Comments are due December 16, 2024.
On September 16, the Internal Revenue Service issued a Notice of proposed rulemaking and notice of public hearing regarding potential amendments to policies that govern which benefits provided by Indian Tribal government programs qualify as tribal general welfare benefits, and therefore are subject to potential exclusion from recipients’ gross income for tax purposes. The proposed amendments are intended to integrate sections of the Tribal General Welfare Exclusion Act and section 139E of the Internal Revenue Code. Comments are due December 16, 2024.
The overall picture is that the IRS largely followed recommendations of the Treasury Tribal Advisory Committee (TTAC) and tribal consultations. This is especially true regarding recommendations that acknowledge crucial aspects of tribal sovereignty—the power to determine what is best for their own communities—by granting tribes discretion to determine whether a program and its benefits promote the general welfare of the tribe, and thus exclude such benefits from consideration as gross income. In addition, the IRS clarified that programs/benefits funded through gaming revenue and distributed equally to all members may qualify for tax exemption under the regulations, so long as they meet all other requirements.
Significantly, though, the IRS essentially “wrote out” regional and village Alaska Native Corporations as established under The Alaska Native Claims Settlement Act from the regulations, by excluding them from the definition of both “Indian Tribal Governments” and “Indian Tribes.” This may have a significant impact on ANCs’ ability to support their shareholders, all of whom are either tribal members or descendants of tribal members prior to ANCSA.
i. Exclusion of ANCs from Proposed Amendments
One of the most significant changes described by the IRS in its proposals is the removal of ANCs from the definition of “Indian Tribal Governments.” Currently, IRS Code 139E defines “Indian Tribal Governments” to include ANCs. The proposal will potentially remove the opportunity of ANCs to provide tax-exempt general welfare benefits to their shareholders, regardless of whether the benefit promotes the general welfare or the beneficiaries qualify as a “Tribal Member” under the Internal Revenue Code. The potential impact for ANCs is that, while ANCSA establishes they are socially and economically disadvantaged, this may remove an opportunity for them to provide benefits and support to their Native shareholders and Alaska Native communities.
Interestingly, the IRS’s exclusion of ANCs from the language of the proposed amendment does not come from recommendations from either TTAC or tribal consultations. Moreover, the IRS states it intends to hold further tribal consultations before it issues guidance on whether ANCs will be regarded as qualifying entities under the definitions of Tribal Government and Indian Tribe, specifically “reserv[ing]” that area of the Regulations for further comments and guidance. This presents a timely opportunity for interested parties, especially ANCs, to submit comments to the IRS and Treasury Department.
ii. Tribal Discretion for Tribal General Welfare Benefits
Benefits categorized as Tribal General Welfare benefits are non-taxable and are excluded from the recipient’s gross income for tax purposes. If adopted, the proposed amendments would require the IRS to defer to the Tribal Governments’ decisions as to when a tribal program/benefit would qualify as a Tribal General Welfare benefit. Requiring the IRS and Treasury Department to grant broad discretion to tribal governments is important for the recognition of tribal sovereignty, and an acknowledgment that tribal governments are in the best position to determine: a) the unique needs of their communities; b) which programs and benefits will best facilitate meeting those needs; and c) how best to execute those programs to benefit their communities effectively.
Under the proposed regulation, tribes decide:
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- Whether a program is “for promotion of the general welfare” at the time it is created
- Whether a benefit promotes the general welfare, and that tribal governments have exclusive power to decide
- Whether a benefit is “lavish” or “extravagant” (“lavish” and “extravagant” benefits don’t qualify for tax exemption), which empowers tribes to give larger benefits based on need without concern about the benefit potentially not qualifying
- Non-monetary benefits in the form of “items of cultural significance”
- “Cultural or ceremonial activities” during which tribal governments may provide non-taxable benefits to their members and honoraria of value to non-member Indians who provide cultural services during such activities (e.g., blessings)
If adopted, these proposals will allow tribal governments to give benefits through programs tailored to the needs of their individual communities without having to follow a specific list of “qualifying” benefits. Additionally, the proposals eliminate some uncertainty as to whether a benefit known by the tribal government to address the needs of its community might be included in a recipient’s gross income. Placing the power solely with tribal governments to address the unique needs of their communities, without the barriers of uncertainty and agency involvement, acknowledges the diversity of experience and unique cultural differences of each tribal nation.
iii. Other Notable Amendments
The IRS also states in its proposals that tribal general welfare benefits funded by casino revenues under the Indian Gaming Regulatory Act would qualify as Tribal General Welfare benefits, even if distributed in equal amounts to the beneficiaries. This clears up a previous concern that using IGRA revenues to fund tribal welfare programs disqualified any benefits that flow from those programs. This concern arose because payments made equally to all members of the tribe (otherwise known as “per capita payments”) are specifically taxable as income under IGRA, and using casino revenue “to provide for the general welfare of the Tribe” is specifically included in the act.
Under the proposed IRS amendments, tribal general welfare benefits qualify for exclusion as gross income even when sourced from gaming revenues and distributed in equal amounts to all participants, so long as they meet all other requirements for Tribal General Welfare benefits and are not merely IGRA per-capita payments. In other words, if a tribe is already distributing per-capita payments to its members under IGRA, those payments cannot qualify as tribal general welfare benefits, but benefits supplied by other welfare programs funded by casino revenues can.
Finally, the IRS declined to amend the regulations to make any statement about the effect on any other federal agency of excluding Tribal General Welfare Benefits from gross income, which leaves uncertainty as to whether Tribal General Welfare Benefits may be regarded as gross income for determining beneficiaries’ eligibility under other federal programs. The IRS did clarify that tribal governments are not required to show financial or other need to provide Tribal General Welfare Benefits to the tribal program’s participants, and that tribal governments maintain broad discretion to require a showing of need for eligibility for a program or to receive its benefits.
The IRS and Treasury Department seek input on all proposals contained in the Notice, including comments related to specific issues noted on page 58-9. In addition, a public hearing will be held on January 13, 2025, beginning at 10 a.m. ET, Washington, DC, and interested parties may request to by 5 p.m. ET on January 9, 2025 to testify in person. Written comments are due by December 16, 2024.
We also acknowledge the contributions of Molly Gunther, one of our 2024 fall associates, in the development of this article.
