New Guidance Provides Planning Opportunities for Tribes
- After receiving more than 120 written comments on how the IRS should apply the general welfare exclusion to Indian tribal government programs, the IRS has issued final guidance detailing how tribal programs may take advantage of safe harbors under which they will be deemed to meet the "individual or family need" requirement of the exclusion.
- More than 30 different types of programs providing education, housing, care to elder and disabled persons, and emergency assistance to tribal members and their families, as well as cultural and religious programs, are eligible for the safe harbors.
- The final guidance includes additional programs and favorable clarifications, but the IRS will continue to insist that the programs have written eligibility guidelines and comply with basic substantiation requirements.
On June 3, 2014, the Internal Revenue Service issued Revenue Procedure 2014-35, which provides final guidance on the application of the general welfare exclusion to Indian tribal government programs. The guidance offers a series of safe harbors applicable to specific types of tribal programs under which the IRS will presume that the "individual or family need" requirement of the exclusion is met. If the requirements of the Revenue Procedure are satisfied, the IRS also will not assert that members of a tribe and "qualified nonmembers" (spouses, dependents, domestic partners, ancestors and descendents) must include the value of governmental program benefits in their gross income, or that the benefits are subject to information reporting by the tribe.
General Welfare Doctrine Benefits
Under the general welfare doctrine, benefits provided to members by tribal governments (like those provided by other governments) typically qualify for exclusion from gross income if they are:
- made according to a governmental program
- for the promotion of general welfare (based on individual or family need, and uniquely in the case of programs of tribal governments, to help establish Indian-owned businesses on or near a reservation)
- not compensation for services
In audits, however, the IRS frequently has refused to apply the general welfare exclusion to tribal programs where the benefits are disbursed on a basis that do not appear to the IRS to be based on need. After a lengthy consultation process with tribal leaders and others, the IRS issued Notice 2012-75 (the "notice"), which contained proposed guidance on the general welfare exclusion. The Treasury and IRS solicited tribal comments on the general welfare exclusion during an extended period and received more than 120 written comments from Indian tribal governments and other individuals and groups. The final guidance incorporated many of these comments by clarifying the safe harbors and broadening their scope.
Key Elements of the New Safe Harbors
The new safe harbors do not supplant current law but provide a sure way for tribal programs to avoid IRS challenge under the traditional three-part test described above. The safe harbors apply to programs that both meet certain general criteria and are specifically described in the Revenue Procedure.
General Criteria for the Benefit
To qualify for exclusion from income under the Revenue Procedure, a benefit must meet the following requirements:
- the benefit is provided according to a specific Indian tribal government program
- the program has written guidelines specifying how individuals may qualify for the benefit
- the benefit is available to any tribal member, qualified nonmember, or identified group of tribal members or qualified nonmembers (for example, veterans) who satisfy the program guidelines, subject to budgetary restraints
- the distribution of benefits from the program does not discriminate in favor of members of the governing body of the tribe
- the benefit is not compensation for services
- the benefit is not lavish or extravagant under the facts and circumstances
In addition to meeting these general criteria, the benefit must be a specific type of benefit that is described in the Revenue Procedure.
Specific Types of Benefits Described in the Revenue Procedure
The specific types of benefits described in the Revenue Procedure include a wide range of benefits falling within five main categories:
- housing program benefits
- educational program benefits
- elder and disabled programs
- other qualifying assistance
- cultural and religious programs
These five categories include the following specific benefits:
- Housing program benefits relating to principal residences and ancillary structures that are not used in any trade or business or for investment purposes that: (1) pay mortgage payments, down payments, or rent payments (including but not limited to security deposits) for principal residences; (2) enhance habitability of housing, such as by remedying water, sewage, sanitation service, safety (including but not limited to mold remediation), or heating or cooling issues; (3) provide basic housing repairs or rehabilitation (including but not limited to roof repair and replacement); or (4) pay utility bills and charges (including but not limited to water, electricity, gas and basic communications services such as phone, Internet and cable).
- Educational program benefits to: (1) provide students (including but not limited to post-secondary students) transportation to and from school, tutors and supplies (such as clothing and laptops) for school activities and extracurricular activities; (2) provide tuition payments and living expenses for students to attend various educational programs (including online education); (3) day care to enable parents or other relatives responsible for the care of children to work or pursue education; or (4) provide job counseling, job training and other assistance to individuals seeking employment.
