pageok
pageok
pageok
Tax Questions Are Everywhere:

A reader asks:

[W]hen are US bounties, such as the kind on Abu Musab al-Zarqawi, subject to US income tax?

I love the question, a perfect example of the lawyer's gift for finding important legal issues in the unlikeliest contexts. I have no idea what the answer is, but I'm sure some of our commenters do.

Armen (mail) (www):
Start with IRC Sec. 61 and move from there: "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived."
6.8.2006 5:25pm
DN:
Assuming the bounty would be paid to an Iraqi citizen, how would the IRS have jurisdiction to collect taxes on it? Granted, I don't practice tax law, and my recollection from law school is hazy at best, but my first thought is that a non-citizen's earnings foreign-earned income would be outside the reach of the U.S. government. Else, why wouldn't the government tax the earnings of say, Microsoft's tech support line in India?
6.8.2006 5:33pm
Eugene Volokh (www):
I assume that the question was about bounties generally, including ones paid to U.S. citizens, and the Zarqawi issue is only a news hook. Indeed, bounties paid by the U.S. government to Iraqi citizens for conduct in Iraq are matters of Iraq income tax law.
6.8.2006 5:35pm
Nunzio (mail):
An even tougher question: Are these bounties subject to Social Security and Medicare taxes or are they treated more like gambling winnings?
6.8.2006 5:41pm
byrd (mail):
I suppose that would turn on whether or not you're a bounty hunter--are you in the business of collecting bounties.
6.8.2006 5:44pm
John Jenkins (mail):
Bounties are subject to the income tax. It's really just compensation for services by unilateral contract. It's not different (from a tax perspective) from commissions paid to salesmen or the like.

Whether you are in the business of collecting bounties would affect whether you could deduct your expenses, not whether it was income, though I suppose one could make a colorable argument that such expenses were in the pursuit of profit.

Nunzio, it probably would be considered compensation for services and therefore subject to payroll taxes.
6.8.2006 6:09pm
AKNYC (mail):
To the contrary -- I think it's a perfect example of a lawyer's capacity to be obsessed with trivia and miss the forest from the trees. It is patently obvious that the person/s passing on the tip leading to the raid was an Iraqui, located in Iraq. So only an American lawyer could spot the "IRS question".

I think this is better characterized as an example of the carpenter who attempts surgery, using a hammer.
6.8.2006 6:10pm
Fern R (www):
Maybe since I have a problem "missing the forest from [sic] the trees" I am missing how it is "patently obvious that the person/s passing on the tip leading to the raid was an Iraqui, located in Iraq." In my limited experience, very little in life--and especially little when it comes to legal matters--is "patently obvious."
6.8.2006 6:14pm
Richard Riley (mail):
Okay, here's a tax lawyer's quick take. If the recipient of a bounty like this is a U.S. citizen or permanent resident (a more common example would be a reward paid by the IRS for turning in somebody who didn't pay their taxes, which the IRS is indeed authorized to pay), then the bounty is definitely "gross income" subject to income tax. I think it is probably NOT subject to social security (FICA) tax or "self-employment tax" and NOT subject to withholding of income tax, because it is not "wages" nor is it income from the recipient's own business or professional activities. It's the kind of income that would be reported to the recipient and to the IRS on Form 1099-MISC Box 3, "Other Income." It should be reported by the recipient as income on Form 1040, line 21 ("Other income"). The IRS instructions say that is the line for reporting "prizes and awards," gambling winnings, and other miscellaneous non-business, non-wage income.

Since a bounty paid by the U.S. government is "U.S. source income," if the recipient is a foreign national, then the payment would be subject to U.S. withholding tax (not employment tax withholding, but withholding tax nonetheless) at the rate of 30% unless the rate is reduced by treaty. U.S. tax treaties with most of our trading partners would allow a reduced withholding rate. But we don't have a tax treaty with Iraq right now, so technically it's subject to 30% withholding. If the $25 million bounty is paid and the recipient is an Iraqi, I wonder if he or she will complain when the check is only $17.5 million?
6.8.2006 6:28pm
arthur (mail):
Assuming the tipster is an Iraqi, he may well choose to move to the United States for personal safety reasons, and probably has grounds to qualify for asylum du to "well founded fear of persecution." In which case he might have to pay United States taxes on his bounty, especially if he receives it after his arival here. Of course taxes are a small price to pay for not being the next guy assassinated.
6.8.2006 6:31pm
brian (mail):
The perennial question of income earned abroad by non-resident aliens. If we could only collect half tax owed on these monies our budget surpluses would extend even through another Republican adminstration. (As long as it's not another Bush administration.)

