                       T.C. Memo. 2011-82



                     UNITED STATES TAX COURT



                     AGRIPINA D. SMITH AND
          JAMES F. SMITH, JR., ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 11580-08, 11607-08,   Filed April 6, 2011.
                 11614-08, 11909-08.



     James F. Smith, Jr., Agripina D. Smith, Peter A. Joseph,

Sandra K. Joseph, Edward Kelly, and Candace R. Kelly, pro se.

     Catherine L. Campbell, for respondent.




     1
      Cases of the following petitioners are consolidated
herewith: James F. Smith, Jr., and Agripina Smith, docket No.
11607-08; Peter A. and Sandra K. Joseph, docket No. 11614-08; and
Edward and Candace R. Kelly, docket No. 11909-08.
                                 -2-

             MEMORANDUM FINDINGS OF FACT AND OPINION


     MORRISON, Judge:   These consolidated cases involve three

members of the tribal council of the Nooksack Indian tribe

located in Washington State.   The issues for decision are:

     • for income tax purposes, the portion of the tribal-council

     compensation received by Agripina Smith in 2003, 2004, and

     2005, by Sandra Joseph in 2004 and 2005, and by Candace

     Kelly in 2004 and 2005, that was derived from the fishing

     rights-related activities of the tribe;

     • whether the petitioners are liable for self-employment tax

     on the compensation received by Agripina Smith in 2003,

     2004, and 2005, by Sandra Joseph in 2004 and 2005, and by

     Candace Kelly in 2004 and 2005 for services as members of

     the tribal council;

     • whether the IRS2 properly disallowed the vehicle-expense

     deductions claimed by Agripina Smith and James Smith for

     2003, 2004, and 2005; and




     2
      For simplicity, we refer to the respondent, the
Commissioner of Internal Revenue, as the IRS.
                                    -3-

       • whether Candace Kelly and Edward Kelly are each liable for

       the additions to tax under section 6651(a)(1) and (2)3 for

       their failures to file tax returns and pay taxes in 2005.

                            FINDINGS OF FACT

1.     The Nooksack Indian Tribe

       The Nooksack Indian tribe is governed by a tribal council.

Each year, the Nooksack Indian tribe spent a portion of its total

operating expenses on fishing-related activities.        The amounts

are set forth in the table below:

                             2003              2004            2005
Expenses of fishing-

     related activities    $1,749,969      $1,521,659      $1,617,835.00
Total operating

     expenses             $14,683,430     $13,994,701     $16,675,927.75
Expenses of fishing-

     related activities

     as percentage of

     total operating

     expenses                11.918%           10.873%            9.702%

The tribe administered tribal ceremonies.       The costs of

administering the tribal ceremonies are reflected in the total

operating expenses but not in the expenses of fishing-related

activities.      One of the ceremonies was the annual salmon


       3
      All section references are to the Internal Revenue Code
(Code), as amended and in effect for 2003, 2004, and 2005, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                         -4-

ceremony.      The purpose of this ceremony was to show respect for

God, the salmon fish, and the ecosystem.

2.     Agripina Smith and James Smith

       During the years 2003, 2004, and 2005 Agripina Smith was a

member of the tribal council of the Nooksack Indian tribe.              She

was also finance director for the Nooksack Indian tribe.              She

received compensation for her service on the tribal council of

$28,000 in 2003, $45,500 in 2004, and $45,500 in 2005.               Agripina

Smith and her husband, James Smith, filed joint income tax

returns for the tax years 2003, 2004, and 2005.              On these returns

they did not include in income Agripina Smith’s compensation for

services as a member of the tribal council.            James Smith ran a

tree service as a sole proprietorship.           The Smiths claimed

deductions for this business on Schedules C, Profit or Loss From

Business.      The deductions related to vehicles are shown in the

table below:

                   Vehicle Expenses of Tree-Service Business
               Deducted by Joseph and Agripina Smith on Schedule C
Type of vehicle                   2003                2004              2005
    expense
Car and truck                   $19,800             $9,375             $10,164
Depreciation                        662               -0-                3,250
Repairs and
  maintenance                     5,200              7,950               3,200
     Total                      $25,662            $17,325             $16,614

The amounts that the Smiths deducted for car-and-truck expenses

($19,800 for 2003, $9,375 for 2004, and $10,164 for 2005) were
                                 -5-

standard vehicle expense allowances computed with reference to

the standard mileage rate.    For the same vehicles for which they

deducted the standard mileage rate, the Smiths also claimed

deductions for “depreciation” and “repairs and maintenance”.