- Elder and disabled program benefits for individuals 55 or older or who are mentally or physically disabled that provide: (1) meals; (2) home care or day care outside the home; (3) local transportation assistance; or (4) improvements to adapt housing to special needs (including but not limited to grab bars and ramps).
- Other qualifying assistance program benefits to: (1) pay transportation costs such as rental cars, substantiated mileage, and fares for bus, taxi and public transportation to public facilities; (2) pay for the cost of transportation, temporary meals and lodging of a tribal member or qualified nonmember while the individual is receiving medical care away from home; (3) provide assistance to individuals in exigent circumstances (including but not limited to victims of abuse); (4) pay costs for temporary relocation and shelter for individuals involuntarily displaced from their homes (including but not limited to situations in which a home is destroyed by a fire or natural disaster); (5) provide assistance for transportation emergencies (for example, when an individual is stranded away from home); or (6) pay the cost of nonprescription drugs (including but not limited to traditional Indian tribal medicines).
- Cultural and religious program benefits to: (1) pay expenses to attend or participate in an Indian tribe's cultural, social, religious, or community activities such as pow-wows, ceremonies and traditional dances; (2) pay expenses to visit sites that are culturally or historically significant for the tribe; (3) pay the costs of receiving instruction about an Indian tribe's culture, history and traditions (including but not limited to traditional language, music and dances); (4) pay funeral and burial expenses, and expenses of hosting or attending wakes, funerals, burials, other bereavement events and subsequent honoring events; or (5) pay transportation costs and admission fees to attend educational, social, or cultural programs offered or supported by the tribe or another tribe.
The Revenue Procedure clarifies that the benefits listed in the parenthetical language above are illustrative only, not an exhaustive list. Consequently, a benefit may qualify for exclusion from gross income under the Revenue Procedure even though the benefit is not expressly described in the parenthetical language, provided that it meets all other requirements of the guidance. The Revenue Procedure also clarifies that the term "pay" means pay or reimburse in whole or part. Accordingly, a newly established program that reimburses a tribal member or qualified nonmember for a past expense should qualify for exclusion.
Special Presumption: Certain Benefits Do Not Represent Compensation for Services
In addition to applying the general welfare exclusion to a broad range of specific benefits offered by tribal government programs meeting the general requirements of a safe harbor, the Revenue Procedure also presumes that certain "benefits" do not represent compensation for services. This special presumption applies to the following benefits:
- 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 (including but not limited to medicine men, medicine women and shamans) to recognize their participation in cultural, religious and social events (including but not limited to pow-wows, rite of passage ceremonies, funerals, wakes, burials, other bereavement events and subsequent honoring events)
Despite the request of several organizations submitting comments, the IRS declined to use a "reasonable compensation" approach or to set a dollar threshold for what would be considered "nominal cash honoraria." Consequently, this will continue to be a gray area and the IRS may argue that certain payments to spiritual and other leaders must be included in income even in circumstances where the tribe might consider such payments to be "nominal."
Effective Date of the Guidance
The Revenue Procedure is effective for benefits provided on or after Dec. 6, 2012, the publication date of the notice. Taxpayers may also apply the Revenue Procedure to any year for which the statute of limitations on refunds remains open. Generally, this will be three years from the time the return was filed or two years from the time the tax was paid, whichever is later. For example, a taxpayer who filed his or her 2011 return on April 15, 2012, could apply the notice to specific benefits received in 2011 until April 15, 2015.
Opportunities for Tribes
Revenue Procedure 2014-35 provides an opportunity for tribes to establish new programs or revise existing programs to take advantage of the generally favorable guidance and protect tribal members from incurring federal income tax on the benefits conferred. Although a program's failure to meet a safe harbor does not necessarily mean that any benefits provided according to such a program should be included in a member's taxable income, if a tribe is able to take steps to modify an otherwise compliant program (such as by establishing written guidelines for the program), doing so will provide the tribe and its members greater assurance of the tax-free treatment of the payments. In addition, tribal members who have paid tax on a substantial amount of any of the types of payments described in the Revenue Procedure should consider filing an amended return for open years to claim a refund for their overpayment of tax, particularly if the tribe issues a corrected 1099 for these benefits.