Housing and education assistance, elder care and cultural programs for American Indians funded by tribal government casinos will remain tax-exempt under a draft general welfare doctrine adopted last month by the Internal Revenue Service.
The new guidelines, reached after months of consultations by a tribal coalition, the IRS and Treasury Department, eases tribal anger over increasing IRS audits demanding that often-impoverished Indians pay taxes on benefits from tribal welfare programs, many funded with gambling revenue.
“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?”
Indian leaders have also been assured that Treasury will respect long-standing federal policy that per-capita payments from timber, energy and other tribal trust resources remain tax-exempt.
Recent IRS correspondence to several tribes indicated per-capita payments from trust accounts and checks from the recent settlement of the Cobell lawsuit over Department of Interior mismanagement also would be considered taxable income.
The landmark general welfare doctrine and largely conciliatory consultations between federal and tribal officials are expected to help resolve the complex issue of taxing Indian tribes and Alaska Native villages, many experiencing economic progress through government gambling.
“Self-governance tribes dedicate their own resources to supplement federal funding for programs intended to benefit tribes and their members,” said Chief Lynn Malerba of the Mohegan Tribe of Connecticut, who represents the United South and Eastern Tribes in a coalition of Indian groups meeting with Treasury and the IRS.
“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.”
Treasury’s General Welfare Exclusion (GWE) doctrine generally calls for the IRS to exempt from taxation social service programs provided by state, municipal, county and tribal governments.
But 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 70 of 246 tribes operating casinos in 28 states were issuing per-capita payments to their members.
The Indian Gaming Regulatory Act, which provides a regulatory framework for the nation’s $27.2 billion tribal gambling industry, requires 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 have 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 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 in early December, when more than 500 tribal leaders attended the fourth White House Tribal Nations Summit in Washington.
“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 guidance is not yet final, and comments can be submitted in writing through June 3.
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.”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.”