[Senate Hearing 111-399]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-399
 
EXAMINING THE FEDERAL TAX TREATMENT OF HEALTH CARE BENEFITS PROVIDED BY 
                  TRIBAL GOVERNMENTS TO THEIR CITIZENS 

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON INDIAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 18, 2009

                               __________

         Printed for the use of the Committee on Indian Affairs

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

56-083 PDF                       WASHINGTON : 2010 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 



                      COMMITTEE ON INDIAN AFFAIRS

                BYRON L. DORGAN, North Dakota, Chairman
                 JOHN BARRASSO, Wyoming, Vice Chairman
DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
KENT CONRAD, North Dakota            LISA MURKOWSKI, Alaska
DANIEL K. AKAKA, Hawaii              TOM COBURN, M.D., Oklahoma
TIM JOHNSON, South Dakota            MIKE CRAPO, Idaho
MARIA CANTWELL, Washington           MIKE JOHANNS, Nebraska
JON TESTER, Montana
TOM UDALL, New Mexico
AL FRANKEN, Minnesota
      Allison C. Binney, Majority Staff Director and Chief Counsel
     David A. Mullon Jr., Minority Staff Director and Chief Counsel


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 18, 2009...............................     1
Statement of Senator Udall.......................................     1

                               Witnesses

Ingram, Sarah H., Commissioner, Tax Exempt and Government 
  Entities, Internal Revenue Service.............................     4
    Prepared statement...........................................     6
Joseph, Jr., Hon. Andrew, Board Member, National Indian Health 
  Board (NIHB)...................................................    21
    Prepared statement...........................................    22
Keel, Hon. Jefferson, Vice President, National Congress of 
  American Indians (NCAI)........................................    16
    Prepared statement...........................................    17
Macarro, Hon. Mark, Chairman, Pechanga Band of Luiseno Indians...    11
    Prepared statement...........................................    14
Taylor, Scott A., Professor, University of St. Thomas School of 
  Law............................................................    25
    Prepared statement...........................................    26


EXAMINING THE FEDERAL TAX TREATMENT OF HEALTH CARE BENEFITS PROVIDED BY 
                  TRIBAL GOVERNMENTS TO THEIR CITIZENS

                              ----------                              


                       FRIDAY, SEPTEMBER 18, 2009


                                       U.S. Senate,
                               Committee on Indian Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:00 a.m. in 
room 628, Dirksen Senate Office Building, Hon. Tom Udall, U.S. 
Senator from New Mexico, presiding.

             OPENING STATEMENT OF HON. TOM UDALL, 
                  U.S. SENATOR FROM NEW MEXICO

    Senator Udall. Good morning, everyone. It is good to have 
you all here. I would at this point ask the Committee to come 
to order.
    First, I would like to pass on Senator Dorgan's apologies 
for the inconvenience in scheduling this hearing and want to 
thank our witnesses for their great flexibility in being here 
today.
    The Committee meets today to examine the Federal tax 
treatment of health care programs the tribal governments 
provide to their citizens.
    It is well documented that we as the Federal Government are 
failing in meeting our obligation to provide health care to 
Native Americans. Native Americans face health disparities at 
almost every level. American Indians and Alaska Natives face 
lower birth rates, shorter life spans, and significantly higher 
rates of disease such as diabetes, suicide, and substance 
abuse. The Indian Health Service attempts to address these 
disparities by delivering health services to tribal 
communities. However, many times the services offered by the 
IHS are outdated and chronically underfunded.
    We have a chart that is being raised that depicts some of 
that underfunding in the form of contract health services. As 
you can see, contract health is only funded at 50 percent of 
need. As a result, contract health funding is depleted half way 
through the fiscal year. It is common in Indian country to hear 
the phrase, don't get sick after June, in reference to the fact 
that funding has run out. When contract health funds run out, 
the Indian Health Service is forced to ration services and 
limit treatment to those patients who face immediate loss of 
life or limb.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Because of the Federal Government's failure to meet these 
obligations, a number of tribal governments are taking matters 
into their own hands. We will hear about some of those today. 
Some tribes are using their own revenue to reimburse 
individuals for services that do not meet the life and limb 
requirement. Other tribes are using revenue to supplement 
services offered by the IHS or to make improvement to the local 
IHS facility. Still other tribes provide private health 
coverage for their members to help offset the failures of the 
Indian Health system. Tribes are taking these steps because 
their communities are suffering an unnecessary loss of life due 
to the lack of access to adequate health care.
    We have another chart here that we are putting up. I have a 
story to share about a young man from Isleta Pueblo in New 
Mexico named Russell Antonio Lente. Russell was a talented 
young artist and a student at the Institute of American Indian 
Arts. He loved to paint and his artwork was featured on 
billboards, murals, and even skateboards. Despite the 
advancement in modern medicine, Russell lost his life to cancer 
at 23 years of age. Russell was diagnosed with cancer but it 
went untreated because contract health services funds were not 
available. He was told that his cancer didn't meet the priority 
one life or limb requirement. Russell's cancer had reached 
stage IV and was untreatable when he was finally eligible for 
contract health services and referred to an oncologist. Russell 
died a short time later.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Russell wasn't given a chance because of this broken system 
that doesn't consider cancer treatment a priority. It is 
because of stories like Russell's that tribes are trying to 
become a part of the solution by attempting to improve their 
health care programs.
    As the Committee will hear today, these tribal efforts are 
being met with some resistance by the Federal Government. Some 
tribal health programs are now under review to determine 
whether they should be treated as taxable income.
    It is my understanding that the Internal Revenue Service is 
attempting to follow the black letter of the tax code. However, 
as a Member of this Committee, I also understand the great 
obligation of this Government to Indian people. The United 
States has treaty and statutory obligations to not only 
maintain but to improve the health status of Native Americans. 
There must be room to consider these competing Government 
obligations when making these decisions about taxability.
    In my mind, we should be relieved that some tribal 
governments are able to fill the void where the Federal 
Government has failed. At the very least, we should not 
penalize tribal governments for meeting our obligation and for 
exercising the right to self-governance that Congress supports.
    I want to again thank our witnesses for their flexibility 
in being here. I look forward to hearing your testimony. I know 
that Mark Macarro, the Pechanga Chairman, has a plane to catch 
and so he is going to have to head to the airport after he 
gives his statement.
    We are going to start from the left. Mark, you will go 
second. We understand you have a commitment to make on that.
    Sarah Hall Ingram, please?

        STATEMENT OF SARAH H. INGRAM, COMMISSIONER, TAX 
           EXEMPT AND GOVERNMENT ENTITIES, INTERNAL 
                        REVENUE SERVICE

    Ms. Ingram. Thank you. Good morning, Mr. Chairman and my 
fellow witnesses. I appreciate the opportunity to be here this 
morning to explain the tax treatment of health care that tribal 
governments choose to provide to their members.
    Before delving into the tax rules, I want to acknowledge 
the unique government-to-government relationship between the 
Federal Government and Indian tribal governments as set forth 
in our United States Constitution, treaties, statutes, 
executive orders, and court decisions. The responsibility to 
provide health services to American Indians and Alaska Natives 
derives from this relationship as well as from specific 
statutes. However, in addition to the services provided through 
that avenue, many tribal governments in the exercise of their 
sovereignty have developed other innovative approaches to 
providing health care to their members.
    As I focus on the Federal tax treatment of health care 
benefits provided by tribal governments, I would like to note 
that these tax rules have existed for decades. They also apply 
to benefits provided by non-tribal governments including 
Federal, State, and local authorities. The provisions in Title 
26 of the U.S. Code, which governs Federal taxation, apply 
equally to all types of citizens and employers. The 
administrative exclusion, the general welfare exclusion, 
applies equally to all governments, tribal and non-tribal.
    Now I would like to address the basic tax rules and how 
they apply under two key scenarios, where the tribal government 
is providing benefits to its own employees, and I will cover 
that briefly, and then where the tribal government is providing 
benefits to a broader group of its tribal members. For this 
discussion, we need to focus on two types of benefits, the up-
front provision of health insurance coverage and the back-end 
provision of medical services.
    To begin, Section 61 of Title 26, a foundational rule in 
Federal tax law, provides that gross income includes all income 
from whatever source derived unless a specific exception 
applies to expressly exclude it from taxation. Although Title 
26 contains many health care related sections, today I would 
like to focus on three provisions in Title 26 and on the 
application of what is known as the general welfare exception.
    So let me touch briefly on where the tribal government is 
the employer. If the tribal government is the employer of the 
individual, it is possible to exclude from the employee's 
income both the value of the up-front health coverage under 
section 106(a) and the back-end benefits under 105(b). This tax 
treatment can work in a number of formats including self 
insurance, the purchase of a group policy, or the payment of 
premiums. These statutory rules apply to all types of 
employers, governmental and private.
    I do want to note that some people have raised to us the 
situation in which the tribe pays for medical benefits to 
employees on an ad hoc basis. In the absence of a consistently 
applied tribal program that addresses who and what is covered, 
an ad hoc arrangement would not tend to constitute a health 
plan under section 105 so the amounts paid for medical services 
under that kind of an arrangement would not be excludable.
    Now I would like to turn to the situations in which the 
tribal government would like to provide health benefits to 
tribal members who are not employees of the tribal government. 
The first thing to note is that there is no statutory parallel 
to section 106 that would give tax favored treatment to the 
tribal member when the tribal government provides up-front 
health benefits to all of its tribal members without regard to 
the employee issue. Section 106(a) excludes the value of up-
front health coverage from income only if it is employer-
provided. With no parallel exclusion for non-employees, these 
tribal members would have no means under the statue to exclude 
the value of tribally-provided health care coverage, that up-
front coverage.
    In contrast, there may be ways under Title 26 to exclude 
the payment of the back-end medical benefits. Section 104(a)(3) 
provides that as long as the arrangement is or has the effect 
of accident and health insurance, then it may be possible to 
exclude the value of the medical services from the tribal 
member's income. In some sense, provision 104(a)(3) parallels 
the section 105(b) treatment on the employee side.
    Again, Title 26 itself provides that for non-employee 
tribal members, the value of the up-front health coverage would 
not be excluded but the value of the back-end medical services 
could be excluded as long as the arrangement meets the 
requirements of 104(a)(3).
    The final component I want to touch on is the general 
welfare exclusion. This is a non-statutory administrative 
exclusion that has developed over more than 50 years in IRS 
revenue rulings and notices. It has been recognized by a number 
of courts.
    Although section 61 broadly defines the items that are 
included in gross income, the Service has consistently 
concluded that payments made to individuals by government 
units, tribal or non-tribal, under legislatively provided 
social benefit programs for the promotion of the general 
welfare are not includable in a recipient's gross income. The 
decades of rulings have generally followed three basic 
principles in determining whether a program may qualify for the 
general welfare exclusion. The payments need to be made from a 
governmental fund; they need to be for the promotion of general 
welfare, generally based on a demonstrated needs criteria; and 
they need to not represent compensation for services.
    Whether this exclusion would apply to a tribal government 
providing health coverage or benefits to tribal members would 
depend on how the program is structured and administered. If 
the tribe provides such assistance only in cases of 
demonstrated need pursuant to consistently applied standards of 
financial need, the general welfare exclusion might well apply. 
The financial needs standard and the nature of the expenses 
being covered would tend to be among the factors that we would 
look at.
    We have seen many programs both in Indian country and with 
other governments that work within the principles of the 
general welfare exclusion and successfully provide needed 
benefits without generating income to recipients. However, the 
Service generally has not applied the general welfare exclusion 
to programs that benefit persons with significant income or 
assets. Any such extension would represent a departure from 
well established administrative practice. Over the past 
decades, the IRS has declined to apply the general welfare 
exclusion to programs that fail to tie benefits to some needs-
based criteria. There are a number of examples, for example in 
the State government area.
    Finally, Mr. Chairman, I would like to thank you again for 
this opportunity to come this morning. I am aware of this 
Administration's commitment to strengthen and build on the 
government-to-government relationship between the United States 
and tribal nations. I appreciate your interest in this matter.
    This concludes my testimony. I would be glad to answer any 
questions.
    [The prepared statement of Ms. Ingram follows:]

  Prepared Statement of Sarah H. Ingram, Commissioner, Tax Exempt and 
             Government Entities, Internal Revenue Service
    Good afternoon, Mr. Chairman, and members of the Committee.
    I appreciate the opportunity to be here this afternoon to explain 
the tax treatment of health care that tribal governments choose to 
provide to their members.
    At the outset of my testimony before delving into the tax rules, I 
want to acknowledge that the United States has a unique legal 
relationship with Indian tribal governments as set forth in the 
Constitution of the United States, treaties, statutes, executive 
orders, and court decisions. Our responsibility to provide health 
services to American Indians and Alaska Natives derives from the 
government-to-government relationship between the Federal Government 
and tribal governments, as well as specific statutes, such as The 
Snyder Act and the Indian Health Care Improvement Act, that provide the 
authority for Congress to appropriate Federal funds to provide health 
care to our First Americans.
    The Indian Health Service, a federal agency within the Department 
of Health and Human Services, provides clinical and public health 
services to American Indians and Alaska Natives often in remote, 
economically depressed locations with limited access to health 
facilities. In the face of these challenges, many tribal governments 
have developed innovative approaches to providing health care to their 
members.
    I recognize that tribes and tribal members may have a variety of 
non-tribal health resources available to them. Depending upon location 
and other considerations, these may include employer provided 
insurance, Medicare, the Indian Health Service, and federal, state and 
local health programs, insurance arrangements, hospitals and clinics.
    Within this health care environment, tribes, in the exercise of 
their sovereignty, may wish to create new health care opportunities for 
their members, or to expand or augment the health care presently 
available to their members. This afternoon, I will address the tax 
aspects of a number of methods tribes may have used, or have considered 
using, to provide medical benefits or health insurance coverage to 
their members.
    Allow me, Mr. Chairman, to note that the tax rules that apply to 
health care provided by tribal governments are the same rules that have 
existed for decades and that apply to such care and benefits provided 
by non-tribal governments, including federal, state, and local 
authorities. \1\ There are no special tax rules that apply uniquely to 
tribal government health care programs.
---------------------------------------------------------------------------
    \1\ The statutory rules are included in the Internal Revenue Code 
(the ``Code''), Title 26 of the United States Code.
---------------------------------------------------------------------------
    I would also like to note that the Internal Revenue Service does 
not have a special program to examine tribal health programs. Nor are 
we emphasizing this area at the moment. That said, the issue of the 
taxability of medical benefits and health insurance coverage can arise 
from time to time in the normal course of an audit as we look at 
whether a tribe, or any other type of government or employer, is 
following appropriate information reporting and withholding practices 
as it administers its various programs. Moreover, the issue can arise 
when a government or employer comes to the IRS seeking a legal ruling 
about the tax treatment of a proposed plan or arrangement.
The Principal Questions at Issue
    In considering the tax treatment of health care that a tribe might 
provide for its members, we need to focus principally on two types of 
benefits and two categories of tribal members.
    The first type of benefit is health insurance coverage that the 
tribe provides to the tribal member. The tribe may pay the insurance 
carrier directly, or self-insure. I will refer to this benefit as 
health insurance coverage, or ``up-front coverage.'' The second type of 
benefit is funds paid out for medical services provided to the tribal 
members and their family members, either from a third party insurance 
company or directly from the tribe itself. These amounts may be paid 
directly to the tribal member as reimbursement, or to the health care 
provider who performed the medical service. In this testimony, I will 
refer to these medical services benefits as ``back-end benefits.''
    The two categories of tribal members we need to consider are tribal 
members who are also tribal employees, and tribal members who are not 
employees. The significance of this distinction will become apparent 
rapidly.
    In this context, when a tribe provides or pays health insurance 
coverage or medical services for its members, two principal income tax 
questions arise:

   Is the value of the health insurance coverage--up-front 
        coverage--paid for or provided by the tribe includable in the 
        tribal member's income?

