased effectiveness or other evolutionary process toward the progress of the tribe,” the court said, revisiting the facts presented in District Court.
The trust-derived tax exemption for development-related programming funds should also exempt his income as tribal chairman from taxation because it fits within the programming aspect, Barrett said.
The appellate court, however, said Barrett’s salary “is not an expenditure for an ‘evolutionary process toward the progress of the tribe economically and/or socially, and/or governmentally,’” and quoted the Supreme Court as repeatedly saying that “tax exemptions are not granted by implication.”
“If the annual compensation paid to a tribal chairman was to be exempt from taxation, it could have been easily and plainly expressed,” the court noted.
Although Barrett cites sources which “emphasize the government’s strong desire for American Indians to progress toward tribal self-sufficiency, this goal does not trump the long-standing requirement that an exemption from the payment of taxes must be explicitly stated,” the appellate court said.
The 10th Circuit upheld the accuracy-related penalty imposed by the lower court because, it said, “Barrett made no effort to ascertain his tax status beyond his own interpretation of the convoluted, historical legislation, revenue regulations and tribal treaties.”
Barrett was out of the office and was not immediately available for comment.