Blue Lake Rancheria Economic Development Corporation v. Commissioner

152 T.C. No. 5UNITED STATES TAX COURT
BLUE LAKE RANCHERIA ECONOMIC DEVELOPMENT CORPORATION,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
MAINSTAY BUSINESS SOLUTIONS, Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket Nos. 16150-17L, 16189-17L. Filed March 6, 2019.
In these consolidated cases P1 is a corporation of a federally
recognized Indian Tribe with a charter issued by the Department of
Interior (DOI) under sec. 17 of the Indian Reorganization Act (IRA
sec. 17). P2 is a division of P1. R initiated collection actions under
I.R.C. secs. 6320 and 6330 against P1 and P2 for unpaid employment
taxes generated from P2’s business operations.
P1’s charter allows it to create subdivisions for the purpose of
legally segregating the assets and liabilities of discrete business
endeavors. R argues that DOI does not have authority to grant P1 this
power because the grant is contrary to established State corporate law
principles. P1 argues that P2 is a legally separate division permitted
by P1’s IRA sec. 17 charter and R is precluded from collecting P2’s
employment tax liabilities from P1. As a secondary issue, R argues
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that irrespective of the charter, P2 assumed P1’s corporate identity
and did not in fact operate as a separate division.
Held: P1’s charter properly allowed it to create corporate
divisions whose assets and liabilities were distinct from those of P1
for Federal tax purposes.
Held, further, P2 acted as a legally distinct division of P1;
therefore, R is precluded from collecting P2’s employment tax
liabilities from P1.
Held, further, P2 is liable for employment taxes in accordance
with the parties’ concessions and stipulations.
Robert R. Rubin, Jonathan Edward Strouse, and Michael E. Chase, for
petitioners.
Mark Alexander Ericson and Mark L. Hulse, for respondent.
GOEKE, Judge: In these consolidated collection due process (CDP) cases,
petitioners seek review pursuant to section 6330, as made applicable by section
6320(c), of respondent’s determinations set forth in his notices of determination.1
Respondent initiated the collection actions with respect to unpaid employment
taxes (i.e., Federal income tax, Social Security, and Medicare withholdings) for
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code as amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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several quarterly tax periods. Respondent sent petitioners Letters 3172, Notice of
Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320, on June 19,
2012, June 20, 2013, and December 19, 2013. On June 30, 2017, respondent sent
petitioners three notices of determination sustaining the employment tax
assessments in his notices of Federal tax lien filings. Respondent assessed unpaid
employment taxes as follows:2
Letter 3172 date Tax period ended Assessment balance
June 19, 2012 June 30, 2009 $264,906.27
June 19, 2012 Dec. 31, 2009 3,896,585.84
June 19, 2012 June 30, 2010 237,861.16
June 19, 2012 Sept. 30, 2010 431,504.25
June 19, 2012 Dec. 31, 2010 397,946.00
June 19, 2012 Mar. 31, 2011 4,131,635.19
June 20, 2013 June 30, 2011 1,085,074.37
Dec. 19, 2013 Sept. 30, 2009 1,085,347.21
Total 11,530,860.29
2
These assessment balances reflect the amounts recorded by respondent on
his notices of Federal tax lien filing sent to petitioners. The amounts do not
include interest and penalty accruals, abatements, payments, and the like, which
occurred after the Federal tax liens were filed and recorded. Respondent has made
concessions, and the parties have stipulated the current outstanding balances.
Petitioners do not dispute the underlying employment tax assessments.
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Following concessions and stipulations by the parties, the sole issue
remaining for decision is whether petitioner Blue Lake Rancheria Economic
Development Corp. (BLREDCo) is liable for the employment tax liabilities of its
corporate division, petitioner Mainstay Business Solutions (MBS).3 We hold that
it is not.
3
Petitioners initially challenged the computation of failure to deposit
penalties assessed under sec. 6656 for some of the taxable quarters at issue.
However, following concessions by respondent these penalties have been resolved
in the fourth stipulation of facts as follows:
Penalty
Tax period ended sec. 6656
June 30, 2010 $153,728.68
Sept. 30, 2010 258,317.20
Dec. 31, 2010 322,761.27
Mar. 31, 2011 450,762.88
The fourth stipulation of facts also purports to resolve the penalties for the
tax period ended March 31, 2010. However, as there was no notice of Federal tax
lien concerning that period, we have no jurisdiction to consider it.
MBS has also filed a claim for interest abatement which is pending before
the Court in docket No. 6510-18. The decision in this case does not take into
account that separate pending claim.
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FINDINGS OF FACT
The parties have filed four stipulations of facts which are incorporated
herein by this reference. The petitions in these cases were timely filed on July 31,
2017. At that time BLREDCO’s principal place of business was in California;
MBS’ principal place of business was also in California before it ceased
operations.
Blue Lake Rancheria (Tribe) is an Indian Tribe federally recognized by the
U.S. Department of the Interior (DOI). BLREDCo is a federally chartered
corporation whose charter was issued to the Tribe by DOI. At all relevant times
MBS operated a professional employment organization that provided employee
leasing and temporary staffing services. MBS has its own Federal employer
identification number (FEIN), separate from the one issued to BLREDCo. The
employment taxes at issue arose from MBS’ business operations.
On June 8, 2012, respondent prepared Forms 668(Y)(c), Notice of Federal
Tax Lien, for the employment taxes for the tax periods ended June 30 and
December 31, 2009, June 30, September 30, and December 31, 2010, and March
31, 2011 (first NFTLs). The first NFTLs were recorded with the County
Recorders of Clark County, Nevada, and Sacramento County, California, and filed
with the California secretary of state. The first NFTLs were recorded and filed in
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the name of “MAINSTAY BUSINESS SOLUTIONS A DIVISION OF BLUE
LAKE RANCHERIA ECONOMIC DEVELOPMENT CORPORATION” and
“BLUE LAKE RANCHERIA ECONOMIC DEVELOPMENT CORPORATION
DBA MAINSTAY BUSINESS SOLUTIONS.” On June 19, 2012, respondent
mailed Letters 3172 and copies of the prepared Forms 668(Y)(c) to MBS and
BLREDCo. The Letters 3172 indicated that the first NFTLs were filed on June
19, 2012.
On June 10, 2013, respondent prepared Forms 668(Y)(c) for the
employment taxes for the tax period ended June 30, 2011 (second NFTLs). The
second NFTLs were recorded with the County Recorder of Clark County, Nevada,
and filed with the California secretary of state. The second NFTLs were recorded
and filed in the name of “BLUE LAKE RANCHERIA ECONOMIC
DEVELOPMENT CORPORATION DBA MAINSTAY BUSINESS
SOLUTIONS.” On June 20, 2013, respondent mailed a Letter 3172 and copies of
the prepared Forms 668(Y)(c) to BLREDCo. The Letter 3172 indicated that the
second NFTLs were filed on June 21, 2013. Respondent has not issued a Letter
3172 or filed a notice of Federal tax lien in the name of MBS for the employment
taxes for the tax period ended June 30, 2011.
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On December 9, 2013, respondent prepared Form 668(Y)(c) for the
employment taxes for the tax period ended September 30, 2009 (third NFTLs).
The third NFTLs were recorded with the County Recorder of Clark County,
Nevada, and filed with the California secretary of state. The third NFTLs were
recorded and filed in the name of “MAINSTAY BUSINESS SOLUTIONS A
DIVISION OF BLUE LAKE RANCHERIA ECONOMIC DEVELOPMENT
CORPORATION” and “BLUE LAKE RANCHERIA ECONOMIC
DEVELOPMENT CORPORATION DBA MAINSTAY BUSINESS
SOLUTIONS.” On December 19, 2013, respondent mailed Letters 3172 and
copies of the prepared Forms 668(Y)(c) to MBS and BLREDCo. The Letters 3172
indicated that the third NFTLs were filed on December 19, 2013.
The first, second, and third NFTLs all reflected the FEIN of MBS, not that
of BLREDCo.
On July 25, 2012, BLREDCo and MBS each timely filed a Form 12153,
Request for a Collection Due Process or Equivalent Hearing, with respondent for
the employment taxes for the tax periods listed in the first NFTLs. On July 18,
2013, BLREDCo and MBS each timely filed a Form 12153 with respondent for
the employment taxes for the tax period listed in the second NFTLs. On January
15, 2014, BLREDCo and MBS each timely filed a Form 12153 with respondent
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for the employment taxes for the tax period listed in the third NFTLs. The Forms
12153 filed by MBS and BLREDCo reflected different FEINs; the FEIN used by
BLREDCo was not its own, but one of another related entity.