   Is the value of any medical services--back-end benefits--
        paid for or provided by the tribe, directly or by tribe-
        purchased insurance, includable in the tribal member's income?

    To answer these questions, Mr. Chairman, I think it would be 
helpful if I began with a brief summary of key tax provisions that 
apply to health care in general. I will then address in more detail 
three provisions of the Internal Revenue Code and an administrative 
exclusion that have particular relevance here.
    As I do so, I'd like to emphasize that the Code provisions apply 
equally to all citizens and all employers, and that the administrative 
exclusion--the general welfare exclusion--applies equally to payments 
of all governments, tribal and non-tribal.
    Following that summary, I will discuss, in several contexts, the 
tax treatment of health benefits that tribes provide to tribal members 
who are employees, and the taxation of benefits to members who are not 
employees.
Summary of the Code's Treatment of Health Care
    Section 61 of the Code is the starting point for our discussion. 
Under section 61, gross income includes all income, from whatever 
source derived, unless a specific exception applies. This seminal 
provision establishes the important principle that income will be taxed 
unless it is expressly excluded from taxation.
    Of course, the Code does exclude many forms of health-care-related 
income.
    An employer's contribution to a plan providing health coverage, and 
direct or indirect payments to reimburse the employee for expenses 
incurred for medical care for the employee and his or her spouse and 
dependents, are excludable from the employee's income for both income 
and payroll tax purposes (secs. 105, 106 and 3121).
    Self-employed individuals may deduct the cost of health insurance 
for themselves and their spouses and dependents (sec.162(I)).
    All individuals may claim an itemized deduction for unreimbursed 
medical expenses, to the extent that such expenses exceed 7.5 percent 
of adjusted gross income (sec. 213).
    Individuals who are covered by a high-deductible health plan are 
able to contribute tax-free to a health savings account (sec. 223).
The Controlling Law
    To answer the question about the inclusion or exclusion of health 
insurance coverage provided by a tribe and the value of medical 
services under that coverage or direct payment of medical services, 
however, we need to look more closely at three provisions of the 
Internal Revenue Code and at the application of what is known as the 
general welfare exclusion.
    Let me begin with the three Code provisions: sections 106(a), 
105(b), and 104(a)(3).
    Sections 106(a) and 105(b) allow tribes to provide health coverage 
and medical benefits--up-front coverage and back-end benefits--to their 
employees on a tax-free basis.
    Section 106(a). Section 106(a) provides, generally, that gross 
income of an employee does not include employer expenditures for 
coverage provided to an employee through an accident or health plan.
    This section excludes from an employee's income the value of health 
coverage paid by an employer. It applies to tribal members who are 
tribal employees, but not to tribal members who are not employees of 
the tribe.
    Section 105(b). Section 105(b) states that except in the case of 
amounts attributable to (and not in excess of) deductions allowed under 
section 213 (relating to medical expenses) for any prior taxable year, 
gross income does not include amounts paid, directly or indirectly, by 
an employer to the taxpayer to reimburse the taxpayer for expenses 
incurred by the taxpayer for the medical care (as defined in section 
213(d)) of the taxpayer or the taxpayer's spouse or dependents (as 
defined in section 152).
    This section provides an exclusion from income for payments for 
medical services provided through an employer-provided plan. Like 
section 106(a), it applies to tribal members who are tribal employees, 
but does not extend to tribal members who are not employees of the 
tribe.
    Section 104(a)(3). The third key provision is Code section 
104(a)(3). This section comes into play only when there is no employer 
in the picture.
    It provides, generally, that gross income does not include 
``amounts received through accident or health insurance (or through an 
arrangement having the effect of accident or health insurance) for 
personal injuries or sickness (other than amounts received by an 
employee, to the extent such amounts (A) are attributable to 
contributions by the employer which were not includable in the gross 
income of the employee, or (B) are paid by the employer).''
    Neither the Code nor the regulations defines ``insurance.'' The 
accepted definition, for purposes of federal income taxation, dates 
back to Helvering v. Le Gierse, 312 U.S. 531 (1941), in which the 
Supreme Court stated that ``[h]istorically and commonly insurance 
involves risk-shifting and risk-distributing.'' Insurance must shift 
the risk of economic loss from the insured and the insured's family to 
the insurance program and must distribute the risk of this economic 
loss among the participants in the program. Risk shifting will occur 
when an insurer agrees to protect the insured (or a third-party 
beneficiary) against a direct or indirect economic loss arising from a 
defined contingency involving an accident or health risk. See, Allied 
Fidelity Corp. v. Commissioner, 572 F.2d 1190, 1193 (7th cir. 1978); 
Haynes v. U.S., 353 U.S. 81, 83 (1957) (Broadly speaking, health 
insurance is an undertaking by one person for reasons satisfactory to 
him to indemnify another for losses caused by illness.).
    The parenthetical language, ``(or through an arrangement having the 
effect of accident and health insurance)'' in section 104(a)(3) was 
added to the Code by section 31 of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA), 1996-43 I.R.B. 7, effective for 
taxable years beginning after December 31, 1996.
    The House Conference Report noted that ``payments for personal 
injury or sickness through an arrangement having the effect of accident 
or health insurance (and that are not merely reimbursement 
arrangements) are excludable from income. In order for the exclusion to 
apply, the arrangement must be insurance (e.g., there must be adequate 
risk shifting). This provision equalizes the treatment of payments 
under commercial insurance and arrangements other than commercial 
insurance that have the effect of insurance.'' H.R. Rept. No. 104-736, 
104th Cong., 2d Sess. 293.
    In short, this section provides an exclusion from income for 
payments for medical services received from an insurance plan, or a 
similar arrangement, that is not provided by an employer. It thus 
provides an exclusion for payments from an insurance plan or similar 
arrangement purchased or created by the tribe for those tribal members 
who are not employees. In some sense, this provision parallels section 
105(b) for non-employees.
    Let me point out that there is no Code provision that parallels 
section 106(a) for non-employees. Where there is no employer involved, 
the Code contains no provision that would allow a tribal member who is 
not a tribal employee to exclude the value of tribally-provided health 
care coverage, the up-front coverage.
    The General Welfare Exclusion. The final component of the 
prevailing law in this area is the general welfare exclusion. This is 
an administrative exclusion that has developed over more than 40 years 
in revenue rulings and notices and has been recognized by the courts. 
See, e.g., Rev. Rul. 63-136, 1963-2 C.B. 19; Graff v. Commissioner, 673 
F.2d 784 (5th Cir. 1982), affg. per curiam 74 T.C. 743 (1980); Bailey 
v. Commissioner, 88 T.C. 1293 (1987). The exclusion applies to payments 
made by governmental units--tribal or non-tribal. Although Code section 
61 defines broadly the items that are included in gross income, the 
Service has consistently concluded that payments made to individuals by 
governmental units, under legislatively provided social benefit 
programs, for the promotion of the general welfare, are not includable 
in a recipient's gross income (``general welfare exclusion''). See, 
e.g., Rev. Rul. 74-205, 1974-1 C.B. 20; Rev. Rul. 98-19, 1998-1 C.B. 
840.
    To qualify under the general welfare exclusion, payments must: (1) 
be made from a governmental fund, (2) be for the promotion of general 
welfare (i.e., be based generally on individual or family needs), and 
(3) not represent compensation for services. The Service generally has 
not applied the general welfare exclusion to persons with significant 
income or assets, and any such extension would represent a departure 
from well-established administrative practice dating back decades and 
respected by courts.
    Whether this exclusion would apply to a tribal government providing 
coverage or benefits to tribal members would depend on how the program 
is structured and administered.
How Tribes are Providing Health Care to Members
    I would like to illustrate how these rules apply in a number of 
situations. This is not an exhaustive list, but reflects some of the 
questions we have received.
The Tribe is the Employer of the Tribal Member
    If the tribal government is the employer of the individual, it is 
possible to exclude both the value of the health coverage under Code 
section 106(a)--the up front coverage--and the amounts actually paid 
out to cover medical expenses under Code section 105(b)--the back end 
benefits.
    Self-Insurance. One option might be for the tribe to self-insure. 
By this I mean that the tribal government promises to pay for the 
health care costs of their employees out of the tribe's resources. All 
tribal employees are covered, and all receive coverage with uniform 
terms and conditions. The coverage may be very extensive, and may even 
cover expenses that commercial health insurance typically does not 
cover. The tribe may provide health insurance coverage, medical 
benefits, or both.
    Looking first at the up-front provision of coverage, Code section 
106(a) provides that gross income of an employee does not include 
employer-provided coverage under an accident and health plan. So, 
assuming the tribal members are employees, they may exclude the value 
of their tribally-provided health coverage from gross income.
    Looking at the provision of the actual medical benefits, Code 
section 105(b) provides an exclusion for amounts paid, under employer-
provided coverage, to reimburse the employee for medical services. 
Therefore, tribal government employees may exclude the value of the 
medical benefits paid for by the tribe.
    Insurance policies. Next, what happens if the tribal government 
pays premiums on insurance policies, or purchases a commercial group 
health insurance policy to cover its employees? Again, Code sections 
106(a) and 105(b) may operate to exclude both the up-front value of 
coverage and the later payments for medical benefits.
    The tribe pays for health care costs on an ad hoc basis. Some 
tribal governments have raised the situation in which the tribe pays 
for medical benefits on an ad hoc basis. In the absence of consistently 
applied tribal policies that address who and what is covered, an ad hoc 
arrangement would not constitute a ``health plan.'' Treas. Reg. 
Sec. 1.105-5(a). Thus, amounts paid for medical services under such an 
arrangement to any tribal employee would not be excludable from income 
under a specific Code provision. Under an ad hoc approach, the issue of 
health care coverage does not arise since the tribe typically pays 
directly for medical benefits and does not provide health care 
coverage.
Tribal Members Who are not Employees of the Tribal Government
    Now, I'd like to turn to the situations in which the tribal 
government would like to provide health benefits to tribal members who 
are not employees of the tribal government. While assistance can be 
provided, the options for excluding it from the tribal members' income 
are more limited.
    The significance of the distinction between employees and non-
employees is not unique to health care benefits provided by tribes to 
their members. The same employee--non-employee distinction applies 
across the country, to all citizens, all employers, all units of 
government.
    Value of up-front coverage. There is no parallel to Code section 
106(a) that would allow the tribal government to provide up front 
health coverage on a tax-preferred basis to all of its tribal members, 
without regard to whether they are employees. Code section 106(a) 
excludes the value of the up-front health coverage from income if it is 
employer-provided, regardless of whether the employer is providing 
premiums for third party insurance or is covering employees in a self-
insured plan. With no parallel exclusion for non-employees, these 
tribal members would have no means under the statute to exclude that 
value from income.
    Value of back-end benefits. There may be ways to exclude the 
payment of medical benefits even for tribal members who are not 
employees of the tribal government. Code section 104(a)(3) provides 
that as long as the arrangement is insurance, or has the effect of 
accident and health insurance, then a variety of formats may operate to 
exclude the payments for medical services from the tribal member's 
income. For example, the tribal government could self-insure and pay 
the benefits itself. Or, it could purchase a group policy or pay 
individual premiums and the medical benefits flowing from that policy 
would not be included in the tribal member's gross income. Again, the 
value of the up front health coverage or health insurance premiums 
would not be excluded, but the value of the medical services would be 
excluded as long as the arrangement meets the requirements of Code 
section 104(a)(3).
The General Welfare Exclusion
    Some people have suggested that the general welfare exclusion could 
be applied to exclude these amounts from income of tribal members. If 
the tribe provides such assistance only in cases of demonstrated need, 
pursuant to a consistently applied standard of financial need, the 
general welfare exclusion arguably could apply. The financial need 
standard and the nature of the expenses being covered would be among 
the factors that we would look at to determine whether the general 
welfare exclusion applied to a particular program.
    As I mentioned earlier, this administrative exclusion generally has 
not been applied to persons with significant income or assets. Whether 
this exclusion would apply to a particular tribe and its members would 
depend on the factual circumstances. But any extension of the general 
welfare exclusion to tribal members with significant income or assets 
would represent a departure from well-established practice.
    If the general welfare exclusion does not apply, the value of the 
health insurance plan coverage for non-employees must be included in 
gross income. We recognize that it may be difficult to determine how 
such coverage should be valued under a self-insured plan. 
Alternatively, if the general welfare exclusion does not apply and 
there is no health insurance plan that satisfies the requirement of 
section 104(a)(3), but instead benefits are paid on an ad hoc basis, 
then the provision of back-end benefits would be included in tribal 
members' income.
Conclusion
    Mr. Chairman, I would like to summarize my testimony and conclude.
    As my prior discussion demonstrates, in the case of a tribe 
providing coverage and health benefits to its employees, the Code--
sections 105 and 106--provides exclusions from gross income for both 
the value of the up-front coverage (e.g., coverage under a commercially 
purchased insurance policy or self-insurance) and the benefits provided 
under the coverage.
    In the case of a tribe providing coverage and health benefits to 
tribal members who are not employees, the Code--section 104--provides 
an exclusion from gross income of the value of the health benefits if 
provided under an insurance arrangement. However, the Code does not 
provide any exclusion from gross income of the value of the up-front 
health coverage outside the employer-provided context.
    In certain cases, the administratively-based general welfare 
exclusion may provide an exclusion from gross income for these amounts, 
but only if the program meets the need standards.
    I am aware of this Administration's commitment to strengthen and 
build on the government-to-government relationship between the United 
States and tribal nations and I appreciate your interest in this 
matter. Thank you for your patience as I worked through the technical 
aspects of current law. I look forward to working with Congress to 
examine this issue further.
    This concludes my testimony this afternoon I would be happy to try 
to answer any questions you might have.

