Tax Law

IRS Considers Tribal Benefit Taxation and the General Welfare Exclusion

A few weeks ago, I had the privilege of hearing Tribal Judge Abby Abinanti speak at an event for women lawyers.  Judge Abinanti, a former Commissioner for the California Superior Court, is currently chief judge for the Yurok Tribal Court in Klamath, California.  An advocate for restorative justice (as contrasted with punitive justice), and a Native American herself, Judge Abinanti is no stranger to the challenges facing tribal members today.  According to the Bureau of Indian Affairs, there is a 70 percent or more rate of unemployment among Native Americans.  A lack of industry and economic activity make it very difficult for tribal members to find work on reservations and logistical challenges hinder attempts to improve their financial situation on and off the reservation.  See Interview with Abby Abinanti, Journal of Court Innovation (2009)

Government social benefit programs, including education, health, and general welfare programs, are essential in terms of assisting tribes to maintain an acceptable standard of living.  Federal, state, and local benefit programs are generally provided on a tax-free basis to tribal members.  When a tribal government wants to provide government services or benefits, the tax treatment of the benefit program may be unclear.  Determining the proper taxation of these tribal-sponsored programs frequently involves a legal opinion or request to the IRS for appropriate ruling.   

Last year, Treasury issued Notice 2011-94 to solicit comments concerning the application of the general welfare exclusion to Indian tribal government programs that provide benefits to tribal members.  There have also been several public sessions to discuss this issue.  Executive Order 13175, "Consultation and Coordination with Indian Tribal Governments," (Nov. 6, 2000) requires that tribal officials be consulted before the formulation and implementation of policies implicating tribes.  Although IRC Section 61(a) provides generally that gross income includes all income from whatever source derived, the IRS has consistently held that payments under governmental social benefit programs "for the promotion of general welfare" are excluded from gross income.  Rev. Rul. 2009-19, 2009-28 I.R.B. 111; Rev. Rul. 98-19, 1998-1 C.B. 840; and Rev. Rul. 74-205, 1974-1 C.B. 20.  To qualify for this exclusion under Rev. Rul. 2001-13, 2003-1 C.B. 283 and Rev. Rul. 2005-46, 2005-2 C.B. 120, the payments must: 

  1. Be made to an individual under a governmental program;
  2. Be for the promotion of the general welfare (based on need); and
  3. Not represent compensation for services.

Benefits provided by Indian tribal governments may include housing, cultural and social, education, and elder programs.  Consistent treatment of these benefits has been an area of concern for tribal governments.  To address these concerns, the IRS is looking at developing official guidance and a national coordination process.  By mid-May 2012, the IRS had received over 65 written comments from tribes and tribal leaders in response to Notice 2011-94.  Over 100 tribal representatives also attended a general welfare-specific consultation session in conjunction with the White House Tribal National Conference on November 30, 2011.  The feedback provided to date includes calls for expansion of the exclusion for all tribal government provided benefits, a removal of the "need-based" requirement, and the establishment of "tax-free" tribal zones (and a proposal for a ten-year exemption on tax for companies operating within those zones).  See Meg Shreve, "Panelists Urge Reexamination of Tribal Benefit Taxation," 135 Tax Notes 958 (May 21, 2012).

Ultimately the IRS intends to issue official and permanent guidance on the general welfare exclusion and the taxation of benefits provided by tribal governments.  It seems clear that bright line rules, or at least better established guidelines, are essential to tribes' abilities to provide these services on a consistent basis.  Whether the tax exclusion applies may not directly limit what benefits or programs tribal governments are permitted to provide, but in practice the exclusion does influence what the tribes choose to provide.  It is this author's opinion that the general welfare exclusion should apply liberally to the tribal government benefits and programs. Clarity and certainty with respect to the application of the exclusion are essential.  Expansion of the tax benefit is also desirable and warranted, given the entities and individuals involved. 

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