In April of 2015, the Department of Treasury and the Internal Revenue Service (IRS) issued a proposed rule to implement the Tribal General Welfare Exclusion Act of 2014 (TGWE). In Notice 2015-34 (dated April 16, 2015), titled "Application of the General Welfare Exclusion to Indian Tribal Government Programs that Provide Benefits to Tribal Members," the IRS provides guidance about the impact of the TGWE on IRS Revenue Procedure 2014-35 and seeks comments about the interpretation and application of the TGWE. Tribal tax advocates view this proposal as violating the text and intent of the TGWE.
Background: IRS Revenue Procedure 2014-35, TGWE P.L. 113-168
As brief background, from 2000 to 2012, tribal governments were subjected to discriminatory IRS audits that targeted tribal government programs and services for federal income taxes. Tribal governments responded to the federal government's failure to meet treaty and trust obligations to provide for health care, education, housing and a wide variety of basic community needs. Instead of fostering these acts of Indian self-determination, the IRS sought to punish tribes by imposing federal income taxes on individual Indians. NIGA and our Member Tribes worked with tribal organizations and tribal governments nationwide to press Congress and the Treasury Department to put a stop to these targeted investigations. As a direct result of our efforts, both Treasury/IRS and Congress responded.
In June of 2014, the IRS issued Revenue Procedure 2014-35, which applied the general welfare exclusion to Indian tribes for the first time. The Revenue Procedure states that the IRS will exclude tribal government provided benefits from income if the benefits: (1) are made pursuant to a specific Indiantribal government program with written guidelines; (2) do not discriminate in favor of the tribe'sgoverning body and are made available to all qualifying members of the tribe; (3) are not compensation for services; and (4) are not lavish or extravagant. The Revenue Procedure applied to a limited list of tribal government programs covering housing, education, elder care, transportation, and culture and religion-each of which included additional requirements and limitations. While the Revenue Procedure was a positive step forward, it did not go far enough to respect and defer to local tribal government decision-making and the longstanding policy supporting tribal self-determination.
On September 26, 2014 Congress passed and the President signed the TGWE into law on September 26, 2014 (P.L. 113-168), which codifies and expands upon IRS Revenue Procedure 2014-35. The TGWE is a historic step forward for Indian Country. The TGWE generally requires broad deference to tribal governments. It codifies and broadens application of the general welfare exclusion doctrine to tribal government programs and services that benefit tribal citizens. The Act effectively put a stop to IRS attempts to impose federal income taxes on benefits derived by individual Indians from tribal government programs and services.
The TGWE defines "Indian general welfare benefits" as "any payment made or services provided" by a tribal government to tribal citizens (or any spouse or dependent). The benefit (tribal government program or service) must:
- be provided under a tribal program with "specified guidelines", which can be oral or written (Text of the TGWE provides that "a program shall 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");
- be available to any tribal member that meets the guidelines;
- promote the general welfare; and
- the benefit cannot be "lavish or extravagant." (The Act expressly provides that "the [Treasury] Secretary shall, in consultation with the Tribal Advisory Committee ... , establish guidelines for what constitutes lavish or extravagant benefits with respect to Indian tribal government programs.")
Importantly, the TGWE mandates reforms of the IRS in Indian Country. It requires the Treasury Secretary to establish a 7-member Tribal Advisory Committee (TAC) that is charged with advising the Secretary on matters related to Indian taxation. The TAC will also develop a mandatory education and training program for IRS field agents to learn about federal Indian law and the unique federal treaty and trust obligations. The TAC is also charged with developing training for IRS agents and the provision of technical assistance to tribal financial officers "about implementation of the Act...." IRS examinations of tribal government programs and services are suspended until the IRS is trained and educated.
The Act codifies the legal canon of construction for Indian affairs statutes, providing that "ambiguities ... 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."
Rep. Devin Nunes (R-CA), sponsor of the TGWE, made the following statement in the Congressional Record to explain the underlying intent of the Act with regard to its interplay with Revenue Procedure 2014-35:
"I expect that the IRS will apply this requirement in a manner that is no less favorable than the safe harbor approach in Revenue Procedure 2014-35, and that the IRS will not interpret the statute as requiring individualized determinations of financial need where a tribal government has established a program consistent with the statute. In construing the individual statutory requirements, including a determination of whether a program is 'for the promotion of general welfare', it is expected that the IRS will develop regulations that are no less favorable to tribes than Revenue Procedure 2014-35, including no limitation of a tribe's ability to address community needs and to make benefits available to all eligible tribal members. This is based on the legislative purpose of the bill as well as the specific statutory construction provision in Section 2(c) of the bill, which states that '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.'"
Despite the fact that it has been nearly one year since enactment of the TGWE, the TAC has not yet been established. Treasury called for nominations for its three appointments to the TAC earlier this year, but the agency has not yet announced appointments. In addition, Congress has not yet nominated any of the four appointments that it makes to the TAC.
IRS Notice 2015-34: Implementation of the TGWE
The IRS issued Notice 2015-34 on April 16, 2015. The Notice clarifies the IRS's position that the TGWE "codifies (but does not supplant) the general welfare exclusion for certain benefits provided under Indian tribal government programs.... Taxpayers may continue to rely on Rev. Proc. 2014-35", which the IRS claims "is broader than § 139E in some respects." While that position is debatable, it is not inconsistent with Congress' intent to implement the TGWE in the broadest manner possible.
However, what is troubling is that the Notice requests comments on possible future guidance about how the IRS should implement the TGWE, including requesting views on how to implement certain provisions of the Act. The Treasury Department and the IRS request comments on the following issues arising under § 139E that may be addressed in future published guidance:
(1) What guidelines would be helpful to Indian tribal governments in determining whether benefits provided under governmental programs are lavish or extravagant?
(2) What tribal customs or government practices may establish an Indian tribal government program administered through specific guidelines under § 139E(b)(1) and § 139E(c)(4)? How may programs established by tribal custom or government practice be identified?
(3) How should items of cultural significance, cash honoraria, and cultural or ceremonial activities for the transmission of tribal culture under § 139E(c)(5) be defined?
The Treasury Department and the IRS also invite comments on other issues pertaining to § 139E or other provisions of the Act.
Requesting comments on these provisions in the TGWE directly conflicts with the text of the Act. The TGWE expressly provides that the Treasury Secretary shall establish guidelines for what constitutes "lavish and extravagant" in collaboration with the TAC. Moving forward to implement the Act absent any input from the TAC violates these provisions.
Treasury / IRS will accept comments on the Notice through Wednesday, October 14, 2015. Attached is a draft comment for your consideration. NIGA will continue to monitor IRS activity on this topic and report on any action. Please contact Veronica Watters, Legislative Director, by email at email@example.com or by phone at 202-546-7711 with any questions or concerns.