On June 30, 2017, respondent issued three notices of determination
addressed to BLREDCo in relation to the first, second, and third NFTLs. The
notices of determination included the FEIN of MBS.
I. Creation of BLREDCo
In June 2003 the Tribe submitted a tribal resolution and proposed charter of
incorporation to DOI, requesting approval of a Federal charter of incorporation
under the Indian Reorganization Act of 1934 (IRA), ch. 576, sec. 17, 48 Stat. at
988 (codified as amended at 25 U.S.C. sec. 5124 (Supp. V 2017) (formerly
codified at 25 U.S.C. sec. 477)) (IRA sec. 17). On December 29, 2004, DOI
approved the Tribe’s request and issued a charter under the authority of IRA sec.
17. On January 31, 2005, the Tribe’s business council passed Resolution No. 05-
07 ratifying the approved charter, which had the effect of bringing BLREDCo into
existence as a federally chartered corporation (IRA sec. 17 corporation). In
relevant part, BLREDCo’s IRA sec. 17 charter states:
WHEREAS, the Business Council has found that the formation of the
Blue Lake Rancheria Economic Development Corporation pursuant
to a § 17 Charter will serve the best interest of the Tribe, its members
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and its enterprises and will protect the political integrity, economic
security and health and welfare of the Tribe and its members by,
among other things * * * creating a legal structure which provides for
the segregation of discrete Corporation assets and liabilities into
separate Corporate subdivisions, without divesting either the
Corporation or the tribe of the privileges and immunities arising
pursuant to their legal status under federal and Tribal Law * * *
* * * * * * *
ARTICLE VIII. - Corporate Powers
Subject to applicable federal law, the Corporation is authorized and
empowered to exercise the following powers:
* * * * * * *
E. To create subdivisions of the Corporation for the purpose of
legally segregating the assets and liabilities of discrete business
endeavors of the Corporation regardless of common directorship;
provided, that each such subdivision shall have the rights and
privileges granted by and be subject to the limitations of this Charter.
II. Creation of MBS
In 2003 MBS was formed as an enterprise of the Tribe and obtained a
separate FEIN. During all relevant times, MBS maintained its own separate FEIN.
On December 11, 2006, the Tribe’s business council passed Ordinance No. 06-02
(conversion ordinance), which created a new article in the Tribe’s Tribal Code
authorizing business entities wholly owned by the Tribe to convert to divisions of
BLREDCo through a plan of conversion. In relevant parts the conversion
ordinance reads:
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§ 2.1.3.01. Conversion of another business entity into a division of
Blue Lake Rancheria Economic Development Corporation.
Any business entity wholly owned by the Tribe * * * may be
converted into a division of the Blue Lake Rancheria Economic
Development Corporation * * * as authorized by Article VIII, Section
E of the Federal Charter issued on December 29, 2004 for * * *
[BLREDCo] by the Secretary of the United States Department of
Interior pursuant to 25 U.S.C. § 477.
* * * * * * *
§ 2.1.3.04. Rights and liabilities.
(a) Except as set forth in subsection (c) below, an entity that
converts into a division of * * * [BLREDCo] pursuant to this article
is for all purposes the same entity that existed before the conversion.
(b) Upon a conversion taking effect, all of the following apply:
(1) All the rights and property, whether real, personal, or
mixed, of the converting entity are vested in the converted division
and shall be held separate and apart from all other rights and property
of * * * [BLREDCo].
(2) All debts, liabilities, and obligations of the
converting entity continue as debts, liabilities, and obligations of the
division and shall be separate and apart from the debts, liabilities, and
obligations of * * * [BLREDCo].
(3) All employees of the converting entity shall remain
the employees of the * * * [BLREDCo] division.
(4) All authorization, identification numbers, and
accounts held by the converting entity shall remain in full force and
effect for the benefit of the new * * * [BLREDCo] division to the
extent authorized or permitted by law.
(5) All rights of creditors and liens upon the property of
the converting entity shall be preserved unimpaired and remain
enforceable against the division to the same extent as against the
converting entity as if the conversion had not occurred.
(6) Any action or proceeding pending by or against the
converting entity may be continued against the division as if the
conversion had not occurred.
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(c) Except as expressly stated above, the division will operate
as a division of * * * [BLREDCo] in accordance with the * * *
[BLREDCo] Corporate Charter and the * * * [BLREDCo] Bylaws
and the division shall have the status of a federally chartered
corporation for all purposes.
Also on December 11, 2006, the Tribe’s business council passed Resolution
No. 06-29 (conversion resolution), which adopted a plan for converting MBS, in
accordance with the conversion ordinance, from an enterprise of the Tribe to a
division of BLREDCo. In coordination with the conversion resolution, a
certificate of conversion was filed with the Tribal secretary. MBS’ name was
changed from “Mainstay Business Solutions” to “Mainstay Business Solutions, a
division of Blue Lake Rancheria Economic Development Corporation.” In
relevant part the conversion resolution states:
Upon Conversion, Mainstay Business Solutions, a division of
* * * [BLREDCo], shall operate as a division of * * * [BLREDCo]
under the direction and control of the * * * [BLREDCo] Board of
Directors in accordance with the * * * [BLREDCo] corporate charter
and bylaws, subject to § 2.1.3.04 of the Blue Lake Rancheria Tribal
Code.
III. Operations of BLREDCo and MBS
At all relevant times, MBS was engaged in a number of employment
staffing business activities including employee leasing, temporary staffing, payroll
services, and Human Resources administration outsourcing. Neither BLREDCo
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nor any of its other divisions were engaged in similar business activities during the
tax quarters at issue. In 2009 and 2010 MBS had more than 20,000 employees and
more than $100 million in revenue and expenses.
MBS had its own bank accounts with Bank of America, including an
operating account and a payroll account, and an account with Union Bank. MBS
paid its employees from its Bank of America payroll account. MBS filed quarterly
Forms 941, Employer’s Quarterly Federal Tax Return, for employment tax
quarters ended June 30, September 30, and December 31, 2009, March 31, June
30, September 30, and December 31, 2010, and March 31, 2011. MBS completed
a Form 941 for the employment tax quarter ended June 30, 2011, but did not file
the return with respondent. MBS had its own employee benefit plans including a
section 401(k) retirement plan, health plan, dental plan, vision plan, and flexible
benefits plan. MBS paid the employer’s portions of the costs for the health,
dental, and vision plans.
MBS had its own customers, including certain departments of the State of
California, and used written contracts and client service agreements with those
customers. MBS was paid by its customers; BLREDCo did not receive payments
from MBS customers. MBS leased equipment and automobiles in its own name
and made lease payments on the same. MBS had commercial general liability
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insurance, workers compensation insurance, and property and casual insurance all
in its own name. The premiums for these policies were all paid out of MBS’
operating account.
BLREDCo was an entity that collected cash and assets for the Tribe for the
purpose of economic development. BLREDCo had bank accounts and assets
separate from MBS’. BLREDCo also administered a general fund with
unrestricted cash from casino operations. The board of BLREDCo received
informational updates on the operations of MBS at its board meetings but was not
involved in the operations of MBS.
A. MBS Office Space
MBS leased office space and paid the rent and personal property taxes
associated with these leases. In addition, MBS occupied part of an office building
at 605 Coolidge Drive, Folsom, California (Coolidge property). Title to the
Coolidge property was taken in the name of BLREDCo d.b.a. MBS as required by
Rabobank, the secured lender, in order to close the loan.
Although title to the Coolidge property was in the name of BLREDCo,
MBS made the monthly mortgage payments on the building and paid maintenance
and repair costs for the property. MBS also collected rent from a lessee in the
building. In addition, MBS paid the property taxes, the utility bills, and the
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liability insurance associated with the Coolidge property. The liability insurance
named only MBS as insured.
B. Flexible Funding Accounts Receivable Financing Agreement
On May 15, 2009, MBS and Flexible Funding, LLC (FF), entered into an
accounts receivable financing agreement (FF agreement) whereby FF provided
accounts receivable financing to MBS. The FF agreement was silent as to the
relationship between BLREDCo and MBS. MBS, but not BLREDCo, gave FF a
Form 8821, Tax Information Authorization, dated June 3, 2009. Under the FF
agreement, certain MBS customers made payment, via check or wire transfer, to a
joint bank account opened by MBS and FF for the benefit of FF. FF provided a
line of credit against which MBS could draw.