     The IRS issued a deficiency notice to the Smiths for 2003

determining a tax deficiency of $7,234.    The notice determined

that the taxable portion of Agripina Smith’s tribal-council

compensation was $36,753.4   Mathematically, $36,753 is equal to

$41,717 - (11.9 percent x $41,717).    Thus, the determination

incorporated two assumptions:    first, that her tribal-council

compensation was $41,717,5 and second, that 11.9 percent of this

compensation was derived from fishing rights-related activities

of the tribe.   The notice also determined that $40 in interest

was includable in income.    The notice determined that the

Schedule C expenses should be reduced by $5,862.    The notice

determined that the Smiths owed $2,459 in self-employment tax, an

adjustment resulting from the IRS’s determination that the

Schedule C deductions should be reduced by $5,862.

     The IRS issued a deficiency notice to the Smiths for 2004

and 2005.   The deficiency notice determined a deficiency in tax



     4
      The IRS contends that the notice determined that the
taxable portion of her tribal-council compensation was $24,948.
This is wrong. The amount in the notice was $36,753.
     5
      The IRS now stipulates that Agripina Smith’s tribal-council
compensation was $28,000.
                                 -6-

of $7,988 for 2004.    The notice determined that 10.9 percent of

Agripina Smith’s tribal-council compensation was derived from

fishing rights-related activities of the tribe.    Thus, of

Agripina Smith’s $45,500 tribal-council compensation for 2004,

$40,540 was determined to be includable in income.    The notice

determined that Schedule C expenses should be reduced by $7,950

for 2004.   The notice determined that a $29 interest payment was

includable in the Smiths’ income for 2004.    The notice determined

that the Smiths owed $2,533 in self-employment tax for 2004, an

adjustment resulting from the IRS’s determination that Schedule C

expenses should be reduced by $7,950.

     For 2005 the deficiency notice determined a deficiency in

tax of $9,373.   The notice determined that 9.7 percent of

Agripina Smith’s tribal-council compensation was derived from

fishing rights-related activities of the tribe.    Thus, of

Agripina Smith’s $45,500 tribal-council compensation for the

year, $41,086 was determined to be includable in income.      The

notice determined that Schedule C expenses should be reduced by

$6,450 for 2005.   The notice determined that the Smiths owed

$3,269 in self-employment tax, an adjustment that resulted from

the IRS’s determination that Schedule C expenses should be

reduced by $6,450.    The notice determined that the Smiths were

required to include $1,200 in gambling winnings in their income

for 2005.
                                 -7-

     The Smiths filed a Tax Court petition challenging the

deficiency notice for 2003.    The resulting case was assigned

docket No. 11580-08.    The Smiths also filed a Tax Court petition

challenging the deficiency notice for 2004 and 2005.    The

resulting case was assigned docket No. 11607-08.    The Smiths were

residents of Washington State when they filed their petitions.

The petitions stated that the Smiths disagreed with the fraction

of Agripina Smith’s tribal-council compensation that the IRS

determined was derived from fishing rights-related activities

under section 7873.    In its answer, the IRS did not assert that

the self-employment income of either Agripina Smith or James

Smith should include Agripina Smith’s tribal-council

compensation.    The Smiths have made the following concessions:

(1) the $40 in interest income is properly included in their 2003

income, (2) the $29 in interest income is properly included in

their 2004 income, and (3) the $1,200 in gambling winnings is

properly included in their 2005 income.

3.   Sandra Joseph and Peter Joseph

     During the years 2004 and 2005 Sandra Joseph was a member of

the tribal council of the Nooksack Indian tribe.    She received

compensation for services as a member of the tribal council of

$26,250 for 2004 and $45,500 for 2005.    Sandra Joseph and her

husband, Peter Joseph, filed joint tax returns for the tax years

2004 and 2005.    On these returns they did not include in income
                                 -8-

Sandra Joseph’s compensation for services as a member of the

tribal council.

