Richard Leo Warbus v. Commissioner , 110 T.C. No. 21 ( 1998 )

110 T.C. No. 21UNITED STATES TAX COURT
RICHARD LEO WARBUS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2194-96. Filed April 21, 1998.
P, a member of a federally recognized tribe of
American Indians, purchased a boat that he used in
treaty "fishing-rights-related" activity as defined in
sec. 7873, I.R.C. In 1984, P obtained a commercial
loan for items related to the fishing boat from the
same lender who financed the purchase of the boat. The
loan repayment was guaranteed by the Bureau of Indian
Affairs (BIA). When P failed to make payments on the
loan as they became due, the lender repossessed and
sold the boat. In 1993, pursuant to its loan guaranty,
the BIA paid to the lender outstanding principal and
interest, which it deemed uncollectible from P. As a
result of the BIA payment and cancellation of his debt,
P enjoyed discharge of indebtedness income in 1993. P
did not report discharge of indebtedness income,
believing it to be exempt from tax as income from
Indian fishing-rights-related activity as described in
sec. 7873.
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Held: Discharge of indebtedness income received
by P from the BIA is not excludable from income under
sec. 7873 because it was not derived by P directly or
through a qualified Indian entity from a fishing-
rights-related activity.
Daniel A. Raas, for petitioner.
Christal W. Hillstead, for respondent.
OPINION
PARR, Judge: This case was heard by Special Trial Judge
John F. Dean pursuant to section 7443A(b) and Rules 180, 181, and
182.1 The Court agrees with and adopts the opinion of the
Special Trial Judge which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
DEAN, Special Trial Judge: Respondent determined a
deficiency in petitioner's 1993 Federal income tax of $3,054 and
additions to tax of $763.50 under section 6651(a) and $127.92
under section 6654(a). Petitioner concedes that he received
unreported rental income of $6,000 and nonemployee compensation
of $3,700 subject to self-employment tax, that he failed to file
a Federal income tax return for the year 1993, and that he did
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended. All Rule references are to
the Tax Court Rules of Practice and Procedure.
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not make estimated tax payments for the taxable year.2 The sole
issue for decision is whether certain discharge of indebtedness
income he received in the year 1993 is not subject to tax because
it is income derived from Indian fishing-rights-related activity.
All of the facts of this case are contained in a Stipulation
of Facts that along with an attached exhibit is incorporated
herein by reference.
Background
Petitioner resided in Bellingham, Washington, at the time
the petition was filed in this case.
Petitioner was in 1993 and is still a member of the Lummi
Nation (nation), a federally recognized tribe of American
Indians. The Lummi Nation is a signatory of the Treaty between
the United States and the Dwámish, Suquámish and other allied and
subordinate tribes of Indians in Washington Territory concluded
on January 22, 1855, at Point Elliott, Washington Territory, 12
2
Petitioner made no argument and presented no evidence to
show that his failure to file was due to reasonable cause and not
to willful neglect, nor did he argue or prove that his failure to
make estimated tax payments is excused because of a statutory
exception. We therefore deem these issues to be conceded by
petitioner. Rule 149(b); see Rothstein v. Commissioner, 90 T.C.
488, 497 (1988); Cerone v. Commissioner, 87 T.C. 1, 2 n.1 (1986).
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Stat. 927 (1859), in which the nation reserved fishing rights at
all of its usual and accustomed fishing grounds and stations.
See also United States v. State of Washington, 520 F.2d 676 (9th
Cir. 1975).
In or sometime before 1984, petitioner purchased a fishing
boat named the Denise W. The boat purchase was financed through
a combination of a commercial loan and a promissory note given to
the former owners of the Denise W.
In 1984 petitioner obtained a loan of $50,000 from the same
commercial lender that financed part of the boat purchase. The
$50,000 was used to make a payment toward the purchase of a
salmon net, to make a payment on the note held by the former
owners of the Denise W, to make insurance and mortgage payments,
and for miscellaneous items. The loan was guaranteed through a
Federal loan guaranty program administered by the Bureau of
Indian Affairs (BIA).
Petitioner operated the Denise W in treaty fishing-rights-
related activities of the nation from about 1986 through 1991.
During that period petitioner was licensed to fish in waters
within the nation, and the Denise W was registered by the nation
for use in the treaty fishing-rights-related activities of the
nation.
