1099-Misc from Indian Tribe for brother's funeral expenses.

[nwtaxlady]

My client received a 1099-Misc for $9224 from the Indian tribe his brother belonged to for reimbursing my client for his brother's funeral expenses. Apparently when brother passed away, the tribe was in turmoil and so my client had to front the money to pay for the funeral expenses. Then the tribe reimbursed my client the money. So then my client received a 1099-misc for other income for the $9224 they reimbursed him for.

What can or should we do with this amount?

[Koss]

Form 1099-MISC

Geez, that's bizarre...

Did they put it in Box 3 or Box 7?

BMK

[Koss]

Nontaxable

You're gonna get different answers on this. There is no one right answer.

It depends on your personality, the nature of your tax practice, and how the client feels about it.

It is not taxable income. I am not suggesting that the client should have to pay tax on it. This is not a gray area of the law. This is a bonehead accountant--or someone who is not an accountant--who got trigger-happy with Form 1099.

Hopefully, your client has a bill for the funeral costs, and hopefully the amount on the bill matches the amount on the Form 1099 to the penny--or very close.

Option 1: Enter the income on line 21, and then back it out on line 36 as an adjustment, and add an explanatory statement to the return. Good luck figuring out how to do all that and still be able to e-file the return. I know it can be done. You have to get creative. Statements can be added to an electronic return. For the adjustment, you'll have to pretend that it was jury pay paid back to the employer, or expenses for personal property rental or something, and then maybe override the description somehow.

Option 2: Don't report it on the return at all, but still add an explanatory statement.

Option 3: Don't report it at all. Period. It's not taxable income. Yes, you'll have to deal with an IRS notice. It should be very straightforward. You respond by fax with a one-paragraph explanation and a copy of the funeral bill.

If they reported it in Box 7, someone may tell you to put it on Schedule C, and somehow back it out as an expense on page 2 of Schedule C. I think that's insanity. The client is not operating a business, and there is no valid reason to file a Schedule C.

It is not the reporting documents that determine the tax taxation of an item. Rather, it is the nature and character of the payment that determines its treatment under the tax law.

Funeral expenses are not deductible. Therefore, a reimbursement is not taxable.

Funny thing is, I almost get why they issued a Form 1099-MISC.

The expense probably is deductible for the Tribe.

Maybe your client should issue a 1099 to the Tribe...

Just kidding.

BMK

[Koss]

Test Case

I would love to have one of these as a test case, with a client that was game for it.

Just leave it off the return altogether. The 1099 is an error. It's not taxable income. And trying to get the payer to fix it is like talking to the wall.

When the CP2000 notice comes, you respond with one letter that is clear, concise, and well-written, together with a copy of the funeral bill.

If that doesn't resolve it, let the IRS conclude the correspondence audit, and then go to the Appeals office. By certified mail. You send the Appeals office a copy of the letter you sent in response to the CP2000.

And that's it. No phone calls, no Taxpayer Advocate, no Practitioner Hotline. One letter to the examination division, and one letter to Appeals.

If that doesn't make the whole thing go away, let the IRS issue a Notice of Deficiency.

I work closely with a tax lawyer. We would file a petition in the Tax Court.

There is a section of the law that allows a taxpayer to recover attorney's fees from the IRS in a Tax Court case when the IRS position is unreasonable. I'm not going to try to cite it right now.

This goofy case is actually the kind of thing that would get resolved very quickly once the IRS lawyer had a chance to look at it. It would never go to trial. But it doesn't matter. Once the petition is filed, the client has incurred attorney fees that should never have been necessary.

I would love to take on the IRS in a case like this.

BMK

[Gene V]

Koss,
Don't know much about Indians Tribes income or expenses, however I was browsing the
internet and ran across this about the Puyallup Funeral Expense Assistance program.
Do you think this has any relation to the above question?
Gene

http://www.puyallup-tribe.com/services/funeral-expense-assistance1/

[Gary2]

Option 1: Enter the income on line 21, and then back it out on line 36 as an adjustment, and add an explanatory statement to the return.