On May 26, 2010, an amended financing agreement (amended FF
agreement) was entered into between FF, BLREDCo, and MBS, which the
agreement identifies as a division of BLREDCo. In relevant part the amended FF
agreement states: “This agreement amends and restates in its entirety that certain
Account Receivable Financing Agreement between MAINSTAY BUSINESS
SOLUTIONS and FLEXIBLE FUNDING dated May 15, 2009 to reflect that Blue
Lake Rancheria Economic Development Corporation was the original contracting
party.”
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Although the amended FF agreement includes BLREDCo as a party and
was ostensibly made to clarify that BLREDCo was a party to the original
agreement, the terms of the amended FF agreement impose obligations and
provide benefits to FF and MBS; they are completely silent as to BLREDCo.
The preamble to the amended FF agreement states:
FLEXIBLE FUNDING hereby agrees to provide MAINSTAY
services as more fully set forth and specified in this Agreement. Such
services shall include: (1) establishing and maintaining for
MAINSTAY’s benefit an “open end” credit program * * * using as
collateral the assignment by MAINSTAY to FLEXIBLE FUNDING
of all of the ACCOUNTS RECEIVABLE resulting from placement of
temporary employees * * *.
In addition, the amended FF agreement, as it relates to collateral, provides:
12. MAINSTAY hereby agrees that all of its obligations under this
Agreement are hereby secured by the assignment to FLEXIBLE
FUNDING of the following property (hereinafter the “Collateral”):
a. All accounts receivable, rights to receive payment for
services rendered whether by contract or otherwise,
rights to liquidated damages, claims for unliquidated
debts (the “Accounts”) now existing or hereafter created
arising from any business of MAINSTAY * * *; and
b. All proceeds from such Accounts * * *, and;
c. All books and records relating to any of the above * * *
in the possession or control of MAINSTAY * * *.
13. MAINSTAY agrees to execute, upon demand by FLEXIBLE
FUNDING, any and all Financing Statements * * * useful or
necessary to perfect FLEXIBLE FUNDING’s security interest * * *.
MAINSTAY hereby irrevocably appoints FLEXIBLE FUNDING its
agent for the purposes of executing and filing any financing statement
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or similar document which may be necessary to perfect and continue
perfected such security interest under the Uniform Commercial Code.
The amended FF agreement is silent as to perfecting any interest against
BLREDCo; however, attached to the agreement is a document entitled
“ATTACHMENT PAGE TO FORM UCC-1” which lists BLREDCo as the
“Entity’s Name”. On April 2, April 22, May 7, and June 11, 2010, FF filed UCC-1
Financing Statements which named BLREDCo as the debtor and MBS as an
additional debtor. Each financing statement covered the collateral described in the
amended FF agreement. Although BLREDCo was listed as the debtor on the
financing statements, there is no evidence in the record that BLREDCo had any
accounts or other assets that were covered by the collateral as described.
Following the amended FF agreement, MBS, not BLREDCo, continued to
make payments to FF. In addition, as a condition of continuing the agreement,
BLREDCo’s board of directors granted a limited waiver of sovereign immunity in
favor of FF, which was enforceable only against the assets of MBS. BLREDCo’s
IRA sec. 17 charter delegated to its board of directors the authority to waive
sovereign immunity for the divisions of BLREDCo, including MBS.
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C. MBS Ceases Operations
Economic conditions in the late 2000’s and early 2010’s made it difficult for
MBS to meet its unemployment insurance obligations with the State of California.
MBS failed to make several payments on its California unemployment insurance
liability. MBS also failed to make appropriate payments to respondent for its
employment tax liabilities throughout the periods at issue in these cases.
As a result of outstanding unemployment insurance liabilities, the California
Employment Development Department (EDD) levied on the bank accounts and
accounts receivable of MBS, making it impossible for MBS to pay its expenses,
including payroll. MBS was forced to cease operations the same day the levies
were served. In August 2011 EDD released the levies pursuant to a court order.
EDD did not levy on the bank accounts of BLREDCo. MBS has few to no assets
remaining following its cessation of operations. No MBS assets were transferred
to the Tribe or BLREDCo during all relevant times, including after MBS ceased
operations.
IV. IRA Sec. 17 Charters Generally
To establish an IRA sec. 17 corporation, an Indian Tribe must submit to the
Secretary of DOI a resolution adopted by its tribal council requesting the issuance
of a charter. The Secretary has delegated his power to issue corporate charters to
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the Bureau of Indian Affairs (BIA) regional offices. As part of the approval
process, each IRA sec. 17 charter must be reviewed by BIA for consistency with
Federal law and subsequently approved by the BIA Regional Director and by the
Assistant Secretary--Indian Affairs. Following approval by DOI, the tribal council
must pass another resolution ratifying the charter. Upon passage of the ratifying
resolution, the corporation is officially created. Once issued, an IRA sec. 17
charter cannot be revoked or surrendered except by an act of Congress.
IRA sec. 17 describes the powers that can be granted to an IRA sec. 17
corporation in its charter, and an IRA sec. 17 corporation is authorized to exercise
only the powers specified in its charter. DOI has issued numerous IRA sec. 17
charters to Federal Indian Tribes. Since May 12, 1998, Federal charters have been
issued to create at least 28 tribally owned corporations under IRA sec. 17,
including the one issued to the Blue Lake Rancheria Tribe which established
BLREDCo. Each of these 28 charters contained terms substantially similar to
those found in BLREDCo’s IRA sec. 17 charter allowing for the creation of
corporate divisions for the purpose of legally segregating assets and liabilities.
OPINION
We are a court of limited jurisdiction, and as such we must determine
whether the case before us is one that Congress has authorized us to consider.
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Naftel v. Commissioner, 85 T.C. 527, 529 (1985). These consolidated cases
involve separate petitioners, and we must decide our jurisdiction over each. We
have jurisdiction to decide a CDP case where there is a written notice embodying a
determination by the Commissioner in regard to the filing of notices of Federal tax
lien and the taxpayer timely files a petition with this Court. Secs. 6320(c),
6330(d); Lunsford v. Commissioner, 117 T.C. 159, 164 (2001). In these cases,
respondent issued three notices of determination in relation to the notices of
Federal tax lien, and petitioners timely filed petitions for this Court’s review.
A notice of determination is generally valid if it specifies the taxable
periods at issue, as well as the liabilities and collection action to which it relates
or, at the very least, provides sufficient information so that the taxpayer cannot
reasonably be deceived as to these items. Dees v. Commissioner, 148 T.C. 1(2017); LG Kendrick, LLC v. Commissioner, 146 T.C. 17, 28-29 (2016), aff’d,
684 F. App’x 744 (10th Cir. 2017). We have held that a flaw in a jurisdictional
notice is not fatal if the notice and any attachments are sufficient to apprise the
taxpayer of the Commissioner’s determination and the taxpayer was not prejudiced
or misled by the flaw. LG Kendrick, LLC v. Commissioner, 146 T.C. at 29; John
C. Hom & Assocs., Inc. v. Commissioner, 140 T.C. 210, 213 (2013) (“Mistakes in
a notice will not invalidate it if there is no prejudice to the taxpayer.”).
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In First Rock Baptist Church Child Dev. Ctr. v. Commissioner, 148 T.C.
380, 387 (2017), we dismissed First Rock Baptist Church (Church) because it had
not been issued a valid notice of determination. We determined we had
jurisdiction over First Rock Baptist Church Child Development Center (Center),
however, because the Center was the subject of the IRS collection action, the
Federal tax lien arose against it, and the notice of determination was sent to the
Center at its correct address, bore the Center’s taxpayer ID number, and showed it
related to the Center’s quarterly tax periods at issue. Id. at 386-387. We
dismissed the Church in that case because, although the notice had been
erroneously addressed to it, the Church was not the subject of any IRS collection
action, it had no outstanding tax liabilities, and no Federal tax lien had been filed
against it. Id. at 387. Accordingly, we held that no valid notice of determination
was issued by the IRS to the Church. Id. at 387-388.
In these cases, respondent issued a single set of three notices of
determination relating to the notices of Federal tax lien he had previously issued to
petitioners. Those notices of determination were addressed to BLREDCo;
however, they included the unique FEIN of MBS. In addition, the notices made
clear which tax periods and which liabilities and collection actions they related to.