    Senator Udall. Thank you very much for your testimony.
    I would just remind each of our witnesses to please keep 
their testimony to five minutes. Your full written testimony 
will become part of the permanent record. We will take all the 
testimony first.
    Chairman Macarro?

  STATEMENT OF HON. MARK MACARRO, CHAIRMAN, PECHANGA BAND OF 
                        LUISENO INDIANS

    Mr. Macarro. Senator Udall, good morning. [Phrase in native 
tongue.] It is good to be here with you this morning.
    The homeland of the Pechanga people is the Pechanga Indian 
Reservation located near Temecula, 60 miles north of San Diego. 
Our people have called the Temecula Valley home for over 10,000 
years. We think this is your homeland, too, for we believe that 
the world was created in the Temecula Valley, known as Exva 
Temeeku.
    In 1847, 18 treaties were negotiated in sequence with 
tribes throughout the State of California. We Luiseno Indians 
were party to the 17th of these treaties. It is called the 
Treaty of Temecula. In good faith, huge land cessions were made 
involving most of southern California in exchange for a 
permanent inviolable homeland and the provision of goods and 
services to improve the health, education, and welfare of my 
great grandfathers.
    Shortly after ceding these huge tracts of land and within 
one month of arriving back in Washington, D.C. with the 18 
treaties, gold was found for the first time in California near 
the town of Julian, about 40 miles away from my reservation. 
The timing was unfortunate for us because the Senate, upon 
hearing of the gold, elected not to ratify these 18 treaties. 
Nonetheless, our land was still taken from us. Most of the 
goods and services that were promised in our treaty never 
materialized.
    But there is more. Twenty-six years later in 1873, sheep 
farmers laid claim to the land our village was on. They 
obtained a Federal court decree of ejectment and on a summer 
day in 1875, a posse led by the San Diego County sheriff 
evicted my ancestors from their village at gunpoint. In one 
fell swoop, 300 elders, women, and children were loaded onto 
wagons with only a few personal effects and just dumped in a 
dry wash two miles away. Their former tule brush homes were 
burned and their livestock herds were seized to pay for court 
costs and the cost of the eviction itself.
    On June 27, 1882, President Chester Arthur signed an 
executive order that established the Pechanga Indian 
Reservation finally as a homeland for my people. Today, 
approximately 66 percent of our tribal citizens currently live 
on or near the reservation.
    Over the years, we have lost much land and resources 
because of now-repudiated Federal policies. We have paid dearly 
for the Federal Government's trust obligation to provide health 
care to our citizens.
    Many of our Pechanga citizens face the same health problems 
associated with other American Indian communities: diabetes, 
obesity, tuberculosis, accidents, and mental health crises. The 
only Indian hospital to have operated in southern California 
was on the Soboba Indian Reservation and it closed permanently 
in 1949. Between 1949 and 1970, no official Indian health care 
existed in our region for my tribe. So between 1970 and 2002, 
our people relied primarily on the IHS for health care with a 
few members eligible to receive VHA care or covered by private 
insurance.
    Beginning in 1970, tribes in the region began pooling their 
paltry IHS dollars to establish a consortium for funding health 
care benefits for Indians on reservations. Pechanga joined this 
tribal health care consortium, called the Riverside San 
Bernardino County Indian Health Consortium, Incorporated. Today 
there are 12 tribes in the consortium, including ours. The 
consortium is headquartered on the Morongo Reservation. It 
operates a small clinic on the Pechanga Reservation for our 
tribal citizens and is open five days a week. The clinic staff 
is comprised of a general practitioner, floating nurse 
practitioners, floating podiatrists, and other medical 
technicians. Special visits and hospitalizations are referred 
out to a local health care provider.
    In 2002 and before, the IHS was not able to provide many 
medical procedures which Pechanga citizens desperately needed 
due to the limited contract health funds that ran out early in 
the fiscal year. I appreciate and honor the work that these 
professionals provide to our Pechanga people and Indians from 
other tribes but, like other IHS facilities, it is underfunded, 
understaffed, and its hands are tied when it comes to more 
modern medicine, thus allowing for the provision of only 
substandard care at the Pechanga clinic.
    In addition to the specific health care portrait at 
Pechanga, the provision of Indian health care in the State of 
California is unique. For example, in spite of having one of 
the highest American Indian populations in the Country, there 
are no IHS direct service clinics or hospitals in California. 
All IHS services are provided through tribal health consortiums 
and urban Indian health clinics. The nearest IHS funded 
hospital is in Phoenix, 350 miles away.
    IHS funding for the members of our consortium is inadequate 
in all areas including the areas of contract health services, 
specialty services, diagnostics, or in-patient services. 
Chronic underfunding in the area of contract health services 
had negatively impacted the delivery of comprehensive health 
care services to our tribal citizens. Specifically, tribal 
citizens that needed care outside of the limited direct 
services offered in the Pechanga clinic were forced to access 
treatment through the already overburdened public health care 
system and were offered no continuum of care. This forced our 
tribal citizens to often ignore symptoms for preventable 
diseases until the symptoms became chronic.
    In 2002, this insufficient health care structure spurred my 
tribe to purchase a group health policy for all tribal members. 
This decision was made following a two year study of the 
tribe's need for health care coverage by a seven member tribal 
committee that explored a number of options including where to 
build our own brick and mortar medical facility, which in the 
end proved too costly for us to pursue. The committee's initial 
concern was to provide coverage for tribal citizens 55 years of 
age and older. However, it found that no health insurance 
companies were willing to cover a group of elders, so it was 
determined that the solution could best be resolved through 
mandatory group coverage for all tribal members.
    The health insurance initially approved by the tribe was 
purchased from Blue Shield. It covered all medically necessary 
health care except dental and optical care. The health 
insurance plan's effective date was January 1, 2003. The health 
insurance contract required all tribal citizens to sign up for 
the plan. Only citizens able to prove that they had other 
insurance were allowed to opt out of this mandatory coverage.
    This approach to Pechanga's health care has led to 
measurable improvement in the physical health of our tribe. 
Pechanga's commitment to improving health can be measured by 
the commitment of millions of dollars annually to pay for these 
health plan premiums. For example, in the coming fiscal year 
2010 we expect we will pay $10 million in premiums for 
coverage. These sizable annual expenditures should be regarded 
as proof of my tribe's commitment to improving the health and 
wellness of our citizens and our willingness to take internal 
responsibility for ourselves and our community.
    In November 2006, we first heard from the IRS that it was 
concerned about the tribe's purchase of health care policies 
for our people. In an ongoing audit, we are being pressed to 
demonstrate how the law exempts this coverage from being 
taxable income to tribal citizens.
    The IRS has indicated to us that we need to demonstrate 
that our tribal governmental programs are needs-based and not 
provided to all citizens regardless of need. It appears to us 
that the IRS is interpreting need as meaning only financial 
need. Did the IRS become the arbitrator of what the health 
needs of my people are?
    When you measure what the IRS is trying to do against the 
history of Pechanga's relationship with the United States, the 
Senate's failure to ratify our treaties, the ensuing 
dispossession and theft of our homeland, and the failure to 
follow through on the health, education, and social welfare 
promises said treaty purported but failed to make good on, the 
IRS's recent actions add insult to historical injury.
    From our perspective, this makes absolutely no sense. The 
Pechanga government has stepped in where the Federal Government 
has fallen short for our people. Federal statues have been 
enacted stating that a major goal of the United States is to 
provide the quantity and quality of health services which will 
permit the health status of Indians to be raised to the highest 
level possible.
    Further, HHS found that the funds appropriated for IHS 
programs have been consistently inadequate to meet even the 
basic health care needs. To remedy this problem, tribes have 
been encouraged by Congress to use their governmental gaming 
revenues to provide for the health care needs of their members, 
including through universal coverage programs.
    Our Indian people deserve the best health care and Pechanga 
has decided not to wait on the Federal Government to fulfill 
its trust obligations to our people. Waiting for the Federal 
Government has not been a winning strategy. The health of our 
people is at stake.
    Mr. Udall, the rest of my testimony is written and has been 
submitted.
    But the situation cries out for a Congressional fix. There 
is a bill that has been introduced on the House side. We would 
like your consideration so that both houses can work on a 
solution for this for the benefit of all Indian people 
throughout Indian country.
    Thank you very much.
    [Mr. Macarro's prepared statement follows:]

  Prepared Statement of Hon. Mark Macarro, Chairman, Pechanga Band of 
                            Luiseno Indians
    Chairman Dorgan, Vice Chairman Barrasso, other Members of the 
Committee, it is an honor to be here to testify concerning this issue. 
This hearing is the latest demonstration that this Committee is willing 
to fight for the advancement of health care for American Indians and 
Alaska Natives. With the health care reform debate raging on, this 
Committee's willingness to address the unique problems Indian country 
faces does not go unnoticed by tribal leaders. Thank you.
    The homeland of the Pechanga people is the Pechanga Indian 
Reservation located near Temecula, California. Our people have called 
the Temecula Valley home for more than 10,000 years. Approximately 66 
percent of our tribal citizens currently live on or near the 
Reservation. Over the years, we have lost much land and resources 
because of now-repudiated federal policies. We have paid dearly for the 
Federal Government's trust obligation to provide health care to our 
members.
    Today, many of our Pechanga citizens face the same health problems 
associated with other Native American communities: diabetes, obesity, 
tuberculosis, accidents and mental health issues. Until 2002, our 
people relied primarily upon the Indian Health Service for health care, 
with a few members eligible to receive care from the Veterans Health 
Administration or covered by private health insurance. Pechanga is a 
member of a tribal health consortium funded by the IHS. The consortium 
operates a clinic on the Pechanga Reservation for tribal citizens that 
was and continues to be open five days a week. The clinic staff is 
comprised of a general practitioner, floating nurse practitioners, 
floating podiatrist and other medical technicians. Specialist visits 
and hospitalizations are referred out to a local (Temecula) health-care 
provider. In 2002 and before, the IHS was not able to provide many 
medical procedures that Pechanga citizens desperately needed due to the 
limited contract health funds than ran out early into the fiscal year. 
I appreciate and honor the work that these professionals provide to our 
Pechanga people and Indians from other tribes, but, like other IHS 
facilities, it is underfunded, understaffed, and its hands are tied 
when it comes to more modern medicine--thus allowing for the provision 
of only substandard care at the Pechanga Clinic.
    In addition to the specific healthcare portrait at Pechanga, the 
provision of Indian health care in the state of California is unique. 
For example, in spite of having one of the highest Native American 
populations in the country, there are no IHS direct service clinics or 
hospitals in CA. All IHS services are provided through tribal health 
consortiums and urban Indian health clinics. The nearest IHS funded 
hospital is the Phoenix Indian Medical Center (PIMC) in Phoenix, AZ, 
350 miles away. The Pechanga Clinic is operated by the Riverside San 
Bernardino County Indian Health Consortium Inc. (RSBCIHC), a health 
consortium of 12 tribes. IHS funding for the members of this consortium 
is underfunded in all areas, including the area of contract health 
services, the purchase of specialty services, diagnostics or inpatient 
services. Chronic underfunding in the area of contract health services 
has negatively impacted the delivery of comprehensive health care 
services to our tribal citizens specifically. Should we have a tribal 
citizen that needs care outside of the limited direct services offered 
in the Pechanga Clinic, they become forced to access treatment through 
the already overburdened public health care system and are offered no 
continuum of care. This forces our tribal citizens to often ignore 
symptoms for preventable diseases until the symptoms became chronic.
    In 2002, this insufficient health care structure spurred the Tribe 
to purchase a group health policy for all tribal members. This decision 
was made following a two-year study of the Tribe's need for health care 
coverage by a seven-member committee that explored a number of options. 
The Committee's initial concern was to provide coverage for members 55 
years or older. However, it found that no health insurance companies 
were willing to cover a group of elders, so it was determined that the 
solution could best be resolved through mandatory group coverage for 
all tribal members.
    The health insurance initially approved by the Tribe was purchased 
from Blue Shield. It covered all medically necessary health care, 
except dental and optical care. The health insurance plan's effective 
date was January 1, 2003. The health insurance contract required all 
members to sign up for the plan. Only members able to prove that they 
had other insurance were allowed to ``opt out'' of this mandatory 
coverage.
    This has led to measurable improvement in the physical health of 
our Tribe. Earlier this year, we opened a new exercise facility that 
both contributes to and facilitates the health and wellness of our 
tribal citizens.
    In November, 2006, we first heard from the IRS that it was 
concerned about the Tribe's purchase of health care policies for our 
people. In an ongoing audit, we are being pressed to demonstrate how 
the law exempts this coverage from being taxable income to tribal 
citizens. The IRS has indicated to us that we need to demonstrate that 
our tribal governmental programs are needs-based and not provided to 
all citizens regardless of need. It appears to us that the IRS is 
interpreting ``need'' as meaning only ``financial'' need.
    From our perspective, this makes absolutely no sense. The Pechanga 
government has stepped in where the Federal Government has fallen short 
for our people. Federal statutes have been enacted stating that a major 
``goal of the United States is to provide the quantity and quality of 
health services which will permit the health status of Indians to be 
raised to the highest possible level'' \1\ Further, the U.S. Department 
of Health and Human Services found that funds appropriated for IHS 
programs have been consistently inadequate to meet even basic health 
care needs. \2\ To remedy this problem, Tribes have been encouraged to 
use gaming revenues to provide for the health care needs of their 
members, including through universal coverage programs. \3\
---------------------------------------------------------------------------
    \1\ 25 U.S.C. Sec. 1601(b).
    \2\ See Overview of Federal Tax Provisions Relating to Native 
American Tribes and Their Members (JCX-61-08) (stating that ``the 
average funding of an IHS site was found to be 40 percent less than an 
equivalent average health insurance plan'').
    \3\ See NIGC Bulletin No. 05-1 (Subject: Use of Net Gaming Revenue) 
(January 18, 2005) (available at http://www.nigc.gov under the 
``Reading Room'' tab and ``Bulletins'' sub-tab).
---------------------------------------------------------------------------
    Our tribal citizens deserve the best health care, and Pechanga has 
decided not to wait on the Federal Government to fulfill its trust 
obligations to our people. Waiting for the Federal Government has not 
been a winning strategy and the health of our people is at stake.
    The fact that my Tribe provides health insurance for our members 
has a direct benefit not only to them but also to the United States. 
When a Pechanga tribal member visits the IHS clinic on our reservation 
or any other reservation, that clinic can actually bill our insurance 
for the service provided. This alleviates the U.S. Government's 
financial burden of providing health care to Pechanga tribal members, 
even though we are entitled to it. In addition, IHS, which, as 
previously mentioned, is perpetually underfunded, is able to use its 
allocated funds on Indians from other tribes that may not have the 
means to provide supplemental coverage.
    We also understand that federal law is not as clear as it should be 
about this issue.
    The Internal Revenue Code and Treasury regulations say that gross 
income includes all income from whatever source derived, unless 
specifically exempted. The IRS and federal courts have consistently 
ruled that payments made under legislatively-provided social benefit 
programs for the promotion of general welfare, including health care, 
are not includable in the recipient's gross income. \4\ Consistent with 
this position, the IRS has ruled that government-provided health care 
benefits for the elderly, commonly known as Medicare benefits, were 
nontaxable to recipients. \5\
---------------------------------------------------------------------------
    \4\ See, e.g., Rev. Rul. 57-102, 1957-1 C.B. 26 (payments to the 
blind); Private Letter Ruling 200845025 (November 7, 2008) (ruling that 
payments made by an Indian tribe to elderly tribal members who were 
displaced by a flood were general welfare payments); Bailey v. 
Commissioner, 88 T.C. 1293 (1987) (considering whether grants to 
restore a building facade were excludable from income as general 
welfare payments).
    \5\ Revenue Ruling 70-341, 1971-2 C.B. 31.
---------------------------------------------------------------------------
    Although the general welfare doctrine provides a ``common law'' 
exclusion for government social welfare programs, the test is based on 
facts and circumstances and is difficult to apply. A statutory 
exclusion is needed to clarify that medical care provided by tribal 
governments to their members is not subject to income taxation.
    This situation cries out for a Congressional fix.
    On the House side, Congressman Xavier Becerra and Congressman Devin 
Nunes are expected to introduce a bipartisan bill this week, the 
``Tribal Health Benefits Clarification Act of 2009,'' that we hope and 
expect will be a part of the House health care reform legislation. This 
bill would make clear that medical care tribes and tribal organizations 
provide for tribal citizens is excluded from gross income. Importantly, 
it also states that enactment of the bill cannot be construed to create 
an inference against health benefits provided by tribes prior to the 
passage of the bill, or benefits provided by tribes, such as education 
assistance, that is not within the scope of this legislation.
    I specifically ask that this Committee's Members strongly consider 
introducing and supporting a companion bill so that both chambers could 
be actively involved in clarifying this situation.
    Thank you.

