Virtual Income, Land Barons, and the IRS

In short, Probably Not.

The dollar and linden minimums arn't related by value but have a direct relationship with the number of m2. Remember that the TOS states explicitly LL pretends neither land nor L$ has value and as long as your just purchasing virtual land from virtual dollars - thats all just part of the game.

For example, 16384 m2 would start at 163 dollars ($1/100m2), or an equal parcel would start at L$16384 (1L$/1m2). That would 'imply' an exchange rate of ~$1/L$100 (which isn't near the GOM exchange rate of $1/L$246) but it isn't possible to convert between the two and money can only go one way through the auctions (to them). Buying land with dollars seems like an extra option that specifically allows people to participate in the auctions without the use of third party sites. If we were able to unload our linden's back onto LL for the same rate as the land sales it might be different but we can't and its unlikely they will ever impliment any in-game currency exchange.

Interestingly - I now want to start bidding on more L$ auctions. Haha. Winning the minimum bid will always be significantly lower than an equally sized dollar auction parcel.

1) if you convert sl stuff to us$, declare income
2) if you have large holdings in sl and are concerned about tax issues, talk to your tax accountant and/or tax attorney. and in cases like hr block, if they are wrong, they will pay the penalties.

I say, screw it. Lets go throw some tea in the harbor.



Good thread, very useful! I am working on my taxes this week, and am claiming my SL income. It will be interesting to see how it all turns out.

Yes Katy is correct I stand corrected on my assertion of what a Nonresident Alien is, and she is also correct that the IRS "requires" all nonresident aliens to file with the IRS if their income is shown to be "effectively connected with the conduct of a trade or business in the United States", which becomes the real question here.

My understanding is if the income is not effectively connected then nonresident aliens who

"intend to reside in the United States for longer than 1 year are subject to the 30% taxation on their capital gains during any tax year if during such tax year (usually calendar year) they are present in the United States for 183 days or more, unless a tax treaty provides for a lesser rate of taxation. This assumes that such capital gains are not effectively connected with the conduct of a United States trade or busines"

If the capital gains ARE "effectively connected with the conduct of trade or business in the united states", then I believe you are required to file with the IRS regadless of having set foot in the country.


"The following categories of income are usually considered to be connected with a trade or business in the United States.

"

"You are considered to be engaged in a trade or business in the United States if you are temporarily present in the United States as a nonimmigrant on an "F," "J," "M," or "Q" visa. The taxable part of any U.S. source scholarship or fellowship grant received by a nonimmigrant in "F," "J," "M," or "Q" status is treated as effectively connected with a trade or business in the United States.

If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States.

If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are not engaged in a trade or business in the United States.

You usually are engaged in a U.S. trade or business when you perform personal services in the United States.

If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the United States. For example, profit from the sale in the United States of inventory property purchased either in this country or in a foreign country is effectively connected trade or business income.

Gains and losses from the sale or exchange of U.S. real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. You must treat the gain or loss as effectively connected with that trade or business.

Income from the rental of real property may be treated as ECI if the taxpayer elects to do so.
"


How or if this applies to SL is a very interesting legal question, one only a Judge can likely answer forsure.

the question is "does a thing have value even if not traded?"
and in some cases the irs has said yes (i.e. trading is not the only way to impute value.)

i guess my main concern is that the irs is not consistent.

while your lawyer makes a very persuasive argument, until tested by the irs or a tax court it's not definitive. note: if my own tax lawyer and/or accountant told me this, i'd go along with them, and just cross my fingers.

I have been going back and re-reading this thread several times and thinking about all this, and I have to say the above statement is false as relates to my personal experience recently with the IRS.

Last fall, we got a letter from the IRS saying that we had underpaid our 2002 taxes by about $1100. The letter noted that this was because we didn't properly declare and pay taxes on some income that my husband removed from a retirement account when he changed jobs that year. We were notified that we had 60 days to successfully refute this statement, otherwise the IRS would assume that we agreed that we made the error. I called the IRS and determined, after discussion with them, that my husband had checked the wrong box on the Turbo Tax form when e-filing the 2002 taxes, which resulted in us underpaying.