     The IRS issued a deficiency notice to the Josephs

determining deficiencies in tax of $5,850 for 2004 and $10,017

for 2005.    The notice determined that 10.9 percent of Sandra

Joseph’s tribal-council compensation in 2004 and 9.7 percent of

her tribal-council compensation in 2005 were derived from the

fishing rights-related activity of the tribe.    Thus, of Sandra

Joseph’s $26,250 tribal-council compensation for 2004, $23,388

was determined to be includable in income.    And of her $45,500

tribal-council compensation for 2005, $41,086 was determined to

be includable in income.    The IRS determined that the Josephs

should include a $21 interest payment in their income for 2005.

The notice did not determine that either Sandra Joseph or Peter

Joseph was liable for self-employment tax.

     The Josephs filed a petition to challenge the deficiency

notice.    The petition stated that the Josephs disagreed with the

portion of Sandra Joseph’s tribal-council compensation that the

IRS determined was derived from fishing rights-related activities

under section 7873.    Their case was assigned docket No. 11614-08.

At the time they filed the petition they lived in Washington

State.    The IRS filed an answer.   The answer did not assert that

either Sandra Joseph or Peter Joseph was liable for self-

employment tax.
                                -9-

4.   Candace Kelly and Edward Kelly

     a.    2004

     During 2004 Candace Kelly was a member of the tribal council

of the Nooksack Indian tribe.   She received $28,000 in

compensation for services as a member of the tribal council.

     Edward Kelly is the husband of Candace Kelly.   The Kellys

filed a joint income tax return for the tax year 2004.    On this

return they did not include in their income Candace Kelly’s

compensation for services as a member of the tribal council.

     On February 12, 2008, the IRS issued a deficiency notice to

Candace Kelly and Edward Kelly for 2004 determining a deficiency

in tax of $4,115.   The notice determined that 10.9 percent of

Candace Kelly’s tribal-council compensation was derived from the

fishing rights-related activities of the tribe.   Thus, of Candace

Kelly’s $28,000 tribal-council compensation, $24,948 was

determined to be included in income.   The deficiency notice did

not determine that either Candace Kelly or Edward Kelly owed

self-employment tax.

     b.    2005

     During 2005 Candace Kelly continued to be a member of the

tribal council of the Nooksack Indian Tribe.   She received

$45,500 in compensation for services as a member of the tribal

council.   She received $14,220 in taxable wages from the tribe
                                -10-

for services other than services performed as a member of the

tribal council.    The tribe withheld $1,020 from her wages.

     Edward Kelly worked for the Nooksack Indian Tribe during

2005.   He was not a member of the tribal council.     He received

taxable wages of $36,072 from the tribe.      The tribe withheld $886

from these wages.

     Neither of the Kellys filed a return for the tax year 2005.

The IRS filed a substitute return for 2005 for Candace Kelly on

January 8, 2008.    The substitute return showed an income tax

liability of $6,034.    The IRS filed a substitute return for 2005

for Edward Kelly on January 8, 2008.      The substitute return

showed an income tax liability of $6,034.      Neither substitute

return reflected any liability for self-employment tax.

     On April 23, 2008, the IRS issued a deficiency notice to

Candace Kelly for 2005 determining a deficiency in tax of $6,034.

The notice determined that 9.7 percent of Candace Kelly’s tribal-

council compensation was derived from fishing rights-related

activities of the tribe and thus that $41,086 of her tribal-

council compensation was taxable.      The IRS determined that

Candace Kelly was required to include in income one-half of the

following amounts:

     • $41,086 in taxable compensation earned by Candace Kelly as

     a member of the tribal council,
                               -11-

     • $14,220 earned by Candace Kelly in wages for services

     provided to the tribe, and

     • $36,072 earned by Edward Kelly in wages for services

     provided to the tribe.

These three amounts totaled $91,378, and one-half of this total,

or $45,689, was included in income.    The deficiency notice did

not determine a self-employment tax liability.   It determined a

late-filing addition to tax under section 6651(a)(1) equal to

$1,143.23, which is the product of 22.5 percent and $5,081

($5,081 is the difference between $6,034 and $953 in federal

taxes withheld).6   It determined a late-payment addition to tax

under section 6651(a)(2), the amount of which could not be

determined at the time the deficiency notice was issued.

     On April 23, 2008, the IRS issued a deficiency notice to

Edward Kelly for 2005 determining a deficiency in tax of $6,034.

