Washington 4, Indians 0

If you’re a Native American and reside in California on a reservation, you’re exempt from California personal income tax. However, you’re not exempt from federal income tax. And that’s where this story begins.

The Chumash tribe runs a very successful casino near Santa Ynez, north of Santa Barbara. Tribal members receive quite a bit of income each year, and must remit federal income tax. A few years ago the Chumash were approached by Benecorp LLC. Benecorp presented to the Chumash the “CapNet 7 Financial Models.” 32 members of the Chumash are alleged to have saved millions in taxes through “sham management fees,” according to this story in the Los Angeles Times. The same story notes that in April 2004, outside experts told the Chumash that the program, “is being administered in a way that is not authorized under current IRS laws.”

Without knowing the nuts and bolts of the program, it’s impossible for me to determine whether the CapNet 7 Financial Model complies with tax laws or not. I did notice when looking at Benecorp’s website that the heart of the plan is a trust. The government alleges that the plan, “[created] sham entities and sham transactions.” We’ve seen that in plenty of trust enforcement actions recently. The Chumash officially severed all links to Kenneth Sorenson, one of the two principals behind Benecorp.

The moral is the usual one. Stephen Drake, the other principal of Benecorp, said in a 2004 interview, that Chumash who learned of the program thought it was too good to be true. That just might be the case.

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