Firstly, we consider the situation of the earner and earnings. The US income tax applies to all worldwide income earned by US citizens, US residents (including part year residents and possibly to those with a right to residence who do not reside in the US), and entities doing any business in the US or territories. If the income is not in one of those categories it isn't subject to US income tax.

FICA taxes apply to wages paid by any US entity to any US citizen or resident and to wages paid to nonresidents for any work done wholly or partially in the US. FICA taxes also apply as self employment taxes to any non-wage income earned by any US citizen or resident while working anywhere in the world. US citizens and residents who wish not to pay FICA taxes for work done wholly outside the US should incorporate their businesses in a foreign country; there are many countires with sunny beaches that provide this service.
6.8.2006 6:32pm
Anthony Infanti (mail):
Nonresident aliens not engaged in a business within the United States are subject to U.S. federal income tax on their U.S. source fixed or determinable annual or periodical income at a flat rate of 30% (unless reduced by treaty). IRC Sec. 871. This tax is generally withheld by the payer of the income. IRC Sec. 1441. (For a discussion of withholding tax under Sec. 1441 on amounts paid to informants, see Gen. Couns. Mem. 37,198 (July 18, 1977)).

For this purpose, whether a bounty is subject to tax by the United States will largely depend on how a bounty is characterized for tax purposes, because that will dictate how the source of the bounty is determined. There is one revenue ruling from 1970 (Rev. Rul. 70-576) that characterizes a reward paid by the United States to a Canadian informant as personal service income. The source of personal service income is generally the place where the services were performed. IRC Secs. 861(a)(3) &862(a)(3). If the informing in this situation was done in Iraq, then the bounty would be foreign source income paid to a nonresident alien, which renders it generally non-taxable by the United States. (In the revenue ruling, the informing appears to have been done in the United States, which would make the reward U.S. source income; however, the IRS found that the informant was nonetheless exempt from tax under the commercial traveler exception in the U.S.-Canada income tax treaty---the US currently has no treaty with Iraq, but we do have a statutory commercial traveler exception---IRC Sec. 861(a)(3), but that exception likely would not apply here given the size of these bounties).

If the informant were in the business of informing, then that would open a whole other can of worms.
6.8.2006 6:43pm
Fern R (www):

Since a bounty paid by the U.S. government is "U.S. source income," if the recipient is a foreign national, then the payment would be subject to U.S. withholding tax (not employment tax withholding, but withholding tax nonetheless) at the rate of 30% unless the rate is reduced by treaty. U.S. tax treaties with most of our trading partners would allow a reduced withholding rate. But we don't have a tax treaty with Iraq right now, so technically it's subject to 30% withholding. If the $25 million bounty is paid and the recipient is an Iraqi, I wonder if he or she will complain when the check is only $17.5 million?

I don't know why I think this is so funny, maybe I have killed one too many brain cells studying for the bar...but the idea of the federal government taking taxes out of its own reward bounty paid to an Iraqi who lives and works in Iraq sounds hilarious. Basically, what you're saying is that the federal government gets to pay itself for receiving a tip about a criminal the federal government wanted to catch/kill.
6.8.2006 6:49pm
TomHynes (mail):
How much will the 1099 form fetch on E-Bay?
6.8.2006 7:01pm
Grisha (mail):
Wouldn't it be any tax? Iraq is a combat zone, but I don't know if the tax-free income extends to civilians (I know the military is not subject to income tax while in the zone).
6.8.2006 7:11pm
Justin (mail):
Arthur, he would probably not have a valid ground - not only do you have to have a "well founded fear of persecution" but it must be based on race, ethnicity, gender, or political grounds. Unless the person independantly satisfies one of those grounds - i.e. he's a religious Sunni who turned in Zarqari for religious grounds, and is afraid of being persecuted by Shias because he violated some interpretation of Islamic law - the fact that Al Queda now wants to kill him would not matter for purposes of asylum or withholding of removal. He may have a grounds under the CAT, but it is doubtful - though I'm hardly an expert on those grounds.

That's not to say that the BIA or the IJ in the case won't see it your way for political purposes (the government wants to encourage Iraqi informants, of course), and then there would of course be no appeal to a higher court.

More likely, if said person wants to come to the US, it will be under the special exemption powers accorded the Attorney General.
6.8.2006 7:13pm
nc3274:
Another tax lawyer piling on...

As several above suggest, the character question seems decided, if notstraightforward--the reward would be treated as income from personal services. Note that a couple of years back, the Tax Court (in Roco) held that a payment to a qui tam relator was taxable, using 1.61-2(a), which deals with wages and other remuneration. Query whether this reward is directly analogous, but it seems to me like it is.

