On June 3, 2014, the IRS released Revenue Procedure 2014-35 providing final guidance for Indian tribal governments regarding the application of the general welfare exclusion to Indian tribal government programs that provide benefits to tribal members and other specified individuals. Largely responding to comments and concerns voiced by tribes and tribal groups regarding the IRS’s preliminary guidance on this topic issued in late 2012, the Revenue Procedure includes within its scope benefits provided to broader categories of non-tribal members than merely spouses and dependents, adding the categories of “former spouse, legally recognized domestic partner or former domestic partner, ancestor, and descendent” of a tribal member. The Revenue Procedure also significantly expands upon the preliminary guidance to provide that a much larger number of commonly provided tribal benefits will be nontaxable under the safe harbors provided for in the guidance. Finally, the Revenue Procedure also clarifies certain ambiguities that tribes and tribal groups identified in the preliminary guidance.
The new Revenue Procedure can be found here.
We have created a comparison document that shows the differences between the preliminary guidance and the final Revenue Procedure (additions shown by underscoring, deletions shown by strikeout, and moves shown in green font), which can be found here.
Under the general welfare exclusion, benefits provided by a government to an individual pursuant to a qualified general welfare program are not includible in the individual’s gross income for federal income tax purposes and are not subject to information reporting to the IRS. As the preliminary guidance anticipated, the new Revenue Procedure (1) describes general principles for the general welfare exclusion, (2) provides a number of safe harbors under which the IRS will conclusively presume that the "individual need" requirement for general welfare exclusion is met for benefits provided under a wide variety of housing, educational, elder and disabled, other assistance, and cultural and religious programs, provided that certain general requirements are satisfied, and (3) provides an additional safe harbor under which the IRS will not assert that certain items of cultural significance or nominal cash honoraria provided to certain individuals represent compensation for services, a classification that would prevent general welfare treatment in the absence of the safe harbor. The remainder of this article discusses the new Revenue Procedure in more detail.
A. Scope of Revenue Procedure
As noted above, the Revenue Procedure includes within its scope benefits provided to a substantially broader group of non-tribal members that a tribe may wish to cover under its benefit programs than merely spouses and dependents, adding the categories of “former spouse, legally recognized domestic partner or former domestic partner, ancestor, and descendent” of a tribal member.
B. Safe Harbors Under Which Individual Need Will Be Presumed
The central provisions of the Revenue Procedure are those which provide that as long as certain general requirements are satisfied, the IRS will conclusively presume that the "individual need" requirement for general welfare treatment is satisfied for benefits provided to tribal members and qualified nonmembers, now under a wider range of tribal government benefit programs than was outlined in the preliminary guidance.
1. General Requirements
In order for individual need to be presumed under any of the safe harbors, all of the following general requirements must be satisfied:
- The benefit must be provided pursuant to a specific government program of the tribe;
- The program must have written guidelines that specify how individuals may qualify for the benefit;
- The benefit must be available to any tribal member or qualified nonmember who satisfies the program guidelines, and the Revenue Procedure clarifies that this requirement will be satisfied if the program is available only for an identified group of tribal members or qualified nonmembers (for example, veterans) or if budgetary restraints prevent serving everyone who may otherwise satisfy the guidelines;
- The distribution of benefits must not discriminate in favor of members of the governing body of the tribe;
- The benefit must not be compensation for services; and
- The benefit must not be lavish or extravagant, and the Revenue Procedure clarifies that whether the benefit is “lavish or extravagant” will be determined under a “facts and circumstances” test.
2. Safe Harbors
As long as these general requirements are satisfied, the Revenue Procedure provides that the IRS will conclusively presume individual need, a key element of the general welfare doctrine, in the case of benefits provided pursuant to the following programs:
Housing programs relating to principal residences (including ancillary structures that are not used in any trade or business or for investment purposes) that (1) pay mortgage payments, down payments, or rent payments (including but not limited to security deposits), (2) enhance habitability of housing, such as by remedying water, sewage, sanitation service, safety (including but not limited to mold remediation), or heating or cooling issues, (3) provide basic housing repairs or rehabilitation (including but not limited to roof repair and replacement), and (4) pay utility bills and charges (including but not limited to water, electricity, gas, and basic communications services such as phone, internet, and cable). These safe harbors expand upon the preliminary guidance in the following ways, among others: (1) eliminate the requirement that the principal residence must be on or near a reservation, (2) provide that benefits for ancillary structures not used for trade or business or investment purposes fall within the housing program safe harbors, (3) replace the references to “assistance” programs to “payment” programs, and include a definition of “pay” to mean payments or reimbursements in whole or in part, (4) add down payment programs, (5) clarify that rent payment programs may include, but are not limited to, security deposits, (6) add programs remedying safety issues, including but not limited to mold remediation, (7) clarify that roof repair and replacement fall within the safe harbor for programs providing basic housing repairs or rehabilitation, and (8) add basic communications services such as phone, internet, and cable to the safe harbor for programs paying utility bills and charges.
