The Internal Revenue Service has issued a revenue procedure providing safe harbors for applying the general welfare exclusion to Indian tribal government programs.
Under the general welfare exclusion, payments or benefits under certain governmental programs for the promotion of the general welfare are not includible in a recipient’s gross income.
The safe harbors in Revenue Procedure 2014-35 apply to benefits provided under certain housing, educational, elder and disabled, cultural and religious, and other qualifying assistance programs of Indian tribal governments.
Under the revenue procedure, the value of benefits under these programs received by tribal members and certain non-members will not be included in income, and certain benefits will not be treated as compensation for services.
The IRS has long been in talks with Native American tribal governments about issues related to the general welfare exclusion (see IRS Consults with Tribal Leaders on Welfare Exclusion).
Section 61(a) of the Tax Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived. The IRS has consistently held, however, under a limited general welfare exclusion that payments under government social benefit programs for the promotion of the general welfare are not to be included in gross income. To qualify under the exclusion, the payments must (1) be made to an individual under a governmental program, (2) be for the promotion of the general welfare (that is, based on need), and (3) not represent compensation for services. The IRS has fielded inquiries from Indian tribal governments for years about the application of the exclusion to tribal government programs that provide benefits to members of the tribe.
In 2012, a Senate committee held a hearing on the tax challenges faced by Native Americans who have been subjected to IRS audits, many of which relate to ambiguities surrounding the general welfare exclusion (see Indian Tribes Face New Tax Burdens). The new revenue procedure aims to provide some answers.
In a notice in 2011, the IRS comments concerning the application of the general welfare exclusion to Indian tribal government programs that provide benefits to tribal members. The IRS said it received over 85 comments from Indian tribal governments and other individuals and groups in response to Notice 2011-94 describing various Indian tribal government programs for tribal members and how the general welfare exclusion should apply to those programs.
In response to those comments, the IRS issued a notice in 2012 that proposed a revenue procedure that would provide safe harbors under which the IRS would conclusively presume that (i) the individual need requirement of the general welfare exclusion would be met for specific benefits provided under described Indian tribal governmental programs, and (ii) certain benefits an Indian tribal government provides under other described programs are not compensation for services. In response to Notice 2012-75, the IRS received over 40 comments from Indian tribal governments and other individuals groups. The more than 120 comments from the two notices and consultations helped in preparing the new revenue procedure.
The IRS noted that benefits qualify under the general welfare exclusion only if they are not lavish or extravagant. Whether a benefit is lavish or extravagant depends on the facts and circumstances. For example, replacement housing payments to help displaced individuals and families acquire dwellings of modest standards qualify for exclusion from gross income under the general welfare exclusion. Assistance to help disaster victims meet necessary expenses or serious needs in the categories of medical or dental, housing, personal property, transportation, and funeral expenses qualifies for exclusion from gross income under the general welfare exclusion, but assistance for nonessential, luxurious or decorative items does not qualify.
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