Petitioners were clearly not deceived as to the items covered by the notice of
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deficiency, and each petitioner timely filed a petition with this Court. See Dees v.
Commissioner, 148 T.C. at 9 (finding that the taxpayer “was not misled by the
ambiguous notice of deficiency, as evidenced by the content of his timely filed
petition”).4 Although separate notices of determination were not issued to MBS
and BLREDCo, Federal tax liens were filed against both entities, both were sent
Letters 3172 indicating the tax lien filings, both participated in the CDP Appeals
process with respondent, and there is a dispute as to whether the tax liabilities can
be collected from BLREDCo. Consequently, we find this situation distinguishable
from that in First Rock Baptist Church Child Dev. Ctr. and determine our
jurisdiction is appropriate as to MBS and BLREDCo.
The parties stipulate that petitioners had no opportunity before the CDP
hearing to dispute the underlying tax liabilities at issue in these cases. Our
jurisdiction allows us to review agency action embodied in a “determination”.
Secs. 6320(c), 6330(d)(1). Where a taxpayer had no prior opportunity to dispute
the tax liability at issue, it may raise it for the first time in its hearing. Secs.
6320(c), 6330(c)(2)(B). Petitioners raised, in their hearing, a dispute as to who is
4
A notice of determination under secs. 6320 and 6330 is the jurisdictional
equivalent of a notice of deficiency; therefore, our caselaw on valid notices of
deficiency informs our analysis. See LG Kendrick, LLC v. Commissioner, 146
T.C. 17, 29-30 (2016), aff’d, 684 F. App’x 744 (10th Cir. 2017); Offiler v.
Commissioner, 114 T.C. 492, 498 (2000).
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liable for the underlying tax liabilities. There remains a genuine case or
controversy between the parties as to who is liable for the taxes owed; and because
the underlying tax liabilities are properly at issue, we will review respondent’s
determinations as to those liabilities de novo. See Sego v. Commissioner, 114
T.C. 604, 610 (2000).5
While the parties have stipulated the proper amounts of liabilities owed,
they leave for us to decide who the responsible taxpayer is in these cases. Thus,
we must review the appropriateness of respondent’s collection action against each
petitioner. MBS has conceded that respondent may collect from it the unpaid
employment taxes; we must decide whether respondent can also pursue collection
action against BLREDCo in these unique cases.
A few guiding principles can help to situate this dispute. As an initial
matter, classification of organizations for Federal tax purposes is determined by
5
Although neither party raised the issue, we must briefly consider our
jurisdiction over MBS for the tax period listed in the second NFTLs. Respondent
acknowledges that he never filed a Federal tax lien for the period ended June 30,
2011, in the name of MBS; however, our jurisdiction turns not on the filing of a
Federal tax lien, but on the issuance of a notice of determination. First Rock
Baptist Church Child Dev. Ctr. v. Commissioner, 148 T.C. 380, 388 (2017)
(rejecting that “withdrawal of the NFTL by itself moots the entire case * * *.
Section 6330(d)(1) grants us jurisdiction to review agency action that is embodied
in a ‘determination’”). Respondent has issued a notice of determination
concerning the tax period ended June 30, 2011, and consequently that tax period is
properly before us. See secs. 6320(c), 6330(d)(1).
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Federal tax law. See sec. 301.7701-1(a)(1), Proced. & Admin. Regs. Whether an
organization is an entity separate from its owners for Federal tax purposes is a
matter of Federal tax law and does not depend on whether the organization is
recognized as an entity under local law. Id. Relevant to this case, IRA sec. 17
corporations are not recognized as separate entities for Federal tax purposes. Id.subpara. (3). However, this is a dispute over employment taxes and, generally,
even disregarded entities are treated as corporations for the purpose of
employment taxes. Id. sec. 301.7701-2(c)(2)(iv). In other legal contexts a
division of a corporate entity is not legally separate from the corporation. See,
e.g., Breitman v. May Co. Cal., 37 F.3d 562, 564 (9th Cir. 1994) (for diversity of
jurisdiction purposes, 28 U.S.C. sec. 1332, “the distinction between an
incorporated subsidiary and an unincorporated division is important * * * . ‘A
division of a corporation does not possess the formal separateness * * * and thus is
not an independent entity’” (quoting Schwartz v. Elec. Data Sys., Inc., 913 F.2d
279, 284 (6th Cir. 1990))); Stotter & Co. v. Amstar Corp. (In re Sugar Indus.
Antitrust Litig.), 579 F.2d 13, 18 (3d Cir. 1978) (holding that for purposes of 15
U.S.C. sec. 15, “[a] division of a corporation is not a separate entity but is the
corporation itself”). There must be something unique to this situation for us to
divert from that customary understanding. Accordingly, to reach our holding we
- 24 -
must examine the creation of BLREDCo and the authority under which it seeks to
be considered an entity separate and apart from MBS.
I. IRA Sec. 17
The parties agree that DOI issued the Tribe an IRA sec. 17 charter
establishing BLREDCo and that BLREDCo’s charter contains language that
purportedly allows it “[t]o create subdivisions of the Corporation for the purpose
of legally segregating the assets and liabilities of discrete business endeavors of
the Corporation regardless of common directorship”. Petitioners contend that the
charter’s text, approved by DOI, is controlling and precludes any responsibility of
BLREDCo for the liabilities of MBS, including its employment tax liabilities.
Respondent, however, counters that the charter exceeds the scope of IRA sec. 17
and cannot grant a corporation such a power; therefore, even though the
BLREDCo charter purports to allow it to create divisions with legally segregated
assets and liabilities, it may not properly do so.6
This is an issue of first impression for the Court. In the only prior case
where we have considered IRA sec. 17 we held, among other things, that a State-
6
BLREDCo’s IRA sec. 17 charter granted it the power to create subdivisions
to legally segregate the assets and liabilities of its discrete business endeavors;
however, the conversion ordinance refers to the converting entity as a division.
We find these terms interchangeable, but for the sake of clarity we attempt to refer
to MBS as a division throughout this report.
- 25 -
chartered corporation of an Indian Tribe is subject to Federal income tax even
though an IRA sec. 17 corporation is not. Uniband, Inc. v. Commissioner, 140
T.C. 230, 264 (2013). Although that case does not address the issues we are
considering today, we note that in Uniband we observed that DOI’s issuance of
charters was within its discretion as afforded by IRA sec. 17; an Indian Tribe has
the option only to adopt or veto an issued charter as that charter confers only the
powers DOI is willing for the tribal corporation to possess. Id. at 261-262.
A. Statutory Interpretation
This dispute is primarily one of statutory interpretation. As we typically do
when looking at such issues, we must first examine the text of the statute. The
Supreme Court has said that “in any case of statutory construction, our analysis
begins with the language of the statute * * * . And where the statutory language
provides a clear answer, it ends there as well.” Harris Tr. & Sav. Bank v. Salomon
Smith Barney, Inc., 530 U.S. 238, 254 (2000) (quoting Hughes Aircraft Co. v.
Jacobson, 525 U.S. 432, 438 (1999)); United States v. Mo. Pac. R. Co., 278 U.S.
269, 278 (1929) (“[W]here the language of an enactment is clear, and construction
according to its terms does not lead to absurd or impracticable consequences, the
words employed are to be taken as the final expression of the meaning intended.”).
Moreover, where the statute is clear on its face, unequivocal evidence of
- 26 -
legislative purpose is required before we can construe the statute to override the
plain meaning. Halpern v. Commissioner, 96 T.C. 895, 899 (1991).
Unique to this case, we are also mindful that the Supreme Court has
cautioned that “the standard principles of statutory construction do not have their
usual force in cases involving Indian law.” Montana v. Blackfeet Tribe of Indians,
471 U.S. 759, 766 (1985). Rather, “statutes are to be construed liberally in favor
of the Indians, with ambiguous provisions interpreted to their benefit”. Id. This
principle of statutory construction must guide our analysis of IRA sec. 17.
In 1934 Congress enacted IRA, including IRA sec. 17, in order “[t]o
conserve and develop Indian lands and resources; to extend to Indians the right to
form business and other organizations; to establish a credit system for Indians; to
grant certain rights of home rule to Indians; to provide for vocational education for
Indians; and for other purposes.” IRA, 48 Stat. at 984. Except for minor
amendments not relevant here, see Act of May 24, 1990, Pub. L. No. 101-301, sec.