As several above also suggest, the source question is harder. (If the tipster is a US resident for tax purposes, the source only matters for foreign tax credits and other minutiae.)

Richard Riley--is there a per se rule that a payment from the US government is US source income? Could be, I just don't know. Otherwise, I'd second Anthony Infanti's suggestion that the "place of performance" rule applies. Then query whether the IRS would assert that certain parts of Iraq (embassies/consulates, military bases, the Green Zone) are US territory. There may be easy answers to these also, I just don't know. Didn't other parts of the administration try to stretch "US territory" for certain purposes in the national security context?

Any source experts out there?
6.8.2006 7:18pm
Justin (mail):
PS - I'm not sure "race, gender, ethnicity, or political grounds" is an exhaustive list (I'm not an asylum expert), but I am pretty sure the dangers cauesd by a dangerous activity, such as providing information to the US government, which are FOR PROFIT are not included. Of course, there may be seperate grounds for that involving national defense/security/intelligence, but that isn't the same thing as asylum. Retribution for pecuniary activity is definitely not a legal ground, technically speaking.
6.8.2006 7:21pm
John Jenkins (mail):
I'm guessing if the tipster wants to come to the USA, we'll take care of him. We've done it before with foreign agents. If nothing else, special laws are always an option (though I think this guy gets to the head of the line in any event. Not even ICE &the BIA are that stupid)
6.8.2006 7:22pm
Gordo:
Gross income from whatever source derived sounds about right. Nobel Prize winnings of U.S. citizens are taxed, even though the Nobel Prize winners whined about it a few years back. My tax law professor was asked about it in a class and his comment was that the claims of the Nobel Prize winners was "a crock of shit," or something to that effect.
6.8.2006 7:51pm
Gaius Obvious (mail):
Are bounties even legal in a war?

From the Army Field Manual 27-10, Law of Land Warfare there is this quote in paragraph 31:

"This article is construed as prohibiting assassination, proscription, or outlawry of an enemy, or putting a price upon an enemy's head, as well as offering a reward for an enemy 'dead or alive'."
6.8.2006 7:52pm
brian (mail):
Gaius:

Are bounties even legal in a war?

You ask. But leaglity of income has no bearing on its taxability for income tax purposes.
6.8.2006 8:12pm
David M. Nieporent (www):
Gaius:

Note that what you describe is a reward for capturing or killing an enemy. This is a reward for information; you'll notice that it was the U.S. military that actually did the killing.
6.8.2006 8:16pm
Ugh (mail):
Anthony Infanti - but is a one time payment by the US Gov't even FDAP income in the first instance? Or does the GCM you cite reach the isse?
6.8.2006 9:13pm
Frank Drackmann (mail):
Supposing you sucessfully robbed a bank,or sold drugs,or got a kidnapping ransom, and didn't get caught. You want to pay your taxes but don't have a 1099 from the bank you robbed. If you document your bank robbery income on your 1040,can the IRS notify the FBI or your local police department, or is this priveleged information?
6.8.2006 9:41pm
Frank Drackmann (mail):
Supposing you sucessfully robbed a bank,or sold drugs,or got a kidnapping ransom, and didn't get caught. You want to pay your taxes but don't have a 1099 from the bank you robbed. If you document your bank robbery income on your 1040,can the IRS notify the FBI or your local police department, or is this priveleged information?
6.8.2006 9:41pm
Frank Drackmann (mail):
Supposing you sucessfully robbed a bank,or sold drugs,or got a kidnapping ransom, and didn't get caught. You want to pay your taxes but don't have a 1099 from the bank you robbed. If you document your bank robbery income on your 1040,can the IRS notify the FBI or your local police department, or is this priveleged information?
6.8.2006 9:41pm
Frank Drackmann (mail):
Dreadfully sorry for the multiple posts!
6.8.2006 9:57pm
Anthony Infanti (mail):
For Ugh: Whether a payment is in a lump sum or in a number of payments is irrelevant for purposes of sections 871 and 1441, notwithstanding the "periodical" language. I believe that both the regulations and an old case address this issue.

As far as "privilege" goes, there is a specific statute (IRC 6103) that prescribes the situations in which the IRS is permitted to disclose tax return information.
6.8.2006 9:59pm
PatHMV (mail) (www):
Frank, generally the answer is no, the IRS is forbidden by the law cited by Anthony from disclosing income tax information except in very limited circumstances.
6.8.2006 11:21pm
JunkYardLawDog (mail):
If you are a bank robber who discloses his real trade or business and real sources and amounts of income on his tax return, then I'd say your biggest problem is something OTHER than taxes owed to the IRS. I'd say your biggest problem is in the area of your IQ and/or rationality.

