On December 5, 2012, the Internal Revenue Service proposed a revenue procedure that would address the general welfare exclusion from gross income as it applies to tribal government programs. It would also offer a safe harbor applicable to specific types of government programs under which the IRS would presume that the "individual need" requirement of the exclusion is met.
Under the procedure proposed in Notice 2012-75 (to be published in the December 17, 2012 Internal Revenue Bulletin), the IRS outlined the circumstances in which it would not assert that members of a tribe (or their spouses or dependents) must include the value of governmental program benefits in their gross income, or that the benefits are subject to information reporting requirements by the tribe. As explained below, tribes may apply the new guidance now even though it is still in proposed form and the IRS is soliciting tribal comments over an extended period that will end on June 3, 2013.
Under the general welfare doctrine generally, benefits provided to members by tribal governments (like those provided by other governments) qualify for exclusion from gross income if:
- they are made pursuant to a governmental program
- they are 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)
- they are not compensation for services
In many recent IRS audits, however, the IRS has refused to apply the general welfare exclusion to tribal programs where the benefits were disbursed on a basis that did not appear to the IRS to be "needs-based."
Key Elements of the New Safe Harbor
The new safe harbor does not supplant current law but provides a sure way for tribal programs to avoid IRS challenge under the traditional three-part test described above. The safe harbor applies to programs that both meet certain general criteria in Section 5.02(1) and are specifically described in Section 5.02(2) of the Notice.
General Criteria in Section 5.02(1)
The general criteria in Section 5.02(1) requires that the benefit meet the following requirements:
- the benefit is provided pursuant to a specific Indian tribal government program
- the program has written guidelines that specify how individuals may qualify for the benefit
- the benefit is available to any tribal member who satisfies the program guidelines
- 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
In addition to meeting these general criteria, the benefit must be a specific type of benefit that is described in Section 5.02(2) of the Revenue Procedure.
Specific Types of Benefits Described in Section 5.02(2)
The specific types of benefits described in Section 5.02(2) of the proposed Notice include a wide range of benefits falling with five main categories: (1) housing program benefits; (2) educational program benefits; (3) elder and disabled programs; (4) other qualifying assistance; and (5) cultural and religious programs. These categories include the following specific benefits.
- Housing program benefits relating to principal residences that: (1) assist in making mortgage or rent payments for residences on or near a reservation; (2) enhance habitability of housing (such as by remedying water, sewage, sanitation services, or heating or cooling issues); (3) provide basic housing repairs or rehabilitation; or (4) assist in paying charges for utilities
- Educational program benefits to: (1) provide students (including post-secondary students) transportation to and from school, tutors, and school supplies; (2) provide tuition payments and living expenses for students to attend various educational programs; or (3) provide job counseling, job training and other assistance to individuals seeking employment
- Elder and disabled program benefits for individuals age 55 or older or who are disabled that provide: (1) meals; (2) home care or day care outside the home; (3) local transportation expenses; (4) travel expenses for doctor appointments or other medical care; (5) transportation costs and admission fees to attend educational, social, or cultural programs offered by the tribe or another tribe; or (6) improvements to adapt housing to special needs
- Other qualifying assistance program benefits to: (1) pay bus, taxi or public transportation fares from the Indian reservation to public facilities (such as medical facilities and grocery stores); (2) pay for the cost of transportation and temporary meals and lodging of a tribal member, spouse, or dependent while the tribal member, spouse, or dependent is receiving medical care away from home; (3) provide assistance to individuals in exigent circumstances (such as victims of abuse); (4) pay costs for temporary relocation and shelter for individuals displaced from their homes (due to fire or natural disaster); (5) provide emergency food, travel or lodging assistance to an individual who is stranded off the Indian reservation; or (6) provide or reimburse the cost of nonprescription drugs
- Cultural and religious program benefits to: (1) pay or reimburse travel expenses (transportation, food, and lodging) to attend an Indian tribe's cultural, social or community activities such as pow-wows, ceremonies, and traditional dances; (2) pay or reimburse travel expenses to visit other Indian reservations or sites that are culturally and historically significant for the tribe; (3) pay or reimburse the costs of receiving instruction about an Indian tribe's culture, history, and traditions (such as traditional language, music and dances); or (4) pay or reimburse funeral and burial expenses and expenses of hosting or attending wakes, funerals, burials or similar bereavement events
Special Presumption: Certain Benefits Do Not Represent Compensation for Services
In addition to applying the general welfare exclusion to this broad range of specific benefits offered by tribal government programs meeting the general requirements of the safe harbor, the proposed Revenue Procedure would also presume that certain "benefits" do not represent compensation for services. This special presumption would apply to one of the following:
- benefits provided under an Indian tribal governmental program that are items of cultural significance (but not lavish or extravagant)
- nominal cash honoraria provided to medicine men or women, shamans or similar religious or spiritual officials to recognize their participation in cultural, religious and social events (for example, pow-wows, rites of passage ceremonies, or funerals, wakes, burials or other bereavement events)
This presumption is in marked contrast to earlier informal guidance from the IRS indicating that any participant in a pow-wow should be issued a Form 1099 if paid to perform services at such an event.
Effective Date of the Guidance
Although the guidance is in proposed form, taxpayers may rely on it immediately. In addition, taxpayers may apply the guidance 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 2009 return on April 15, 2010 could apply the Notice to specific benefits received in 2009 until April 15, 2013.
The IRS's release of guidance on the general welfare exclusion provides an opportunity for tribes to evaluate their current general welfare programs and determine which of those programs meet the safe harbor described in the Notice. Although a program's failure to meet the safe harbor does not necessarily mean that any payments made and benefits provided pursuant to such program should be included in 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 would provide the tribe and its members assurances of the tax-free treatment of such payments. In addition, tribal members who have paid tax on a substantial amount of any of the types of payments described in the Notice 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 such benefits.