The notice determined that 9.7 percent of Candace Kelly’s tribal-

council compensation was derived from fishing rights-related

activities of the tribe and thus that $41,086 of her compensation

was taxable.   The IRS determined that Edward Kelly was required

to include in income one-half of the following amounts:

     • $41,086 in taxable compensation earned by Candace Kelly as

     a member of the tribal council,


     6
      The $953 is equal to half of the $1,020 withheld from
Candace Kelly’s wages, plus half of the $886 withheld from Edward
Kelly’s wages.
                               -12-

     • $14,220 earned by Candace Kelly in wages for services

     provided to the tribe, and

     • $36,072 earned by Edward Kelly in wages for services

     provided to the tribe.

These three amounts totaled $91,378.     One-half of the total, or

$45,689, was included in income.    The deficiency notice did not

determine a self-employment tax liability.     It determined a late-

filing addition to tax under section 6651(a)(1) equal to

$1,143.23, which is the product of 22.5 percent and $5,081

($5,081 is the difference between $6,034 and $953 in federal

taxes withheld).   It determined a late-payment addition to tax

under section 6651(a)(2), the amount of which could not be

determined at the time the deficiency notice was issued.

     c.   Petition

     On May 12, 2008, Candace Kelly and Edward Kelly filed a

petition challenging the deficiency notice for 2004 and the

deficiency notices for 2005.   They lived in Washington State when

they filed the petition.   The petition stated that the Kellys

disagreed with the fraction of Candace Kelly’s tribal-council

compensation allocated to fishing rights-related activities under

section 7873.   The petition did not give a specific reason the

Kellys were not liable for additions to tax for 2005.    The case

was assigned docket No. 11909-08.     In its answer the IRS did not

assert that the Kellys were liable for self-employment tax.
                              -13-

5.   Trial

     The Court consolidated the four docketed cases for trial.

In each case the parties executed a stipulation of facts.   The

Court hereby incorporates each stipulation of facts into its

findings of fact, with the exceptions noted infra note 7.

                             OPINION

1.   The Portions of the Compensation Received by Agripina Smith,
     Sandra Joseph, and Candace Kelly for Services as Members of
     the Tribal Council That Were Derived From the Fishing
     Rights-Related Activities of the Tribe

     Agripina Smith, Sandra Joseph, and Candace Kelly received

compensation for their services as members of the tribal council.

The Smiths, the Josephs, and the Kellys contend that the tribal-

council compensation is totally exempt from federal income tax by

the operation of section 7873.7   In the deficiency notices, the


     7
      Inadvertently, we think, the stipulations state that the
three members of the tribal council received “taxable payments”
that were exactly equal to the amounts that the IRS determined.
For example, par. 17 of the stipulation in the 2004 and 2005 case
of Agripina Smith and James Smith states: “In the tax year 2004,
Agripina Smith received taxable payments for her services as a
member of the Nooksack Tribal Council in the amount of
$40,540.00” All six petitioners plainly challenge the IRS’s
determinations. We decline to adopt the portions of the
stipulation that say otherwise. These portions are:

     • Par. 14 of the stipulation in docket No. 11580-08 (the
     case involving the 2003 tax year of the Smiths),
     • pars. 17 and 18 of the stipulation in docket No. 11607-08
     (the case involving the 2004 and 2005 tax years of the
     Smiths).
     • pars. 17 and 18 of the stipulation in docket No. 11614-08
     (the case involving the Josephs), and
     • pars. 23 and 24 of the stipulation in docket No. 11909-08
                                                   (continued...)
                              -14-

IRS determined that only small fractions of the payments (11.9

percent in 2003, 10.9 percent in 2004, and 9.7 percent in 2005)

are excludable from income under section 7873.8


     7
      (...continued)
     (the case involving the Kellys).

For the same reason, we adopt par. 25 of the stipulation in
docket No. 11909-08 without the words “in the amount of
$20,543.00”. We adopt par. 26 of the same stipulation without
the words “in the amount of $20,543.00”.
     8
      Under sec. 1.6013-4(b), Income Tax Regs., if a joint return
is made, the gross income of the husband and wife on the joint
return is computed in the aggregate. The regulation provides:
“If a joint return is made, the gross income and adjusted gross
income of husband and wife on the joint return are computed in an
aggregate amount and the deductions allowed and the taxable
income are likewise computed on an aggregate basis.” The
regulation also provides: “Although there are two taxpayers on a
joint return, there is only one taxable income. The tax on the
joint return shall be computed on the aggregate income and the
liability with respect to the tax shall be joint and several.”

