[Senate Hearing 112-674]
[From the U.S. Government Publishing Office]
S. Hrg. 112-674
NEW TAX BURDENS ON TRIBAL SELF-DETERMINATION
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HEARING
before the
COMMITTEE ON INDIAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
JUNE 14, 2012
__________
Printed for the use of the Committee on Indian Affairs
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COMMITTEE ON INDIAN AFFAIRS
DANIEL K. AKAKA, Hawaii, Chairman
JOHN BARRASSO, Wyoming, Vice Chairman
DANIEL K. INOUYE, Hawaii JOHN McCAIN, Arizona
KENT CONRAD, North Dakota LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota JOHN HOEVEN, North Dakota
MARIA CANTWELL, Washington MIKE CRAPO, Idaho
JON TESTER, Montana MIKE JOHANNS, Nebraska
TOM UDALL, New Mexico
AL FRANKEN, Minnesota
Loretta A. Tuell, Majority Staff Director and Chief Counsel
David A. Mullon Jr., Minority Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on June 14, 2012.................................... 1
Statement of Senator Akaka....................................... 1
Statement of Senator Barrasso.................................... 2
Statement of Senator Johnson..................................... 2
Statement of Senator Udall....................................... 3
Witnesses
Jacobs, Christie J., Director, Office of Indian Tribal
Governments, Internal Revenue Service, U.S. Department of the
Treasury....................................................... 38
Prepared statement........................................... 39
Klein, Aaron, Deputy Assistant Secretary, Office of Economic
Policy, U.S. Department of the Treasury........................ 32
Prepared statement........................................... 34
Lomax, William, President, Native American Finance Officers
Association.................................................... 54
Prepared statement........................................... 56
Malerba, Hon. Lynn, Chief, Mohegan Tribe; on Behalf of the United
South and Eastern Tribes, Inc.................................. 47
Prepared statement........................................... 50
Sanchey-Yallup, Hon. Athena, Executive Secretary, Confederated
Tribes and Bands of the Yakama Nation Tribal Council........... 23
Prepared statement........................................... 24
Steele, Hon. John Yellow Bird, President, Oglala Sioux Tribe..... 4
Prepared statement........................................... 6
Appendix
Dillon, Sr., Herman, Tribal Council Chairman, Puyallup Tribe of
Indians, prepared statement.................................... 69
Mendoza, Hon. Gregory, Governor, Gila River Indian Community,
prepared statement............................................. 73
National Congress of American Indians (NCAI), prepared statement. 79
NEW TAX BURDENS ON TRIBAL SELF-DETERMINATION
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THURSDAY, JUNE 14, 2012
U.S. Senate,
Committee on Indian Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 2:15 p.m. in room
628, Dirksen Senate Office Building, Hon. Daniel K. Akaka,
Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. DANIEL K. AKAKA,
U.S. SENATOR FROM HAWAII
The Chairman. The Committee will come to order.
We say aloha to all of you and welcome to this hearing on
New Tax Burdens on Tribal Determination.
Federal Indian policy is rooted in the United States
Constitution, in its treaties and its Federal statutes, and in
these documents and in administrative actions the Federal
Government has always acknowledged the unique status of Indian
tribes on government-to-government basis. We can all agree that
Indian tribes and Indian people have given much to this
Country, in land, in every war since the inception of this
Country, and in culture. Tribes have never been opposed to
contributing to the well-being of the Country or doing their
fair share, so long as the unique status of sovereigns is
acknowledge.
Today we are holding a hearing on taxation of Tribal
governments and individual Tribal members to ensure that the
government-to-government relationship is upheld by every branch
of the Government.
During this Congress, the Committee has heard from many
tribes that are concerned with recent efforts by the Internal
Revenue Service to tax important Tribal governmental benefits
provided for the general welfare of their citizens, a cultural
practice at the core of Tribal identity. Today tribes provide a
wide range of these programs, including funeral assistance,
elder care, education assistance, and many of the social
services.
The ability of tribes to provide for the general welfare of
their citizens is truly critical to the self-determination of
Tribal governments. This is especially important given that one
out of every four Native people in the U.S. lives in poverty.
Where the Federal Government has fallen behind in its trust
responsibility to tribes, tribes have done their best to fill
in the gaps. This Committee has spoken in strong support of the
efforts of the Department of the Interior to settle
longstanding trust suits. However, we have heard from tribes
who are concerned that distribution of those trust settlements
to Tribal members may now be subject to taxation, in sharp
contrast to prior policy and Federal statute.
Tribes have raised these concerns during consultations with
the Treasury Department and the Internal Revenue Service. I am
looking forward to a productive discussion on this issue and
welcome any recommendations on moving forward in a positive
way.