    Senator Udall. Thank you very much. We understand you have 
to catch a plane. Certainly stay as long as you can but we will 
excuse you when you choose to leave.
    Mr. Macarro. Thank you, Senator.
    Senator Udall. Thank you very much.
    Vice President Keel, it is good to have you here. Please 
proceed.

  STATEMENT OF HON. JEFFERSON KEEL, VICE PRESIDENT, NATIONAL 
              CONGRESS OF AMERICAN INDIANS (NCAI)

    Mr. Keel. Thank you, Mr. Chairman. Senator, on behalf of 
the National Congress of American Indians, I want to thank you 
for the opportunity to provide views on issues critical to our 
people.
    The Internal Revenue Service is now engaged in a broad and 
unprecedented effort to tax the basic human services that 
Indian tribal governments provide to their members. This is a 
relatively new issue that has honestly baffled tribal leaders 
across the Country. We cannot understand why a Federal agency 
would create a disincentive for tribal governments to provide 
services for our members. It is also a direct affront to tribal 
sovereignty, a violation of the Federal trust responsibility, 
and at best a terrible Federal policy.
    Our chief concern is that the IRS is targeting health care 
benefits and services provided by tribal governments. The 
Federal Government has treaty and trust responsibilities to 
provide health care to American Indians and Alaska Natives. As 
you noted, the Indian Health Service is terribly underfunded 
and, in many places, the IHS services are outdated or simply 
unavailable. In response, tribal governments throughout the 
Country have implemented a variety of supplemental health care 
programs. Now the IRS is attempting to require the tribes to 
issue 1099 forms and withhold tax for health care we provide to 
tribal members. Our people ask, why should we pay Federal taxes 
on health benefits that should have been provided by the 
Federal Government in the first place?
    The IRS is not targeting only health care services. The IRS 
also proposes that tribes withhold taxes on basic educational 
services, meals for elders, housing assistance, the provision 
of safe drinking water, and waste disposal services. All of 
these are services that are commonly provided by other 
governments. We also have heard from our members that IRS 
personnel have instructed a pueblo to issue 1099 forms for the 
meals provided at a traditional feast day.
    These absurdities raise very serious questions for tribal 
leaders. We urge Congress to engage in a two track effort to 
address these problems.
    First, Congress should immediately pass legislation that 
will specifically amend the tax code to clarify that health 
care benefits provided by tribal governments are excludable 
from gross income. This legislative clarification should be 
included in the national health care reform bill.
    We are particularly grateful to Chairman Baucus of the 
Senate Finance Committee and Chairman Rangel of the Ways and 
Means Committee, along with Representatives Becerra, Nunes, and 
many others for their support and encouragement of this 
proposal. Although NCAI would prefer to exempt all tribally 
provided social welfare benefits, our supporters in Congress 
are indicating that it will be difficult to include all general 
welfare issues as part of a health care bill.
    Second, Congress needs to exercise oversight over the 
Treasury Department and the IRS to ensure that adequate policy 
guidance is provided. Indian tribal governments have a unique 
status in our Federal system under the U.S. Constitution and 
numerous Federal laws, treaties, and Federal court decisions. 
Tribes have the power and responsibility to provide a broad 
range of governmental services to our citizens. The IRS has 
never attempted to tax the thousands of Federal, State, and 
local government services that are provided to all citizens 
regardless of income.
    It is common for Federal, State, and local governments to 
provide health care, education, transportation, trash and 
recycling collection, snow removal, public libraries, nutrition 
programs, museums, and public parks. The list goes on. In 
practice, the general welfare doctrine has exempted a huge 
range of public benefits. We can think of no legitimate reason 
why the IRS would choose to discriminate against tribal 
government services.
    It appears the IRS is confused because of the source of 
tribal revenues. Although tribal governments collect taxes, 
most tribes lack an adequate tax base on the reservations. 
Instead, tribes rely on revenue from natural resources, Federal 
appropriations, and tribal business enterprises to fund our 
programs.
    NCAI urges Congress to immediately pass legislation that 
would exclude tribal health benefits from income for Federal 
tax purposes. Even with this legislative fix, we anticipate 
that Indian tribes will be subject to IRS audits on other 
social welfare programs that will create uncertainty and delay 
tribal progress for years to come. Oversight and engagement is 
needed to ensure that proper policy guidance is provided and 
that Indian tribal governments are treated equitably.
    We thank you for your diligent efforts on behalf of Indian 
country on these and many other issues. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Keel follows:]

  Prepared Statement of Hon. Jefferson Keel, Vice President, National 
                  Congress of American Indians (NCAI)
    On behalf of the National Congress of American Indians, thank you 
for the opportunity to provide our views on an issue of critical 
importance to tribal governments and tribal citizens throughout the 
United States. It is often said that there are no new issues in Indian 
country--that the same old issues re-circulate again and again. 
However, thanks to enterprising auditors at the Internal Revenue 
Service, this has been proven untrue. The IRS is now engaged in a broad 
and unprecedented effort to tax the basic human services that Indian 
tribal governments provide to their members. This is a direct affront 
to tribal sovereignty, a violation of the federal trust responsibility, 
and at best is utterly bad federal policy. We cannot understand why the 
Federal Government would choose to create a disincentive for Indian 
tribal governments to provide basic human services to their members.
    One of our major concerns is that there has been little or no 
policy guidance from the Treasury Department, and instead IRS auditors 
are creating policy through the rote application of a tax code that was 
never intended to reflect the fundamental federal-tribal relationship 
embodied in the U.S. Constitution. Moreover, we are concerned that the 
IRS actions are highly discriminatory in impact if not in intent. The 
IRS is subjecting tribal governments to audits on issues that have 
never been raised when substantially similar benefits have been 
provided by other government entities. The IRS has initiated 139 
examinations during the past two years that focused specifically on the 
use of tribal government revenues used to provide governmental services 
to tribal citizens. \1\
---------------------------------------------------------------------------
    \1\ IRS Letter to The Honorable Senator Charles Grassley, Ranking 
Member of the Finance Committee, June 28, 2009.
---------------------------------------------------------------------------
    This Committee has noted that the IRS is targeting health care 
benefits and services provided by tribal governments. This is our chief 
concern. The Federal Government has treaty and trust responsibilities 
to provide health care to American Indians and Alaska Natives. The 
Indian Health Service is the federal agency responsible for providing 
this care, yet the IHS is funded at only 60 percent of need. Most 
tribal communities cannot readily access health care services and, even 
when services are available, they are often subject to decades-old, 
outdated practices and services. As detailed in the statement submitted 
by the National Indian Health Board, across every indicator, American 
Indian and Alaska Natives face massive disparities in health.
    In response to the need for adequate health care, Indian tribal 
governments throughout the United States have implemented a wide 
variety of supplemental measures, including the following:

   Direct health care in the form of tribally-funded health 
        care clinics;

   Tribal subsidies for programs that the tribe operates under 
        a contract or compact with the Indian Health Service (IHS);

   Tribal health care reimbursement programs or plans that pay 
        for the cost of care not covered by IHS (because of funding 
        shortfalls) or other sources; and

   Self-insured tribal health care plans and group health 
        insurance policies that cover tribal members and their 
        dependents.