Educational programs that provide (1) students transportation to and from school, tutors, and supplies (including but not limited to clothing, backpacks, laptop computers, musical instruments, and sports equipment) for use in their school activities and extracurricular activities, (2) tuition payments (including but not limited to allowances for room and board on or off campus for the student, spouse, domestic partner, and dependents) to attend preschool, school, college or university, educational seminars, vocational and technical school, and adult, continuing, or alternative education, (3) out-of-home childcare to help parents or other relatives responsible for childcare to be gainfully employed or to pursue education, and (4) job counseling, placement, and training programs, including allowances for certain travel and other expenses incurred in interviewing and training away from home, tutoring, and appropriate clothing for job interviews or training. These safe harbors expand upon the preliminary guidance in the following ways, among others: (1) clarify that programs providing supplies can include supplies for both school programs and extracurricular programs, (2) expand the type of education for which tuition and room and board can be paid to include preschool, elementary and secondary school, and online school, and eliminate the requirement that colleges and universities attended must be accredited, (3) add students’ domestic partners to the approved beneficiaries of room and board payment programs, (4) add a new safe harbor for out-of-home childcare programs, and (5) change the safe harbor for programs providing “necessary” clothing to programs providing “appropriate” clothing.
Programs for individuals age 55 and older or who are disabled that provide (1) meals, (2) home care or day care, (3) local transportation assistance, and (4) improvements to adapt housing to special needs. These safe harbors expand upon the preliminary guidance in the following ways, among others: (1) clarify that “disabled” individuals are those who are mentally or physically disabled as defined under applicable law, including but not limited to tribal government disability codes, (2) clarify that meals programs include programs providing meals at facilities similar to a community center, (3) eliminate the safe harbor for programs covering travel expenses for medical care, on the basis that reimbursements for such expenses are already excludible from income under Internal Revenue Code Section 139D, and (4) eliminate the safe harbor for programs providing transportation costs and admission fees to attend educational, social, or cultural program offered by the tribe or another tribe from the elder and disabled program safe harbors, because a similar safe harbor is added in the “other qualifying assistance programs” category for such programs benefiting all tribal members or qualified nonmembers.
Other qualifying assistance programs that provide (1) transportation costs such as rental cars, substantiated mileage, and bus, taxi, and other public transportation fares between the reservation, service area, or service unit area and facilities that provide essential services to the public, (2) travel and lodging expenses while the individual is receiving medical care away from home, (3) assistance to individuals in “exigent circumstances,” (4) temporary relocation expenses for individuals involuntarily displaced from their homes, (5) emergency assistance for transportation emergencies (for example, when stranded away from home) in the form of transportation costs, a hotel room, and meals, and (6) expenses for the cost of nonprescription drugs (including but not limited to traditional Indian tribal medicines). These safe harbors expand upon the preliminary guidance in the following ways, among others: (1) broaden the types of transportation costs covered in the first category enumerated above to include mileage reimbursements and the cost of rental cars, in addition to public transportation fares, and to include transportation to and from “service areas” as defined in 25 C.F.R. § 20.100 or “service unit areas” as defined for purposes of administration of Indian Health Service programs in 42 C.F.R § 136.21(l), in addition to transportation to and from the reservation, (2) broaden the types of transportation emergencies covered beyond merely the emergency of being “stranded off the Indian reservation,” and (3) clarify that the safe harbor for nonprescription drugs includes traditional Indian tribal medicines.
Cultural and religious programs that pay (1) expenses (including but not limited to admission fees, transportation, food, and lodging) to attend or participate in an Indian tribe’s cultural, social, religious, or community activities, (2) expenses (including but not limited to admission fees, transportation, food, and lodging) to visit sites of cultural or historical significance for the tribe (including but not limited to other Indian reservations), (3) the costs of receiving instruction about a tribe’s culture, history, and traditions, (4) expenses for funerals, burials, and hosting or attending wakes, funerals, burials, and other bereavement events, and subsequent honoring events, and (5) transportation costs and admission fees to attend educational, social, or cultural programs offered or supported by the tribe or another tribe. These safe harbors expand upon the preliminary guidance in the following ways, among others: (1) add admission fees to the types of expenses covered in the first and second category of programs, (2) add religious activities to the first category of programs, (3) add honoring events to the fourth category of programs, (4) add the fifth category of programs, so that safe harbors are now provided for educational, social, or cultural programs for all tribal members and qualified nonmembers rather than only for elders and disabled persons, and (5) add safe harbors for educational, social, or cultural programs supported by a tribe, not just those offered by a tribe.