3(c), 104 Stat. at 207, the text of IRA sec. 17 has remained largely unchanged and
in its entirety reads:
The Secretary of the Interior may, upon petition by any tribe, issue a
charter of incorporation to such tribe: Provided, That such charter
shall not become operative until ratified by the governing body of
such tribe. Such charter may convey to the incorporated tribe the
power to purchase, take by gift, or bequest, or otherwise, own, hold,
- 27 -
manage, operate, and dispose of property of every description, real
and personal, including the power to purchase restricted Indian lands
and to issue in exchange therefor interests in corporate property, and
such further powers as may be incidental to the conduct of corporate
business, not inconsistent with law; but no authority shall be granted
to sell, mortgage, or lease for a period exceeding twenty-five years
any trust or restricted lands included in the limits of the reservation.
Any charter so issued shall not be revoked or surrendered except by
Act of Congress.
Respondent submits that IRA sec. 17 corporations cannot have the power to
create legally distinct divisions whose liabilities are uncollectible from the
corporation--a power, respondent argues, other corporations do not have.
Petitioners counter that the wording is broad and by its express terms does not
prevent IRA sec. 17 corporations from holding this power. For the reasons that
follow, we are unpersuaded by respondent’s reading of IRA sec. 17.
B. Application of State Law
Central to respondent’s argument is his belief that State law should guide
our interpretation of IRA sec. 17. Respondent encourages us to consider that IRA
sec. 17 allows tribal corporations to be vested with powers “incidental to the
conduct of corporate business, not inconsistent with law”, which respondent
maintains must be limited to State law corporate powers.
BLREDCo is a tribal corporation created by a Federal charter, issued by a
Federal agency under IRA sec. 17--a Federal law--involved in a dispute over
- 28 -
Federal taxes. We fail to see why respondent believes State law should apply. It
is a common principle of statutory interpretation that where Congress has shown it
knows how to express a limitation, we will not assume it has done so through
silence, absent a clear expression of intent. See Miss. ex rel. Hood v. AU
Optronics Corp., 571 U.S. 161, 169 (2014) (interpreting the Class Action Fairness
Act of 2005, the Court reasoned that “[h]ad Congress intended” a statutory
numerosity requirement to mean named or unnamed parties “it easily could have
drafted language to that effect. Indeed, when Congress wanted a numerosity
requirement in CAFA to be satisfied by counting unnamed parties in interest in
addition to named plaintiffs, it explicitly said so”); see also Meghrig v. KFC
Western, Inc., 516 U.S. 479, 485 (1996) (“Congress * * * demonstrated in
CERCLA that it knew how to provide for the recovery of cleanup costs, and * * *
the language used to define the remedies under RCRA does not provide that
remedy.”). Had Congress intended for IRA sec. 17 to be limited by State law, it
knew how to do so explicitly. In fact, it did so in other sections of IRA. For
example, IRA sec. 4, 48 Stat. at 985 (amended by the Indian Land Probate Reform
Technical Corrections Act of 2005, Pub. L. No. 109-157, sec. 8(b), 119 Stat. at
2952) (codified as amended at 25 U.S.C. 5107 (Supp. V 2017)) (emphasis added),
provided that restricted Indian lands “shall descend or be devised, in accordance
- 29 -
with the then existing laws of the State, or Federal laws where applicable, in which
said lands are located”. In IRA sec. 17, Congress chose not to explicitly call for
the application of State law to incorporated tribes. Therefore, absent a clear
showing to the contrary in the legislative history, we will not assume Congress
intended a tribal corporation chartered under IRA sec. 17 to be limited by State
law.7
Respondent’s reading has another problem. The Constitution provides that
“the Laws of the United States * * * shall be the supreme Law of the Land”. U.S.
Const. art. VI, cl. 2. Therefore, we will not assume that Congress chose to
subordinate its authority to State law, absent a clear showing of congressional
7
History surrounding the enactment of IRA further illustrates congressional
awareness in applying State law. United States v. Riverside Bayview Homes, Inc.,
474 U.S. 121, 136-137 (1985); United States v. Universal C.I.T. Credit Corp., 344
U.S. 218, 222 (1952) (“[R]egard for the specific history of the legislative process
that culminated in the Act now before us affords more solid ground for giving it
appropriate meaning.”). A prior Senate version of IRA allowed restricted land to
“descend or be devised, in accordance with existing law”. S. 3645, 73d Cong.,
sec. 4 (2d Sess. 1934). Contrast that with a prior House version, which provided
that restricted land “may descend or be devised in accordance with the then
existing laws of the State in which said lands are located”. H.R. Rept. No. 73-
1804, at 2 (1934) (accompanying H.R. 7902). As finally enacted, the House
version was adopted with an additional caveat that “Federal laws where
applicable” also apply. H.R. Rept. No. 73-2049, at 2, 7 (1934) (accompanying S.
3645); 78 Cong. Rec. 12162-12163 (1934) (statement by the house conferees
explaining that section 4 of the conference version “is section 4 of the House bill”
with some amendments).
- 30 -
intent. Moreover, even in the absence of express legislative preemption, we may
infer that Congress intended to foreclose the application of State law where an
“Act of Congress * * * touch[es] a field in which the federal interest is so
dominant that the federal system will be assumed to preclude enforcement of state
laws on the same subject.” Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230
(1947). Said another way, “Congress implicitly may indicate an intent to occupy a
given field to the exclusion of state law.” Schneidewind v. ANR Pipeline Co., 485
U.S. 293, 300 (1988).
We recognize that the Constitution confers authority on Congress to
regulate Indian affairs, see U.S. Const. art. I, sec. 8, cl. 3 (“Congress shall have
power * * * To regulate Commerce * * * with the Indian Tribes[.]”), and this
authority has been described by the Supreme Court as “plenary” and “exclusive”,
South Dakota v. Yankton Sioux Tribe, 522 U.S. 329, 343 (1998) (“Congress
possesses plenary power over Indian affairs[.]”); County of Oneida, N.Y. v.
Oneida Indian Nation, 470 U.S. 226, 234 (1985) (“With the adoption of the
Constitution, Indian relations became the exclusive province of federal law.”); see
also Am. Vantage Cos. v. Table Mt. Rancheria, 292 F.3d 1091, 1096 (9th Cir.
2002) (“Because ‘Congress possesses plenary power over Indian affairs,’ * * *
Indian tribes fall under nearly exclusive federal, rather than state, control.”).
- 31 -
“[T]ribal sovereignty is dependent on, and subordinate to, only the Federal
Government, not the States.” Washington v. Confederated Tribes of Colville
Indian Reservation, 447 U.S. 134, 154 (1980). Thus, Congress has evidenced an
intent to dominate the field of Indian law so that it generally preempts State law on
the subject. Absent clear intent to the contrary, we will not assume Congress
intended to lessen its preemption in this field by allowing State law to control
what powers may be held by an IRA sec. 17 corporation.
We find no clear intent in the text of IRA sec. 17 that tribal corporate
powers should be limited by State law. Respondent points us to the phrase “not
inconsistent with law” as evidence that State law applies. However, clearly, in the
light of the principles outlined above, that phrase does not suggest the application
of State law. Likewise, we find no clear intent in the legislative history of IRA
sec. 17 suggesting it is to be limited by State law principles.
Throughout the voluminous legislative history relating to the enactment of
IRA and, specifically, IRA sec. 17, respondent has identified only two statements
from a single member of Congress to support his reading. Isolated statements of a
single member of Congress, especially one absent from the relevant committees
and lacking a leadership role in the bill’s passage, are “not impressive legislative
history”. Zuber v. Allen, 396 U.S. 168, 187 (1969); see also Garcia v. United
- 32 -
States, 469 U.S. 70, 76 (1984) (“We have eschewed reliance on the passing
comments of one Member * * * and casual statements from the floor debates.”).
Even so, we are not sure these statements provide as much support as respondent
would have us conclude.