    Yet, it is our understanding that in the scenarios described above 
(all of which involve dedication of tribal government revenues to 
supplement the inadequate IHS system), the IRS is attempting to require 
the tribe to issue 1099 forms to each tribal member. This makes no 
sense from a policy perspective as it reduces the net amount of health 
care expenditures that tribal governments will be able to fund. It also 
compounds the violations of federal trust and treaty responsibilities, 
as tribal members would be required pay federal taxes on health 
benefits that should have been provided by the Federal Government in 
the first place.
    Moreover, we understand that the IRS is not targeting only health 
care services. The IRS is also proposing that tribe withhold or report 
on basic educational services, job training, meals for elders, housing 
assistance, the provision of safe drinking water, and waste disposal 
services. All of these are government services that are commonly 
provided by other governments. We have also heard from our members that 
IRS personnel have instructed a pueblo to issue 1099 forms for the 
meals provided at a traditional feast day. All of these raise issues 
raise very serious concerns for tribal leaders.
    We would urge Congress to engage in a two-track effort to address 
these problems. First, Congress should consider legislation that would 
specifically amend the IRS to exempt health care services provided by 
Indian tribes. Second, Congress needs to exercise oversight over the 
Treasury Department and the IRS to ensure that adequate policy guidance 
is provided.
Legislation Needed
    NCAI and many tribes have proposed a legislative fix that would 
clarify that health care benefits provided by tribal governments are 
excludable from gross income. This legislative clarification should be 
included in the national ``Health Care Reform'' bill. (NCAI is 
proposing several other health care amendments to protect IHS and 
tribal health care systems.) We are particularly grateful to Chairman 
Baucus of the Senate Finance Committee, Chairman Rangel of the Ways and 
Means Committee, along with Representatives Becerra and Nunes and many 
others, for their support and encouragement of this proposal.
    Although NCAI would prefer to exempt all tribally provided social 
welfare benefits, our supporters in Congress are indicating that it 
will be difficult to include all general welfare issues as part of a 
health care bill. Instead, they are asking that we consider excluding 
only tribal health care benefits as a part of this legislation, and we 
use that to build momentum for a broader exclusion of all tribally 
provided social welfare benefits. NCAI will continue to push for a 
broad exclusion, but at this point NCAI is supporting a narrower 
exclusion of tribal health care benefits as a first step.
    There is a concern that if we address health care in the 
legislation, the IRS will be even more likely to challenge other 
welfare programs provided by tribal governments. To guard against this 
we are urging Congress to include ``no-inference'' language in both the 
statute and committee reports, to make sure that the legislative 
history is clear that there are many tribal government programs that 
are not subject to tax, and to continue oversight with Treasury and IRS 
officials at the highest levels to curb the overly aggressive approach 
to tribal government social welfare benefits.
Oversight Needed on Application of ``General Welfare'' Doctrine
    Indian tribal governments have a unique status in our federal 
system under the U.S. Constitution and numerous federal laws, treaties 
and federal court decisions. They have a governmental structure, and 
have the power and responsibility to enact civil and criminal laws 
regulating the conduct and affairs of their members and reservations. 
They operate and fund courts of law, police forces, and fire 
departments. They provide a broad range of governmental services to 
their citizens, including education, transportation, public utilities, 
health, economic assistance, and domestic and social programs. Like 
states and local governments, tribal revenues and property are not 
treated as taxable income--but as the governmental revenues of a 
distinct sovereign. Tribes are generally treated in the same manner as 
states under the IRS Code, 26 USC Sec. 7871, the Indian Tribal 
Governmental Tax Status Act of 1982. In contrast, individual tribal 
members, whether they live on or off-reservation, are generally subject 
to federal taxes.
    Internal Revenue Code Section 61 provides that, gross income 
includes all income from whatever source derived unless excluded by 
law. The IRS and the federal courts have consistently held that 
payments made under legislatively provided social benefit programs for 
the promotion of general welfare are not includable in the recipient's 
gross income. \2\ Revenue Ruling 76-131, 1976-1 C.B. 16 explicitly 
lists health as a need that promotes the general welfare. The problem 
is that the IRS seems to have narrowed its interpretation of the 
general welfare doctrine in the context of tribal governments to 
require that the recipient demonstrate financial need, and not simply 
that the benefit contribute to the welfare of the community.
---------------------------------------------------------------------------
    \2\ See, e.g., Rev. Rul. 57-102, 1957-1 C.B. 26 (payments to the 
blind); Private Letter Ruling 200845025 (November 7, 2008) (ruling that 
payments made by an Indian tribe to elderly tribal members who were 
displaced by a flood were general welfare payments); Bailey v. 
Commissioner, 88 T.C. 1293 (1987) (considering whether grants to 
restore a building facade were excludable from income as general 
welfare payments).
---------------------------------------------------------------------------
    This is where we sharply disagree with the discriminatory 
application of the general welfare doctrine by the IRS. First, the 
general welfare doctrine originated in a 1938 decision by the IRS to 
exempt the Social Security system, which is not a means tested program. 
\3\ Second, in Revenue Ruling 70-341, 1971-2 C.B. 31, the IRS ruled 
that government provided health care benefits for the elderly, commonly 
known as Medicare benefits, are nontaxable to all recipients, not only 
to those in financial need. Third, federal and state governments 
commonly provide vaccinations and basic health tests to all citizens 
free off charge. Fourth, the Federal government has a longstanding 
policy of providing tax-free medical care to Indians. To effect this 
policy, federal statutes have been enacted stating that a major ``goal 
of the United States is to provide the quantity and quality of health 
services which will permit the health status of Indians to be raised to 
the highest possible level'' and providing specific authorization for 
the Indian Health Service, a federal agency that administers funds 
provided by Congress for the promotion of Indian health care services. 
\4\
---------------------------------------------------------------------------
    \3\ See I.T. 3194, C.B. 1938-1 114, which concluded that lump sum 
payments made to individuals as Social Security benefits not subject to 
federal income tax in the hands of the recipients.
    \4\ 25 U.S.C. Sec. 1601(b) and 25 U.S.C. Sec. 13.
---------------------------------------------------------------------------
    In addition, the IRS has never attempted to subject to income tax 
the value of myriad non-medical federal, state and local government 
services that are provided to all citizens regardless of income. It is 
common for state and local governments to provide refuse and trash 
collection, recycling collection, snow removal, and hazardous waste 
disposal to all citizens. For example, the City of San Diego has 
provided free trash collection for the last 96 years without a 
challenge by the IRS. Cities and local governments also provide free 
access to benefits with clear value to individuals, such as public 
libraries, public education, pest eradication programs, museums and 
public parks, and public concerts and events. Free government services 
range from National Public Radio and Television, to the local pancake 
breakfast provided by a Parent Teacher Association.
    As indicated by past IRS rulings and administrative practice, the 
general welfare doctrine is clearly much broader than simply those 
programs provided to low-income individuals. In practice, the general 
welfare doctrine has exempted all legislatively provided public 
benefits that do not inure simply to the individual, but improve the 
entire community.
    Health care is a classic example of a government service that does 
not benefit only an individual. In the treatment and prevention of 
infectious diseases it is essential that all members of a community 
receive treatment in order to protect the entire community. Beyond 
this, a healthy workforce is necessary for the economy, and healthy 
children are a prerequisite for successful education. Moreover, medical 
researchers are proving that more and more medical conditions are in 
effect ``contagious''--obesity, smoking, diabetes, drugs and alcohol--
all of these are examples where an individual's social interactions 
with the rest of the community have a significant effect on the entire 
community's health. An Indian tribe, just like any government, has an 
enormous interest in ensuring that its citizens share in the benefits 
of excellent community health.
    We can think of no legitimate reason why the IRS would choose to 
discriminate against tribal government services, but it appears to be 
that the IRS is confused because of the source of tribal revenues. 
Although Indian tribal governments are tax collecting entities and 
tribes often collect sales and excise taxes, unlike States, tribes 
typically lack an adequate tax base on the reservations, and have 
traditionally relied on revenue from their own natural resources, 
federal appropriations, and tribal business enterprises to fund their 
governments and government programs.
    Indian gaming has grown to be the most significant source of 
revenue for tribal governments, in much the same way that state 
lotteries and other forms of state gaming have grown significantly in 
recent years. The source of tribal revenues provides no rationale for 
discriminating against tribal general welfare programs. Congress's 
intent that general welfare benefits for tribal members should not be 
treated as income is made clear in the Indian Gaming Regulatory Act, 
where Congress distinguished between revenues used to provide for the 
general welfare and per capita payments.
    25 USC 2710 provides that:

             (B) net revenues from any tribal gaming are not to be used 
        for purposes other than--
               (i) to fund tribal government operations or programs;
               (ii) to provide for the general welfare of the Indian 
        tribe and its members;
               (iii) to promote tribal economic development;
               (iv) to donate to charitable organizations; or
               (v) to help fund operations of local government 
        agencies;

        (3) Net revenues from any class II gaming activities conducted 
        or licensed by any Indian tribe may be used to make per capita 
        payments to members of the Indian tribe only if . . .

             (D) the per capita payments are subject to Federal 
        taxation and tribes notify members of such tax liability when 
        payments are made.

    In fact, the in the only clear guidance provided to Indian tribes 
on the appropriate uses of gaming revenue under the Act, tribal 
governments have been encouraged to use gaming revenue to provide for 
the health care needs of their members, including through universal 
coverage programs. \5\
---------------------------------------------------------------------------
    \5\ See NIGC Bulletin No. 05-1 (Subject: Use of Net Gaming Revenue) 
(January 18, 2005) (available at http://www.nigc.gov under the 
``Reading Room'' tab and ``Bulletins'' sub-tab).
---------------------------------------------------------------------------
Conclusion
    NCAI urges Congress to immediately pass legislation that would 
specifically exclude tribal health benefits from income for federal tax 
purposes. Even with this legislative fix, we anticipate that Indian 
tribes will be subject to vexatious IRS audits on other social welfare 
programs that will create uncertainty and delay tribal progress for 
years to come. Oversight and engagement with the Treasury Department is 
needed to ensure that proper policy guidance is provided to the IRS to 
ensure that Indian tribal governments are treated equitably. We thank 
you for your diligent efforts on behalf of Indian country on these and 
many other issues.

    Senator Udall. Thank you for your testimony.
    Chairman Joseph, go ahead.

 STATEMENT OF HON. ANDREW JOSEPH, JR., BOARD MEMBER, NATIONAL 
                   INDIAN HEALTH BOARD (NIHB)

    Mr. Joseph. Senator Udall and distinguished Members of the 
Senate Committee of Indian Affairs, [greeting in native 
tongue]. Badger is my name in my language. I am Andrew Joseph, 
Jr. I appear today as a Portland Area Representative to the 
National Indian Health Board, NIHB. I am also accompanied by 
our NIHB Chairman, Reno Franklin, from the California Area. 
Thank you for inviting NIHB here today to help the Committee in 
its efforts to examine the Federal tax treatment of health care 
benefits provided by tribal governments to their citizens.
    Indian health care is provided for in the Federal law and 
the Constitution of the United States through a complex web of 
law and regulations. This is described in detail in my written 
testimony.
    First, the provision of health care to tribes is funded on 
a formalized trust responsibility with our people. The receipt 
of health care services or benefits has been consistently held 
in Federal policy in case law to not be included as income to 
individual beneficiaries. Likewise, funding from the Indian 
Health Service, IHS, has never been classified as income for 
individual beneficiaries.
    The IHS has been the primary provider of health care to our 
people since 1955 and has been grossly underfunded since its 
birth. The IHS is currently funded at approximately 54 percent 
of identified need. Until the IHS is fully funded, many tribes 
will continue to find it necessary to supplement Federal 
funding to provide needed health care services to their people.
    All of the 564 tribes of the United States provide health 
care services under some level of self-determination 
contracting. This is needed to provide health services and 
assume a portion of the health care delivery obligations of the 
Federal Government. Due to the chronic underfunding of the 
Indian self-determination line item of IHS appropriations, 
these contracts are grossly underfunded from day one.
    Recent concerns have been raised regarding the Federal 
Government's efforts to tax the value of health care services 
provided to individual American Indians and Alaska Native 
people, particularly in the area of contract health services. 
Health benefits are defined under the Internal Revenue Code as 
general welfare assistance programs and are not subject to 
taxation. As such, health benefits payments like these derived 
through IHS contract health service programs are not subject to 
Federal income tax. Tribal financial assistance provided to 
meet IHS shortfalls should be treated the same.
    The benefits should not be subject to the gross income 
calculation for the purposes of Federal income tax. Taxation of 
health benefits steps beyond the authorities and requirements 
of the Indian Health Care Improvement Act and frustrates the 
Congressional intent of law to elevate the health status of 
American Indians through expansion of participation, 
entitlement programs, and programs offered by the IHS tribal 
health providers.
    IHS is defined clearly in the Indian Health Care 
Improvement Act and no limitations are placed on the source or 
amount of benefit payments under the Act. Tribal supplemental 
funds to support CHS program payments are one type of cost 
incurred by tribes.
    Transportation costs tribes assume to assure that their 
members can receive health care services are a significant 
financial burden. Two significant reasons for these tribal 
investments include the extreme poverty and unemployment in 
tribal communities and the remote locations where tribes and 
Alaska Natives occur. These costs are required of nearly every 
tribe in the United States. Many tribes transport members out 
of town at least once a week to receive necessary medical care 
not available in tribal communities.
    It is a given that IHS is grossly underfunded. This makes 
supplemental funding to IHS care delivery systems drastically 
needed regardless of whether the supplemental funding comes 
from additional Federal appropriations, tribal generated 
revenue sources, or other sources. All such funding is utilized 
to meet the Federal Government's trust responsibility to 
provide health care to American Indian and Alaska Native 
people. It should never be taxed.
    The taxation of funds to provide health care services to 
individual American Indians and Alaska Natives has never 
occurred nor should it. All attempts to tax the value of health 
care services provided to tribal citizens should be abandoned. 
Rather, the sacred trust between the Federal Government and 
tribes should stand.
    The tribes purchased this trust through forfeiture of land, 
resources, American Indian lives, and our way of life. This has 
already been negotiated. Appropriate funding commitment from 
the Federal Government to honor its responsibility to provide 
health care to tribes would end this discussion quite 
effectively.
    Thank you for this opportunity to provide these comments. I 
am pleased to answer your questions. [Phrase in native tongue.]
    [The prepared statement of Mr. Joseph follows:]

