Notice 2015-34 Provides Instruction on the Tribal General Welfare Exclusion Act's Effect on Prior IRS Guidance
- On April 16, 2015, the IRS released Notice 2015-34, its first guidance on general welfare since President Obama signed the Tribal General Welfare Exclusion Act (the "Act") into law in September 2014.
- The Act added a new Internal Revenue Code section (139E) that applies the general welfare exclusion to Indian tribes and payments received by tribal members, their spouses and dependents.
- There is some concern with the IRS statement in Notice 2015-34 that the Revenue Procedure provides certainty that the "need requirement" of the general welfare exclusion is met. Under the Act's legislative history, it is arguable that this "requirement" is largely irrelevant for tribal programs for the "promotion of general welfare."
On April 16, 2015, the Internal Revenue Service ("IRS") released Notice 2015-34, its first guidance on general welfare since President Obama signed the Tribal General Welfare Exclusion Act (the "Act") into law in September 2014. The Act added a new Internal Revenue Code section (139E) that applies the general welfare exclusion to Indian tribes and payments received by tribal members, their spouses and dependents. Three months before the Act became law, the IRS released Revenue Procedure 2014-35 (the "Revenue Procedure"), which provides a series of safe harbors applicable to specific types of tribal general welfare programs. Notice 2015-34 provides guidance on the Act's effect on the Revenue Procedure. It states that §139E codifies, but does not supplant, the general welfare exclusion, and that taxpayers may continue to rely on the Revenue Procedure.
Overview of the General Welfare Exclusion and Prior IRS Guidance Affecting Tribes
1. The General Welfare Exclusion
Taxpayers must generally include all items of income when computing gross income. Long-standing IRS guidance established a general welfare exclusion under which payments made to individuals by governmental entities according to legislatively provided social benefit programs for the promotion of general welfare are not included in the recipient's gross income. To qualify under the general welfare exclusion as contained in this general guidance, payment must be made:
- under a government program
- for the promotion of general welfare
- not as compensation for services
In evaluating Indian tribal government programs under the second prong of this test ("for the promotion of general welfare"), the IRS frequently insisted that tribal benefits – including universal health coverage, education, and cultural programs – be based on individualized determinations of financial need. Thus, this IRS approach prevented the general welfare exclusion from covering programs designed to provide substantially equal benefits to all members of a tribe without regard to financial need. Such insistence led to controversies between tribes and IRS field agents who conducted examinations of tribal government programs.
2. Revenue Procedure 2014-35
In order to minimize controversies, the IRS agreed to consult with Indian tribal governments and to issue more tailored guidance, which culminated with the Revenue Procedure in June 2014. In the Revenue Procedure, the IRS stated that it would conclusively presume that certain payments from Indian tribes to tribal members, their spouses and dependents qualify under the general welfare exclusion if the following requirements are met:
- the payment must be made according to a specific Indian tribal government program
- the program must have written guidelines specifying how individuals may qualify for the benefit
- the benefit must be made available to any tribal member or qualified non-members (e.g., descendants) who satisfy the program guidelines subject to budgetary constraints
- the distribution of benefits from the program does not discriminate in favor of members of the tribe's governing body
- the benefit is not compensation for services
- the benefit is not lavish or extravagant under the facts and circumstances
In addition, only certain types of programs that meet the procedural requirements qualify for a safe harbor. The Revenue Procedure lists 23 different qualifying programs, including housing, education, elder care, cultural and other assistance programs.
The Revenue Procedure also presumes that certain "benefits" do not represent compensation for services. This special presumption applies to:
- benefits provided under an Indian tribal government program that are items of cultural significance and that are not lavish or extravagant under the circumstances
- nominal cash honoraria provided to religious or spiritual officials or leaders to recognize their participation in cultural, religious and social events
For detailed information on Revenue Procedure 2014-35, see Holland & Knight's alert, "In Final Guidance, IRS Broadens General Welfare Safe Harbor for Tribal Programs," June 6, 2014.
