On June 3, 2014, the U.S. Department of the Treasury and Internal Revenue Service (IRS) issued Revenue Procedure 2014-35, Application of the General Welfare Exclusion to Indian Tribal Government Programs That Provide Benefits to Tribal Members. This Revenue Procedure (Rev. Proc. 2014-35) supersedes the draft guidance set forth in IRS Notice 2012-75 and makes important clarifications concerning the application of the General Welfare Exclusion (GWE) to tribal government programs. The text of Rev. Proc. 2014-35 is available here: http://www.irs.gov/pub/irs-drop/rp-14-35.pdf A copy of the Treasury Department’s press release is attached.
IRS final guidance on the GWE’s application to tribes has been highly anticipated. Tribes and tribal organizations have demanded that the IRS consistently and clearly establish that tribal government program benefits are not subject to income tax. In developing this new Revenue Procedure the IRS considered over 120 comments. Tribal engagement on this issue has also fostered a legislative effort that has built an important base of support in the House and Senate for the Tribal General Welfare Exclusion Act (HR 3043 and S 1507). Although several significant tribal concerns remain unaddressed by Rev. Proc. 2014-35, many of the provisions of the IRS’ final GWE guidance reflect tribal input on key issues of concern.
Rev. Proc. 2014-35 affirms that the GWE applies to payments by tribal governments no less favorably than it applies to payments by federal, state, local, or foreign governments. Under the GWE, government payments are not taxable if they are (1) made pursuant to a government program; (2) for the promotion of the general welfare, based on individual or family need; and (3) are not compensation for services.
In addition, Rev. Proc. 2014-35 acknowledges, in recognition of the unique legal status of tribes, that the general welfare exclusion applies differently to tribal government programs than to other governments. Rev. Proc. 2014-35 explains that “Indian tribal governments have developed a broad range of programs to address their unique social, cultural and economic needs,” and that tribal government programs for the general welfare consider not only individual and family need but also “the needs of the entire community.”
Rev. Proc. 2014-35 also provides two “safe harbor” rules for tribal governments. Under the first, the IRS will conclusively presume that the “need” criterion under the GWE is met for certain tribal programs. To qualify for this first safe harbor, a tribal program must: (1) be structured to comply with six criteria, including having written guidelines; and (2) fall within the program areas of housing, education, culture and religion, elder and disabled assistance, or other specified assistance programs. Under the second safe harbor, the IRS will conclusively presume that certain payments related to cultural program services satisfy the “need” criterion of the GWE and are not taxable as compensation. This second safe harbor applies to benefits under a program that either (1) are items of cultural significance that are not lavish or extravagant under the facts and circumstances; or (2) are nominal cash honoraria provided to religious or spiritual officials or leaders to recognize their participation in ceremonies and cultural events.
In order to effectively utilize the GWE, including the two safe harbor provisions, tribes will need to review the authority and procedures governing the administration of tribal general welfare programs and consider whether to update existing codes, ordinances, guidelines or procedures. Rev. Proc. 2014-35 requires that tribes maintain accurate records for an extended period of time in order to substantiate benefits provided. Thus, tribes will need to carefully review the administrative and recordkeeping procedures for their general welfare programs.
Please let us know if we may provide additional information or assistance in analyzing, drafting, or updating your GWE authorities and procedures to ensure that your general welfare programs receive the full scope of the exclusion from tax made available pursuant to Rev. Proc. 2014-35.