During debate on the House version of IRA, before the conference
committee report, Representative Hastings--who did not sit on the relevant House
committee and who had no leadership role related to the bill--discussed four
sections of the bill, three of which were never enacted. See 78 Cong. Rec. 11739
(1934); see also Statement by House conferees, 78 Cong. Rec. 12163-12164
(1934) (explaining which provisions were adopted in the conference report and
noting the exclusion of three sections discussed by Rep. Hastings). See generally
H.R. Rept. No. 73-2049 (1934) (conference report to accompany S. 3645). In his
floor speech, he stated his support for authorizing the formation of Indian
chartered corporations to promote the economic welfare of the Indian Tribe, so
long as “it is made clear that they are governed by the State and Federal laws”. 78
Cong. Rec. 11739 (1934). He also expressed some discomfort with the self-
government features of certain sections in the House bill. In particular, he noted:
“I think every tribe, wherever located, should be * * * subject to State and Federal
laws and courts.” Id. Clearly, these casual statements are nothing more than
- 33 -
passing comments on Representative Hastings’ preference that Indian Tribes as a
whole ought to be governed by State law in addition to Federal law. Regardless of
his views on the matter, the reality is that they are not. This is evident in his
comments on the subject; if Indian Tribes were already subject to State law, he
would have no need to express his views that they “should be” subject to the same.
Representative Hastings’ personal views are not relevant to interpreting the statute
at issue here, and we give no weight or consideration to his statements concerning
sections of the bill that were never enacted. Shannon v. United States, 512 U.S.
573, 583-584 (1994) (“To give effect to this snippet of legislative history, we
would have to abandon altogether the text of the statute as a guide in the
interpretative process. * * * ‘[C]ourts have no authority to enforce [a] principl[e]
gleaned solely from legislative history that has no statutory reference point.’”
(quoting Int’l Bhd. of Elec. Workers, Local Union No. 474 v. NLRB, 814 F.2d
697, 712 (1987)).
We would expect a clear statement of congressional intent before assuming
a desire to disrupt the well-settled notion of federalism and the principles of
preemption and Federal law supremacy. Finding no clear statement to that effect
in the text or the legislative history, we are persuaded that Congress did not intend
- 34 -
IRA sec. 17 corporations to be limited by State law.8 Respondent has not argued
that the power DOI has conferred on the Tribe to create legally separate
subdivisions is inconsistent with Federal law, and we can find no reason why it
would be.
C. Powers Incidental to the Conduct of Corporate Business
Having determined that State law does not restrict the powers of tribal
corporations chartered under IRA sec. 17, we must turn to respondent’s other
argument. Respondent urges us to find that the power to create legally distinct
corporate divisions is not an ordinary corporate power--i.e., it is not one possessed
by corporations organized under State law (State corporations). Thus, he argues, it
is outside the scope of IRA sec. 17 for DOI to grant a charter containing such a
power. We must attempt to discern whether the power to create legally separate
corporate divisions is one within the plain meaning of IRA sec. 17. Where the
statute is clear, we must interpret the law as written and are not free to replace the
8
Our holding is also consistent with DOI regulations. In 2004 when the
Tribe’s charter was approved, DOI regulations imposed no restrictions on the type
of corporate powers that could be granted to IRA sec. 17 corporations. See
generally 25 C.F.R. pts. 81, 82 (2004). Pts. 81 and 82 were combined into pt. 81
and pt. 82 was removed in 2015. Final Rule, 80 Fed. Reg. 63094 (Oct. 19, 2015).
Additionally, current regulations only instruct the BIA to review proposed IRA
sec. 17 charters for violations of Federal law. 25 C.F.R. 81.45(c)(3) (2018).
- 35 -
text with “unenacted legislative intent.” INS v. Cardoza-Fonseca, 480 U.S. 421,
453 (1987) (Scalia, J., concurring).
On its face, IRA sec. 17 is plainly intended to be broad. It expressly sets out
what Federal charters issued by DOI “may convey to the incorporated tribe”. This
permissive provision implies discretion. See Lopez v. Davis, 531 U.S. 230, 241
(2001) (“[U]se of the permissive ‘may’ * * * contrasts with the legislators’ use of a
mandatory ‘shall’ in the very same section. Elsewhere * * *, Congress used ‘shall’
to impose discretionless obligations[.]”). IRA sec. 17 does not specify an
exhaustive list of the powers that DOI can convey to an IRA sec. 17 corporation;
rather it frames the kinds of powers that DOI may grant through the issuance of a
Federal charter. IRA sec. 17 contains no explicit grant of authority for a DOI
issued charter to allow a corporation to create subdivisions with legally distinct
assets and liabilities. However, it is clear from the brevity of IRA sec. 17 that the
statute is not intended to serve as a comprehensive list of powers DOI may
properly grant through an IRA sec. 17 charter. In fact, only two powers are
expressly mentioned in the text of the statute: “the power to purchase, take by gift,
or bequest, or otherwise, own, hold, manage, operate, and dispose of property” and
“the power to purchase restricted Indian lands”.
- 36 -
IRA sec. 17 also places very few limitations on the broad power it otherwise
grants DOI to issue Federal charters to Indian Tribes. In particular, it expressly
disallows the granting of charters that would permit corporations “to sell,
mortgage, or lease for a period exceeding twenty-five years any trust or restricted
lands included in the limits of the reservation.” The only other restriction in the
statute is the general provision that grants cannot be “inconsistent with law”,
which we have already held to mean Federal law. Rather than search the express
list of powers in IRA sec. 17 for the authority to create legally distinct divisions of
an IRA sec. 17 corporation, petitioners contend that such a power is derived from
the broad authority of DOI to grant charters that convey “further powers as may be
incidental to the conduct of corporate business”.
Respondent’s central argument throughout these proceedings is that a tribe
incorporated under IRA sec. 17 cannot have powers that a corporation
incorporated under State law would not have. Respondent’s position is
summarized in his reply brief: “Clearly, a power that non-section 17 corporations
do not possess cannot be incidental to the conduct of corporate business.” We
have already explained why we do not believe that IRA sec. 17 corporate powers
should be limited to those of State corporations. We must assume that absent “a
plain indication to the contrary, * * * Congress when it enacts a statute is not
- 37 -
making the application of the federal act dependent on state law.” Miss. Band of
Choctaw Indians v. Holyfield, 490 U.S. 30, 43 (1989) (citations omitted).9
The canon of statutory construction unique to Indian law also weighs
against respondent on this point. We are mindful that canons are “only guidelines,
not substantive laws, and should not be used to defeat the manifest intent of
Congress.” United States v. Atl. Richfield Co., 612 F.2d 1132, 1139 (9th Cir.
1980). However, the Supreme Court has guided us to construe statutes liberally in
favor of Indians. Blackfeet Tribe of Indians, 471 U.S. at 766. Congress willingly
ceded broad authority to DOI and vested it with the sole discretion as to what
powers may authorized for IRA sec. 17 corporations. See Uniband v.
Commissioner, 140 T.C. at 261-262. Moreover, while we are not “free to create
favorable rules” based on this principle of statutory construction, Fry v. United
States, 557 F.2d 646, 649 (9th Cir. 1977), IRA sec. 17 can be liberally construed
to give DOI broad power to issue charters to Indian Tribes without creating a
favorable rule unsupported by the statutory text.
9
This statement is also consistent with our reading of IRA sec. 17 in
Uniband where we explained the distinctions between a State-chartered
corporation and an IRA sec. 17 corporation that led us to hold that State-chartered
corporations are subject to Federal income tax where IRA sec. 17 corporations are
not. Uniband, Inc. v. Commissioner, 140 T.C. at 264 (“In sum, * * * [the State-
chartered corporation] lacks the special character of a section 17 corporation and
its special relationship to an Indian tribe.”).
- 38 -
Although IRA sec. 17 corporations may be vested with broad powers,
including ones not available to State corporations, we must still determine whether
the power to create legally distinct subdivisions is one “incidental” to conducting
corporate business. Petitioners suggest that we should look at how courts have
interpreted the word “incidental” in the National Bank Act of 1864 (National Bank
Act) to guide our understanding of the word as it is used in IRA sec. 17. In Bank
of Am. v. City & Cty. of S.F., 309 F.3d 551, 562 (9th Cir. 2002) (quoting M & M
Leasing Corp. v. Seattle First Nat’l Bank, 563 F.2d 1377, 1382 (9th Cir. 1977)),
the Court of Appeals for the Ninth Circuit held that as used in the National Bank
Act “[i]ncidental powers include activities that are ‘convenient or useful in
connection with the performance of one of the bank’s established activities
pursuant to its express powers under the National Bank Act.’” However, absent
clear intent that Congress intended the meaning in both statutes to be the same, we
will not apply this same reading here. Nothing in IRA suggests to us that
Congress intended the use of the word “incidental” in IRA sec. 17 to have the
same meaning as the “incidental powers” phrase in the National Bank Act.
