Tribal General Welfare Exclusion Act: New Law Supersedes IRS Guidance
H.R. 3043 Allows Tribes More Latitude in Social Programs
- H.R. 3043, the Tribal General Welfare Exclusion Act, establishes a new Internal Revenue Code section (Section 139E) to apply the general welfare exclusion to Indian tribes and payments received by tribal members, their spouses and dependents.
- The social programs encompassed by the Act include universal health coverage, education and cultural opportunities, elder care and housing.
- Tribal members who have paid tax on tribal benefits within the scope of the exclusion provided by Section 139E should consider filing amended returns for open years to claim a refund for their overpayment of tax, particularly if the tribe issues a corrected 1099 for these benefits.
On Sept. 26, 2014, President Obama signed into law a measure that excludes from taxable income various general welfare payments to members of Indian tribes.
One of the last pieces of legislation agreed upon by the U.S. Congress before breaking for the fall campaign season, the new law definitively establishes the rules applicable to social welfare programs provided by Indian tribes for their citizens. H.R. 3043, the Tribal General Welfare Exclusion Act, was passed by the House on Sept.16, 2014, under suspension of the rules and by the Senate on Sept.18, 2014, by unanimous consent. Since the bill did not go through a committee markup in either the House or the Senate, the bill's legislative history is contained in floor statements by the bill's sponsors, a colloquy among Senate Finance Chairman Wyden and the bill's Senate sponsors, and a summary of the bill prepared by the Joint Committee of Taxation for Rep. Devin Nunes in response to his request for a revenue estimate. This alert takes into account the legislative history in describing the scope and significance of the new law.
Qualification for the General Welfare Exclusion Prior to the Act
Under prior law, taxpayers must generally include all items of income when computing gross income. Long-standing IRS guidance established a general welfare exclusion under which payments made to individuals by governmental entities according to legislatively provided social benefit programs for the promotion of general welfare are not included in the recipient’s gross income. To qualify under the general welfare exclusion as contained in this general guidance, payment must be made:
- under a government program
- for the promotion of general welfare
- not as compensation for services
In evaluating Indian tribal government programs under the second prong of this test ("for the promotion of general welfare"), the IRS frequently insisted that tribal benefits – including universal health coverage, education, and cultural programs – be based on individualized determinations of financial need, thus preventing the general welfare exclusion from covering programs designed to provide substantially equal benefits to all members of a tribe without regard to financial need. Such insistence led to a spate of controversies between tribes and IRS field agents who conducted examinations of tribal government programs over the last 10 years.
In order to minimize these controversies, the IRS agreed to consult with Indian tribal governments and to issue more tailored guidance. This consultation process led to the issuance of IRS Notice 2012-75 (released Dec. 5, 2012) and Revenue Procedure 2014-35 (released June 6, 2014). In its Revenue Procedure, the IRS stated that it would conclusively presume that certain payments from Indian tribes to tribal members, their spouses and dependents qualify under the general welfare exclusion if the following requirements were met:
- a general welfare benefit must be made according to a specific Indian tribal government program
- the program must have written guidelines specifying how individuals may qualify for the benefit
- the benefit must be made available to any tribal member or qualified non-members (e.g., descendants) who satisfy the program guidelines subject to budgetary constraints
- the distribution of benefits from the program does not discriminate in favor of members of the tribe’s governing body
- the benefit is not compensation for services
- the benefit is not lavish or extravagant under the facts and circumstances
In addition, only certain types of programs that met the procedural requirements would qualify. Revenue Procedure 2014-35 listed 23 different qualifying programs, including housing, education, elder care, cultural and other assistance programs. For detailed information on Revenue Procedure 2014-35, see Holland & Knight’s alert, "In Final Guidance, IRS Broadens General Welfare Safe Harbor for Tribal Programs," June 6, 2014.
New Internal Revenue Code Section 139E
The Tribal General Welfare Exclusion Act (the "Act") added a new Internal Revenue Code section (Section 139E) that applies the general welfare exclusion to Indian tribes and payments received by tribal members, their spouses and dependents. In adding this tax code provision, the Act supersedes Revenue Procedure 2014-35. However, the Act includes similar requirements to those found in the Revenue Procedure, providing that tribal government benefits qualify for exclusion from income only if all of the following criteria are met:
- the tribal government program is administered under specified guidelines and does not discriminate in favor of members of the governing body of the tribe
- the benefits provided:
- are available to any tribal members (including spouses and dependents) who meet the government program's guidelines
- are for the promotion of general welfare
- are not lavish or extravagant
- are not compensation for services
One difference is that the Act requires that the tribal benefits provided be "for promotion of general welfare," but it does not include a definition of this term. By contrast, Revenue Procedure 2014-35 presumes that any tribal benefit falling within one of the 23 enumerated general categories meets this requirement – even if the benefit program is not based on need. Unlike the Revenue Procedure, the Act would not limit its application to specific types or examples of tribal programs.
