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Posts from April 2014.

As the Chair of the Oregon Tax Institute (OTI), I would like to invite you to the 14th Annual Oregon Tax Institute scheduled for June 5 & 6 in Portland, Oregon.  We have grown the OTI from a local tax forum into a preeminent tax institute for both tax attorneys and CPAs.  Our topic coverage and faculty this year are fabulous and each one of our speakers is a nationally recognized expert in tax law.  This year’s OTI will be on par with the best tax institutes in the country.      

I hope you will join us in June and I encourage you to sign up for OTI as soon as possible.  Also, please feel free to share this information with your colleagues. Click here to register.



Seminar Description:

The 14th Annual Tax Institute offers an outstanding faculty on hot topics for tax practitioners. Federal income tax developments will be covered in depth, and you will hear about significant national and Oregon SALT developments. Learn the latest about the 0.9% additional Medicare tax on wages and self-employment income, such as tax liability trigger points, the rules, special complications, and refund opportunities. Gain an overview of grantor retained annuity trusts, including ways to present the effectiveness of GRATs to clients. Discuss structuring considerations when a partnership or tenants in common are involved in a Section 1031 exchange. Our experts will demonstrate how LLCs and disregarded entities can be used to solve tax issues, explore the IRSs treatment of conservation easements, and examine the federal tax consequences and pitfalls of converting entities under a variety of state statutes. And what happens when tax professionals cross the line? Find out with a review of the civil and criminal penalties.


On March 18, 2014, the Internal Revenue Service announced that one of its employees had taken home a computer thumb drive containing unencrypted data relating to 20,000 agency workers.  The employee then plugged the thumb drive into an unsecure home computer network.  While the thumb drive did not contain any data relating to persons outside the Internal Revenue Service, it still put 20,000 individuals at risk of theft of identity and/or financial assets.

Commissioner John Koskinen described the data breach as an “isolated event.”  Isolated or not, his statement likely does not give any solace to the 20,000 affected IRS workers.  This data breach may have been narrower in scope than the recent Target Corp. data breach, but it nevertheless illustrates how vulnerable we are to data breaches and potential theft of identity and/or financial assets in this electronic era.

We have to constantly safeguard the personal information we receive from our clients, as well as our own personal information.   Loss of client information could easily lead to liability.



On March 10, 2014, the Internal Revenue Service (“Service”) issued Notice 2014?17 (“Notice”).  The Notice focuses on the tax treatment of per capita distributions made to members of Indian tribes from funds previously held in trust by the Secretary of the Interior and which were derived from interests in trust lands, trust resources and/or trust assets.

The Department of Interior (“DOI”) is responsible for holding these trust funds on behalf of federally-recognized tribes and certain individual Indians who have an interest in trust lands, trust resources, or trust assets.  The Office of Special Trustee within the DOI is tasked with the responsibility of managing these funds.

Prior to 1983, the DOI made per capita distributions of the trust funds directly to the members of the tribes.  In 1983, pursuant to the Per Capita Act, however, tribes were given authority to receive the trust funds and hold them in tribal trust accounts for subsequent per capita distributions to members.  So, now the DOI can distribute the trust funds to the tribes who, in turn, make the per capita distributions to members.

The law appears fairly clear in that per capita distributions of these funds from the DOI to tribal members are excluded from gross income.  The issue, following the enactment of the Per Capita Act, is whether per capita distributions received by members from their tribes are likewise excludable from gross income.

In the Notice, the Service concludes, pursuant to 25 USC § 117b(a) and § 1407, per capita distributions from the DOI trust account for the benefit of a tribe are generally excluded from the gross income of the members who subsequently receive the per capita distributions from the tribe’s trust account.  There is an exception, however, to this rule.  If the tribe’s trust account is being used to “mischaracterize taxable income as nontaxable per capita distributions,” the distributions will be taxable.  In other words, based upon the facts and circumstances, if the distributions are, in reality, not per capita distributions to members, they will be taxable.  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.

For illustrative purposes, the Notice sets forth three examples:

  • In Example 1, the Service describes the situation where two tribal members manage a federally-recognized tribe’s housing authority.  In 2011, 2012, and 2013, they each receive a salary and bonus of X amount.  In 2014, 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 corporation’s offices are located on land held in trust by the DOI for the benefit of the tribe.  The tribe charges the corporation fair market value rent for the offices.  The lease, however, provides that the corporation deposit into the tribe’s trust account as “additional rent” an amount approximating its net revenues.  Thereafter, the tribe distributes to the members per capita an amount equal to the “additional rent.”  The distributions are taxable to the recipients.  They are, in reality, business profits which constitute taxable income. 
  • In Example 3, a federally-recognized tribe owns a corporation which operates a casino on land held in trust by the DOI for the tribe’s benefit.  Fifty percent (50%) of the corporation’s net revenues are distributed to the tribe outside of trust.  The remaining 50% of net revenues are placed in the tribe’s trust account and labeled “rent” for the corporation’s use of the land upon which the casino operates.  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. 

The Notice is designed to provide interim guidance until the Service issues what is called a “Final Notice.”  You may submit written comments on or before September 17, 2014, to:

Internal Revenue Service


Room 5203

PO Box 7604

Benjamin Franklin Station

Washington, DC 20044



(with "Notice 2014-17” in the subject line)


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 1,400 gold coins. The coins, which are said to be in mint condition, date back to the 19th century. Experts have placed a preliminary value on the coins of more than $10 million. 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. A law professor from the University of North Carolina, John Orth, recently told TIME Magazine, because the coins were found on the couple’s own property, they will likely be able to retain them.

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. U.S., 23 AFTR 2d 69-997 (Northern District of Ohio, 1969), a couple purchased a piano in 1957 for $15. In 1964, while cleaning the piano, they discovered almost $4,500 in U.S. currency.

On the Cesarinis’ 1964 joint income tax return, they reported the money found in the piano as ordinary income from other sources. 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.S. District Court for the Northern District of Ohio.

The taxpayers asserted three arguments (without offering legal support):

    • IRC § 61 does not include money found in a piano;
    • If the money found in the piano is includible in income, it should be included in the year the piano was purchased (i.e., 1957), rather than the year of discovery (i.e., 1964). Since tax year 1957 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.

The Internal Revenue Service’s position was equally simple and, in some respects, lacking proper legal support. It asserted:

    • IRC § 61 is broad sweeping—it includes income from all sources. Consequently, unless specific provisions of the Code exclude an item of income, it is includable. Since no provision of the Code specifically excludes treasure trove, the money found in the Cesarinis’ piano is includible in their gross income;
    • It is ordinary income; and
    • It is includible in income in the year of discovery.

Section 61 of the Code provides: “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following…”

Both the Cesarinis and the Internal Revenue Service appear to have failed to review the applicable Treasury Regulations. Treasury Regulation Section 1.61 14(a) specifically provides:

“Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.”

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.

In the present case, assuming the value of the gold coins is $10 million, and further assuming the California couple has an undisputed right to the gold coins, they will have a combined federal and state income tax liability of approximately $5 million. Despite the Cesarinis’ argument, the income to the California couple is ordinary income. It is hard to debate this result. The California couple reportedly had an increase in wealth by $10 million. Good fortune found them!

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Larry J. Brant

Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.

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