Instead, we will rely on the plain meaning of this provision within the context of
IRA sec. 17.
- 39 -
In the absence of a statutory definition, “we construe a statutory term in
accordance with its ordinary or natural meaning.” FDIC v. Meyer, 510 U.S. 471,
476 (1994). Courts frequently turn to dictionaries to determine a word’s ordinary
meaning. See id.; see also, e.g., Asgrow Seed Co. v. Winterboer, 513 U.S. 179,
187 (1995); Commissioner v. Soliman, 506 U.S. 168, 174 (1993). At the time IRA
sec. 17 was enacted, “incidental” was defined as “happening as a chance or
undesigned feature of something else; casual; hence, not of prime concern;
subordinate; collateral”. Webster’s New International Dictionary of the English
Language 1088 (1930). It was likewise defined by Oxford as “occurring or liable
to occur in fortuitous or subordinate conjunction with something else of which it
forms no essential part; casual.” Oxford New English Dictionary on Historical
Principles Volume V2 152-153 (1901). Consistent throughout these definitions is
the theme that “incidental” denotes a nonessential, casual, or subordinate part of a
larger scheme.
In 1933, a year before the enactment of IRA sec. 17, Black’s Law
Dictionary 943 (3d ed. 1933) stated:
The term “incidental powers,” within the rule that a corporation
possesses only those powers which its charter confers upon it, either
expressly or as incidental to its existence, means such powers as are
directly and immediately appropriate to the execution of the powers
- 40 -
expressly granted and exist only to enable the corporation to carry out
the purpose of its creation. * * *
In the light of these definitions, we understand incidental powers to include
ones that are nonessential and subordinate, but nevertheless appropriate to the
powers expressly granted in the corporation’s charter. Further, these powers must
exist only to aid the corporation, even if only casually, in carrying out the purpose
for which it was created.
Applying this meaning to the instant cases, powers incidental to an IRA sec.
17 corporation are powers, even nonessential ones, which are appropriate to the
execution of the powers expressly stated in the corporation’s charter and aid the
corporation in carrying out the express purpose for which it was created. This
encompasses a broad array of corporate powers. Certainly, as BLREDCo argues,
the creation of legally distinct subdivisions whose assets and liabilities are not
collectible from the corporation as a whole has a role in furthering the purpose of
BLREDCo--i.e., to promote the economic stability of the Tribe. In fact,
BLREDCo’s charter explicitly provides that such power is essential to protecting
the “economic security” of the Tribe and furthering the purpose of BLREDCo.
Given the plain meaning of the word “incidental”, we understand the phrase
“powers incidental to the conduct of corporate business” to encompass powers
- 41 -
subordinate and nonessential to the corporation’s overall business and which are
appropriate to the execution of other powers specifically granted to an IRA sec. 17
corporation through its charter and aid the IRA sec. 17 corporation in carrying out
its expressly stated purpose. In these cases, the power at issue is one the Tribe has
expressly described in its Federal charter as essential to the corporation’s purpose.
Even if it were not essential, however, we believe it clearly aids BLREDCo in
carrying out its explicit purpose and is therefore incidental to the execution of
other powers expressed in BLREDCo’s IRA sec. 17 charter.
We believe the plain meaning of powers “incidental to the conduct of
corporate business” allows for broad discretion in the powers granted to an IRA
sec. 17 corporation through its charter. Nothing in the legislative history suggests
to us that Congress intended a different result. Thus, we find that it is within the
scope of IRA sec. 17 to grant tribal corporations incorporated under its provisions
the power to create legally distinct subdivisions.
D. Subsequent Agency Interpretation
Given the plain meaning of the relevant statutory text, informed by the
legislative history, the power DOI granted to BLREDCo--to establish legally
distinct subdivisions of the corporation--is one encompassed within the phrase
“powers as may be incidental to the conduct of corporate business, not
- 42 -
inconsistent with law”. A brief overview of the subsequent interpretation of IRA
sec. 17 by DOI confirms our reading.
Under IRA sec. 17, DOI is tasked with issuing charters to Federal Indian
Tribes. DOI has issued several charters with terms substantially similar to the
terms found in BLREDCo’s charter, allowing tribal corporations to create
subdivisions whose liabilities and assets are legally distinct from those of the rest
of the corporation. In fact, the record reflects that DOI has issued at least 27
charters with such terms, other than the one issued to BLREDCo. Clearly, DOI’s
prevalent issuance of such charters indicates a belief that it is empowered by IRA
sec. 17 to grant such a power to Indian Tribes.
In addition DOI has issued three Solicitor Opinions on IRA sec. 17. The
DOI Solicitor, appointed by the President and confirmed by the Senate, is
responsible for performing the legal work of DOI. Act of June 26, 1946, ch. 494,
60 Stat. 312 (codified as amended at 43 U.S.C. 1455 (Supp. II 2014)). As part of
his responsibilities, the Solicitor has the authority “[t]o issue final legal
interpretations, in the form of M-Opinions * * *, on all matters within the
jurisdiction of the Department”. DOI Departmental Manual, 209 DM 3.2(A)(11).
Solicitor Opinions are “binding, when signed, on all other Departmental offices
and officials and * * * may be overruled or modified only by the Solicitor, the
- 43 -
Deputy Secretary, or the Secretary.” Id. Of course, these opinions are not binding
on us, but we find them persuasive insight into how DOI interprets the statutes it is
tasked with executing.
While none of the opinions issued by the Solicitor directly deal with the
power DOI conferred on BLREDCo in these cases, they do describe DOI’s views
of IRA sec. 17 generally. The first of these opinions, issued May 15, 1934, before
the enactment of IRA, discussed the constitutional authority of the Congress to
incorporate an Indian Tribe. Solicitor’s Opinion, Indian Corporations--Federal
Charters (May 15, 1934). In finding that “there is no constitutional restriction
upon the method of incorporation that Congress may select”, the Solicitor
explained that the legislation under consideration “puts the responsibility for
working out * * * [administrative] details upon the Secretary of the Interior and
the Indians seeking the charter.” Id.Following enactment of the IRA, the Solicitor issued two more opinions on
IRA sec. 17. In an opinion discussing whether an IRA sec. 17 charter could
permit an Indian Tribe to ignore statutory requirements related to making a
contract, the Solicitor noted: “It seems to be clear from this language that section
17 permits the Secretary to grant to incorporated tribes far-reaching powers with
respect to the conduct of business activities”. Solicitor’s Opinion M-36119,
- 44 -
Contracts for the Employment of Managers of Indian Tribal Enterprises (Feb. 14,
1952). The Solicitor went on to explain that the Secretary’s power is subject only
to the express limitations of IRA sec. 17: The Secretary may not authorize a tribal
corporation to sell reservation land or lease the same for a period of more than 10
years, and the Secretary may not authorize incidental corporate powers that are
inconsistent with law. Id. These are the same express limitations we have
identified in the statutory text. Further, the Solicitor explained that powers
inconsistent with law are ones “which cannot lawfully be given to any
corporation”. Id. Clearly, the power at issue in these cases is one that could be
given to State corporations; respondent’s argument is simply that it has not been,
and therefore, he claims, it cannot be given to IRA sec. 17 corporations. In 1958
the Solicitor restated and reaffirmed his position from the 1952 opinion. See
Solicitor’s Opinion M-36515, Separability of Tribal Organizations Organized
Under Sections 16 and 17 of the Indian Reorganization Act (Nov. 20, 1958).
Although these opinions are not binding authority on us, they are helpful in
confirming our understanding of the broad authority DOI has under IRA sec. 17.
E. Conclusion
The plain terms of IRA sec. 17 clearly bestow broad discretionary power on
DOI to issue Federal charters of incorporation to Indian Tribes. The powers that
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may be conferred on a tribal corporation under IRA sec. 17 are not limited to those
held by State corporations, nor are they limited by State law. Consequently, the
power granted to BLREDCo “[t]o create subdivisions of the Corporation for the
purpose of legally segregating the assets and liabilities of discrete business
endeavors of the Corporation regardless of common directorship” is within the
scope of IRA sec. 17.
