The Internal Revenue Service has issued a new revenue procedure that provides a safe harbor for Native American tribes to establish trusts for tribal members who are minors or legally incompetent for the distribution of gambling revenues under the Indian Gaming Regulatory Act.
Revenue Procedure 2011-56 clarifies, modifies, and supersedes Rev. Proc. 2003-14 in response to comments received about the older rules.
Native American tribes and their members had requested guidance from the IRS on determining the taxable years in which beneficiaries must include in gross income amounts transferred to, or earned by, an IGRA trust, and under what circumstances a tribe would be considered the grantor and owner of an IGRA trust.
The new revenue procedure, which the IRS released Monday, provides a safe harbor under which beneficiaries of an IGRA trust are not required to include amounts in gross income under the economic benefit doctrine when transferred to, or earned by, the IGRA trust, but must include trust distributions in income when actually or constructively received.
If the provisions of the revenue procedures are followed, an Indian tribe is treated as the grantor and owner of the trust. The trust beneficiary is not taxed on distributions to the trust or income earned by the trust until they are actually or constructively received.
Under IGRA, an Indian tribe may make per capita payments to tribal members from gaming revenues if the interests of minors and other legally incompetent persons who are entitled to receive the per capita payments are protected and preserved. Native American tribes frequently use trusts to maintain and preserve the minor and incompetent members’ interests through IGRA trusts.
In 2003, the IRS released Revenue Procedure 2003-14, which provided safe harbor requirements for IGRA trusts. IGRA trusts meeting these requirements are treated as tribally owned grantor trusts, and the per capita payments or trust earnings are not included in the beneficiaries’ incomes until actually or constructively received.
In addition to providing a safe harbor, Revenue Procedure 2003-14 sought public comments on the safe harbor requirements. After receiving and considering numerous comments, the IRS published Revenue Procedure 2011-56.
The new revenue procedure clarifies that an IGRA trust must be an ordinary trust (pursuant to 26 C.F.R. Section 301.7701-4(a)) for federal tax law purposes; clarifies that trustees may make staggered distributions to beneficiaries at different ages or upon the occurrence of specific events rather than distributing all the trust assets when the beneficiary attains a specified age; eliminates the references to federal and local trust law, as the validity of trusts is governed by state or tribal law; broadens the class of survivors who may inherit a beneficiary’s trust interest; and modifies the trustee discretion provisions for making health and welfare distributions.