 Prepared Statement of Hon. Andrew Joseph, Jr., Board Member, National 
                       Indian Health Board (NIHB)
    Chairman Dorgan, Vice-Chairman Barrasso and distinguished members 
of the Senate Committee on Indian Affairs, I am Andrew Joseph Jr. and I 
appear today as the Portland Area Representative to the National Indian 
Health Board (NIHB). I am also the Chairman of the Northwest Portland 
Area Indian Health Board. In addition, my fellow NIHB board member, 
Reno Franklin, NIHB Chairman and California Area Representative, is 
here with me to assist with answering any questions. I thank you for 
inviting NIHB here today to help with the Committee's efforts to 
examine the federal tax treatment of health care benefits provided by 
tribal governments to their citizens.
    Since its establishment in 1972, the National Indian Health Board 
serves federally recognized American Indian/Alaska Native tribal 
governments by advocating for the improvement of health care delivery 
to American Indian/Alaska Natives (AI/AN). It is the belief of the NIHB 
that the Federal government must uphold its trust responsibility to AI/
AN populations in the provision and facilitation of quality health care 
to our people. The end results that we all wish to achieve are the 
enhancement of the level and quality of health care, the adequacy of 
funding for health services that are operated by Tribal Governments, 
the Indian Health Service and other programs. Our Board Members 
represent each of the twelve Areas of the Indian Health Services (IHS) 
and are elected to serve on our Board by the respective Tribal 
Governmental Officials within their Area. The NIHB is the only national 
organization solely devoted to the improvement of Indian health care on 
behalf of all Tribes. As health care is the top priority of Tribes 
across the nation, and delivery of health care is unique and individual 
to each Tribal nation in the United States, it is fitting that the 
National Indian Health Board provides comments regarding the federal 
tax treatment of health care benefits provided by Tribal Governments to 
their citizens. Thank you for inviting us to do so.
    First and foremost, the provision of health care to AI/AN tribes is 
founded on a sovereign government-to-government relationship between 
the United States and Tribes. This provision of health care is 
formalized as a federal trust responsibility to AI/AN people that has 
been guaranteed through numerous treaties and federal law. Health care 
for AI/AN people was permanently authorized in the Snyder Act of 1921 
(25 U.S.C. Sec. 13).
    The Indian Self-Determination and Education Assistance Act 
reiterate the trust obligations of the United States to provide for the 
health and welfare of AI/AN people. Likewise, Tribal Governments 
establish in their constitutions similar commitments to provide for and 
protect the health and welfare of the citizens they govern.
    The Indian Health Care Improvement Act (IHCIA), (P.L. 94-437, as 
amended), is another cornerstone to the health care delivery system for 
AI/AN people. The IHCIA has provided numerous benefits to the AI/AN 
health care delivery system by authorizing Tribes to participate in 
federal entitlement programs, among other things. Under the authorities 
of Title IV of the IHCIA, Tribes have been allowed to participate in 
the U.S. Medicare, Medicaid and State Children's Health Insurance 
Program entitlements through the enrollment of AI/AN people and billing 
for reimbursement of covered services. S. 1200, introduced in the 110th 
Congress sought to expand participation of AI/AN individuals in the 
federal entitlement programs; Medicare, Medicaid and SCHIP. This 
language was inserted in an effort to improve the ``quantity and 
quality'' of health services, to ``permit the health status of Indians 
to be raised to the highest level possible.'' This legislation further 
defines Contract Health Services (CHS) ``as services provided at the 
expense of the Service (IHS) or a Tribal Health Program by public or 
private medical providers other than the service unit or Tribal health 
program at whose expense the services are provided.'' No limitations 
were placed in the legislation relative to the level or source of funds 
to pay for those services; essentially the funds may be derived from 
multiple sources. The receipt of such benefits (i.e., health care 
services) has been consistently held in federal policy and case law to 
not be included as income to the individual beneficiary. Likewise, 
funding appropriated to the Indian Health Service (IHS) has never been 
classified as income for individual AI/AN beneficiaries.
    The IHS has been the primary provider of health care to AI/AN 
people since 1955, and the overall value of health care services 
provided to individual AI/AN people is immeasurable. Much has been 
accomplished since 1955 in terms of improvements in public health and 
health care delivery, but much more improvement is still needed. The 
AI/AN population still suffers vast disparities in overall health 
status, and the funding appropriated to the IHS is abysmal relative to 
the per capita health care amounts provided to other federally-funded 
population groups (e.g., federal employees, Medicaid beneficiaries and 
even federal prisoners). Moreover, the IHS has been characterized as a 
``broken'' system. The truth is that the IHS system is not so much 
broken, as it is ``starved.'' The IHS has been grossly under-funded for 
the past several decades, and as such, cannot be expected to perform 
optimally. The IHS is currently funded at approximately 54 percent of 
the identified need. Until the IHS is fully-funded (i.e., 100 percent 
of documented need), many tribes will continue to find it necessary to 
supplement federal trust funding to provide needed health care services 
to their people.
    All of the 564 Tribes in the United States operate under self-
determination contract to provide some level of services, assuming a 
portion of the health care delivery obligation of the Federal 
Government. This assumption of services is under-funded from the first 
day of the contract agreement. This is due to the lack of funding in 
the Indian Self-Determination (ISD) line item of the IHS 
appropriations, which is consistently under-requested in the 
President's budget.
    The shortfall demonstrated in IHS funding is over $1 billion and in 
excess of $121.8 million per 2008 contract support cost data annually. 
Clearly, the care delivered to Native Americans and Alaska Natives 
through the Indian Health Service system is provided on chronically 
deficient funding, and this requires Tribes to supplement funds to 
provide the care they provide through external revenue resources such 
as Tribal revenue support, third party collections and grants. By 
virtue of the limits on annual appropriations, 1.9 million American 
Indians are affected by the Tribe's efforts to supplement IHS services 
when they take on some degree of their own service delivery.
Recent Concerns Regarding Taxation of Health Benefits
    Recent concerns have been raised regarding the Federal Government's 
efforts through the United States Internal Revenue Service seeking to 
tax the value of health care services provided to individual AI/AN 
people, particularly in the area of contract health services.
    Section 7701(a)(40) of the IRS Code defines Tribal governments as 
the governing bodies of an Indian Tribe, band, community, village or 
group of Indians, and recognizes that these bodies exercise government 
functions. In general, where Tribal governments act in a capacity to 
provide general welfare type services, similar to those traditionally 
provided by federal, state or local governmental bodies, federal tax 
treatment of those benefits is equivalent and those payments are not 
subject to taxation under the Code.
    Health benefits are by their nature, general welfare assistance 
programs; they provide for the continued improved health status of the 
individual to enhance the quality of life of the person, and 
ultimately, the wellbeing of the community. It is within the ability of 
Tribal governments to assess the needs of the community and create 
programmatic opportunities to address those priorities. In the instance 
of health benefit programs, Tribal governments must pass and accept 
either funding for, or implementation of, programs by Tribal 
authorizing resolution or ordinance.
    Health benefit payments, like those derived through the Indian 
Health Service Contract Health Service program, are not subject to 
federal income tax. Health benefit payments are a benefit established 
by the Federal Government by law and through the exercise of Tribal 
sovereignty by the acceptance of the program funds. Similar programs 
established by Tribal statute designed to assist with meeting the 
shortfalls of this program and other health care programs should be 
treated the same. The benefits should not be subject to the gross 
income calculation for the purposes of federal income tax. Tribes 
redirect their revenue to support the shortfall gap in federal trust 
funding in an attempt to provide basic health care delivery to their 
citizens. The goal of the funding is to prevent further erosion of 
services provided for Indian health programs. These challenges are 
multiplied in the face of recent dramatic increases in operating cost 
of health care while IHS funding fails to keep pace with medical 
inflation.
    Tribes that provide CHS payments in an effort to reach beyond the 
life and limb definition of CHS Priority I services into basic primary 
care, are dependent on Tribal supplemental funding. They seek 
supplemental insurance to reduce the burden of cost to existing CHS 
programs, and in turn generate revenue that supports direct service 
operations, or creates programs to provide insurance premium co-
payments Tribal members purchase or are mandated to purchase. These 
types of benefits are provided in the interest of the general welfare 
of the citizens Tribes serve based on the needs of individuals and the 
priorities of the Tribal government. To add the burden of factoring 
these benefit structures into the gross income of the individual falls 
outside of current IRS structures and place an unfair burden on an 
economically disadvantaged population. The contract health services 
funding is an extension of health care services funds provided directly 
within IHS or tribal facilities, and cannot justifiably be presumed as 
the personal income of individual tribal citizens any more than can the 
funding allocated to provide Medicare health care services to the 
elderly. CHS is one facet of costs associated with providing medical 
care to AI/AN people that Tribes assume and supplement under Tribal 
Self-Determination at less than whole costs. That is not the only cost.
    Transportation costs Tribes assume to ensure that their members can 
receive health care services are a significant financial burden. It is 
necessary for these costs to be covered by the Tribes due to the lack 
of federal funding for these purposes. Two significant reasons for 
these Tribal investments include extreme poverty and unemployment in 
Tribal communities and the remote locations where Tribes and Alaska 
Native Villages occur. These costs are required of nearly every Tribe 
in the United States but many Tribes transport members out of town at 
least once a week to receive necessary medical care not available in 
the Tribal community.
    An additional demonstration of the cost burden to the Tribes is 
found in health information technology. It is estimated that the per 
capita expenditure for health information technology in Indian Country 
is $28 per IHS user, as reported by the IHS Data Quality Workgroup in 
2008. After meeting the cost to implement government mandated records 
management and security, $14.00 remains to support patient care 
information. A tribe with an annual budget of $15,000,000 spends an 
average of 5 percent of the total budget on health information 
technology implementation (electronic health records); $750,000 or 
$82.00 per user. The IHS spends approximately $28.00 per user; 2 
percent of the total IHS budget. Based on this example, the Tribe 
spends $54.00 per user to support information technologies. This is 
another example of the types of costs Tribes incur. This is not a 
direct payment to the Tribal citizen; however, it is part of the cost 
of doing business to support the individual Tribal patient.
    As stated, the IHS is grossly under funded. Therefore, supplemental 
funding to the IHS health care delivery system is drastically needed, 
and regardless of whether such supplemental funding comes from 
additional federal appropriations, Tribally-generated revenue sources 
or other sources, all such funding is utilized to meet the Federal 
Government's trust responsibility to provide health care to AI/AN 
people.
    The taxation of these funds, whether appropriated or Tribally 
contributed, to provide health care services to individual American 
Indian and Alaska Natives has never occurred, nor should it. Taxation 
frustrates the intent of Congress as stated in the Indian Health Care 
Improvement Act to ``permit the health status of Indians to be raised 
to the highest level possible.'' This action creates a slippery slope; 
increasing the burden of costs to the individual and eroding the intent 
of honoring the federal trust responsibility to American Indians. All 
attempts to tax the value of health care services provided to tribal 
citizens should be abandoned; rather the sacred trust between the 
Federal Government and Tribes should stand. The Tribes purchased this 
trust through forfeiture of lands, resources, American Indian lives and 
our way of life. This has already been negotiated. Appropriate funding 
commitments from the Federal Government to honor its responsibility to 
provide health care to the Tribes would end this discussion quite 
effectively.
    I wish to thank the Committee for the opportunity to provide these 
comments and will be pleased to answer any questions the Committee may 
have.

    Senator Udall. Thank you, Chairman Joseph.
    Our final witness today, Professor Taylor, it is good to 
have you here. I am sorry that we at the University of New 
Mexico lost you as a law professor in past years and you moved 
on to Minnesota. But it is great to have you in front of the 
Committee today. Please proceed.

  STATEMENT OF SCOTT A. TAYLOR, PROFESSOR, UNIVERSITY OF ST. 
                      THOMAS SCHOOL OF LAW

    Mr. Taylor. Thank you very much, Senator Udall. I don't 
know if you recall but when you were in law school there was a 
law student who was one year behind you. That was me.
    [Laughter.]
    Mr. Taylor. I thank you for how you enriched my educational 
experience when we were law students together at the University 
of New Mexico School of Law.
    Senator Udall. Yes, I do remember. Thank you.
    Mr. Taylor. You have my statement. Instead of me reading 
it, I think I will just leave it for the record and provide you 
with some responses to the testimony that I have heard thus 
far.
    In terms of the testimony of Commissioner Ingram, she 
stated that the general welfare exclusion generally has not 
been applied to persons with significant income or assets. I 
just wanted to state that I think that is not true.
    If you look at Revenue Ruling 79-172, the IRS by its ruling 
provided an exclusion for Medicare benefits. But Medicare 
benefits are not means-tested. They are based on age. That is 
an incredible area of health care. It is one of the biggest 
sources of the Federal budget. So if what she says is correct, 
perhaps that revenue ruling should be revoked. If it were, we 
know that there would be dire consequences for the Internal 
Revenue Service.
    In addition, it is the practice of the Internal Revenue 
Service to exclude medical benefits provided by the VA. So that 
is another area where, by practice not by ruling, there is an 
exclusion.
    By practice, there is an exclusion for medical care 
provided under the Indian Health Service. The Indian Health 
Service provides medical care based on status, not based on 
need. So if someone who is a Native American happens to be a 
wealthy individual, if that person does go to the Indian Health 
Service and receives care, the value of the care or the value 
of the coverage is not included in gross income.
    So those are examples that are really quite pervasive.
    I think it is not correct to say that the need is based on 
income. I want to refer to a private letter ruling. It is in my 
testimony. It is Private Letter Ruling 200632005. It says, 
``The general welfare exclusion applies only to governmental 
payments out of a welfare fund based upon the recipient's 
identified need, which need not necessarily be financial.'' In 
other words, it doesn't need to be financial. It can be based 
on health. It can be based on education. It can be based on 
employment status. These are different articulations of need.
    It is my position in my testimony that someone who needs 
health care has a need. They need to be treated for their 
sickness, for their illness. If someone has a predisposition 
for a particular condition, they need to be screened for that 
to see if the condition has arisen. To me, it seems that 
whenever an insurance plan provides for health care, it is only 
given if someone has the articulated need. If someone does not 
have a health condition, they are not going to receive 
treatment for it. Therefore it is self-defining as a personal 
need.
    So if I were in Commissioner Ingram's position, what I 
would do, knowing the ruling history of the IRS, to provide 
clarity and guidance to tribes, I would issue a revenue ruling 
just like the Medicare ruling which says that tribally provided 
health care through insurance or reimbursement plans is 
excluded from gross income. I think that the rulings history of 
the Internal Revenue Service is clear enough to provide a basis 
for such a ruling.
    Now, in the absence of the Service's willingness to provide 
such a ruling, it seems to me that the legislative fix that 
Vice President Keel has recommended and suggested is actually a 
good idea. In addition, I think that Chairman Joseph's 
testimony showed that health care is a pervasive need for 
Native Americans. Therefore, to tie up or impede the provision 
of tribally provided health care, health insurance, or 
reimbursement plans through audits by the IRS is not really 
good policy. It actually impedes that.
    As I said, a revenue ruling could easily clarify this. In 
the absence of a revenue ruling, I guess it is up to the 
legislative branch of our Government to fix the problem which 
could be fixed through administrative practice. It has been 
fixed in almost all the other areas, as I said, with the VA, 
IHS, and Medicare.
    I will take any questions. Thank you.
    [The prepared statement of Mr. Taylor follows:]