3. Internal Revenue Code §139E
Internal Revenue Code §139E, created by the Act, includes similar requirements to those found in the Revenue Procedure. The section provides that tribal government benefits qualify for exclusion from income only if all of the following criteria are met:
- the tribal government program is administered under specified guidelines and does not discriminate in favor of members of the governing body of the tribe
- the benefits provided:
- are available to any tribal members (including spouses and dependents) who meet the government program's guidelines
- are for the promotion of general welfare
- are not lavish or extravagant
- are not compensation for services
Like the Revenue Procedure, §139E also contains a rule that any items of "cultural significance, reimbursement of costs, or cash honorarium for participation in cultural or ceremonial activities" will not be treated as compensation for services.
Although similar to the Revenue Procedure in many respects, §139E contains some differences. One difference is that §139E requires that the tribal benefits provided be "for promotion of general welfare," but it does not include a definition of this term. By contrast, the Revenue Procedure presumes that any tribal benefit falling within one of the 23 enumerated general categories meets this requirement – even if the benefit program is not based on need. Unlike the Revenue Procedure, §139E is not limited to specific types or examples of tribal programs. The Act's legislative history also clarifies that Congress intended that "in no event will the IRS require an individualized determination of financial need where a Tribal program meets all other requirements of [§139E]." In addition, the Act contains a provision stating that "[a]mbiguities in section 139E ... shall be resolved in favor of Indian tribal governments and deference shall be given to Indian tribal governments for the programs administered and authorized by the tribe to benefit to the general welfare of the tribal community."
For detailed information on Revenue Procedure 2014-35, see Holland & Knight's alert, "Tribal General Welfare Exclusion Act: New Law Supersedes IRS Guidance," Oct. 6, 2014.
Notice 2015-34 states that §139E codifies, but does not supplant, the general welfare exclusion, and that taxpayers may continue to rely on the Revenue Procedure. The IRS also notes that the Revenue Procedure is broader than §139E in some respects and, for benefits described in the safe harbors, provides certainty that the "need requirement" of the general welfare exclusion is satisfied. These benefits include the 23 enumerated safe harbors, as well as items of cultural significance and nominal cash honoraria that are presumed not to be compensation for services.
The Notice requests comments on three specific areas:
- What guidelines would be helpful to Indian tribal governments in determining whether benefits provided under governmental programs are lavish or extravagant?
- What tribal customs or government practices may establish an Indian tribal government program administered through specific guidelines under the Act? How may programs established by tribal custom or government practice be identified?
- How should items of cultural significance, cash honoraria, and cultural or ceremonial activities for the transmission of tribal culture be defined?
The IRS also invites comments on other issues pertaining to §139E as well as other provisions of the Act. All comments are due by Oct. 14, 2015.
Impact of Notice 2015-34
Notice 2015-34 is generally consistent with the Act's legislative history, which confirms Congress intended to "expand rather than restrict" the safe harbors, and cautions that the IRS should not "retrench, narrow or ... withdraw" the Revenue Procedure. It is interesting, however, that the IRS states in Notice 2015-34 that the Revenue Procedure is broader than the Act in some respects. One way this is true is with respect to the scope of the persons that can benefit from the Revenue Procedure's safe harbors. The Act codifies the exclusion only for tribal members, their spouses and legal dependents, while the Revenue Procedure includes those individuals as well as former spouses, domestic partners, descendants of tribal members and certain others. But in other respects, the Act is broader because excludable general welfare programs are not limited to specific categories of tribal programs (i.e., the 23 enumerated safe harbors). Moreover, the legislative history specifically instructs the IRS to apply the Act's "for the promotion of general welfare" requirement in a manner that is "no less favorable" than the Revenue Procedure's safe harbor approach.
There is some concern with the IRS statement in Notice 2015-34 that the Revenue Procedure provides certainty that the "need requirement" of the general welfare exclusion is met. Under the Act's legislative history, it is arguable that this "requirement" is largely irrelevant for tribal programs for the "promotion of general welfare," which would include all tribal programs designed to meet a tribal, communal need. This is an area that hopefully the IRS will address in its future guidance in a way that is consistent with the Act's legislative history.