If any of the safe harbors applies to a program, the Revenue Procedure provides that the IRS will not assert that tribal members or qualified nonmembers receiving benefits must include the value of the benefits in gross income or that the benefits are subject to information reporting by the tribe on a Form 1099.
C. Limited Safe Harbor for Honoraria Provided to Religious or Spiritual Officials
In addition to the above safe harbors, the Revenue Procedure provides that the IRS will conclusively presume that the individual need requirement for general welfare treatment is met and that the benefits are not compensation for services when items of cultural significance (that are not lavish or extravagant under the facts and circumstances) or nominal cash honoraria are provided to religious or spiritual officials or leaders (including but not limited to medicine men, medicine women, and shamans) to recognize their participation in cultural, religious, and social events (including but not limited to pow-wows, rite of passage ceremonies, funerals, wakes, burials, other bereavement events, and subsequent honoring events). This limited safe harbor remains largely unchanged from the preliminary guidance, and continues to leave undefined the amount of a cash honorarium that would be considered nominal.
D. General Principles Where Safe Harbors Do Not Apply
In situations in which the safe harbors do not apply, the Revenue Procedure sets forth the IRS’s general position on the applicability of the general welfare exclusion to tribal government benefit programs. As with the preliminary guidance, there is nothing surprising or momentous in the statement of the IRS’s position in this regard. The Revenue Procedure states that in order for tribal government benefits to qualify for the general welfare exclusion, the benefits must (1) be made pursuant to a governmental program of the tribe, (2) be for the promotion of the general welfare (that is, based on individual or family need or to help establish Indian-owned economic enterprises on or near a reservation and based on need), and (3) not represent compensation for services. In addition, the Revenue Procedure provides that benefits will qualify under the general welfare exclusion “only if they are not lavish or extravagant,” with the determination of what is lavish and extravagant depending on the “facts and circumstances.” The Revenue Procedure adds a paragraph providing that government payors and recipients must maintain accurate books and records “to substantiate that a payment qualifies for the general welfare exclusion,” keeping the books and records available for inspection in the event of an IRS audit for as long as the contents are material in the administration of any internal revenue law. This new paragraph references the general recordkeeping requirements in the tax regulations, which many tax practitioners had assumed to be generally applicable to tribes and tribal members in any case.
E. Effective Date
The Revenue Procedure is effective for benefits provided on or after December 6, 2012, the date of the issuance of the preliminary guidance. In addition, tribes, tribal members, and qualified nonmembers can apply the Revenue Procedure in any taxable year for which the statute of limitations on refunds and credits under Section 6511 of the Internal Revenue Code has not expired. At the present time, 2011, 2012, and 2013 are open years for filing refund claims, so refund claims can be filed for benefits provided in those years that were reported as taxable, if the guidance supports treating those benefits as nontaxable.
F. Webinar for Tribal Leaders and Representatives
The National Congress of American Indians and the Native American Finance Officers Association (“NAFOA”) will host a joint webinar on Thursday, June 5, 2014, from 12:30 to 1:30pm Eastern Time for tribal leaders, professionals, and representatives to review the Revenue Procedure and its implications for tribal governments. Our partner Mary Streitz, the head of Dorsey’s Indian tax practice, works closely with NAFOA on tax policy matters, including matters involving the general welfare doctrine. She will be one of the presenters in the webinar. For tribal leaders and their representatives who wish to participate in the webinar, Mary would be happy to provide you with registration information.
G. Implications for Tribal Programs and Next Steps
Many tribes may wish to review their tribal program documents to determine whether any of the programs can be brought within the safe harbors, which will provide more certainty that the provision of benefits will not have adverse tax consequences. Tribes also may wish to explore setting up new tribal programs that fall within the safe harbors. Such programs might be viewed as appropriate mechanisms to achieve desirable tribal policy goals, without putting tribal members at risk of adverse tax consequences. Finally, for tribes that have issued any Forms 1099 for years that are still open under the statute of limitations (i.e., 2011, 2012, and 2013) reporting as taxable benefits falling within the safe harbors, Mary Streitz and her colleagues in our tax group can assist tribal members and qualified nonmembers in filing refund claims with the IRS. If you need assistance or have questions about any of these matters, Mary can be reached in our Minneapolis office at (612) 340-7813.