Indian tribe sues IRS

The Santa Ynez Band of Chumash Mission Indians has sued the Internal Revenue Service, claiming the agency double-taxed them and owes them a refund that could total in the millions of dollars.

The group operates 2,000 slot machines at a casino in Santa Ynez, about 125 miles northwest of Los Angeles. Unlike many lawsuits and disputes around tribes and taxes in recent years — such as disagreements on the collection of sales tax on reservations or state income taxes of casino revenues — the Santa Ynez Tribe is making no claims about the agency’s right to tax them. 

“Congress has declared in its wisdom that distributions from gaming to tribal members, no matter where when or how, are subject to federal taxes,” said Glen Feldman, an attorney for the tribe with the Phoenix firm Mariscol Weeks MacIntyre and Friedlander. 

But the tribe maintains that this contrasts with California law, which states that casino income is exempt from taxes, but only if the recipient is a member of the casino tribe, living on the same reservation as the casino itself, or if they are living out of state. 

The dispute arises out of the 2003 and 2004 tax years.

According to Feldman, the IRS could levy these taxes on these revenues from the tribe or directly from its members in their individual tax returns, but not both. 

But confusion arose among some 30 tribal members when they sought to take advantage of an estate planning service. Later, the IRS audited the tribe and assessed back tax and penalties on this money. In May, 2006, the tribe paid the IRS $1,041,745 for the tax year 2003 and $2,891,865 for 2004 to cover the debt.

As it turned out, Feldman said, most of these tribal members had paid the necessary taxes on their individual tax returns, absolving the tribe of their responsibility. This meant that the IRS was obligated to pay back much, if not most of this money. The tribe asserts than they are due about $3.8 million.

The tribe believes the only legal question is whether the tribe met a May 2009 deadline to file an appeal with the IRS to have the money repaid. The tribe filed suit last month on the grounds that they met the deadline.

“There is no tax dispute here. The tribe thinks it’ entitle to a refund because their members paid their taxes. The IRS is making the claim that the tribe filled after the deadline.” 

A spokesman for the IRS said the agency will not comment on pending legal matters. 

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