Uniband, Inc. v. Commissioner, 140 T. C. 230 (2013)

In Uniband, Inc. v. Commissioner, the U. S. Tax Court ruled that Uniband, a corporation wholly owned by the Turtle Mountain Band of Chippewa Indians (TMBCI), was not exempt from federal income tax, despite its tribal ownership. The court invalidated Uniband’s attempted consolidated tax returns with another tribal corporation, and upheld the IRS’s reduction of Uniband’s wage deductions by the full amount of the Indian employment credit, even though Uniband did not claim the credit. This decision clarifies the tax status of corporations owned by Indian tribes and the requirements for filing consolidated returns.

Parties

Uniband, Inc. , the petitioner, was a Delaware corporation wholly owned by the Turtle Mountain Band of Chippewa Indians (TMBCI). The respondent was the Commissioner of Internal Revenue. Uniband was the appellant at all stages of litigation, from the filing of the petition in the U. S. Tax Court to the appeal process.

Facts

Uniband, Inc. , was incorporated in Delaware in 1987, with TMBCI initially owning 51% of its stock. By September 1990, TMBCI became the sole shareholder. Uniband engaged in commercial activities, including data entry services. It operated from TMBCI’s reservation and employed some tribal members. Uniband attempted to file consolidated federal corporate income tax returns with Turtle Mountain Manufacturing Co. (TMMC), another corporation wholly owned by TMBCI, for the years 1995 through 1998. On these returns, Uniband did not claim Indian employment credits under I. R. C. § 45A, instead deducting the full amount of its employee expenses. The IRS determined that these consolidated returns were invalid and that Uniband was required to claim the credit and reduce its wage deduction accordingly.

Procedural History

Uniband received a notice of deficiency from the IRS on November 28, 2005, for tax years 1996, 1997, and 1998, asserting deficiencies of $220,851, $754,758, and $308,498, respectively. Uniband timely filed a petition with the U. S. Tax Court to redetermine these deficiencies. The case was fully stipulated under Tax Court Rule 122. The court’s decision addressed three main issues: Uniband’s tax exemption, the validity of the consolidated returns, and the reduction of Uniband’s wage deductions by the Indian employment credit.

Issue(s)

Whether Uniband, as a State-chartered corporation wholly owned by an Indian tribe, is exempt from the corporate income tax under I. R. C. § 11?

Whether the consolidated returns that Uniband and its sister corporation TMMC filed for 1996, 1997, and 1998 were valid under I. R. C. § 1501?

Whether I. R. C. § 280C(a) requires that Uniband’s I. R. C. § 162 deductions for wage and employee expenses be reduced by the full amount of the Indian employment credit determined under I. R. C. § 45A(a), even if Uniband did not claim the credit?

Rule(s) of Law

The Internal Revenue Code imposes income tax on “every corporation” under I. R. C. § 11. Indian tribes are not subject to federal income tax, but this does not extend to corporations they own unless those corporations are deemed integral parts of the tribe or are organized under specific federal statutes like section 17 of the Indian Reorganization Act (IRA). Consolidated returns under I. R. C. § 1501 require that all members of an affiliated group consent to the return, and the return must be made by the common parent corporation. I. R. C. § 280C(a) mandates the reduction of wage deductions by the amount of the Indian employment credit determined under I. R. C. § 45A(a), regardless of whether the credit is claimed.

Holding

The court held that Uniband was subject to corporate income tax under I. R. C. § 11, as it was not an integral part of TMBCI and not a section 17 corporation. The consolidated returns filed by Uniband with TMMC were invalid because TMBCI, the common parent, did not make or consent to these returns, nor were TMBCI’s tax items included on the returns. The court also held that Uniband’s wage deductions must be reduced by the full amount of the Indian employment credit determined under I. R. C. § 45A(a), as per I. R. C. § 280C(a), regardless of whether the credit was claimed.

Reasoning

The court reasoned that Uniband, as a State-chartered corporation, was distinct from TMBCI and thus subject to taxation. It was not an integral part of TMBCI because it lacked the characteristics that would make it so, such as being established by the tribe under its own laws or having its operations controlled by the tribe. The court rejected Uniband’s arguments regarding sovereign immunity and its status as an “Indian tribal organization” as not relevant to its tax-exempt status. The court also found that the consolidated returns were invalid because they were not filed by TMBCI, the common parent, and did not include TMBCI’s tax items. On the issue of wage deductions, the court adhered to the plain language of I. R. C. § 280C(a), which requires a deduction reduction by the credit amount determined under I. R. C. § 45A(a), not limited by the credit amount allowed after applying I. R. C. § 38(c)(1).

Disposition

The court entered its decision pursuant to Tax Court Rule 155, upholding the IRS’s determination of deficiencies against Uniband for the tax years in question.

Significance/Impact

This case clarified that corporations owned by Indian tribes are subject to federal income tax unless they are specifically organized under federal statutes like section 17 of the IRA. It also reinforced the strict requirements for filing valid consolidated returns, including the necessity of the common parent’s involvement. The decision further established that the Indian employment credit under I. R. C. § 45A is not elective, and its full amount must reduce wage deductions under I. R. C. § 280C(a). This ruling has implications for tax planning and compliance for corporations owned by Indian tribes and for the application of credits and deductions under the Internal Revenue Code.