There came a time in or around the year 1993 when petitioner
did not make his loan payments as they became due. As a result,
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the Denise W was repossessed and sold by the commercial lender to
satisfy the unpaid loan amount. The BIA in 1993, pursuant to its
loan guaranty, paid lenders a total of $13,506.88, of which
$5,589.45 was applied to principal and the balance to interest.
For the year 1993 petitioner was sent a Form 1099-G from the BIA
reporting income in the amount of $13,506 from the "discharge of
indebtedness". Petitioner did not file a Federal income tax
return for the year 1993.
The parties agree that petitioner is entitled to one
personal exemption and a standard deduction based on married-
filing-separate status for the year 1993.
Discussion
It is petitioner's position that the income from discharge
of indebtedness he received in 1993 is not subject to tax because
it is income derived by an Indian from the exercise of fishing
rights under section 7873.
Section 7873 provides in relevant part:
SEC. 7873(a). In General.--
(1) Income and self-employment taxes.--No tax
shall be imposed by subtitle A on income derived--
(A) by a member of an Indian tribe
directly or through a qualified Indian
entity, or
(B) by a qualified Indian entity,
from a fishing rights-related activity of such tribe.
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(2) Employment taxes.--No tax shall be
imposed by subtitle C on remuneration paid for
services performed in a fishing rights-related
activity of an Indian tribe by a member of such
tribe for another member of such tribe or for a
qualified Indian entity.
(b) Definitions.--For purposes of this section--
(1) Fishing rights-related activity.--The
term "fishing rights-related activity" means, with
respect to an Indian tribe, any activity directly
related to harvesting, processing, or transporting
fish harvested in the exercise of a recognized
fishing right of such tribe or to selling such
fish but only if substantially all of such
harvesting was performed by members of such tribe.
(2) Recognized fishing rights.--The term
"recognized fishing rights" means, with respect to
an Indian tribe, fishing rights secured as of
March 17, 1988, by a treaty between such tribe and
the United States or by an Executive order or an
Act of Congress.
(3) Qualified Indian entity.--
(A) In general.--The term "qualified
Indian entity" means, with respect to an
Indian tribe, any entity if--
(i) such entity is engaged in a
fishing rights-related activity of such
tribe,
(ii) all of the equity interests in
the entity are owned by qualified Indian
tribes, members of such tribes, or their
spouses,
(iii) except as provided in
regulations, in the case of an entity
which engages to any extent in any
substantial processing or transporting
of fish, 90 percent or more of the
annual gross receipts of the entity is
derived from fishing rights-related
activities of one or more qualified
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Indian tribes each of which owns at
least 10 percent of the equity interests
in the entity, and
(iv) substantially all of the
management functions of the entity are
performed by members of qualified Indian
tribes.
For purposes of clause (iii), equity interests owned by
a member (or the spouse of a member) of a qualified
Indian tribe shall be treated as owned by the tribe.
(B) Qualified Indian tribe.--For
purposes of subparagraph (A), an Indian tribe
is a qualified Indian tribe with respect to
an entity if such entity is engaged in a
fishing rights-related activity of such
tribe.
The parties agree that petitioner operated the Denise W in a
"fishing rights-related activity". See sec. 7873(a)(1) and (2).
From this agreed starting point, petitioner argues that the
purchase of the Denise W and expenditures for associated
equipment and operating expenses are fishing-rights related and
that therefore the income from discharge of indebtedness incurred
to meet these expenses is fishing-rights related.
Every item of a person's gross income is subject to Federal
income tax unless there is a statute or some rule of law that
exempts the person or the item from gross income. HCSC-Laundry
v. United States, 450 U.S. 1, 5 (1981). Tax exemptions,
including those affecting native peoples, are not granted by
implication. If Congress intends to exempt certain income, it
must do so expressly. Earl v. Commissioner, 78 T.C. 1014, 1017
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(1982); Lazore v. Commissioner, T.C. Memo. 1992-404, affd. in
part and revd. in part 11 F.3d 1180 (3d Cir. 1993).
Under section 7873, income derived by a member of an Indian
tribe "directly or through a qualified Indian entity" from a
"fishing rights-related activity of such tribe" is not subject to
income tax. For purposes of section 7873, income derived from
"fishing rights-related activity" means income derived from
activity "directly related" to harvesting, processing,
transporting, or selling fish in the exercise of recognized
fishing rights of an Indian tribe. Sec. 7873(b).
