On December 5, 2012, the Internal Revenue Service (IRS) and Department of the Treasury released a new proposed revenue procedure to govern the application of the General Welfare Exclusion (GWE) to tribal government program benefits. See the attached Notice 2012-75 which may also be found here: http://www.irs.gov/pub/irs-drop/n-12-75.pdf . Notice 2012-75 explains that the proposed revenue procedure is in draft form to allow for additional consultation with tribes. Comments are due before June 3, 2013. The Notice also states that although they are in draft form, the guidelines may be relied upon immediately.
IRS examinations and audits of tribal government general welfare programs have been of concern to tribes since well before the IRS and Treasury announced a comment period on the development new general welfare guidelines. (See our General Memorandum 11-151 of December 6, 2011.) Over the past year, tribal leaders and intertribal organizations have called for the IRS to consistently and clearly establish that the program benefits from tribal governments to their members for the social, cultural, and general welfare of the tribal community are exempt from taxation. Tribal concerns regarding the inconsistent application of the GWE to tribal government programs have been raised with IRS and Treasury officials through meetings, consultation sessions and written comments and through testimony before Congress urging greater oversight of IRS examinations and audits of tribal governments.
The new proposed revenue procedure clarifies that payments by tribes to its members under a tribal government program for the general welfare are to be excluded from income and thus exempt from taxation. Notice 2012-75 states that tribal general welfare programs must meet the following criteria:
• the program has written guidelines as to what individuals qualify for the program;
• the benefit is available to any tribal member meeting the guidelines;
• the benefit is not distributed in a discriminatory manner;
• the benefit is not compensation for services; and
• the benefit is not “lavish or extravagant.”
Notice 2012-75 specifically clarifies that the GWE income exclusion and tax exemption will apply to tribal program benefits related to housing, education (including higher education and allowances for room and board), job training, elder and disabled programs, transportation needs, special assistance for food, shelter, clothing, transportation, auto repair, and other expenses. The Notice also establishes that the GWE applies to programs that pay or reimburse travel expenses for activities associated with participation in cultural, religious, social and community programs and activities (such as pow-wows, ceremonies and dances). The guidance states that the GWE will likewise apply to payments and reimbursements for costs related to the participation in cultural education activities and visits to culturally significant sites.
The proposed revenue procedure also extends the general welfare exclusion to benefits provided by a tribe to cultural, spiritual and religious officials for services they provide in social or ceremonial events (such as pow-wows, rite of passage ceremonies, wakes and burials). Tribal comments strongly criticized IRS past practice of considering such payments for cultural heritage activities to represent taxable compensation for services. Under the new procedure set forth in Notice 2012-75, IRS adopts the tribal recommendation. It states that the IRS will “conclusively presume” that benefits in this category do not represent compensation for services, but that such payments are with the GWE from income and exempt from taxation.
Please let us know if we may provide additional information regarding the proposed ruling on the General Welfare Exclusion.