Says the "Dog"


P.S., isn't there a specific statute that exempts nobel prize winnings from taxation? I think the tax lawyers here have staked out the issues pretty well. Its not wages because the tipster isn't an employee. If it isn't wages then it isn't subject to FICA and medicare. Some here have analyzed the payment as though it is for sure some type independent contractor gross income, which I guess in a sense it is. If the USA hires a foreign only based service provider (like a law firm or advertising agency) to provide a service in that foreign country, when the US government pays on the contract would such payments be subject to any kind of USA income tax or withholding? I don't think it would, absent the payment being effectively connected with a USA based trade or business carried on by the foreign person/entity providing the foreign service.

Finally, the coup de gras argument would be that the reward contract between the tipster and the USA was for a net payment to be received by the tipster of $25 million and if the USA fails to deliver $25 million net to the tipster then the USA has breached the contract (i.e., if tax is owed the promise by the USA impliedly contained the agreement that such taxes would either be waived or paid by the USA itself or at worst paid by the tipster AFTER first having received the full $25 million).
6.9.2006 1:14am
logicnazi (mail) (www):
Wait so do I correctly understand some of the earlier posters to be saying that it might depend on whether the informing was done in the Green zone or a US embassy and thus on US territory or not? While admittedly I don't know too much about the law here this seems kinda strange. I mean the actual work/risk the individual is being paid for all takes places outside of US controlled territory. Does it really matter where the individual happens to be standing when he delivers the goods?

I mean suppose you are a salesman whose contract specifies that you will be paid such and such amount per *proof* of sale when this proof is handed over (say a reciept from the customer's order form). It seems quite strange to suggest that a salesman who did all his selling in the US (or not in the US) could play games with the income tax he owes by handing over the proof of sales in another country.

Anyway the real reason I wanted to post was just to ask whether CIA operatives and other US government employees paid to uncover Osama or similar terrorists can collect on these rewards. If you are reporting the tip to the US goernment as part of your normal employment can you still recieve the reward? If not could you quit your job as soon as you learn the info and then turn it over and collect the reward?
6.9.2006 6:16am
great unknown (mail):
Gaius:
Does this apply to terrorists, or only to legitimate combatants as defined by Geneva? It seems that terrorists come under the purview of criminal, not military, law. Spies behind enemy lines, e.g., do not merit the protections of the Geneva Conventions.
6.9.2006 8:36am
Gavin Peters (mail):
Some of the posts characterize the income as US source. This concerns me. There's one main reason! I'm a foreign national, and while living outside of the United States, I have been a salaried employee of US corporations. I took the position that this was not US source income, did not file a 1040NR, and paid only income tax in my country of residence.

Was I a tax cheat? I didn't think so, and I don't think publication 519 calls me a tax cheat for it. The section on personal services and employment income describes the source of the income keying on the location the service is provided; and not the location of the payer.

If I wasn't, why would a foreign-national Iraq resident tipster be fine paying only Iraqi tax?

I'd like to hear more about why a payment by the US government to a foreign national who is a foreign resident is US source income.
6.9.2006 9:51am
jallgor (mail):
On the asylum issue I am pretty sure you are only eligible for asylum if you are in danger due to your political beliefs or activities. For example, someone fleeing from ethnic genocide would not be entitled to asylum in the US.
6.9.2006 10:39am
ZZYZX (mail):
I am not a tax lawyer, but have broad second-hand experience with wages earned in Iraq. Merely an observation, not knowing the specific laws involved: contractors (non-government civilians) in war theatre do not pay taxes, military in theatre do not pay taxes, civilian federal government employees do pay taxes.
6.9.2006 12:13pm
ZZYZX (mail):
Re "From the Army Field Manual 27-10, Law of Land Warfare" comment: is the bounty is offered by Army Dept, State Dept, or CIA? Army rules may not apply to other federal agencies.
6.9.2006 12:16pm
Lawyer J:
As several have noted, the bounty is clearly "gross income" as that termis defined in 26 USC s. 61. Accordingly, if the recipient is a US citizen, or an alien lawfully admitteed for permanent residence, or an alien physically present in the US for more than a specififed # of days [I've condensed that defintion, I swear] then the income is includible in his/her taxable income. There is no colrable argument to the contrary.

If the recipient is a non-resident alien, the bounty is taxable only if it is considered U.S. sourced income. The bounty is most likely income from personal services, and as such is U.S. source if the personal service sare performed in the United States. 26 USC s. 861(a)(3).

