The Internal Revenue Service provided guidance to Indian tribes on the tax treatment of the legal settlements over the federal government’s mismanagement of their trust funds.
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The federal government entered into agreements earlier this year with certain federally recognized Indian tribes to settle long-running lawsuits in which the tribes accused the Interior Department and the Treasury Department of mismanaging the monetary assets and natural resources that the United States holds in trust for the benefit of the tribes. Attorney General Eric Holder and Secretary of the Interior Ken Salazar announced a $1 billion settlement in April of the lawsuits over tribal trust accounting and mismanagement filed by more than 40 tribes. The IRS noted that the United States foresees the possibility of future substantially similar settlements of substantially similar claims brought by other federally recognized Indian tribes.
Some portion of the settlement proceeds may be distributed per capita to members of the tribe. In Notice 2012-60, the IRS advised taxpayers Thursday that the per capita payments made from the proceeds of these settlements are excluded from the gross income of tribal members who receive the payments.
Most of the Indian tribes that have reached Tribal Trust case settlements with the United States have directed that the settlement proceeds be transferred to accounts at private banks or other third-party institutions, where the proceeds will be invested until the tribes use the funds for various purposes, which may include making per capita payments to their members, the IRS noted. Other Indian tribes have directed that all or part of the settlement proceeds be paid into a trust account established or maintained by the Secretary of the Interior, through the Office of the Special Trustee for American Indians, for the benefit of the tribes, until the tribes provide instructions for the disposition of the funds, which may include making per capita payments to their members.
While agreeing to the settlements, the United States admits no liability in the Tribal Trust case settlements and the government has no fiduciary responsibilities over the Tribal Trust case settlement proceeds that the tribes receive and that are deposited into accounts at private banks or other third-party institutions.
Several tribes and other affiliated organizations requested direct consultation on the income tax treatment of the per capita payments from the Tribal Trust case settlements. In response to these requests and in the spirit of Executive Order 13175, direct consultation and communication occurred. The consultations and conversations were extremely useful in preparing Notice 2012-60, the IRS acknowledged.
The settlement proceeds from the Tribal Trust cases must be viewed as being in lieu of amounts that would have been held in a trust fund account for the tribe that is maintained by the Secretary of the Interior, the IRS noted. Thus, for federal income tax purposes, per capita payments that an Indian tribe makes from the tribe’s Tribal Trust case settlement proceeds are treated the same as per capita payments from funds held in trust by the Secretary of the Interior.
Per capita payments made from the proceeds of an agreement between the United States and an Indian tribe settling the tribe’s claims that the federal government mismanaged monetary assets and natural resources held in trust for the benefit of the tribe by the Secretary of the Interior are excluded from the gross income of the members of the tribe receiving the per capita payments. Per capita payments that exceed the amount of the Tribal Trust case settlement proceeds and that are made from an Indian tribe’s private bank account in which the tribe has deposited the settlement proceeds are included in the gross income of the members of the tribe receiving the per capita payments.
For example, if an Indian tribe receives proceeds under a settlement agreement, invests the proceeds in a private bank account that earns interest, and subsequently distributes the entire amount of the bank account as per capita payments, then a member of the tribe excludes from gross income that portion of the member’s per capita payment attributable to the settlement proceeds and must include the remaining portion of the per capita payment in gross income.