On November 30, 2011, the Treasury Department and the Internal Revenue Service (IRS) held a listening session with tribal leaders to receive comments on the application of the general welfare exclusion to Indian tribal government programs that provide benefits to tribal members. The general welfare exclusion is a federal tax doctrine under which payments made to individuals through governmental social benefit programs are excluded from an individual’s gross income and, therefore, not reported to the IRS or taxed. The doctrine has been applied to programs providing assistance for such things as food or shelter for the poor based on financial need, as well as for broader needs of the community itself, such as tax free grants for tribal members to promote employment and economic development on Indian reservations. See e.g., IRS Priv.Ltr. Rul. 99-24026 (1999).
Inconsistent application of the general welfare doctrine to tribal governmental programs, however, has prompted tribes to request that Treasury and IRS develop guidance through consultation that promotes tribal self-determination and respects the sovereign right of tribes to determine what tribal governmental program benefits should be excluded from a beneficiary’s gross income under the general welfare doctrine. The Treasury Department and IRS issued the attached Notice 2011-94 on November 15, 2011, setting forth its planned tribal consultation process. The notice explains that Treasury and IRS will begin the process through an initial listening session. That session took place on November 30, 2011. Written comments are due by February 13, 2012.
During the November 30 listening session, Treasury and IRS officials affirmed the need for consultation in developing guidance on the applicability of the general welfare doctrine to tribal program benefits. The IRS acknowledged the problems tribes face from the uncertainty of the application of the general welfare doctrine to Indian tribal governments. The IRS also indicated agreement that tribal government programs should receive fair treatment with state and local government programs as to the type of programs eligible for general welfare exclusions. The federal participants emphasized that they would like to receive comments on those tribal programs that are not directly analogous to state/local government programs, such as cultural programs. The IRS indicated that it needs a better understanding of such programs in order to provide tribes with clarity.
Tribal representatives stressed that the IRS needs to develop its guidance based upon recognition of tribal sovereignty. Many commenters expressed deep distrust as to how the IRS would use information provided by the tribes. Several indicated concern that sharing details of tribal programs might provide the IRS with the basis to change policy to require reporting and taxation of program benefits that are currently being excluded under the general welfare doctrine.
Other commenters identified uniquely tribal programs that they believe merit treatment under the general welfare exclusion, such as cultural and ceremonial activities as well as native language and higher education scholarship programs. Several commenters pointed out that the IRS should not be concerning itself with a list of programs eligible for the exclusion, but rather should establish broad parameters that defer to the tribes’ determination of such programs based on their status in tribal law. They recommended that the IRS guidance should state that if the tribal government authorizes benefits as part of a tribal government program, the general welfare exclusion should apply. Several of these recommendations emphasized that the IRS guidance should make clear that withholding on per capita payments applies only to direct distributions of gaming revenue and does not apply to tribal government program benefits that are simply funded by gaming revenues.
Tribal participants in the November 30 listening session identified the resolution of these issues as urgent. Many of them noted that their tribes were currently the subject of IRS field audits or had recently been audited. One tribal representative asked whether the IRS would consider suspending its field audits during the period the consultation is underway. IRS made no comment.
The deadline for written comments on the general welfare exclusion to benefits provided by tribal government programs is February 13, 2012. Please contact us if you would like further information or assistance preparing comments.