Q&A with the IRS: General Welfare Benefits for Tribes

Tribal Finance Quarterly: Winter 2015

Tribes across the country are wrestling with the Department of Treasury’s final guidance for the General Welfare Exclusion to Indian Tribe Government Programs That Provide Benefits to Tribal Members in the Internal Revenue Service’s Revenue Procedure 2014-35. Moss Adams met with John Saltmarsh from the IRS and several tribal financial leaders to discuss hot button issues in the final guidance. In this issue of Tribal Finance Quarterly, we summarize three important issues with responses from Saltmarsh that may help you and your tribe in interpreting the provisions of Revenue Procedure 2014-35.

Moss Adams: Mr. Saltmarsh, thanks for chatting with us today. We know that benefits considered “lavish and extravagant” (L&E) will be taxable to the recipient, but how has the IRS defined L&E? For example, what if a tribe pays for the total costs of an elders group to take various trips throughout the year, some of which might be day or overnight trips. If the trips were pursuant to a written elders program and were cultural in nature and not luxurious as defined by the tribe, should the cost of these trips be considered a nontaxable benefit, or a taxable item for which the tribe would send the elder a Form 1099? 

Saltmarsh: Historically, this has been an area of disagreement between the IRS and tribal governments. To a large extent, however, I think the IRS and tribal governments reached common ground culminating in the issuance of Revenue Procedure 2014-35, because tribal governments, tribal organizations, and their representatives provided a lot of feedback throughout the process. Revenue Procedure 2014-35 loosened up considerably on elders programs, but the IRS is reluctant to provide guidance in this particular situation. The Tribal General Welfare Exclusion Act was enacted since releasing the revenue procedure, and we’re working through the steps necessary to eventually issue guidance. There is no official interpretation of L&E. But some things to consider: 

  • Were tribal events going on concurrently with the trips? 
  • Did the elders visit native or other significant locations? What is the cultural relevance, if any?  
  • Did they travel first class, stay at five-star hotels, or have other possible L&E issues? 

It should also be noted that the General Welfare Act suspended examination of general welfare issues. So, any audit items even vaguely related to general welfare have been suspended or closed, and I don’t imagine these general welfare issues would be picked up again until the act has been fully implemented and guidance released.

Moss Adams: We’re aware of tribes that pay for life insurance policies for their tribal members as a way to replace the lost income or discontinued per capita payments when a family member passes on. For tribes with large per capita payments, a large life insurance policy would be needed to replace the lost income, which raises the concern of whether the premium costs paid by the tribe would qualify as a nontaxable benefit or a taxable one. Could the payment of these premiums meet the exception provisions of Revenue Procedure 2014-35, making them tax-exempt? And would the L&E provisions come into play?

Saltmarsh: This was a concern for a number of tribes. Why the tribe determined the life insurance policy amounts the way it did should be addressed in a program or policy. If the benefit is replacing income, and assuming there is a benefit program in place that is well-defined, the IRS likely wouldn’t question the benefit or the premiums.

Moss Adams: Under the provisions of Revenue Procedure 2014-35, many tribes have reevaluated benefit plans provided to elderly tribal members that may be necessary to support the needs typically experienced by that segment of the population. This might include paying for home renovations for disabled members, home heating costs, or transportation costs, for example. What eligible cost documentation is necessary for programs like these to be considered nontaxable? And what constitutes eligible cost documentation?

Saltmarsh: The short answer is the tribe doesn’t need to obtain receipts from the tribal member. There is no extra burden on tribes to maintain extra records. The tribe isn’t required to obtain any specific receipt from the elder in this instance. Assuming the tribe has a benefits program in place, the requirements to retain records would be no more than the normal books and records required for any business or tax purpose.

We're Here to Help

It’s critical that a tribe’s policies thoroughly and clearly explain the underlying needs intended to be addressed in benefit programs, as well as the eligibility criteria and other details, according to Saltmarsh. This careful attention to detail could help ensure that benefits to members remain nontaxable. Contact your Moss Adams professional at tribes@mossadams.com or brad.odegard@mossadams.com to help your tribe interpret the provisions of the IRS’s Revenue Procedure 2014-35 or other tribal tax issues.