At this point, we were given the option of either paying the amount we owed in full (which included and continued to accrue interest until it was paid), or setting up a payment plan that was agreeable to the IRS. I offered to pay $150 a month in order to settle the debt, and they said that was fine. (Incidentally, the debt was paid off in full out of our 2004 tax return.)

What I'm getting at here is that the IRS recognizes that people make mistakes and that they won't necessarily come down on you like a ton of bricks if they catch you at it. They do, however, have ways of checking what you actually earned and comparing it to what you say you earned. This makes me wonder if people like IGE, GOM, Hank & Anshe will be declaring the commerce that goes through their respective sites, because I figure that's about the only way that the IRS could tell if someone isn't being truthful about how much they earned from SL. Will they name names and amounts? Will they have to?

This whole issue makes me dizzy to contemplate.

"Tax Year

Generally, you can receive effectively connected income only if you are a nonresident alien engaged in a trade or business in the United States during the tax year. However, income you receive from the sale or exchange of property, the performance of services, or any other transaction in another tax year, is treated as effectively connected in that year, if it would have been effectively connected in the year the transaction took place or you performed the services
"


So the real question in my mind is, while the SL servers are in California, does this then mean that SL itself is in California. IF Sl can be considered legally to be in california (which it likley is) then someone who is making money providing services or property in SL is required to file with the IRS.

Yet another reason not to business with the 'mom and pop' GOM.

i guess i should have hedged that with "if one persists in one's mistake."

I've read this thread with interest.
And as a non-resident US Alien (i love the way this sounds) some questions come to mind.
Next i'll describe my usual activies concerning "income" made in SL.

1 - L$ sits in SL account (in US soil)
2 - L$ sold at GOM (in Canada)
3 - US$ appears in Paypal account (US i think)
4- US$ is payed for some item for sale in ebay (various locations)
5 - Item is shipped to my doorstep (Portugal)

Now, the Portuguese IRS is complety oblivious to all this.
Besides the actual item (book, dvd, whatever) i suppose they have no jurisdiction whatsoever over the other transactions.
And as a citizen it's my duty to report my income to my local IRS.

Some of my questions have been already answered in the thread. But some still remain.

Am i "effectively connected with the conduct of trade or business in the united states" ?

If so i have to report my "income" to my local IRS or to the US IRS?

And also what should be my actual "income"? The money that gets to the paypal account? The price of the item i've bought?

If the item on ebay is boght from a seller in the US. Do i incur in more taxes?

I do know, the way Germany feels about the bush administration, if a single IRS agent should happen to set foot on their soil, Germany would declare them an Enemy combatant(SP) and throw them in some Concentration camp equal to mr. bush's concentration camp in cuba.

I don't think it matters... Germany will refuse to corporate and will probably issue a warning that if any IRS agent sets foot on their soil, WHAM into the slammer they will go.

That would violate the German constitution. Not to mention all the international media uproar about "torturing Nazi Germans" if Germany would copy Guantanamo

I am afraid for now we have to rely on the Bush clan to help us out with them concentration camps. It is in a good tradition: Bush's grandfather and his buddies already helped us big time when they made sure Adolf Hitler had enough American money for his 1933 election campaign

We're talking about an IRS agent here...trust me no one would give a shit.

yep...the IRS if interested would subpoena all transaction and account records they are interested in from LL. Payment out of the accounts to any source would be indicated in these records.

Have you never heard of the US government freezing assets and accounts in the US that are owned by a foreigner? Even if there is no actual seizure of the asset it can remain frozen for years.

The IRS can't freeze bank accounts in another country ...they don't have jurisdiction. They also technically cant access LL's accounts about play money because well...its play money. The courts would have a field day with the IRS over that...

Besides I was talking about torturing IRS agents abroad

See Talen gets it. Whats up with the rest of y'all...Hmmm??

I would very carefully consider opinion that limits the scope of IRS involvement. The IRS does what it wants to do. There are some limitations on them, but very very few. A safe assumption is that the IRS can do exactly what it wants to do, and proving them worng can be a very very expensive mistake.

I don't have any trouble remembering that the U.S. government and laws (including the IRS) don't apply to most of the world. Perhaps because I don't live in the U.S.?