In order for petitioner's argument to prevail, we must find
that his discharge of indebtedness income is derived from
activity "directly related" to harvesting, processing,
transporting, or selling fish in the exercise of recognized
fishing rights of an Indian tribe. To make that determination,
we must examine the nature of petitioner's income.
The income at issue results from petitioner's discharge of
indebtedness for funds he borrowed in part to purchase property
with which to engage in fishing-rights-related activity. In or
around 1993 petitioner's creditor seized collateral to satisfy
part of his unpaid loan amount. In 1993 the BIA paid off
petitioner's debts to the original lenders pursuant to, we
presume, the terms of the Indian Loan Guaranty and Insurance
Fund. See Indian Financing Act of 1974, Pub. L. 93-262, sec.
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201, 88 Stat. 79, current version at 25 U.S.C. sec. 1481 (1994).
This payment satisfied the remaining original loan amount, paying
it in full.
Upon payment of petitioner's obligations, however, the BIA
assumed the rights of the debtors insured under the fund,
including the right to cancel as uncollectible any portion of
petitioner's obligations. See 25 U.S.C. sec. 1491 (1994).
Petitioner therefore received his discharge of indebtedness
income from the Bureau of Indian Affairs, Department of the
Interior, an instrumentality of the United States. See An Act to
provide for the appointment of a commissioner of Indian affairs,
and for other purposes, July 9, 1832, ch. 174, 4 Stat. 564(1846), R.S. sec. 462, current version at 25 U.S.C. sec. 1
(1994).
Borrowed funds are not included in a taxpayer's income. Nor
are repayments of a loan deductible from income. When, however,
one's obligation to repay the funds is settled for less than the
amount of the loan, one ordinarily realizes income from discharge
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of indebtedness.3 Sec. 61(a)(12); Vukasovich, Inc. v.
Commissioner, 790 F.2d 1409, 1413-1414 (9th Cir. 1986), affg. in
part and revg. in part T.C. Memo. 1984-611.
Income from the discharge of indebtedness results from the
release of a taxpayer from an obligation to repay a debt that
causes "a net increase in assets equal to the forgiven portion of
the debt". United States v. Centennial Sav. Bank FSB, 499 U.S.
573, 582 (1991); Commissioner v. Tufts, 461 U.S. 300, 310 n.11
(1983) (the doctrine relies on a freeing-of-assets theory to
attribute ordinary income to the debtor upon cancellation);
United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931);4 Cozzi
v. Commissioner, 88 T.C. 435, 445 (1987) (an accession to income
due to a freeing of assets).
Petitioner's discharge of indebtedness income is the result
of the freeing of his assets from obligations by the BIA in
3
Depending upon the solvency of the taxpayer and the source
or use of the funds borrowed, an amount of income from discharge
of indebtedness may be deferred or excluded from income under
sec. 108. Petitioner has not raised exclusion under sec. 108,
and the record does not support one.
4
In an earlier case, Bowers v. Kerbaugh-Empire Co., 271 U.S.
170, 175 (1926), forgiveness of indebtedness was described as a
transaction that "did not result in gain from capital and labor,
or from either of them, or in profit gained through the sale or
conversion of capital." See discussion in Vukasovich, Inc. v.
Commissioner, 790 F.2d 1409, 1414-1415 (9th Cir. 1986), affg. in
part and revg. in part T.C. Memo. 1984-611.
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1993,5 not from any activity by him "directly related" to
harvesting, processing, transporting, or selling fish in the
exercise of recognized fishing rights of an Indian tribe. We
note that even had petitioner's loan proceeds been income in the
first instance in 1984, their source was not activity directly
related to harvesting, processing, transporting, or selling fish
in the exercise of recognized fishing rights of an Indian tribe.
Forgiveness of the repayment of those loan proceeds by a third
party cannot convert the freeing of petitioner's assets into
fishing-rights-related income merely because the loan proceeds
were used to purchase equipment used in such an activity.
The BIA does not engage in harvesting, processing,
transporting, or selling fish and is not a "qualified Indian
entity" under section 7873(b)(3). Petitioner's income was
generated in the year 1993 by the BIA's discharge of his
indebtedness. Petitioner therefore did not receive directly, or
through a qualified Indian entity, income from a fishing-rights-
related activity.
5
The parties stipulated that petitioner was engaged in
fishing-rights-related activity in the years 1986 through 1991.
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We find to be correct respondent's determination that
petitioner's discharge of indebtedness income is includable in
income in 1993.
Decision will be
entered for respondent.