II. Operations of BLREDCo and MBS
Respondent framed his argument primarily as a legal one, contending that
the issue in these cases is whether an IRA sec. 17 charter can allow BLREDCo to
create subdivisions whose assets and liabilities would be legally distinct from
those of the corporation. However, respondent also suggested at trial and in his
brief that even if such a power was within the scope of IRA sec. 17, as we have
determined it is, MBS was not in fact a legally distinct division of BLREDCo and
thus cannot count on the benefit of having its liabilities segregated from those of
the corporation. Although neither party devoted much attention to this issue--a
combined six pages of briefing--we are compelled to examine respondent’s
concern and address whether MBS was in fact operated as a legally distinct
division of BLREDCo.
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Respondent appears to have conceded this issue in his reply brief. He
acknowledges that MBS was engaged in a “separate and distinct business that
generated the tax liability at issue * * * [and] was always operating this business
endeavor as a division of BLREDCo.” Nonetheless, he points out that “when it
was to their benefit, petitioners had no problem with operating as BLREDCo dba
MBS”. Respondent points to two instances where he claims MBS assumed the
identity of BLREDCo to receive some benefit. His argument seems to be that this
should prevent MBS from now claiming the benefit of having liabilities legally
segregated from those of BLREDCo. We will examine respondent’s claims.
Respondent first points to the Coolidge Property as evidence that MBS was
willing to assume the identity of BLREDCo when doing so was to its benefit.
Although the Coolidge Property was acquired in the name of BLREDCo d.b.a.
MBS, MBS still assumed all benefits and burdens of ownership of the property
including making the monthly mortgage payment, maintaining liability insurance,
paying the utility bills, paying the property taxes, and collecting rent from a
sublessee. The record is not entirely clear as to why title was taken in the name of
BLREDCo. However, Eric Ramos, the CEO of MBS, testified that it was in part
because some banks have trouble understanding what a division of an IRA sec. 17
corporation is and are wary about entering a financing arrangement with such an
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entity. Some banks may also be concerned about the ability of an IRA sec. 17
corporation to take title to property.
Regardless of whose name title was taken in, we determine ownership for
Federal tax purposes on the basis of who possesses the benefits and burdens of
ownership, rather than legal title. See Houchins v. Commissioner, 79 T.C. 570,
591 (1982); Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221, 1237
(1981). We believe this analysis can be extrapolated to the facts at hand, and on
the record before us it is clear that the benefits and burdens of ownership were felt
by MBS. See Houchins v. Commissioner, 79 T.C. at 591 (“The question of
whether the benefits and burdens of ownership have been transferred is essentially
one of fact * * *. Among the factors to be considered in making this
determination are:” who holds title, who has control over the property and the
extent of such control, who bears the risk of loss or damage to the property, and
who receives the benefits from the property). Therefore, MBS was the owner in
fact of the Coolidge Property, and the issue raised by respondent is of little
consequence. Moreover, even assuming MBS took on the identity of BLREDCo
for the purpose of purchasing the Coolidge Property, we are not inclined to use
this isolated instance to impute all assets and liabilities of MBS to BLREDCo in
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contravention of the intended business structure as allowed by BLREDCo’s IRA
sec. 17 charter.
Next, respondent suggests that because MBS entered into a financing
agreement for its accounts receivable as BLREDCo, petitioners should be
foreclosed from now arguing MBS was a legally distinct division of BLREDCo.
MBS initially entered into the FF agreement as itself; that agreement did not
mention BLREDCo at all. A year later MBS entered into the amended FF
agreement, which provided that “Blue Lake Rancheria Economic Development
Corporation was the original contracting party.” In spite of this, following the
enactment of the amended FF agreement, MBS continued to make payments to FF,
not BLREDCo. In addition, there is nothing in the record indicating the
BLREDCo had any accounts or other assets that could actually be foreclosed on
by FF under their filed financing statements in the event of default.10 Rather than
the explanation respondent encourages, the more likely explanation for this
10
It is also not clear from the record whether FF was authorized to file UCC
financing statements naming BLREDCo as the debtor. Authorization must be
provided by the debtor for a financing statement to be valid. Cal. Com. Code sec.
9509 (West 2010). Although the amended FF agreement named BLREDCo as a
contracting party, the section on collateral authorized FF to file financing
statements only against accounts held by MBS.
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arrangement seems to be that FF was hesitant to enter into an agreement with
MBS, an entity they did not fully comprehend.
This explanation is bolstered by the fact that FF requested a limited waiver
of sovereign immunity as a condition of continuing the arrangement. BLREDCo
consented and passed a resolution calling for a limited waiver of sovereign
immunity in favor of FF (waiver resolution); importantly, however, the waiver
resolution was limited to the assets of MBS. Respondent urges that the waiver
resolution bolsters his argument that MBS and BLREDCo were acting as one and
the same because BLREDCo asserted that it was “operating as MBS” when the
agreements with FF were signed. We believe, however, contrary to respondent’s
assertion, that this waiver does nothing to support his position. Respondent’s
argument disintegrates when we take into account that BLREDCo was the only
entity permitted under the IRA sec. 17 charter to waive sovereign immunity.
Rather than an admission that MBS and BLREDCo were one and the same, the
waiver resolution merely states the obvious. BLREDCo had to be operating as
MBS in order to waive sovereign immunity as requested by FF. See Uniband, Inc.
v. Commissioner, 140 T.C. at 261 (“One feature of a section 17 corporation is that
it gives a tribe the ability to waive tribal sovereign immunity for a business
operated by a section 17 corporation[.]”). Even assuming MBS presented itself as
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BLREDCo in its dealings with FF, as respondent urges, we do not find this
instance enough to justify piercing the entirety of BLREDCo and MBS’ chosen
relationship as permitted by the DOI-authorized charter.
Perhaps most important in these cases is what respondent does not argue or
dispute. For instance, there is no indication in the record that respondent was
misled as to who owed the employment taxes at issue in these cases. MBS, using
its unique FEIN, filed the quarterly employment tax returns for the periods at
issue. Even so, respondent attempts to confuse the issue by suggesting that MBS
never filed its own income tax return, relying on the income tax exclusion for IRA
sec. 17 corporations provided to BLREDCo.11 In spite of respondent’s attempts,
the undeniable fact remains that MBS was not seeking to disguise its employment
tax obligations. Respondent even admits that it was MBS’ separate and distinct
business activities that generated the tax liabilities at issue in these cases, not the
activities of BLREDCo.12
11
Moreover, it is telling that respondent does not suggest MBS’ reliance on
the income tax exclusion of BLREDCo is improper; respondent’s introduction of
the fact that MBS did not file Federal income tax returns is solely intended to
confuse the issue.
12
Although no party raised the issue, we find this analysis to be similar to
our approach to alter ego cases. In determining whether an entity is merely the
alter ego of another and therefore properly liable for its tax obligations we look at:
(continued...)
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On this record we cannot accept respondent’s argument that MBS forfeited
its distinction as a legally separate division of BLREDCo permitted under the IRA
sec. 17 charter. Accordingly, we hold that BLREDCo’s IRA sec. 17 charter
properly allowed it to create subdivisions whose assets and liabilities were distinct
from those of the corporation.13 We further hold that MBS was such a legally
distinct division of BLREDCo at all relevant times, and consequently respondent
may not look to BLREDCo to collect the employment tax liabilities owed by
MBS. However, MBS remains liable to respondent for the employment taxes in
issue, as reflected following concessions and stipulations by the parties.
12
(...continued)
(1) whether the alter ego treated the corporate assets as its own; (2) whether the
alter ego held insurance covering the corporate assets; (3) whether corporate funds
were used to pay the alter ego’s expenses; (4) whether transactions between the
corporation and the alter ego were at arm’s length; and (5) whether the corporation
and the alter ego have any separation in control. See Loving Saviour Church v.
United States, 728 F.2d 1085, 1086 (8th Cir. 1984). In considering these factors,
we find that MBS was not merely an alter ego of BLREDCo or vice versa. They
operated as separate and legally distinct entities, and we will not hold BLREDCo
liable for the obligations of MBS.
13
Our holding is limited to an IRA sec. 17 corporation’s ability to create
divisions whose assets and liabilities are legally distinct for Federal tax purposes
only.
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In reaching our holdings herein, we have considered all arguments made,
and, to the extent not mentioned above, we conclude they are moot, irrelevant, or
without merit.
To reflect the foregoing,
Decision will be entered for
petitioner in docket No. 16150-17L.
Decision will be entered under
Rule 155 in docket No. 16189-17L.