The Notice highlights three situations where distributions were disguised as per capita distributions of trust funds, but were really compensation for tribal member services, profits from tribal business activities, or gaming revenues, all of which are taxable to the members.
Excessive Energy Property Grant Is Includible in Gross Income
In , , and , they each receive a salary and bonus of X amount. In , rather than pay a bonus of X amount to the two tribal members, the tribe authorizes a distribution out of the trust account to each of them in an amount equal to X. The distributions are taxable to the two recipients.
They are, in reality, compensation which constitutes taxable income. They do not constitute per capita distributions of the DOI trust funds. In Example 2 , a federally-recognized tribe owns a corporation which operates an information technology business. The tribe charges the corporation fair market value rent for the offices. They are, in reality, business profits which constitute taxable income.
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Thereafter, the tribe distributes the trust funds per capita to its members. The distributions are taxable to the members. They are, in reality, gaming revenues which constitute taxable income. A California couple was recently walking their dog when they noticed a rusty tin container protruding from the soil next to a tree in their garden. Upon investigating the matter, they discovered several tin cans buried in the soil. The cans contained 1, gold coins.
The coins, which are said to be in mint condition, date back to the 19th century. For obvious reasons, the couple is keeping their identity and the location of their home out of the media.
It appears the couple is legally entitled to retain the treasure trove. Like the winner of a lottery, the California couple will be required to declare their new fortune as gross income for income tax purposes. This is not the first time a person has been faced with good fortune and a corresponding tax bill.
In Cesarini v. About six months later, however, they had a change of heart. Consequently, they filed an amended return, seeking a refund of the tax paid on the treasure trove, claiming it was excludable from income. The Internal Revenue Service reviewed the claim for refund, but eventually denied it.
So, the Cesarinis filed a refund lawsuit in the U.
District Court for the Northern District of Ohio. It asserted:. Treasury Regulation Section 1. Judge Young, however, did review the Treasury Regulations. Based upon this regulation, he held the Cesarinis had income in the year of discovery. As there was no sale or exchange of a capital asset, the income is properly characterized as ordinary income.
Consequently, their request for refund was properly denied. It is hard to debate this result. Good fortune found them!
In the brief interview, I describe some of the proposed tax provisions that will impact individual taxpayers and corporate taxpayers. It has exclusive responsibility for overseeing practitioner conduct and implementing discipline. For this purpose, practitioners include attorneys, certified public accountants, enrolled agents, enrolled actuaries, appraisers, and all other persons representing taxpayers before the Internal Revenue Service. The Legal Analysis Branch is tasked with the interpretation and application of Circular in the cases involving practitioners. Referrals to OPR, alleging practitioner violations of Circular , typically come from two sources:.
The life of a referral generally takes the following path:. The OPR performs a preliminary investigation of the facts and circumstances to determine whether it is likely a violation of Circular occurred. If the OPR determines that a violation of Circular likely occurred, it notifies the practitioner and gives the practitioner an opportunity to present evidence to support his or her case.
After taking into consideration its investigatory findings and information presented by the practitioner, the OPR determines the level of discipline, if any, to apply to the case. The Office of Chief Counsel will generally attempt to work with the practitioner, giving him or her another opportunity to resolve the matter.
If the case is not resolved, a hearing before the ALJ will occur. The practitioner may appeal a Final Agency Decision to the U. District Court. The proceeding is not, however, a trial de novo. Consequently, the court will only review the findings of fact on the record in the ALJ proceeding and will only set aside the decision if it was arbitrary or capricious, contrary to law, or an abuse of discretion.
The burden of proof in these cases is on the OPR. The types of matters referred to the OPR include, without limitation, practitioners involved in promoting abusive tax shelters, preparing and filing frivolous tax returns, willfully attempting to evade any federal tax, diverting taxpayer refunds, repeated patterns of misconduct, and willful violations of Circular As reflected in the Announcement, during the last half of , three enrolled agents, seven CPAs, three unenrolled preparers, and three attorneys were subjected to OPR discipline.
This included 11 suspensions and 5 disbarments. The Announcement illustrates the high stakes. Practitioners must pay careful attention to Circular and their obligations thereunder. As a result of the mistakes, Durant alleges he will have to amend certain income tax returns, pay additional taxes, and possibly be subjected to penalties. If the client ends up engaging a new preparer to amend his or her tax return, and pays the tax, interest on the underpayment of taxes and penalties, it seems logical the preparer could be liable for the cost of amending the returns and the penalties.
The client owes the tax; nothing the preparer did likely changes that conclusion. Unless the client would have refrained from incurring the non-deductible expenses in the first place had he or she been given a correct recitation of the tax laws, how can the preparer be liable for the tax?
Interest is a bit trickier. Since the client got the use of the money from the time the taxes were originally due until actually paid , one can argue the preparer is not liable for the interest.
Obviously, there may be facts that would cause a court to rule differently. Stay tuned for the outcome of this case! Section Consequently, tax preparers should:. If the preparer knows or has reason to know an expense item listed as a business expense is in reality a personal expense or was not actually incurred, the preparer should not include the expense on the income tax return. Advise the client that the expense is non-deductible. If the client still wants you to deduct the costs of his or her vacation travel or personal chef, just say no!
If the preparer suspects a client is classifying personal expenses as business expenses, the preparer should terminate the relationship and memorialize the termination in a disengagement letter. The risks to the preparer are significant. This case should serve as a reminder—tax preparers cannot put their heads in the sand! While preparers are not required to audit their clients, they must act prudently and with reasonable care in the preparation of tax returns.
Larry J. Brant Editor. Brant practices in the Portland office.
New Documents Suggest IRS Reads Emails Without a Warrant
At hearing, several bad facts came out, including: Edgar had been convicted of a felony for making false statements and for mail fraud. Tags: Charles M.
Edgar , Disbarment , Tax Procedure. Tags: State and Local Tax. Maybe Not! Tags: Data Breaches , Identity Theft , unencrypted data. Finders Keepers Losers Weepers. Since tax year was closed, the Internal Revenue Service is out of luck; and If the money found in the piano is includible income, it is capital gain rather than ordinary income. Consequently, unless specific provisions of the Code exclude an item of income, it is includable. Tags: income tax , treasure trove. Referrals to OPR, alleging practitioner violations of Circular , typically come from two sources: Internal sources e.
The life of a referral generally takes the following path: The OPR performs a preliminary investigation of the facts and circumstances to determine whether it is likely a violation of Circular occurred.