     Joint income tax returns were filed by the Smiths for 2003,
2004, and 2005, by the Josephs for 2004 and 2005, and by the
Kellys for 2004. For each of these years the aggregate income of
each of the three couples must include the taxable portion of the
tribal-council compensation received by the spouse who was a
member of the tribal council (i.e., Agripina Smith, Sandra
Joseph, and Candace Kelly). The deficiency notices determined
that the aggregate income of each couple should exclude the
portion of the tribal-council compensation that the IRS
determined was derived from the fishing rights-related activities
of the tribe (11.9 percent for 2003, 10.9 percent for 2004, and
9.7 percent for 2005).

     The Kellys did not file a joint return for 2005. Although
their incomes are not computed on an aggregate basis, they each
earned a one-half share of community income. Thus, for 2005
Candace Kelly was required to include in her income one-half of
her tribal-council compensation minus the amount excluded under
sec. 7873. The deficiency notices issued to Candace Kelly for
2005 determined that 9.7 percent of the tribal-council
                                                   (continued...)
                                  -15-

     Section 7873(a)(1) provides that no income tax shall be

imposed on income derived by a member of an Indian tribe from a

fishing rights-related activity of such tribe.9    The term

“fishing rights-related activity” is defined as “any activity

directly related to harvesting, processing, or transporting fish

harvested in the exercise of a recognized fishing right of * * *

[an Indian] tribe or to selling such fish but only if

substantially all of such harvesting was performed by members of

such tribe.”   Sec. 7873(b)(1).    The term “recognized fishing

rights” is defined by the Code to mean “fishing rights secured as

of March 17, 1988, by a treaty between * * * [an Indian] tribe




     8
      (...continued)
compensation should be excluded from her income in computing her
tax liability.

     Likewise, for 2005 Edward Kelly was required to include in
his income one-half of Candace Kelly’s tribal-council
compensation minus the amount excluded under sec. 7873. The
deficiency notice sent to Edward Kelly for 2005 determined that
9.7 percent of Candace Kelly’s tribal-council compensation should
be excluded from Edward Kelly’s income in computing his tax
liability.
     9
      Native Americans are United States citizens. Hoptowit v.
Commissioner, 709 F.2d 564, 565 (9th Cir. 1983), affg. 78 T.C.
137 (1982). They are generally subject to federal income
taxation unless exempted by a treaty or an Act of Congress. Id.
The salaries received by members of tribal councils are generally
subject to federal income taxation. Id. at 566. The Indian
tribes themselves, like states, are generally exempt from federal
income taxation. 1-8 Cohen’s Handbook of Federal Indian Law,
sec. 8.02[2][a] (Matthew Bender & Co. 2009).
                                 -16-

and the United States or by an Executive order or an Act of

Congress.”    Sec. 7873(b)(2).

     The exact nature of the work of the Nooksack tribal council

on salmon fishing issues is unclear in the record, as is the

magnitude of the work in comparison to the council’s other

activities.   The trial record does not even contain the minutes

of the meetings of the council.    The only concrete piece of

relevant evidence is that the tribe spent 11.9 percent, 10.9

percent, and 9.7 percent of its budget on fishing expenses in

2003, 2004, and 2005.   On the basis of these budget statistics,

the IRS determined in the deficiency notice that 11.9 percent,

10.9 percent, and 9.7 percent of the compensation for services on

the tribal council was derived from the fishing rights-related

activities of the tribe.    The preponderance of the evidence does

not support a finding that the portion of the tribal-council

compensation that was derived from fishing rights-related

activities exceeded these percentages.    Although the budget

statistics for fishing activity may not have included the costs

of ceremonies such as the annual salmon ceremony, we have no way

of estimating what those costs were.    The lack of information

about the ceremonies (and about the council’s activities

generally) is the fault of the petitioners.    Either they did not

keep records of their activities, or they did not produce the

records to the Court.   We conclude that the portion of each
                                  -17-

tribal-council member’s compensation derived from the fishing

rights-related activities of the tribe was 11.9 percent in 2003,

10.9 percent in 2004, and 9.7 percent in 2005.