In response to tribal concerns that IRS could interpret the new statutory requirement that the benefits be "for promotion of general welfare" as requiring a determination of individual or family financial need (as IRS has required in the past in evaluating tribal programs), the Act's legislative history clarifies that Congress intended
that the IRS will apply this requirement in a manner no less favorable than the safe harbor approach provided for in Revenue Procedure 2014-35, and in no event will the IRS require an individualized determination of financial need where a Tribal program meets all other requirements of new section 139E as added by the bill ... .
See Colloquy on H.R. 3043 and S. 1507 among Senator Moran, Senator Wyden and Senator Heitkamp, Congressional Record S5686 (Sept.17, 2014).
The Act also provides a number of definitions or special rules applicable to new Code Section 139E, including:
- a definition of "Indian Tribal Government" that includes any agencies or instrumentalities of such a government, as well as any Alaska Native regional or village corporation
- a mandate that IRS consult with a Tribal Advisory Committee (described below) in establishing guidelines for what constitutes "lavish or extravagant" benefits
- a rule that a tribal program will not fail to be treated as an Indian tribal government program solely by reason of the program being established by tribal custom or government practice
- a rule that any items of "cultural significance, reimbursement of costs, or cash honorarium for participation in cultural or ceremonial activities" shall not be treated as compensation for services
- a special rule of statutory construction that all ambiguities in new Code Section 139E shall be "resolved in favor of Indian tribal governments and deference shall be given to Indian tribal governments for the programs administered and authorized by the tribe to benefit the general welfare of the tribal community."
One area in which the new law appears to be potentially more limited than Revenue Procedure 2014-35 is the definition of who is a qualified recipient of a tax-free tribal benefit. Under the new statute, the term "Indian general welfare benefit" includes "any payment made or services provided to or on behalf of a member of an Indian tribe (or any spouse or dependent of such member)." By contrast, the Revenue Procedure 2014-35 explicitly permitted excludable benefits to be provided to tribal members or "qualified non-members" of an Indian tribe, a term which it defined as including "a spouse, former spouse, legally recognized domestic partner or former domestic partner, ancestor, descendant, or dependent of a member of an Indian tribe."
The Act requires the Secretary of the Treasury ("Secretary") to:
- establish a Tribal Advisory Committee to advise on matters relating to taxation of Indians
- establish and require training and education for IRS agents on federal Indian law and the federal government's unique legal treaty and trust relationship with Indian tribal governments
- require training of IRS agents and tribal financial officers about implementation of the new code provisions
The Act further requires the Secretary to suspend audits and examinations of Indian tribal governments and tribal members related to the general welfare exclusion until this education and training has been completed. Additionally, the Act's provisions provide the IRS with discretion to waive any interest and penalties under the code for any tribe or tribal member with regard to the general welfare exclusion.
Effective Date of the Act
The provisions in the Act codifying the general welfare exclusion for tribal payments are effective for tax years for which the statutory period of limitations is open as of the date of enactment. Taxpayers also have one additional year from the date of enactment to file for a refund with respect to any such open tax year. For example, a taxpayer who filed his or her 2011 return on April 15, 2012, would have until Sept. 26, 2015, to file a refund claim. The Act would not apply to taxable years prior to 2011.
Scope and Significance of the New Law
The Act is significant to both tribes and their members for several reasons:
- It creates certainty by enabling tribal members and member spouses receiving tribal payments and in-kind benefits to know in advance which benefits are considered income and which are not, and thus to more effectively plan their finances.
- It encompasses a fairly broad range of benefits, thereby enabling tribes to more comprehensively assist their members by providing non-taxable benefits so long as the procedural requirements of the Act are met.
- It enables tribes to more accurately manage their tax reporting by clarifying the categories of payments, in-kind benefits and services for which 1099s are unnecessary.
- It provides a potential hiatus for tribes whose programs are currently under IRS examination and, by virtue of requiring the IRS to train its financial officers prior to resuming audits, enables tribes to work with more knowledgeable and qualified agents.
- It paves the way for tribes to draft and adopt program guidelines carefully tailored to meet the Act's requirements and the general welfare needs of the tribe.
With the finality and certainty provided by the Act, tribes will be able to establish new general welfare programs or revise existing programs to take advantage of new Code Section 139E. In addition, tribal members who have paid tax on a substantial amount of tribal benefits within the scope of the exclusion provided by Section 139E should consider filing amended returns for open years to claim a refund for their overpayment of tax, particularly if the tribe issues a corrected 1099 for these benefits.
To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.