Anshe hun, this is not attempted blackmail. If I have ANY beef with ANYONE I can "threaten" to report them to whoever I want. If the poster said that you had to pay him money (or in your case, perhaps land) or he would report you, it would be extortion. That would be a no-no.

Besides, your attorney would have to indicate at some point, who the client is. Would you really want that out there since you could not be a "Jane Doe" because you are just some avatar in a silly online game?

So this means your comming to my place next time so I dont have to hide under the bed right?

(((hugs)))

I was talking about assets in the USA. (see prior posts about seizing telehub property and linden accounts.) Is it a joke? Maybe, who knows. I know a lot of people said the Justice Dept would not go after Martha Stewart for 50K, but Justice was looking for an example.

I know that the IRS is waiting for the right cases to test these kinds of issues. Who knows, maybe one day we will see members in world with the last name "IRS."

Joe is right about one thing, the IRS can act to do what it wants, and in fact once the IRS claims you owe a tax debt, the burden of proof shifts. The IRS is not required to prove you owe the tax; it is up to the taxpayer to prove she does not. This is the one area of law where you are presumed liable.

Katy,

My only concern with your original post (very informative, BTW) is that not everyone knows your background and as an officer of the court you should be aware of bar guidelines for tossing out this type of information on an Internet message board.

In other words, there should be disclaimers galore to protect yourself. You do not want to be in a position in which someone follows your "advice" and then attempts to track down the esquirette from SL who gave him/her supposedly bad advice. You should know that happens to attorneys frequently.

This true...for now. The IRS has come under immence heat in the past decade for numerous fuckups including killing a 68 year old man who tried to stop them from taking his boat because they were going after the wrong man for taxes due.

...and actually the IRS does have to prove you owe the tax if it ends up in court....many cases have been thrown out in the past decade due to awful paperwork presented by the IRS as evidence.

IF this country had half a fucking clue they would switch from an income tax to a national goods tax which would be lower because everyone would pay into it and you would only be taxed on goods purchased.

Another big thing the IRS is having a problem with is going after people for not filing their tax returns....unfortunately even though they claim otherwise the the law was never properly ratified and due to the verbage of " filing a yearly return is voluntary " more and more people are paying their income tax weekly but not filing at the end of the year when they owe money and several very hush hush verdicts have gone in the defendants favor.

Not initially.

Tax Court proceedings are quasi criminal cases. The tax debt is a civil liability, however the penalty for nonpayment evasion is a criminal penalty. It is the only area of law where the possible sanction for a civil debt liability can result in incarceration.

In the US when criminal charges are brought against a defendant, the prosecution has the initial burden of proof to prove all the elements of the crime. The accused does not have to say one word in her defense, nor does she have to prove her innocence.

In Tax Court, the burden of proof starts out on the other side. The Defendant, taxpayer, has the initial burden to prove he does not owe the debt for whatever reason. If the defendant meets that burden, then the burden shifts to the IRS to prove the tax is owed.

The initial presumption is that the taxpayer owes the tax.

This burden is stated in the US Code, Title 26, Section 7491 as follows:

26 U.S.C.§7491, Burden of proof

(a) Burden shifts where taxpayer produces credible evidence

(1) General rule
If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue.

(2) Limitations
Paragraph (1) shall apply with respect to an issue only if—

(A) the taxpayer has complied with the requirements under this title to substantiate any item;

(B) the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews; and

(C) in the case of a partnership, corporation, or trust, the taxpayer is described in section 7430 (c)(4)(A)(ii).

Subparagraph (C) shall not apply to any qualified revocable trust (as defined in section 645 (b)(1)) with respect to liability for tax for any taxable year ending after the date of the decedent’s death and before the applicable date (as defined in section 645 (b)(2)).

(3) Coordination

Paragraph (1) shall not apply to any issue if any other provision of this title provides for a specific burden of proof with respect to such issue.

(b) Use of statistical information on unrelated taxpayers

In the case of an individual taxpayer, the Secretary shall have the burden of proof in any court proceeding with respect to any item of income which was reconstructed by the Secretary solely through the use of statistical information on unrelated taxpayers.

(c) Penalties

Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.