2.   Whether the Petitioners Are Liable for Self-Employment Tax
     on the Compensation Received by Agripina Smith in 2003,
     2004, and 2005, by Sandra Joseph in 2004 and 2005, and by
     Candace Kelly in 2004 and 2005 for Services as Members of
     the Tribal Council

     Section 1401 imposes a tax on the “self-employment income”

of every individual.    “[S]elf-employment income” is generally

defined as the “net earnings from self-employment derived by an

individual”.   Sec. 1402(b).   The term “net earnings from self-

employment” is defined as “the gross income derived by an

individual from any trade or business carried on by * * * [the]

individual, less the deductions allowed by this subtitle [i.e.

subtitle A of title 26] which are attributable to * * * [the]

trade or business”.    Sec. 1402(a).     A trade or business for these

purposes excludes the performance of service by an individual as

an employee.   Sec. 1402(c)(2).    In computing the gross income

derived by an individual from a trade or business, if any of the

income derived from a trade or business is community income under

community property laws, the gross income and deductions

attributable to such trade or business shall be treated as the

gross income and deductions of the spouse carrying on such trade
                                  -18-

or business.     Sec. 1402(a)(5)(A).10   Thus, if a wife runs a

business that generates $20,000 in gross income, then, even if

the $20,000 is community income, it is treated as the gross

income of the wife, not the husband, in the calculation of the

net earnings from self-employment.       See, e.g., Landsberg v.

Commissioner, T.C. Memo. 2001-105 (husband who filed separate

return was required to include 100 percent of income from his

sales business in net earnings from self-employment even though

income was community property under California law).      Net

earnings from self-employment do not include income derived from

fishing rights-related activity.     See sec. 1402(a)(15).

     If a married couple files a joint return, the self-

employment tax is computed separately for the husband and for the

wife.11     Each spouse’s self-employment tax liability is added to




     10
      Sec. 1402(a)(5)(A) was effective Mar. 2, 2004. Social
Security Protection Act of 2004, Pub. L. 108-203, sec. 425(b),
118 Stat. 536. Before that date, a similar provision was in
effect. Sec. 1402(a)(5)(A) (2002).
     11
          As sec. 1.6017-1(b)(1), Income Tax Regs., provides:

     In the case of a husband and wife filing a joint return
     under section 6013, the tax on self-employment income
     is computed on the separate self-employment income of
     each spouse, and not on the aggregate of the two
     amounts. The requirement of section 6013(d)(3) that in
     the case of a joint return the tax is computed on the
     aggregate income of the spouses is not applicable with
     respect to the tax on self-employment income.
                               -19-

arrive at the couple’s total self-employment tax liability.12

The liability is joint and several.13

     The IRS asks the Court to find that it “properly determined

that petitioners are liable for self-employment tax on the

taxable portion of the remuneration received by Agripina Smith,

Sandra Joseph, and Candace Kelly for their services as members of

the Nooksack Indian Tribal Council.”

     Agripina Smith received compensation for her tribal-council

services during 2003, 2004, and 2005, Sandra Joseph received

compensation for her tribal-council services during 2004 and

2005, and Candace Kelly received compensation for her tribal-

council services for 2004 and 2005.     For none of the years did

any of petitioners report on tax returns any self-employment

income attributable to the compensation received for services on

the tribal council.   In the deficiency notices it issued to

petitioners for these years, the IRS did not determine any

deficiency in self-employment tax attributable to tribal-council

compensation.   The IRS’s answers in these cases do not assert


     12
      This Court observed in Charlton v. Commissioner, 114 T.C.
333, 337 (2000) (citing sec. 6017): “Self-employment tax for a
husband and wife filing a joint return is the sum of the taxes
computed on the self-employment income of each spouse.”
     13
      Sec. 6013(d)(3) imposes joint-and-several liability on
spouses who file joint returns. Sec. 1.6017-1(b)(2), Income Tax
Regs., explains: “Except as otherwise expressly provided,
section 6013 is applicable to the return of the tax on self-
employment income; therefore, the liability with respect to such
tax in the case of a joint return is joint and several.”
                                -20-

that the petitioners are liable for self-employment tax on

tribal-council compensation.   In its pretrial memoranda the IRS

asserted that the tribal-council compensation paid to the three

petitioners, except for the fraction the IRS determined was

derived from fishing rights-related activities, was subject to

self-employment tax.