How about entering it on line 21, then backing it out on line 21? I believe e-filing accepts multiple items on line 21.

[nwtaxlady]

Thanks KOSS & Gene

I will ask my client for the paper work to back up these funeral expenses. I agree with you 100%. I have seen different Indian tribes pay for all kinds of things for their members. So I am not surprised if they paid it or reimbursed my client, but why the 1099? It is in box 3 as other income. I will request the funeral expenses from my client and do the in & out thing. In the mean time when I have a spare minute or two (rarely this time of year) I will look online for "Elem Indian Colony" to see what I find.

Thanks again to both of you Gene & KOSS

[nwtaxlady]

yes, that is what I do!

How about entering it on line 21, then backing it out on line 21? I believe e-filing accepts multiple items on line 21.

Yes, that is what I plan to do! That is my way of in & out!

[DonPriebe]

Standing on the table, he yells ...

Hold on there!

This discussion has focused on how to report this transaction, given that the reimbursement was non-taxable. Why do we believe that it was non-taxable? The rationale given was

Funeral expenses are not deductible. Therefore, a reimbursement is not taxable.

This seems to me to be incorrect. All money received, per se, is taxable. If the expenses were deductible, then the reimbursement and the expenses could net out leaving possibly no additional taxable income. The fact that the expenses are totally non-deductible mean that the entire reimbursement IS taxable.

Examples abound. Think of ...

A gambling trip to Las Vegas is not deductible [assuming the taxpayer is not a professional gambler.] Reimbursement of travel expenses by the casino would be taxable.

Reimbursement by an employer of non-deductible moving expenses is taxable.

Maintenance of your personal automobile is non-deductible. Winning a year of free car washes is taxable.

[Gary2]

This seems to me to be incorrect. All money received, per se, is taxable. If the expenses were deductible, then the reimbursement and the expenses could net out leaving possibly no additional taxable income. The fact that the expenses are totally non-deductible mean that the entire reimbursement IS taxable.

Examples abound. Think of ...

I'm thinking of the next time I go out to eat with a group, wind up putting the bill on my credit card because I'm out of cash, and collect the corresponding shares in cash from my friends. I'm in big trouble if that's taxable income.

Though in this case, I suppose one could ask whether the amount in question is really a loan on behalf of the tribe, and whether there's any imputed interest income gifted back to the tribe.

[Koss]

Reimbursement

If there was a clear agreement before the bill was ever paid that the Tribe was going to reimburse the taxpayer, then it is not taxable income.

Technically it might have been a loan, as Gary2 pointed out.

But even if the Tribe had no obligation to pay for the funeral, and even if Tribe made the decision to pay the funeral expenses long after the taxpayer had actually paid the bill, it's still not taxable income. It would be a nontaxable gift.

The relationship between the parties may not be totally irrelevant. But sometimes it doesn't matter. Gary2 made a point about using his credit card to pay for a meal where he is then reimbursed by friends for their share of the bill.

But what about some other situation just a bit more analogous?

Suppose a taxpayer is killed in an industrial accident. The surviving spouse pays funeral expenses out of her pocket, and the employer then reimburses her.

This does happen, even without any kind of formal employee benefit plan that would provide such a payment. And it can happen independently of any lawsuit or insurance claim that may have been filed alleging that the employer was somehow negligent and responsible for the employee's death. Sometimes the employer just decides to pay the funeral expenses to help out the family of the guy that worked there. And by doing so, they are not admitting any liability.

That's a nontaxable gift from the employer to the family. Whether it is a deductible expense for the employer is a different question.

In other cases, the co-workers of the deceased take up a "collection" to help the family.

Would that money be taxable to the employee who is collecting it? Certainly not. Nor is it taxable to the widow who ultimately receives the money.

DonPriebe is correct that "all income is taxable unless specifically exempted under the law."

But you have to take into account the fact that an awful lot of money that changes hands is either gifts, loans, or reimbursements.

DonPriebe pointed out that some reimbursements are taxable. But that's the exception, not the rule. A reimbursement, by definition, means that the original expense was paid by one person on behalf of another. The person receiving the reimbursement is merely acting as an agent, or a middleman. These things are simply not taxable, whether they occur in a personal or business context.

