Tribes, IRS Making Progress on Tax Issues

It was during a September hearing of the House Subcommittee on Indian and Alaska Native Affairs that Rep. Don Young, D-Alaska, grew a bit impatient with witness Christy Jacobs, director of the Internal Revenue Service’s Office of Indian Tribal Governments,

At issue was an April letter from the IRS Portland office that stated per capita payments from tribal trust resources to citizens of the Confederated Tribes of Warm Springs could be subject to taxation, reversing several decades of federal policy that per capita payments are tax exempt. A similar letter was sent to the Yakama Nation.

“Christy, I’m a little confused,” Young said. “Where did this idea come from? Which brainchild and what area of the moon did they come from?

“Did we have some little energetic individual that thinks, ‘I’ll go get those Indian tribes [and] they have to pay their money?’”

Jacobs acknowledged the letter was a massive mistake.

“I do not believe that per capita payments made to tribal members pursuant to the Per Capita Act from trust resources are taxable,” she said.

The very notion Treasury and the IRS would consider taxing per capita payments from tribal resources, exempt under the Per Capita Act of 1983, struck Young as a gross injustice.

“Per capita payments are not government handouts,” Young said. “They are benefits that belong to Indians secure in terms of negotiated treaties and statutes whereby tribes ceded tens of millions of acres of land to the United States.

“It would be a grave injustice to tax revenues originated from lands” held in tribal trusts, he said.

American Indian tribes have for several years been monitoring and at times fending off efforts by Treasury and the IRS to revise or reinterpret the tax status of tribal governments.

Fortunately for indigenous communities, recent moves to alter the taxability of per capita payments from tribal trust resources and re-examine the tax exempt status of health care and social welfare programs funded by casino revenues have been resolved to the benefit of tribes.

A December Treasury guidance document states that per capital payments to citizens of some 40 tribes arising out of the recent federal trust settlement lawsuit will not be included in the individual’s gross income for tax purposes.

Another threat was averted Dec. 5, when Treasury and the IRS unveiled a revised draft of the General Welfare Exclusion (GWE) doctrine that, in effect, recognizes that most tribal government services are to remain tax exempt, even those funded with gambling revenues.

The draft GWE doctrine was the result of months of consultations between Treasury, the IRS and the Intertribal Organization Tax Initiative (IOTI), a coalition comprised of the National Congress of American Indians, Native American Finance Officers Association (NAFOA), United South and Eastern Tribes (USET) and the California Association of Tribal Governments.

The GWE doctrine generally calls for the IRS to continue to exempt from taxation most social service programs provided by state, municipal, county and tribal governments.

Comments on the draft doctrine are open till June 3.

To their credit, Treasury and IRS officials were willing to work with IOTI in settling the long simmering dispute over the tax status of social programs for this country’s indigenous citizens, many of whom remain locked in cyclical poverty and unemployment.

“[IRS and Treasury] were very interested in what the tribes had to say,” said Lynn Malerba, chief of the Mohegan Tribe of Connecticut and USET’s representative to IOTI.

“This wasn’t adversarial at all. It was a very cordial effort and the IRS and Treasury … incorporated a lot of their comments into their guidance.”

“Treasury and the IRS are now publicly committed to issuing new written guidelines on this subject,” Aaron Klein, Treasury’s deputy assistant secretary for economic policy coordination, said of the agency’s doctrine on the tax exempt status of social service programs offered by state, local and tribal governments.

 “In doing so we will remain mindful of the comments and position thoughtfully articulated by tribes and tribal leaders.”

The progress made in tribal consultations with the IRS and Treasury should be applauded.

“The consultations with the IRS have worked,” said NAFOA Executive Director Dante Desidario. “The agency is taking the tribal concerns seriously.”

But what remains disconcerting is the apparently ignorance of tribal self-governance and the economic state of tribal communities that planted the seeds of IRS and Treasury suspicions and, eventually, the assault of auditors on tribal lands.

Much of the misconceptions are fueled by tribal government gambling.

There is a looming perception among the public and too many elected officials and federal bureaucrats that indigenous communities are less culturally rich, sovereign governments than they are prospering casino operators.

That is, of course, far from the truth.

While it was congressional intent of the Indian Gaming Regulatory Act to strengthen tribal governments and build strong, diversified tribal economies, the results have been mixed.

Of the 421 casinos audited by the National Indian Gaming Commission in 2011, 78 of them (18.6 percent) generated $19.4bn, or 71.8 percent of the gross revenues from tribal gambling nationwide.

Many of the more lucrative casinos are operated by small tribes in urban areas, leaving the larger, more remote tribes in the Southwest and Great Plaines with marginal casino operations, providing jobs but little in the way of economic progress.

Yet tribal leaders have in the last decade complained that IRS auditors were descending on often impoverished reservations, requesting documents on such government aid as school clothes, burial rituals, elder care and even minor housing repairs.

“Self-governance tribes dedicate their own resources to supplement federal funding for programs intended to benefit tribes and their members,” Malerba said.

