Miccosukee Tribe sues IRS over back taxes owed on gambling distributions to members

 

jweaver@MiamiHerald.com

On the hook for $170 million in income taxes and related bills, the Miccosukee Tribe of Indians is suing rather than settling with the Internal Revenue Service over the tribe’s failure to report and withhold income from its gambling distributions to members.

But what makes the federal lawsuit filed in Miami so distinctive is that the tribe has mounted the counteroffensive not only against its longtime nemesis, the IRS, but also against Attorney General Eric Holder and the secretaries of the Treasury and Interior departments.

The crux of the suit: The contention that in 2005, the IRS reached a “secret deal” with the Miccosukees’ former Chairman Billy Cypress, his personal lawyer and the tribe’s general counsel to hand over the financial records of certain tribal members — a “bargain” that the U.S. government has exploited to wage an unconstitutional tax war against the West Miami-Dade tribe.

The tribe’s leader, Colley Billie, claims in the suit that he and the Miccosukee tribe members only discovered the deal in 2010 after Cypress left office.

“This suit involves willful, purposeful and malicious actions by the United States ... by selectively targeting the Miccosukee Tribe and its people for federal tax audits,” the suit, filed earlier this month, said.

The IRS and the other federal agencies declined to comment.

In its long-running battle with the Miccosukee Tribe, the IRS has not only slammed the tribe over its gambling distributions. The agency also has smacked hundreds of the tribe’s members with separate bills totaling $58 million for their failure to pay personal income taxes on their share of casino profits from 2000-2005, records show.

The IRS filed tax liens for that period in the Miami-Dade Circuit Court in April. Those liens are likely to skyrocket for subsequent years because the tribe has continued to refuse to report and withhold taxes on the individual allocations, as required under federal law.

The tribe’s aggressive legal posture is similiar to other lawsuits filed in recent years against its former lawyers, one-time Miami U.S. attorneys Dexter Lehtinen and Guy Lewis, and ex-chairman, Cypress, who lost power in late 2009.

In the latest suit against the U.S. government, the tribe asserted that Lehtinen argued in a 2006 memo to the IRS that the Miccosukees had a “unique tax system” that exempted them from paying income taxes.

But behind the scenes, according to court records, Lehtinen and other lawyers for the Miccosukees warned the tribe’s leaders of personal income-tax liabilities from the distribution of gambling profits to members.

Cypress, who was among the original IRS targets dating back almost a decade, has been sued by the agency for allegedly failing to pay millions in back taxes. Cypress, who was once represented by Lewis’ law firm, also has been accused by the tribe in a lawsuit of embezzling $26 million.

The agency’s crackdown comes after years of fighting with the tribe over its refusal to pay taxes on the distribution of profits from its casino operation off the Tamiami Trail. The assessments for back taxes, interest and penalties revealed for the first time the sheer scope of the tribe’s tax problems.

Without the extras, the tribe’s withholding taxes alone for 2000 to 2005 totaled $45 million, and individual members’ taxes amounted to $30 million for that period, according to the tax liens.

The tax obligations of the tribe and its members are expected to soar because IRS examiners also are auditing the Miccosukee’s gambling distributions for the years 2006-2010, when payouts to each member were as high as $160,000 annually.

Despite the audits, the Miccosukee Tribe continues to argue that it does not have to withhold taxes on the gaming distributions and that individual members do not have to pay taxes on the income derived from the Miccosukee’s bingo-style slot machines and poker.

The tribe’s general counsel, Bernardo Roman III, wrote the IRS in 2011 that “the distributions at issue are not subject to federal income taxation and therefore not subject to federal reporting and withholding under applicable Supreme Court precedent.”

According to federal law, the Miccosukee Tribe’s status as a sovereign nation means the entity itself is not subject to taxes. But once the tribe distributes profits from its casino to members, they are individually responsible for reporting and paying income taxes on their annual tax returns, several legal experts say. Moreover, the tribe itself must withhold taxes on the income and turn those deductions over to the IRS.

Experts say those requirements are spelled out clearly in the 1988 Indian Gaming Regulatory Act and in the IRS tax code.

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