Alert

The Tribal General Welfare Exclusion Act of 2014 became law in September 2014, creating Internal Revenue Code (IRC) Section 139E. There are proposed regulations that would clarify its requirement for benefits that an Indian Tribal government program provides to qualify as a Tribal general welfare benefit eligible for exclusion from gross income of the Tribal member.

The proposed regulations were published in the Federal Register on September 17, 2024, and provide that the gross income (i.e. taxable income) of benefits received by a Tribal program participant doesn’t include the value of any Tribal general welfare benefit provided by an Indian Tribal government program.

The proposed regulations define terms in IRC Section 139E, provide examples, and set requirements for a program and a benefit to qualify as a Tribal general welfare benefit.

Learn more about opportunities to provide comments on the proposed regulations to the Department of Treasury and IRS before the final regulations are published.

Background for Exclusion of Benefits

If a benefit satisfies the requirements of Section 139E, the value of the benefit is excluded from the recipient’s gross taxable income. If Section 139E doesn’t apply, the benefit could still be excluded by qualifying under another IRC provision or the Administrative General Welfare Exclusion. Examples include benefits derived from a treaty right or provided under a program based on individual need.

IRC Section 139E added Indian General Welfare Benefits, under which gross taxable income to a Tribal member doesn’t include the value of any Indian general welfare benefit paid pursuant to an Indian Tribal governmental program and the program is administered under specified guidelines, doesn’t discriminate in favor of members of the governing body of the Tribe, and the benefits provided under such program are:

• Available to any Tribal member who meets such guidelines
• For the promotion of general welfare
• Not lavish or extravagant
• Not compensation of services

The Tribal Treasury Advisory Committee (TTAC), created under the original Tribal General Welfare Exclusion Act, requires all audits and examinations of Indian Tribal governments and members be suspended relating to the exclusion of a payment or benefit from an Indian Tribal government under the general welfare exclusion until final regulations are published and training and education is completed.

Section 139E Proposed Regulations Definitions and Explanation Summary

Indian Tribal Government

Indian Tribal government is defined by reference to IRC Section 7701(a)(40) and includes agencies and instrumentalities of the Indian Tribal government. The definition doesn’t include Alaska Native Corporations.

Benefit

Any money, property, services, or other item of value provided to or on behalf of an individual.

Tribal Program Participant

A Tribal member, member’s spouse or dependent, or other individual who has been determined by the Indian Tribal government to be eligible for general welfare benefits.

Indian Tribal Government Program

A program established by an Indian Tribal government may be established by Tribal custom, government practice, or formal action of the Indian Tribal government under Tribal law. If allowed by Tribal Law, the Tribal government may delegate authority to establish general welfare programs to a designated individual or entity of the Indian Tribal government.

For example, Tribe A operates under the direction of its Tribal Government (the Council). According to the laws of A, all expenditures must be approved by a majority of the Council. During an annual meeting of A’s Council, a majority of the Council vote to approve establishing a program.  A’s council has established a program.

In another example using the same facts as above, except A’s Council approves $X of annual funding to be provided for an educational program, and delegates authority to the Tribal Education office to establish a scholarship program. A’s council has established a program.

The proposed regulations don’t require a written document to prove the establishment of the program, though Tribal law might.

If written documentation isn’t required under Tribal law, then affidavits or Indian Tribal government declaration—oral or written—may be used to substantiate the establishment of a program.

Program Must Be Administered Under Specified Guidelines

In general, the proposed regulations require program be administered under guidelines which must include:

• A description of the program to provide Tribal general welfare benefits
• The benefits provided by the program, including how benefits are determined
• The eligibility requirements for the program
• The process for receiving benefits under the program

Written documentation is recommended but not required. Written guidelines help recipients to determine whether a benefit received is nontaxable, which is important if a Tribal member has to substantiate the benefit payment as nontaxable income if questioned by the IRS. Written specified guidelines also help determine if the benefits are considered lavish and extravagant.

Program Can’t Discriminate in Favor of Members of the Governing Body

The proposed regulations provide a facts and circumstances test to determine if a program discriminates in favor of members of the governing body by either its terms or administration of the program, such as disproportionately favoring members of the governing body because of their member status.