  Prepared Statement of Scott A. Taylor, Professor, University of St. 
                          Thomas School of Law
Application of the General Welfare Exclusion to Health Care Provided by 
        Federally Recognized Indian Tribes to Their Members
    Mr. Chairman and members of the Committee allow me to thank you for 
the invitation to present testimony on the question of whether the 
value of tribally provided health care is included in the gross income 
of tribal members for purposes of the federal income tax. I have 
concluded that the general welfare exclusion, an administrative 
practice that the Internal Revenue Service (IRS) has developed through 
rulings, operates to exclude the value of tribally provided health care 
from the gross income of members. In addition, I have concluded that 
exclusion of these benefits is justified as a matter of federal Indian 
law because the United States has undertaken the obligation to provide 
health care to Native Americans as a general treaty obligation through 
the Indian Health Service (IHS). If tribes determine that, compared to 
IHS, they can provide better health care through private health 
insurance or direct reimbursements for health care, then tribal health 
care should receive the same federal income tax treatment as medical 
care provided through IHS. IRS has provided no explanation of why it 
excludes the value of IHS care coverage from the gross income of Native 
Americans receiving such care.
Some Federal Income Tax Background
    In terms of understanding the federal income tax questions 
involved, we need to focus on the benefits that IRS may treat as gross 
income. The underlying transaction involves a federally recognized 
Indian tribe that purchases health insurance for its members. Under 
this health insurance arrangement, an individual tribal member may 
receive health care that the health insurance pays for directly or 
through reimbursement. Under section 104(a)(3) of the Internal Revenue 
Code, amounts received through health insurance to cover medical care 
are excluded from the gross income of the person receiving the health 
care. Section 104(a)(3) does not apply to employer provided health 
care. The rules for employer provided health are contained in section 
105 and, generally speaking, provide rules of exclusion similar to 
those in section 104(a)(3). As a result, section 104(a)(3) operates to 
exclude the value of the health care that a tribal member actually 
receives under the health insurance arrangement.
    However, no federal income tax provision deals with the cost of 
health care that a tribe purchases on behalf of individual members. For 
example, if a tribe pays a health insurance provider $7,000 per year 
for comprehensive health insurance for each tribal member requesting 
such coverage, then IRS may assert that the tribe is conferring a 
benefit on the member in the amount of $7,000 each year. This $7,000 is 
gross income, IRS would argue, because the benefit goes to the tribal 
member and because Congress has provided no statutory rule of 
exclusion. The result is different if a tribal member receives health 
insurance coverage as an employee of the tribe. In the case of a tribal 
employee, section 105 excludes the cost of the health insurance from 
the member's gross income. Likewise, if a tribal member is self-
employed, then section 162(l) allows the individual to deduct the cost 
of the health insurance as an above-the-line business expense 
effectively giving the same treatment as the exclusion provided in 
section 105. See IRC Sec. 62(a)(1) (allowing the health insurance cost 
of self-employed individuals as an above-the-line deduction; see IRS 
Form 1040 for 2008, line 29).
    Without a specific statutory exclusion to protect a tribal member 
from an aggressive IRS auditor, the amount a tribe pays for health 
insurance on behalf of a tribal member may be treated as the gross 
income of that member. IRS, however, has discovered that many types of 
governmental payments not covered by a specific statutory rule of 
exclusion should be excluded. The most often used theory of exclusion 
is the ``general welfare exclusion'' (sometimes also described as the 
``general welfare exemption'').
The General Welfare Exclusion
    Most law professors teach their students that gross income includes 
all income from whatever source derived. As a general concept, income 
is any realized benefit or accession to wealth over which the taxpayer 
has dominion and control. This concept comes from the Supreme Court 
case of Commissioner v. Glenshaw Glass, 348 U.S. 426 (1955), and 
applies to all potential income unless the taxpayer can find a specific 
statute that provides a rule of exclusion. See Vincent v. Commissioner, 
T.C. Memo 2005-95 (construing rules of statutory exclusion narrowly). 
This sweeping characterization of the federal income tax is so over 
inclusive that IRS has been forced to develop some explicit and some 
implicit rules of exclusion, without which our federal income tax would 
collapse.
    The broadest explicit administrative rule of exclusion that IRS 
uses is the ``general welfare exclusion'' (GWE). IRS, back when it was 
called the Bureau of Revenue, developed this doctrine in 1938 to 
provide for the exclusion of lump sum payments made under the Social 
Security Act. See I.T. 3194, 1938-1 C.B. 114. By 1971 IRS referred to 
GWE as a long-standing doctrine. See GCM 34506 (May 26, 1971) 
(providing exclusion of federal mortgage assistance payments). The 
United States Tax Court seems to acknowledge that GWE may provide a 
basis of exclusion in appropriate cases. See Bannon v. Commissioner, 99 
T.C. 59 (1992) (refusing to apply GWE in a case where a relative was 
paid to care for a disabled relative but acknowledging its possible 
application under appropriate facts).
    In applying the general welfare exclusion, the IRS generally 
requires that the payments (1) come from a governmental general welfare 
fund, (2) be spent to promote general welfare, and (3) not be based on 
payment for service rendered. See Rev. Rul. 98-19, 1998-1 C.B. 840 
(excluding relocation payments made by local governments to those whose 
homes were damaged by floods). The second requirement (promotion of 
general welfare) must be based on the need of the recipient; however, 
the need can be based on a variety of considerations including 
``financial status, health, educational background, or employment 
status.'' IRS CCA 200021036 (May 25, 2000) (excluding state adoption 
assistance payments made to those individuals adopting special needs 
children even though not based on any financial means test applied to 
the adoptive parents). IRS has applied GWE to tribal payment and has 
acknowledged that tribes are governments within our legal system and 
capable of setting aside and making payments out of a ``governmental 
welfare fund.'' See PLR 200632005 (April 13, 2006) (excluding tribal 
funds expended for housing assistance allocated based on multiple 
factors of need); compare Tec. Adv. Memo. 9717007 (Jan. 13, 1997) 
(including as gross income those per capita payments made by a tribe to 
its members when the amount of the payments were made without regard to 
the health, education, or employment status of individual members) .
    The question here is whether tribes can provide health care, 
through health insurance or through a reimbursement plan, to all 
members without regard to the financial needs of their members. IRS, in 
some of their audits, is asserting that tribal health plans provided to 
all members may produce gross income to recipients because the benefits 
are not based on financial need. If IRS is making such an assertion, 
then such an assertion is wrong. Health care is provided to prevent and 
treat disease. Those receiving medical treatment receive such treatment 
because they have a need for it. Those at risk of contracting breast 
cancer, for example, should receive regular screening. Those not at 
risk do not require such screening. Those who have a chronic disease, 
such as diabetes, require and need medical treatment to mitigate the 
effects of such a disease. It is entirely appropriate for IRS to treat 
all health care as need based because it treats or prevents illness. 
Providing this health care through health insurance is a prudent way 
for a tribe to manage costs. Such an arrangement benefits from risk 
pooling and should lower the overall costs of health care.
    IRS currently treats the value of health care received through 
Medicare, the Veterans Administration, and the Indian Health Service as 
excluded from gross income. Except in the case of Medicare, IRS has not 
provided any rulings and Congress has not enacted any statutes 
providing a specific exclusion for these benefits. See Rev. Rul. 79-
172, 1979-1 C.B. 86 (applying the general welfare exclusion to Medicare 
benefits). Health care under these federal plans is not provided based 
on financial need. Medicare is based solely on age. Coverage through 
the Veterans Administration is based on past military service, although 
some medical services are based on financial need. Care though IHS 
depends on an individual's status as an Indian without regard to wealth 
or income. See 42 C.F.R. Sec. 136.12 (describing eligibility based on 
status as a Native American and not based on financial need).
    Senator John McCain, a member of your Committee, qualifies for 
health insurance through his service as a United States Senator, 
through the VA based on his military service, and through Medicare 
based on his years on this earth. None of these programs is means 
tested. Nonetheless, the value of these benefits, if equated to health 
insurance, is not included in his gross income. To single out Native 
Americans as the only group of Americans who should treat as gross 
income the value of governmentally provided health care would be 
unfair. The health care needs of Native Americans are just as real and 
substantial as those over 65, those who have served in the military, 
and those Native Americans who are members of tribes that cannot afford 
health care for their members and who must seek care through the Indian 
Health Service.
Treaty Exemption
    IRS takes the position that tribal members are subject to the 
federal income tax unless specifically exempted by treaty or statute. 
See Rev. Rul. 67-284, 1967-2 C.B. 55. Congress has provided no 
statutory rule of exclusion for the benefit a member receives when the 
tribe pays for the member's health insurance. See IRC Sec. Sec. 105 & 
106 (applying rules of exclusion to employer provided health care but 
not to tribes or other health care provided through government 
programs, such as Medicare).
    The Indian Health Service exists primarily because many treaties 
obligated the United States to provide health care to the members of 
tribes. The Indian Health Service explains that treaties ``between the 
United States Government and Indian Tribes frequently call for the 
provision of medical services, the services of physicians, or the 
provision of hospitals for the care of Indian people.'' See IHS Facts 
Sheets, available at http://info.ihs.gov/BasisHlthSvcs.asp. If health 
care is a federal treaty obligation and if tribes are willing to 
provide their members with better health care through the purchase of 
private health insurance, then it makes sense to honor the treaty 
obligation and to treat tribally provided health care benefits as 
excluded from gross income for purposes of the federal income tax. It 
would be strange to allow tribal members to exclude the value of IHS 
medical care but to tax the value of tribally provided care, especially 
when it lessens the federal obligation owed.
Conclusion
    The general welfare exclusion is a sufficient and adequate legal 
theory to exclude the benefits of health care provided by tribes to 
their members. The difficulty comes from IRS auditors and revenue 
agents who view all tribal benefits as gross income unless provided 
based on financial need. The criteria of need used by IRS acknowledge 
that an allocation of benefits based on health, education, or 
employment status is just as appropriate as one based on financial 
status. In this case, the health of a tribal member is the need, and 
tribal health insurance meets the health needs of tribal members. 
Therefore, the general welfare exclusion clearly applies. To clarify 
this situation and to instruct IRS agents in the field, IRS should 
issue a revenue ruling. This ruling should hold that the cost of health 
insurance provided by tribes to their members is excluded from gross 
income under the general welfare exclusion.
    In addition, the federal treaty obligation to provide health care 
to Native Americans is an independent legal basis for excluding the 
cost of health care provided by tribes. Tribes that choose to purchase 
health insurance for their members should be allowed to step into the 
shoes of the Federal Government and provide medical services to 
members. Treating tribal health benefits the same as those that the 
Indian Health Services provides is just and fair. This treatment would 
validate tribal sovereignty and enhance the government-to-government 
relationship that the United States has with Native American 
governments.

