Joe T. Kieffer and Linda R. Kieffer - Page 3

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          The property where petitioner cut the timber into lumber was and            
          remains reservation land not allotted to an individual Indian.              
          The lumber petitioner produced was sold to Spokane Indian                   
          Reservation Timber Products Enterprises (SIRTPE).  In 1993,                 
          petitioner had lumber sales of $17,253 to SIRTPE and in 1994 his            
          sales to SIRTPE were in the amount of $10,699.  Petitioner                  
          incurred lumber sales expenses of $11,214 in 1993 and $6,954 in             
          1994.                                                                       
               On their joint individual Federal income tax returns filed             
          for 1993 and 1994, petitioners did not report income or expenses            
          from lumber sales.  Attached to the return for 1993 is a Form               
          1099-MISC reporting nonemployee compensation from SIRTPE bearing            
          the handwritten notation, "Indian Exempt".                                  
                                     Discussion                                       
               Respondent takes the position that petitioners must report             
          as income receipts from lumber sales and are allowed to deduct              
          expenses associated with such sales for both years.                         
          Petitioners argue that "income derived by an Indian from                    
          activities which directly benefit the Tribe is tax-exempt."                 
          Petitioners argue also that income derived by an Indian from a              
          "natural resource" on Indian reservation land is, by analogy to             
          section 7873, exempt from income tax.                                       
               We start from the premise that every item of a person's                
          gross income is subject to Federal income tax, unless there is a            





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