Per Capita Distributions on Net Gaming Profits and the Kiddie Tax

Per capita distributions from net casino profits made to certain children are subject to a special tax calculation commonly referred to as the “kiddie tax”. For taxable years prior to 2018, the tax is based on the parent’s rate if the parent’s rate is higher than the child’s rate. Pursuant to the Tax Cuts and Jobs Act of 2017, for taxable years 2018 through 2025, children required to make this calculation may be subject to tax based on tax rates normally applicable to trusts and estates. 

IRC Section and Treas. Regulation

IRC Section 1(g) – imposes a tax on the unearned income of certain children 

IRC Section 1(j)(4) – provides special rates for the calculation of the tax imposed under IRC Section 1(g) for taxable years 2018 through 2025.

IRC Section 911(d)(2) – defines “earned income” for certain purposes

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

The Indian Gaming Regulatory Act of 1988 (IGRA) (P.L. 100-497) – codified as 25 USC Sections 2701-2721, provides a statutory and regulatory framework concerning the operation of Indian gaming. 

Rev. Proc. 2011-56 – IRS won’t require beneficiaries of an IGRA trust to include per capita payments received by the trust, and any earnings on the per capita payments, in gross income until the taxable year that the beneficiaries receive a distribution

CCA 201729001 – a tribe’s per capita distribution of tribal gaming revenues paid under its revenue allocation plan to or on behalf of a minor tribal member is unearned income subject to the “kiddie tax” under IRC Section 1(g). 

United States vs. Jim (891 F. 3d 1242) – per capita distributions made pursuant to a tribe’s revenue allocation plan authorized by the Indian Gaming Regulatory Act (IGRA) are not excludible as general welfare payments

Analysis

IRC Section 1(g) requires children under age 18, and certain older children, with net unearned income over an annual threshold ($2,100 for calendar year 2017) to be taxed at the parents’ rate if the parents’ rate is higher than the child’s rate. This tax is commonly known as the “kiddie tax”. 

For purposes of this calculation, IRC Section 1(g)(4) defines net unearned income as the excess of the adjusted gross income that isn’t attributable to earned income as defined in IRC Section 911(d)(2) over the sum of the amounts described in IRC Sections 1(g)(4)(A)(ii)(I) and (II).

IRC Section 911(d)(2)(A) defines earned income as wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered. 

An older child subject to this tax includes a child who was 18 at the end of the calendar year and had earned income that wasn’t more than half of his or her support, or was a full-time student at least age 19 and under age 24 at the end of the calendar year and didn’t have earned income that was more than half of his or her support. 

IRC section 1(j) established new tax rates for taxable years 2018 through 2025. IRC section 1(j)(4) states that a child with unearned income subject to the “kiddie tax” under IRC Section 1(g) must now use rates generally applicable to estates and trusts in place of the parent’s tax rate. 

Under IGRA, a tribe making per capita distributions from its net gaming revenues must protect the interest of members who are minors. Tribes often establish trusts for such minors., The per capita distributions of tribal gaming revenues made under the tribe’s revenue allocation plan to or on behalf of a child don’t meet the definition of “earned income” under IRC Section 911(d)(2). Therefore, they are treated as unearned income subject to the “kiddie tax”. 

However, Revenue Procedure 2011-56 states beneficiaries of a trust that meet the requirements of this Revenue Procedure aren’t required to include per capita payments received by the trust, and any earnings on the per capita payments, in gross income until the taxable year that the beneficiaries actually or constructively receive payment.  

In the case, United States v, Jim, the 11th Circuit Court of Appeals ruled that per capita payments made under a tribe’s revenue allocation plan were subject to federal income taxation under IGRA and were not exempt from tax as general welfare payments under the Tribal General Welfare Exclusion Act.

Issue Indicators or Audit Tips

Determine if per capita distributions from net gaming revenues were made by the tribe. 

Determine if any such distributions to minors were placed in a trust that meets the requirements of Rev. Proc. 2011-56. 

If not, verify that any recipients subject to the “kiddie tax” properly calculated this tax.

Investigate whether any distributions were made from these trusts and whether the tribe properly reported the payment and withheld tax on the amount distributed. 

Verify that any recipients of IGRA trust distributions who were subject to the “kiddie tax” properly calculated this tax.