     The belatedness with which the IRS raised the issue of self-

employment liability for the tribal-council compensation is a

violation of Rule 31(a), which provides that the answer and other

pleadings should give the other party fair notice of the matters

in controversy.   In Stewart v. Commissioner, 714 F.2d 977, 986

(9th Cir. 1983), affg. T.C. Memo. 1982-209, the Court of Appeals

for the Ninth Circuit explained that the most appropriate times

for the IRS to raise the legal theories on which it intends to

rely are in the deficiency notice and in the answer.    The failure

of the IRS to raise a legal theory at these times does not cause

the IRS to forfeit its right to rely on the theory if the

taxpayer is not surprised and disadvantaged by the delay in

raising the theory.    Id. at 986-987.   The petitioners would

suffer prejudice from the belated raising of the issue of self-

employment tax liability stemming from the tribal-council

compensation.   The issue does not hinge on the same factual

questions as does petitioners’ liability for income taxes
                                -21-

stemming from the tribal-council compensation.    Therefore the IRS

is barred from raising the issue.

     We determine that none of petitioners are liable for self-

employment tax on compensation received for services on the

tribal council for the years at issue.

3.   Whether the IRS Properly Disallowed Vehicle Expense
     Deductions Claimed by James Smith and Agripina Smith for
     2003, 2004, and 2005

     The deficiency notices determined that the deductions

claimed by the Smiths in 2003, 2004, and 2005 for vehicle

depreciation and maintenance and repairs should be disallowed.

The IRS argues that the Smiths failed to assign error to these

determinations.   Rule 34(b)(4) requires the petition to contain

clear assignments of each error that the petitioner alleges to

have been committed by the Commissioner in the determination of

the deficiency.   If the petition fails to clearly assign error,

the issue is deemed conceded.   Id.    We need not determine whether

the Smiths conceded the vehicle-expense issue because, even if

the Smiths were entitled to challenge the disallowance of the

deduction, the IRS has shown that it was correct to disallow the

deduction.

     The expenses of operating a vehicle used in business are

deducted from gross income.   Sec. 162(a).   Under section 1.274-

5(j)(2), Income Tax Regs., a taxpayer can use the standard

mileage rate to calculate the cost of using a vehicle in a
                                 -22-

business instead of substantiating the actual cost.    Although it

is permissible for a taxpayer to deduct the amount calculated

from the standard mileage rate, it is not permissible to deduct

such an amount and also the actual cost of operating the vehicle.

See Larson v. Commissioner, T.C. Memo. 2008-187, 98 T.C.M. (CCH)

74, 77.

     The Smiths used the standard mileage rate deductions.      For

the same vehicles they also claimed deductions for depreciation,

and for repairs and maintenance.    In the deficiency notices, the

IRS allowed the Smiths only the standard mileage rate deductions,

after making some corrections.    The corrections resulted in

standard mileage rate deductions greater than the standard

mileage rate deductions the Smiths claimed on their returns.

Because the Smiths cannot deduct the expenses of their vehicles

using both the standard mileage rates and the actual operating

costs, and because the amounts of the standard mileage rate

deductions in the deficiency notices exceed the actual operating

costs claimed as deductions, we conclude that the amounts of the

deductions reflected in the deficiency notices are the correct

deductions for the vehicles the Smiths used in their tree-service

business.
                                -23-

4.     Whether Candace Kelly and Edward Kelly Are Each Liable for
       the Additions to Tax Under Section 6651(a)(1) and (2) for
       2005

       The deficiency notices determined that Candace Kelly and

Edward Kelly were each liable for an addition to tax for the

failure to file returns for 2005 and an addition to tax for the

failure to pay taxes shown on returns for 2005.    The IRS has

established that the Kellys are liable for these additions to

tax.    See sec. 7491(c) (imposing burden of production on IRS “in

any court proceeding with respect to the liability of any

individual for any penalty, addition to tax, or additional amount

imposed by this title”).    And the Kellys have failed to show that

a statutory exception exonerates them from their liability for

the additions to tax.    There is evidence that the Kellys were

told by the lawyer for the tribe that Candace Kelly’s tribal-

council compensation was exempt from income tax.    However, this

does not excuse the Kellys from filing a tax return.    Their

incomes, even without Candace Kelly’s tribal-council income, were
                                 -24-

above the threshold for filing tax returns.      Therefore, whatever

reliance they may have placed on the advice of the tribe’s lawyer

did not constitute reasonable cause for failing to file tax

returns.14

     To reflect the foregoing,


                                        Decisions will be entered

                                 under Rule 155.




     14
      The respondent objected to the admission of Exhibit 14-P,
a memorandum from the tribe’s lawyer. Because this memorandum
does not affect our determinations, we need not decide whether it
is admissible.