    Senator Udall. Thank you very much, Professor Taylor.
    We will proceed now with questions. I will allow all of you 
to comment as we move along here.
    Ms. Ingram, thank you for your testimony. I understand you 
are constrained to informing us about the black letter of tax 
law and how the IRS is implementing that law. With that in 
mind, I will ask some questions about the activity of your 
Division. I understand that the IRS Chief Counsel in June of 
2007 stated that the IRS had initiated 139 examinations of 
tribal government programs. Is that correct?
    Ms. Ingram. I am sorry, Senator. I am not familiar with 
that statement. If I look at our level of activity in terms of 
cases that have been completed with tribal entities, that 
number seems high. But I would have to check and get back to 
you for an answer on the record.
    Senator Udall. We would like to have that pinned down for 
the record, both on the 2007 date and the statement of the 
Chief Counsel but also on what you have going today. So you 
can't tell us specifically how many tribal governments are 
under audit today?
    Ms. Ingram. I do not have the exact number of how many are 
underway at the moment. I will say that if I look at how many 
we have completed per year, I would have said it was below 100. 
But I would rather be more precise in getting back to you.
    Senator Udall. One of the things I am wondering is, you 
have State and local governments and then you have tribal 
governments. What would be the comparison of the two in terms 
of audits for general welfare programs? Do you have a rough 
sense on those? You thought the number was a little lower. Do 
you have a rough sense on how much the IRS is proceeding with 
State and local governments?
    Ms. Ingram. If you will allow us a two part answer, 
Senator?
    Senator Udall. Yes.
    Ms. Ingram. The numbers that we put in our annual data book 
for the Internal Revenue Service and the numbers that appear in 
our annual work plan that go on our website every year for both 
Federal, State, and local government audits and then also for 
Indian tribal audits are numbers that come from the number of 
returns that have been pulled and closed. So for any one 
examination with an entity, there may be quite a few returns 
because of employment taxes, quarters, and things like that.
    So backing out of those numbers into the number of 
entities, my information indicates that the rate at which we 
reach out to members of each of those populations is quite 
comparable, one to the other.
    Senator Udall. Is it the practice of the IRS to audit a 
State or local government without first providing some guidance 
or bulletin on the subject of the audit?
    Ms. Ingram. Well, we audit many State and local governments 
and Federal agencies. We try to have a continuous flow of 
information about what the laws are or what issues we think 
might be of concern in the conversation for examinations. So I 
am at a loss as to what specific bulletin you would have in 
mind, Senator.
    Senator Udall. Well, any kind of guidance or bulletin, any 
guidance before you carry out an audit.
    Ms. Ingram. We have quite a lot of educational activity 
that goes on across the board. In fact, when we established our 
Indian Tribal Governments Office almost 10 years ago, we spent 
a great deal of time in the first part of the last decade doing 
almost exclusively outreach and educational activities, trying 
to figure out how to make sure that the laws that applied 
equally to everybody could be explained or educational 
materials could be prepared and put into the context of Indian 
country. We do the same thing for State and local and Federal 
agency governments.
    As time passed, we tried to see what the impact of that 
educational process and outreach process was on the voluntary 
compliance of our constituents. Over time, we have gone in and 
looked at actual compliance with some of our 2,700 entities 
that we are responsible for to see how that is playing out on 
the ground. So the current rate of audit coverage is something 
that has evolved.
    We are always in the business of trying to figure out what 
the right balance is in terms of how we spend our time and how 
we interact with the community, whichever community it is. That 
continuous evaluation of do we need to spend more time on the 
education versus on the checking on filing compliance is an 
ongoing conversation.
    Senator Udall. You mentioned in your answer this Indian 
Tribal Governments Office that I think was established in 1999. 
Can you explain the role that that Office has today, 10 years 
later? How does it look into the trust responsibility and the 
responsibilities under the treaties and statutes that are out 
there with regard to Native Americans?
    Ms. Ingram. Yes, Senator. The role of the Indian Tribal 
Governments Office is only as wide as the responsibility of the 
Internal Revenue Service with the specialization of trying to 
understand, dialogue, and listen to the interests of Indian 
country in particular. But its responsibilities start and end 
with the issues of the taxation, particularly of the 2,700 
entities that come within that umbrella.
    It is a continuous process of trying to make sure that as 
we administer the tax laws that we are given and as we 
understand how to consistently apply the general welfare 
exclusion to all kinds of governments that we try to understand 
the context in which we are doing that. It is a rich and 
complicated historical context in this context. We are 
continuously trying to understand that and administer it 
appropriately.
    But the jurisdiction is only as to taxes.
    Senator Udall. So are you saying that this Tribal Office 
doesn't look into matters except for taxes? Is it excluded from 
looking into these other things where you have a much different 
relationship with tribes than with the Federal Government?
    Many of the tribes would argue, and I think they have a 
pretty strong argument in Indian law, that the trust 
responsibility applies to all of the Federal Government. So 
your agency and the Treasury Department has an obligation to 
understand the treaties and the context of these treaties. You 
have an obligation to understand the statutes and then to try 
to reflect in your policy what you see from those. But you say 
this Tribal Office isn't even looking at those kinds of issues?
    Ms. Ingram. The Tribal Office never walks away from trying 
to understand these things more deeply. The difficulty that 
faces the tax administrator is understanding where and when, as 
a tax administrator without more specific guidance as to the 
Internal Revenue Code, we have adequate maneuvering room, shall 
I say, to go beyond that black letter.
    The general welfare exclusion is a place where the Service 
has tried vis-a-vis governments in general to find ways to go 
beyond the black letter law. The variety of rulings and, may I 
say, the variety of statutes underlying the actual words of the 
rulings show how challenging it is as we go beyond those 
parameters and how much clearer it can be for both the 
administrator and the constituents to navigate these things 
when we do have bright lines and black letter rules. That is a 
continuing conversation.
    There are many conversations going on in terms of tribal 
governments or entities coming to us to ask for rulings who 
come and talk to us about our views about the general welfare 
exclusion. They are able to craft what they would like to do 
within that and often then don't bother going through with that 
private letter ruling process so there is no public document at 
the end.
    It is a more challenging conversation the farther we get 
away from the traditional 50 years of rulings. But it is a very 
fact driven process when it is not actually in Title 26.
    Senator Udall. I want to focus a little bit more on this 
Tribal Office because I would think that is the one focal point 
for tribes to be able to have a voice in terms of the general 
welfare exclusion, exemption.
    Look at the history that the tribes have with the United 
States and that relationship, the treaty relationship, the 
statutes that have been put in place, specifically with regard 
to health care, trying to provide the very best health care. We 
know they aren't doing that. The Indian Health Service, because 
of the resources and the various circumstances, is not able to 
do that. Now you have tribes stepping forward and doing that in 
cases where they have the ability to do so.
    I would hope that that Tribal Office would see its mandate 
as reviewing all of these things and educating the Treasury 
Department, the IRS, and everybody within the Department. Maybe 
at some point we should talk with them about it.
    But Professor Taylor raises something which I think I would 
like you to explain if it is true that we have this Medicare 
exemption and a Veterans exemption. Senator McCain sits on this 
Committee. His medical care through the Veterans Administration 
is not taxed. You have applied the exemption in this one area. 
Yet tribal health care, which I think stands alone because of 
the trust responsibility--you haven't initiated an effort to go 
forward on that. The burden is now on the tribes and many of 
them don't have the resources to hire the lawyers, and to go 
through the process.
    Could you speak to what he pointed out, that you do have 
the ability? You could issue a ruling with regard to these 
tribal health policies. Why aren't they like Medicare and like 
Veterans?
    Ms. Ingram. Well, if I could mention a couple of things 
without the Professor and I doing dueling revenue rulings and 
private letter rulings, I have a couple of thoughts and then a 
comment and an offer.
    Since I assumed this job recently, I have tried to 
understand what is behind the printed word of what is available 
on the public record when you read these rulings. What is of 
interest to me is that so often the results depend on the 
underlying statute. The ruling might not have a needs filter in 
it but if you go to the statute, it is in the statute. So I 
think it is very hard for all of us to look at those rulings 
and understand everything we need to know about why they came 
out the particular ways they did.
    That said, I will say there is a very strong sense amongst 
the people who work on these rulings, this doesn't go to the 
next topic, but there is a strong sense that we need to be very 
careful to make sure that we are treating all governments 
equivalently because the general welfare exclusion is not for 
one kind of government versus another.
    To the extent people feel like that has not been what we 
are doing, we would like to pursue that thought because we are 
totally committed to applying it equitably across all kinds of 
governments. That does not respond to the point about whether 
there is this special trust relationship that ought to provide 
an additional policy backdrop either to the general welfare 
exclusion or to any legislative efforts.
    The last thought I would share is that I am very flattered 
but I don't personally control the issuance of revenue rulings. 
That is a collaborative process. It includes a great many 
policy people in the process.
    I certainly can sit here today and say that it is in the 
best interests of both the administrators and the communities 
to have as much clarity as possible. To the extent that that 
should be embodied in more rulings, which is a very messy road 
to try to do that with, or whether that should be in 
legislation or in a revenue ruling that draws a bright line of 
some kind in this community would require more discussion with 
people beyond myself for sure. I will pursue that discussion.
    Senator Udall. We are hoping to educate people through you.
    Ms. Ingram. Thank you, Senator.
    Senator Udall. But you didn't comment on the Medicare or 
Veterans. Tell us the difference. Applying the black letter of 
the law, what is the difference here? You have a tribe, as 
Chairman Macarro talked about, that wasn't getting health care 
so they went out and got health care for all their tribal 
members. What is the difference there with Medicare and the 
health care provided by the Veterans Administration? What would 
you argue would be the difference based on the law?
    Ms. Ingram. Well, there are some things that are not 
different. There are some things that are. I think it is an 
important comparison to continue discussion on after today.
    If you go back through the history of the rulings on 
Medicaid and Medicare, they are grounded back in the 1940s in a 
comparison to Social Security. Now, all those programs have 
evolved in those many years. But the rationale in the long line 
of rulings appears to be those portions that are particularly 
focused on the needs safety net and those portions for which 
citizens use post-tax dollars for premiums to get extra 
coverage. Whether those theories actually answer the question 
for every piece of those programs, I am not going to claim 
expertise today to respond to.
    But if you look at the portion, for example, where I could 
provide an extra premium through payroll withholding at the 
moment since I am employed, those are post-tax dollars. I have 
paid on that up-front piece as I described and so the back-end 
would not be includable in income.
    But the underlying statutes are terribly important for 
trying to figure out how to apply these things. I certainly am 
committed to and take away from today the commitment to look at 
how those line up across the board. I would just say that it is 
hard to do that by looking at just the revenue rulings.
    Senator Udall. Thank you, thank you.
    Professor Taylor, do you have any thoughts on what you have 
just heard?
    Mr. Taylor. Yes, I have of a couple of thoughts. One, in 
terms of the pre-tax/post-tax dollars at least in the 
employment context, it is true that there were no statutes 
covering the situation where people would have out of pocket 
expenses or buy supplemental insurance. Those were post-tax 
dollars that had to go through medical expense rules and things 
like that. But the IRS has allowed employers to set up flexible 
spending accounts where deductibles and things like that can be 
paid for with pre-tax dollars. That has been done 
administratively as a convenience to employers. That is an 
example.
    Then, in terms of a revenue ruling, I do agree with her 
that a revenue ruling is a consultative process. But when I 
served as Professor in Residence in the Chief Counsel's Office 
of the Internal Revenue Service, one of my projects was a speed 
regulation. Someone wanted a regulation that relieved crime 
stoppers from the obligation of issuing 1099s for the rewards 
they were paying. That regulation was drafted, approved, and 
adopted within one week. I don't know that that was an 
incredible national emergency but it was done quickly. So where 
there is a will there is a way.
    Maybe that is a record that can never be beaten. Maybe it 
needs to go into the Guinness Book of World Records for the 
fastest regulation ever promulgated in the history of the 
United States. But my point is that a revenue ruling could be 
opened as a project.
    When I was Professor in Residence there also was a revenue 
ruling that I was reviewing, recommending that it be published 
and issued. It was initially proposed in 1955 and I reviewed it 
in 1988. I was the fifth person to recommend publication and it 
is still not published. I guess that may be the world's record 
for the longest revenue ruling project that never saw the light 
of day. No, there are older ones than that? Okay.
    Senator Udall. You made the argument in your testimony that 
Medicare and Veterans were very similar to what the tribes are 
doing. Based on the testimony that you heard here, do you still 
feel pretty strongly that the tribes' facts fit into that 
scenario?
    Mr. Taylor. Yes, absolutely. The benefits that are involved 
with Medicare are not based on financial need, they are age-
based. In the case of Veterans, it is service based. Again, it 
is not based on financial need. If you look at the medical 
benefits that are available to veterans, there are very few 
that are based on financial need. Most of them are status-
based. That is, you are veteran and therefore you are entitled 
to those. You may seek your health care elsewhere.
    The one we haven't talked about is the Indian Health 
Service. I cited the regulation and Commissioner Ingram is free 
to look at that regulation. It is absolutely, fundamentally 
clear that Indian Health Service rights to service are based on 
status, not based on financial need. I don't see any effort on 
the part of the Internal Revenue Service to determine the value 
of the coverage or the value of the benefits that are received.
    I think that the value of the health care benefits should 
be excluded under 104(a)(3). She and I probably agree on that. 
But the value of the coverage is something that is just like 
the tribal coverage where the tribe purchases insurance. I 
really don't see any difference at all. I don't see the 
Internal Revenue Service wanting to take on the task of trying 
to value the coverage of the Indian Health Service and then 
including that in the gross income of all the recipients of 
Indian Health Service coverage.
    Then to go out and audit the million and a half people, I 
don't know how many are covered by the Indian Health Service 
but someone probably knows, that would be an awful lot of 
audits to go back and correct just because it is not needs-
based financially. It is based on medical need.
    Senator Udall. Vice President Keel, your testimony 
indicates that the IRS may be looking into other tribal 
government programs such as education, housing, or even 
benefits provided to help participation in religious and 
cultural activities.
    Of particular interest to me, you mentioned the fact that 
the IRS is requiring some New Mexico pueblos to provide 1099 
forms to their tribal members if the tribal government helps 
offset the cost of the pueblo's religious feast day. Now, I 
have been to a few pueblo feast days and I can tell you that it 
is quite a production. Each family in the pueblo feeds well 
over 100 visitors.
    Can you please share any additional information about some 
of these additional programs that you believe the IRS is 
looking into?
    Mr. Keel. Thank you, Senator. You are absolutely correct. 
The pueblo feast days are part of their religious activities. 
For instance, the families who provide those meals that feed 
sometimes in excess of 100 people, they go and purchase food 
and other goods to accomplish that and to accommodate those 
folks who come in. They are simply reimbursed so there is no 
gain on those services. We would say that to be reimbursed for 
the food that they purchase and provide for other tribal 
members and other folks, there is no gain there and so there is 
no need to provide or to require 1099s for that or to tax that 
type of service.
    In terms of the trash and recycling collection and other 
types of services, the City of San Diego has been doing that 
for 100 years. They have never been audited and they have never 
been required to issue 1099s to folks who live within the city 
for trash collection and other types of services. So that would 
be the equivalent.
    For the IRS to come to some of our member tribal programs, 
for instance, educational benefits, and attempt to tax those, 
again, we are simply providing services. In fact, in many ways 
the scholarships and funds that we provide for many of our 
students are reimbursement-type programs. So again, there is no 
gain for that.
    Senator Udall. Thank you. Ms. Ingram, do you have any 
thoughts on that particular part of this in terms of other 
governmental services or programs?
    Ms. Ingram. No, I don't think I am prepared today to talk 
about the array of other governmental services.
    But I have been taking many notes, Mr. Keel. I would be 
curious as to exactly how the arrangements, both in the tribal 
setting and in the government setting, the State government or 
the city government in your example, are actually structured 
and administered. I would like to make sure we are doing it 
correctly.
    Senator Udall. Great, thank you.
    Chairman Joseph, do you have any thoughts on what you have 
heard at this point? I want to give you a chance here as we get 
ready to conclude.
    Mr. Joseph. Yes, sir. Earlier we had some charts that were 
brought up. They are very good charts. They show that our 
people are funded at very low levels. What they didn't show is 
a comparison of the different programs like the VA or Medicaid, 
or like the Federal prisoners who receive almost twice the 
amount of funding in health care as what is needed for our 
people. I don't see the IRS going there and giving those people 
the 1099s.
    Our people are unique. We are mentioned in the Constitution 
of the United States. There are treaties and executive orders. 
The ones that our Chief signed, there is no language about any 
out of pocket expenses. There is no language about being taxed. 
As a tribal leader, I don't think any of our tribes have agreed 
to pay any of this.
    We are struggling with the economy, with the way it is 
going, and having to supplement and help our people from the 
high rates of disparities in health and the average age of 
Native American men. I am going to be 50 next week and 
according to the data, I have 13 more years. That is what an 
average Native American male lives to be. These are hard words. 
We have got children, K-8, on my reservation that were at a 
pre-diabetic stage. We are just trying to do our part to try to 
prevent our people from dying at these young ages.
    Like I said in my testimony, if IHS was fully funded to its 
need then we wouldn't even have to worry about this. It should 
be fully funded. I would much rather have our tribe spending 
money on other things like our housing shortfalls. On my 
reservation there are about 1,400 families needing homes, young 
people that got an education and are starting their families. 
But instead we are having to take care of what our priorities 
are. Living is one of our priorities. Thank you.
    Senator Udall. Chairman Joseph, thank you very much. I 
think you make a very good point. Compare the resources that 
the Indian Health Service has with other medical care. Federal 
prisoners are one comparison. I think actually it is even worse 
than you said. I think it is about three to one. The last time 
I saw the numbers, it was about $1,300 per patient for the 
Indian Health Service and for a Federal prisoner it was $3,900. 
If you go to the society in general and look at Medicare, those 
numbers are much, much higher. So we need to put the resources 
behind the Indian Health Service. There is no doubt about that.
    Now, because we moved the hearing to today I think you were 
all told we were going to try to keep this to an hour. So I 
want to thank all of you for your time and for your 
flexibility.
    The United States Tax Code is complicated. When we consider 
Federal Indian law, we are looking at two unique areas of the 
law. On one hand we have the black letter of the tax code and 
on the other we have this flexible doctrine of the general 
welfare exclusion. We must include the Indian Health Care 
Improvement Act in this debate as well as the hundreds of 
treaties and laws that make promises to Indian tribes.
    It seems to me that Indian tribes need much clearer 
guidance on this issue before IRS audits continue. Ms. Ingram, 
I hope you can pass that message back to the Treasury. I know 
that you have been listening here. It was great to have you as 
a part of this panel.
    In addition, I think the Treasury Department should have a 
discussion with the Interior Department, which has a better 
understanding of the United States' obligations to Indian 
tribes. I hope that that specific unit within the IRS also 
keeps that same kind of focus. Through those communications, I 
hope we can then meet with tribal leaders themselves and 
develop guidance that respects the tax code and respects the 
promises made to the tribes.
    At the same time, I think Congress will also consider 
proposals to address this issue, which is timely given the 
current national debate on health reform. Several of the 
witnesses have mentioned bills in the House, Xavier Becerra, 
and other colleagues. We are certainly going to be taking a 
look at those.
    Again, thank you for your flexibility and willingness to be 
here. With that, the hearing is adjourned.
    [Whereupon, at 11:15 a.m., the Committee was adjourned.]

                                  