The question thus becomes: "where did the recipient of the bounty perform the services?" If the information was obtained in Iraq, and delivered to United States officials in Iraq, then it seems that the recipient has a very strong argument that the income is not US source, and thus not subject to United States income tax.

I suppose there are other possible characterizations of the income (e.g., the sale of intangible property), but the source outcome would not change. See 26 USC s. 865(a), (d).

There is no blanket rule that payments by the US government are US source. Indeed, s. 861(a)(6) specifically lists social security benefits as a type of income that is US source. It stands to reason that if US government payments were ipso facto US source, s. 861(a)(6) becomes "mere surplusage," a result that diligent construers of statutes like to avoid.

It might make a neice exam question next time I teach International Tax.
6.9.2006 12:49pm
ohwilleke:
The conclusion that this is U.S. source income is suspect. The assumption is that the U.S. Department of Defense pays the bounty. But, there is a coalition fighting this war, and there is also an Iraqi government.

If the coalition or the Iraqi government makes the payment, and if the U.S. merely provides a grant to these tax exempt entities to fund the bounty, then the income is no longer U.S. source income. To the extent the income is paid to a non-U.S. citizen who is not a permanent resident of the U.S. (quite likely), it would be tax free since it concerns services outside the United States.

Also, practically speaking, the I.R.S. reports to the President, and U.S. always has discretion to not pursue rights that it has to collect taxes, something it does routinely in domestic cases for less weighty reasons like expense or a lack of a desire to disturb common practice.

Thus, if a tax was due, the only way it would likely be enforced is through a qui tam action, and the person who gets the bounty may very well prefer anonymity, so establishing a qui tam case might be difficult and also might be legitimately barred by the state secrets privilege, even though the exercise of that privilege in many other cases is far more questionable.
6.9.2006 1:28pm
Anthony Infanti (mail):
As for the speculation about whether making the payment in the green zone or a US embassy could somehow turn it into US source income, IRC Sec. 7701(a)(9) specifically defines the "United States," when it is used in the geographic sense (as it is in the source rules in the Code), as including only the 50 states and the District of Columbia. Possessions, territories, and the green zone are not part of the United States for source rule purposes. See Treas. Reg. Sec. 1.861-4(a)(5).
6.9.2006 2:04pm
biu (mail):
手机铃声 和弦铃声下载 手机铃声免费下载 手机铃声下载 手机铃声下载 mp3铃声下载 下载手机铃声 三星手机铃声 手机铃声 免费铃声下载 铃声下载免费 搞笑铃声下载 搞笑免费铃声 铃声下载免费 搞笑下载铃声 下载铃声 三星铃声 免费铃声下载 MP3铃声下载 手机铃声下载 手机铃声下载 手机铃声 MP3铃声下载 手机铃声下载手机铃声 免费铃声下载 免费铃声下载 搞笑免费铃声 免费铃声下载 手机铃声 mp3铃声下载 免费铃声下载搞笑下载铃声 下载铃声 mp3手机铃声 三星铃声下载 免费手机铃声下载 手机铃声下载 手机铃声下载 免费铃声下载 搞笑手机铃声 手机铃声免费下载免费铃声下载 铃声下载免费 手机铃声下载 免费铃声下载 免费铃声下载 手机铃声下载 免费手机铃声下载 和弦特效铃声下载 文秘写作 竞聘演讲稿 个人工作总结 八荣八耻演讲稿 中国文秘网 治疗牛皮癣,阴虱特效药 免费歌曲铃声下载 免费手机铃声下载 免费铃声下载 mp3铃声下载 免费手机铃声下载 手机铃声下载 免费铃声下载 手机铃声下载 免费铃声下载 手机铃声下载 手机铃声下载 mp3手机铃声 免费手机铃声下载 免费铃声下载 免费铃声 手机铃声下载 手机铃声下载 免费铃声下载 搞笑铃声 免费手机铃声 免费铃声免费铃声下载 mp3手机铃声 mp3铃声下载 免费铃声 手机铃声免费下载 mp3铃声 免费手机铃声下载 免费手机铃声下载 手机铃声 手机铃声 免费铃声下载 手机mmf铃声下载mp3手机铃声 手机铃声 手机铃声免费下载 铃声下载 免费铃声 手机铃声下载 免费手机铃声免费铃声 免费手机铃声 mp3铃声 mp3铃声下载 免费铃声
6.10.2006 4:08am
markm (mail):
Of course payments by the US government to foreign nationals overseas don't automatically become US source income. If they did, then a British janitor cleaning the US Embassy in London would be subject to US income tax.
6.10.2006 10:17am