IRS Issues Notice Addressing Impact of the Tribal General Welfare Exclusion Act of 2014 on Existing IRS Guidance

by Dorsey & Whitney LLP
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On April 16, 2015, the IRS released Notice 2015-34 clarifying the effect of the Tribal General Welfare Exclusion Act of 2014, Pub. L. No. 113-168, 128 Stat. 1883 (2014) (the “Act”), which added new Section 139E to the Internal Revenue Code on September 26, 2014, on the final guidance in Revenue Procedure 2014-35 (released June 3, 2014) regarding the application of the general welfare exclusion to Indian tribal government programs that provide benefits to tribal members and other specified individuals. Significantly, the Notice provides that Indian tribal governments may continue to rely on Revenue Procedure 2014-35 and its safe harbors under which the IRS will conclusively presume that the “individual need” requirement for general welfare exclusion is met for benefits provided under certain Indian tribal government programs and will not assert that certain benefits provided represent compensation for services. The Notice also requests comments about specific issues arising under Section 139E that the IRS may address in future published guidance and invites comments generally on other issues related to Section 139E or the Act.

The new Notice can be found here. For a complete discussion of Revenue Procedure 2014-35 and its safe harbors, please visit our earlier e-Update on this topic.

A. Tribal General Welfare Exclusion Act of 2014

In September 2014, Congress enacted the Tribal General Welfare Exclusion Act of 2014, which codifies the general welfare doctrine for Indian tribal government programs and is effective to allow refund claims for taxable years for which the statute of limitations was open as of September 26, 2014 (generally, 2011, 2012, and 2013). The Act amended the Internal Revenue Code to add new Section 139E, which provides that gross income does not include the value of any “Indian general welfare benefit.” For purposes of the exclusion, “Indian general welfare benefit” is defined as “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) pursuant to an Indian tribal government program,” but only if the following statutory criteria are satisfied:

  1. the program must be administered under specified guidelines and must not discriminate in favor of members of the governing body of the tribe, and
  2. the benefits provided under such program—
  • must be available to any tribal member who meets such guidelines,
  • must be for the promotion of general welfare,
  • must not be lavish or extravagant, and
  • must not be compensation for services.

The Act does not define “for the promotion of general welfare,” although there is one helpful interpretation rule in the Act and other helpful statements in the legislative history suggesting that Congress intended this requirement to be interpreted broadly. The Act itself provides that “[a]mbiguities in 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.” Representative Nunes, the chief sponsor of the House version of the legislation, made the following statement for the legislative record:

I expect . . . that the IRS will not interpret this statute as requiring individualized determinations of financial need where a tribal government has established a program consistent with the statute.

Likewise, Senator Wyden, then the Chairman of the Senate Finance Committee, and Senator Moran, a sponsor of the Senate version of the legislation, engaged in the following colloquy regarding the intent of the legislation that was entered into the legislative record:

Mr. Moran: “I ask the chairman, . . . It is intended that . . .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 . . .?”

Mr. Wyden: “The Senator is correct.”

The Act also does not define “lavish or extravagant,” although Congress established a process for defining this term with tribal input. The Act provides that “[t]he Secretary of the Treasury shall, in consultation with the Tribal Advisory Committee [established pursuant to the Act], establish guidelines for what constitutes lavish or extravagant benefits with respect to Indian tribal government programs.” The Tribal Advisory Committee will be a seven-member committee established to “advise the Secretary [of the Treasury] on matters relating to the taxation of Indians.” Three members will be appointed by the Secretary, two members will be appointed by the Chairman and Ranking Member, respectively, of the House Ways and Means Committee, and two members will be appointed by the Chairman and Ranking Member, respectively, of the Senate Finance Committee. The committee members will serve staggered, four-year terms. Until the committee is appointed and the education and training for IRS field agents is developed with the committee’s input and completed, the Act provides for a temporary suspension of tax audits related to the general welfare doctrine. Since the enactment of the Act, the Secretary of the Treasury has called for nominations from the general public for its three appointments, with a deadline for such nominations of April 28, 2015.

The Act provides two special rules governing the application of the general welfare exclusion in new Code Section 139E. First, the Act provides that a tribal program will not fail to be treated as an Indian tribal government program under the statute “solely by reason of the program being established by tribal custom or government practice.” Second, items of cultural significance, reimbursement of costs, or cash honoraria for participation in cultural or ceremonial activities for the transmission of tribal culture will not be treated as compensation for services under the Act.

B. Effect of the Act on Revenue Procedure 2014-35

Notice 2015-34 clarifies the IRS’s position on the effect of the Act on Revenue Procedure 2014-35 and its safe harbors under which the IRS will conclusively presume that the “individual need” requirement for general welfare exclusion is met for benefits provided under certain Indian tribal government programs and will not assert that certain benefits provided represent compensation for services. The Notice provides:

Section 139E 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 is broader than § 139E in some respects, and which provides certainty that the need requirement is satisfied for the benefits described in [the safe harbors] and that the benefits described in [the safe harbor on items of cultural significance or cash honoraria provided to certain individuals] are not compensation for services.

The IRS’s position expressed in the Notice is not inconsistent with the statements in the legislative history of the Act, which indicate that the intent of the legislation was that the IRS would not require an individualized determination of financial need where the tribal government program meets all other requirements of new Code Section 139E. The Notice merely announces that the IRS will continue to conclusively presume need in the case of benefits provided under the tribal government programs described in the Revenue Procedure 2014-35 safe harbors.

The Notice also assures Indian tribal governments that they may continue to rely on Revenue Procedure 2014-35, even where it is broader than new Code Section 139E. One such area where the Revenue Procedure is broader is the definition of who is considered a qualified recipient of tribal government program benefits. As described above, the term “Indian general welfare benefit” is defined under the statute as “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).” In contrast, Revenue Procedure 2014-35 applies the general welfare exclusion to program benefits provided to tribal members and “qualified nonmembers,” which it defines as “a spouse, former spouse, legally recognized domestic partner or former domestic partner, ancestor, descendant, or dependent of a member of an Indian tribe.”

C. Request for Comments

In addition to clarifying the effect of the Act on Revenue Procedure 2014-35, the Notice requests comments on certain unresolved issues under new Code Section 139E that may be addressed in future published guidance. The issues are:

  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 the statute? 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 be defined?

The Notice also invites comments on other issues arising under new Code Section 139E or other provisions of the Act. All comments should be submitted in writing to the IRS by October 14, 2015, under the procedures provided in the Notice.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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