“Yet, in recent years, the IRS has increasingly sought to tax what were previously understood as non-taxable benefits provided by tribes to their members.”

“Our weather gets quite cold in South Dakota and some of our homes only have wood heat,” said President John Yellow Bird/Steele of the Oglala Sioux Tribe on the poverty-ridden Pine Ridge Reservation, home to the Prairie Ridge Hotel & Casino.

“It’s imperative the tribe help out with energy assistance: buying a pickup load of wood; helping to pay a light bill; buying some propane,” Steele told a recent Senate Indian Affairs committee hearing.

“Do we give a 1099 [tax form] to all of these people?”

Tribal leaders as early as 2006 began noticing an increase in IRS audits of tribal programs, a trend they believe was prompted by economic growth on tribal land and the fact about 70 of 246 tribes with casinos in 28 states issue per capita payments to members.

Ironically, the Indian Gaming Regulatory Act (IGRA), which provides a regulatory framework for the nation’s $27.2bn tribal gambling industry, states that that casino revenues be used for the general welfare of tribal citizens.

Gambling revenues have been used by tribal governments to subsidize housing, education, health care, cultural and religious activities and other notoriously underfunded federal programs promised to tribes in treaty agreements.

But IGRA also requires that the tribe deduct and withhold income taxes from gambling revenues paid directly to tribal members.

“The IRS has frequently initiated its audits on the presumption that tribal general welfare benefits are actually disguised per capita payments from tribal gaming revenues” subject to taxation, Malerba said.

“IRS field auditors began examinations with a bias and presumption of guilt until proven innocence.”

“One IRS agent ruled that tribal citizens who benefited from a tribal government program should be taxed on the part of the revenue generated from gaming proceeds,” said Bill Lomax, president of the Native American Finance Officers Association, a member of the tribal coalition.

“The same benefit from other revenues was considered exempt.”

Lomax said tribes had been singled out for GWE audits.

Treasury in a 2007 work plan said it had in the previous two years conducted 139 examinations on tribal governments “that focused specifically on the use of net gaming revenues,” Lomax said.

The results of the investigations are not known.

“The taxability of [GWE] benefits from state and local governments was not even mentioned,” he said.

The IRS in 2006 began auditing casino tribes purchasing health insurance for its members, threatening to tax the benefits as income.

Mark Macarro, chairman of the Pechanga Band of Luiseno Indians, led an effort to amend the Affordable Health Care Act to keep the benefits tax exempt.

The landmark draft GWE doctrine was unveiled Dec. 5, when more than 500 tribal leaders attended the fourth White House Tribal Nations Summit in Washington.

The draft GWE guidance sets down what aspects of tribal government education, housing, cultural and elder care assistant programs can be tax exempt. It requires that tax exempt assistance to tribal citizens be made through a government program, promote general welfare based on community and family needs and does not constitute payments for services.

The landmark GWE doctrine and largely conciliatory consultations between federal and tribal officials is expected to help resolve the complex issue of taxing Indian tribes and Alaska Native villages, many experiencing economic progress through government gambling.

“A key challenge for tribal nations is economic development,” Deputy Treasury Secretary Neal Wolin told leaders at the summit. “Many of your communities face poverty, high unemployment and lack of good paying jobs.

“Effective immediately, tribes can rely on this guidance and have comfort that programs that meet these guidelines will be respected by IRS."

The proposed guidance generally exempts from taxation assistance from a government program that is not compensation for services.

Treasury said exclusions from taxation are housing payments to help individuals and families acquire modest homes or apartments, aid for disaster victims, education expenses, medical or dental assistance and services of a shaman or medicine men or women for health and spiritual and cultural reasons.

NAFOA Executive Director Dante Desiderio said tribes are pleased with the proposed GWE doctrine, in part because it is not based on the economic need of the individual,

 “The idea is that we as tribes don't base our benefits and services on financial need,” he said. “It's the need of the community.”

Malerba said the draft doctrine also recognizes that unlike non-Indian governments, tribal reservations “are also communities of familial relations who hold property and resources communally.

“Their leaders have been charged with the responsibility to maintain and foster culture and traditions and revitalize languages,” she said, programs that should not be subject to taxation.

“The difficulty has been each application is fact specific,” Jacobs said. “And the historical and cultural context within the tribal government environment adds a layer of complexity.”

Part of the consultations involved educating Treasury and IRS officials about the unique needs of indigenous communities.

 “[Tribes] are very different from other governments,” Klein said. “We need to respect and understand [cultural programs and language revitalization] are purposes of the tribe.”

There will be an effort to train IRS agents about the cultural distinctions of tribal communities in doing future GWE audits.

“Tribes should be able to determine what services are offered to their communities and what criteria should be developed to administer those programs,” Malerba said.

“Even if tribes have had success with their gaming, they’re rebuilding their communities, their nations. And they’re using [gambling] funds to supplement federal trust and treaty programs and responsibilities that have been chronically underfunded. It’s important that we put gaming in that context.

“The state of Virginia decides what programs it will provide for its citizens. We are sovereigns as well. We will determine what is right and appropriate for our communities.”