Suppose my office is out of toilet paper, and my receptionist picks it up on her way into work. She hands me the receipt, and I give her cash or I write her a check.

That's not a taxable reimbursement.

BMK

[FEDUKE404]

Smells like income!

Hold on there!

This discussion has focused on how to report this transaction, given that the reimbursement was non-taxable. Why do we believe that it was non-taxable? The rationale given was "Funeral expenses are not deductible. Therefore, a reimbursement is not taxable."

This seems to me to be incorrect. All money received, per se, is taxable. If the expenses were deductible, then the reimbursement and the expenses could net out leaving possibly no additional taxable income. The fact that the expenses are totally non-deductible mean that the entire reimbursement IS taxable.

Examples abound. Think of ...

A gambling trip to Las Vegas is not deductible [assuming the taxpayer is not a professional gambler.] Reimbursement of travel expenses by the casino would be taxable.

Reimbursement by an employer of non-deductible moving expenses is taxable.

Maintenance of your personal automobile is non-deductible. Winning a year of free car washes is taxable.

While this is, indeed, an unusual situation, I tend to agree with your overall assessment.

Let's take a similar scenario: Were I to pay for a family member's funeral (obviously a totally non-deductible event) and somewhere along the way I later received funds (of the type "for reimbursing my client for his brother's funeral expenses") it would seem to me a rational person might logically consider that payment as taxable income.

It's not really much different from a generous employer who pays you a monthly amount for "commuting expenses" when you merely drive to/from work.

The only possible exit I see in this unusual scenario is that if, perhaps, the tribe routinely paid for such expenses and, for whatever reason could not do so at the time, and the relative fronted ("loaned") them the funds, then it might be a wash. If that is indeed the case, the accountant who issued the Form 1099-MISC needs to come to his senses!

FE

[thomtax]

The only possible exit I see in this unusual scenario is that if, perhaps, the tribe routinely paid for such expenses and, for whatever reason could not do so at the time, and the relative fronted ("loaned") them the funds, then it might be a wash. If that is indeed the case, the accountant who issued the Form 1099-MISC needs to come to his senses!

FE

If you believe the original post, and I myself have no reason to think that we are being told something other than the truth, then the funeral expense is something that is ordinarily expected to be covered by the tribe. However, because of circumstances, the money was delayed in paying out, so that the individual had to "front" the money. I can't see that this would be anything other than basically repaying a loan, which would not be taxable. The analogy of repaying an employee who purchased supplies for you and was repaid looks to be a perfect example to me.

[Burke]

I think we have to look at it under the concept of the IRS' treatment of death proceeds. This appears to be nothing more than a form of death proceeds paid to a tribal member. It would carry no more weight than I would give to SSA lump-sum death proceeds ($255) or VA proceeds payable upon death of a veteran, or the proceeds of a life insurance policy payable upon death. Only if the proceeds exceeded the cost of the funeral expenses, would I be contemplating taxable income to the estate or surviving heirs in this particular case. It also does not fit the scenario involving employer-employee relationship and compensation. I don't think the issue of whether the estate paid for it and then was reimbursed is really a relevant factor. You could contact the tribal council to see if they have some sort of IRS ruling on this, but I would tend to believe the 1099 was simply issued in error.

[RitaB]

OK, I confess

OK, I confess that I just skimmed all the posts, but I am with the folks who say this IS taxable income. Not that anyone gives fat rat about my opinion, but if somebody gives me $9,000 to pay my dead relative's funeral expenses, it's the same as if they gave me $9,000 for playing the lottery. If funeral expenses were deductible, and I itemized deductions, and it's a full moon, and no 2% haircut, blah, blah, blah.

OK, it's not at all the same as lottery winnings, but it's Monday. Line 21.

Unless this is something unique to tribal member taxes. In that case, nevermind.

Edit: "Wait, what? OK, this is a gift, and not taxable to the recipient. AMIRIGHT? Taxes are tough, huh? I hereby withdraw all that other crap I said. Just kidding.