For example, a program established to provide benefits solely to the children of the members of the governing body of the Tribe would fail the nondiscrimination requirement, unless all adult members of the Tribe are members of the governing body.

No Limitation on Source of Funds

The proposed regulations permit that funding of the benefits under the Indian Tribal government program may be from any source of revenue or funds, including net gaming revenue.

Benefits provided and paid from net gaming revenues must still follow the permitted spending under Indian Gaming Regulatory Act (IGRA) and the Tribe’s gaming revenue allocation plan, if applicable.

For benefits to be excluded from gross taxable income, they can’t be designated as per capita payments by the Indian Tribal government, including those paid under a revenue allocation plan (RAP) from net gaming revenues. This doesn’t limit a Tribe’s ability to payment of general welfare benefits from gaming, revenues still need to be stated and allowed under a RAP.

Benefits Must Be for the Promotion of General Welfare

The IRS would defer to the Indian Tribal government’s determination at the time the program is established whether a benefit is for the promotion of general welfare of Tribal members.

No Need Requirement

Tribal general welfare benefits may be provided without regard to the financial or other individual need of the Tribal program participants. However, Tribes may choose to limit a program or its benefits to Tribal member participants based on need.

Benefits May Be Equal in Amounts

Payments of benefits may be uniform or on a pro rata basis to Tribal member recipients.

Benefits Can’t Be Lavish or Extravagant

The determination of whether benefits are lavish or extravagant would be made based on the facts and circumstances at the time the benefit is provided. Criteria would include a Tribe’s culture and cultural practices, history, geographic area, traditions, resources, and economic conditions or factors.

Under that facts and circumstances test, an Indian Tribal government, when establishing the types of benefits, may also determine the frequency of payment that best meet the needs of its Tribal members.

The proposed regulations also provide a presumption that a benefit isn’t lavish or extravagant if it’s described in, and provided in accordance with, the written specified guidelines of the Indian Tribal government program.

More clarification is needed to determine the meaning of lavish and extravagant.

Benefits Can’t Be Compensation for Services: Exception

Services wouldn’t include participation in cultural or ceremonial activities, including:

• Powwows
• Rite of passage ceremonies
• Funerals
• Wakes
• Burials
• Other bereavement events and honoring events

The IRS will defer to the Indian Tribal government’s determination.

Compensation limited to nominal cash honoraria generally wouldn’t cause the compensation to be taxable, nor reimbursements paid by individuals to participate in the cultural ceremony.  

Payment for participation in cultural or ceremonial activities could include payment to a member of a Tribe other than the Tribe that established the program, such as a cultural leader who performs another Tribe’s powwow, or a cash honorarium given to the cultural leader.

Other Items to Note

Key dates and important notes related to the proposed regulations are as follows.

IRS Audit Suspension

After the date of publication of the final regulations in the Federal Register, the Department of the Treasury and IRS, in consultation with TTAC, will establish and require the education and training of Treasury employees prior to starting any audits. This includes training and education with respect to Federal Indian law and the federal government’s unique legal treaty and trust relationship with Indian Tribal governments, training of internal revenue field agents, and provisions of training and technical assistance to Tribal financial officers.

Not addressed in the guidance is whether the IRS will only perform audits going forward or whether they could retroactively go back and perform audits of Tribal programs from 2014 forward, which would seem difficult given rules and requirements didn’t exist during that period.

Applicability Date

The regulations under IRC Section 139E will apply to taxable years of Tribal program participants that begin on or after the date of publication of the final regulations in the Federal Register.

Comments and Public Hearing

Before the proposed regulations are adopted as final regulations, the Treasury Department and IRS request comments where additional clarification is needed.

Electronic or written comments on the regulations from the public must be received by December 16, 2024. Once comments are submitted, they can’t be withdrawn. All comments are considered public and will be posted online once the Treasury has reviewed them.

The Treasury will host Tribal consultations on November 18—20, 2024 from 1:00 p.m.–4:00 p.m. ET.

The public hearing is scheduled for 10:00 a.m. ET, January 13, 2025.

We’re Here to Help

For more information on the proposed regulations and potential impacts on your Tribe or Tribal entity, contact your Moss Adams professional.

Additional Resources

• Tribal & Gaming Practice