When President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) in December 2017, it marked the first major overhaul of the U.S. tax system in more than 30 years. Although the TCJA lowered tax rates, it also significantly curtailed tax deductions. With Democrats taking control of the U.S. House of Representatives in January 2019, tax provisions impacting tribal governments and their members are once again on the table for discussion.
While Congress focuses its attention on reinstating important tax extenders (including those that impact Indian Country) and debating technical corrections to the TCJA, several opportunities currently exist that can benefit tribal governments and their members when filing their taxes. Among them are exemptions for health insurance, general welfare exclusion payments, distributions from non-taxable sources of revenue, deferred per capita savings plans and various investment incentives.
Under longstanding IRS guidance, tribal council members were not allowed to pay into the Social Security program. This caused difficulty for tribal council members and tribes, forcing them to explore other options to save for retirement or face potential shortfalls.
The Tribal Social Security Fairness Act of 2018 allows tribes to opt in to Social Security coverage for tribal council members by entering into an agreement with the U.S. Social Security Administration (SSA). The bill passed both the House and Senate by unanimous votes and was signed into law by the President on Sept. 20, 2018.
Now that tribal council members are eligible to participate in Social Security, tribes should consider whether it makes sense to elect into the program. Tribes should also work with council members to obtain refunds or credits for any Social Security taxes paid prior to entering into an agreement with the SSA.
The TCJA added an important incentive designed to spur economic development in low-income communities: Opportunity Zones. Taxpayers who invest under the new law can reap significant tax benefits. To qualify for these tax benefits, the taxpayer must make the investment through a special purpose investment vehicle (referred to as a Qualified Opportunity Fund) organized for this purpose. Qualified Opportunity Funds can invest in new or ongoing businesses, or purchase and develop real property.
Among those who should be interested in the new Opportunity Zone incentive are tribes who can leverage this incentive to attract investment.
A map of Opportunity Zones and a list of tribal Opportunity Zones are available online. (See also Holland & Knight's Native American Law Blog, "Opportunity Zones: Spurring Development in Indian Country," Aug. 21, 2018.)
Section 139E of the Internal Revenue Code, enacted pursuant to the 2014 Tribal General Welfare Exclusion Act, specifically exempts payments made by an Indian tribe to its members, spouses and dependents of tribal members. This provision allows tribal governments to provide a wide range of excludable benefits, ranging from education and housing to elder care and cultural programs. Under Section 139E, the exclusion applies as long as the tribal government program complies with the following requirements.
In June 2018, the U.S. Court of Appeals for the Eleventh Circuit issued an opinion in a case that relates to distributions made to members of the Miccosukee Tribe of Indians of Florida from the tribe's gaming revenue. The IRS assessed a tribal member for failure to report approximately $275,000 in income from the distributions. In response, the tribal member made several arguments as to why the distributions should be excluded from income, including because they were for the promotion of general welfare.
The Eleventh Circuit did not accept the tribal member's argument that the distributions to her qualified for the general welfare exclusion. The court concluded that the general welfare exclusion could not apply to the distributions because the Indian Gaming Regulatory Act (IGRA) requires per capita distributions of gaming revenue to be taxed. The court stated that "the distribution payments cannot qualify as Indian general welfare benefits ... because Congress specifically subjected [per capita distributions of gaming revenue] to federal taxation in IGRA." However, the court's analysis ignores several relevant factors and legal provisions. It is also contrary to the IRS public guidance, which states that "general welfare payments may be funded from casino revenues."
Although the Eleventh Circuit case appears to be an outlier, tribes should carefully monitor developments in the case and general welfare more broadly. To maximize the potential tax savings, a tribal program inventory should be undertaken to make sure that the tribe's existing programs comply with the statutory requirements for exclusion from income and to consider the establishment of new programs to meet the needs of the tribal membership.
(For more information and to access the most recent IRS General Welfare Exclusion guidance, see Holland & Knight's alert, "IRS Issues Guidance on Tribal General Welfare Exclusion and Safe Harbors," April 21, 2015.)
Since 2003, when the IRS proposed safe harbor requirements for the creation of tax-deferred minors trusts, most tribes decided to establish grantor trusts meeting the IRS safe harbor requirements for the following reasons.
In 2011, when the IRS finalized its minors trust guidance that included provisions allowing tribes to stagger distributions made to minors over whatever period the tribe selects, many tribes have decided to restructure their minors trust. In some cases, the trusts are being restructured to delay the age at which distributions are made and/or to include special provisions applicable to minors with special needs.
Restructuring minors trusts is especially important in light of changes made to the Kiddie Tax by the TCJA. The TCJA "simplified" the Kiddie Tax by applying the income tax rates generally applicable to estates and trusts to the net unearned income of an individual to whom the Kiddie Tax applies, instead of the rates of the individual's parents. This change in law will sharply increase the rate and overall amount of tax imposed on minors trust distributions, per capita distributions and other "unearned income" distributions made to minors and young adults who are subject to the Kiddie Tax. For example, a 19-year-old tribal member subject to the Kiddie Tax would owe $35,000 in taxes on a $100,000 minors trust distribution. The same individual would owe only $15,000 in taxes on the distribution if he or she was not subject to the Kiddie Tax.
(See Holland & Knight's presentation, "Indian Country and Tax Reform: What Happened, What's Next, and What Can We Do?", Jan. 18, 2018.)
Fortunately for tribes, Section 139D of the Internal Revenue Code survived both tax reform and efforts to repeal and replace the Affordable Care Act (ACA). This section was added to the tax code by the ACA and states that healthcare benefits provided by the Indian Health Service (IHS), a third-party program funded by the IHS, medical care purchased by the tribe or tribal organization, coverage under accident or health insurance, and any other medical care provided by the tribe or tribal organization is excluded from the gross income of tribal members, and thus exempt from tax. In 2019, tribes who wish to provide healthcare benefits should ensure they are taking full advantage of this section.
Per capita distributions are fully taxable at ordinary income rates. Further, since such distributions are not considered "earned income," no portion of the revenues can be contributed by the tribal member into a 401(k) plan or other type of deferred compensation plan. However, a long-standing IRS private letter ruling and more recent IRS revenue procedures confirm that general income deferral principles apply to the taxable per capita revenues. Applying the same principles utilized by rabbi trusts to certain tribal trusts, IRS administrative guidance provides a roadmap for tribes to establish a deferred per capita savings plan that allows tribal members to voluntarily defer receipt of a portion of their per capita distribution by having it placed in a grantor trust owned by the tribe until a set date. Since this type of plan and accompanying trust can be established by the tribe only, this is again a situation where tribal leaders can provide opportunities for tribal member tax savings. Deferred per capita plans are especially useful to the extent that they allow deferral of income from a year in which the member is subject to a high tax rate to a future year in which the income may be subject to lower rates.
Of course, there are many reasons, in addition to income tax savings, that a tribal member might voluntarily decide to defer a portion of a per capita payment, including:
Most tribal leaders have found that members appreciate having options, and this is one that a tribe can establish for its members at minimal expense.
(See Holland & Knight's alert, "A Tribal Financial Executive's Guide to Deferred Per Capita Plans," Sept. 14, 2015.)
Almost all types of revenue are free from federal income tax when earned by an Indian tribe, but some also are free from tax when they are subsequently distributed to the tribe's members. Based on IRS guidance interpreting the Per Capita Act of 1982, the following sources of income may be earned by an Indian tribe and distributed to tribal members free of federal and state income tax:
(See also Holland & Knight's alert, "Interim IRS Guidance Confirms Per Capita Distributions from Tribal Trust Resources Are Nontaxable," March 18, 2014, and "IRS Confirms Per Capita Tribal Trust Payments Not Taxable," Sept. 21, 2015.)
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.
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