The Office of Indian Tribal Governments within the Internal
Revenue Service was created to enhance the relationship between
the IRS and Tribal governments. You can see the mission
statement of that office displayed here before you today. It is
this side.
Today we will hear from the Treasury and the IRS regarding
their efforts and to hear about their recent consultations. We
will also hear from Tribal leaders who have been directly
impacted by IRS policies and from national organizations who
have been involved in the Tribal tax initiatives.
The record for this hearing will remain open for two weeks
from today for comments from all parties.
Senator Barrasso, as the Vice Chairman, will now present
his opening statement.
STATEMENT OF HON. JOHN BARRASSO,
U.S. SENATOR FROM WYOMING
Senator Barrasso. Thank you very much, Mr. Chairman. As you
advised, I took a look at the mission of the IRS Office of
Tribal Government, and you see the words partnership,
opportunities, respectfully, cooperatively, and that is what we
are talking about with self-determination here, Mr. Chairman.
So I want to thank you for holding the hearing. I am going to
keep my opening statement brief so we can proceed to the
witnesses.
Last December, the Committee received testimony from Indian
tribes about the effects of taxation on Indian reservations,
and then on May 15th of this year the Finance Committee held a
hearing in which it addressed, in part, the Tribal taxation
issue. So this hearing, I think, hopefully, will build, as you
have said, upon past hearings, and to that end we will hear
from tribes on how recent IRS actions have affected their
communities. We will also hear from the Department of Treasury
and the Internal Revenue Service on these and other proposed
actions for Indian Country.
So I welcome the witnesses, look forward to the testimony,
and thank you, Mr. Chairman, for your leadership.
The Chairman. Thank you very much, Mr. Vice Chairman.
Senator Tim Johnson, your opening statement, please.
STATEMENT OF HON. TIM JOHNSON,
U.S. SENATOR FROM SOUTH DAKOTA
Senator Johnson. Good afternoon. Thank you, Mr. Chairman,
for holding this hearing. I first would like to welcome Mr.
Klein from our second panel. Welcome, Mr. Klein. I wanted to
take time to thank you for all your work with my staff at the
Banking Committee.
I would also like to give a special welcome to a good
friend, President Steele, from the Oglala Sioux tribe, for his
attendance and testimony today. Welcome, President Steele. It
is good to see you.
As you know, Mr. Chairman, this issue has significant
effects on the tribes and Tribal members of my home State. In
South Dakota, we have nine Indian tribes. Unfortunately, some
of these tribes are located in the poorest counties in the
entire U.S. Many of the families on these reservations do not
have steady incomes and, from time to time, require assistance
from our Tribal governments, from heating assistance to burial
assistance, to pow wow prizes, our Tribal members rely heavily
on their governments.
While I understand that the Internal Revenue Service has a
mission and there should always be accountability for Federal
funds, we should not be focusing attention on the Nation's
poorest individuals. Rather, we should be using our treaty and
trust responsibility to look for ways to assist our tribes to
become more self-sustaining and to provide them the tools to
determine their own path forward.
I look forward to the testimony today and it is my hope
that we can find some solutions today to alleviate the burden
put on our poor tribes and Tribal members.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Johnson.
Senator Tom Udall, your opening statement.
STATEMENT OF HON. TOM UDALL,
U.S. SENATOR FROM NEW MEXICO
Senator Udall. Thank you, Mr. Chairman, very much, and
thanks to co-member Senator Barrasso for moving forward with
this very important hearing. Our discussion today regarding the
general welfare exclusion application to Tribal government
programs is an important one as we work to improve economic
conditions in Indian Country.
The title of the hearing is very formal, but the problem we
are here to discuss goes to the very heart of Tribal self-
government and self-determination. The Federal Government and
all of its arms must interact with the tribes as the sovereign
nations that they are, and with all of the respect that that
implies. I am especially concerned that Tribal programs to
improve housing conditions, provide training and educational
opportunities, and to preserve traditional customs could be
viewed as a way to skirt taxation of per capita payments.
Working through the application of tax law is never an easy
thing, but I hope that our efforts today will help make the
process easier to navigate for tribes and ensure that all
parties are working together effectively.
Look forward to hearing the testimony of the witnesses and,
Mr. Chairman, thank you once again for focusing on this issue.
The Chairman. Thank you very much, Senator Udall.
With that, I welcome our witnesses. I appreciate that you
have all traveled to be here with us today and look forward to
hearing your testimony on this very important matter.
I ask that you limit your testimony to five minutes. Your
full written testimony will be included in the record.
Serving on our first panel is The Honorable John Yellow
Bird Steele, who is President of Oglala Sioux Tribe in Pine
Ridge, South Dakota; and the Honorable Athena Sanchey-Yallup,
Secretary of the Tribal Council for the Confederated Tribes and
Bands of the Yakama Nation in Toppenish, Washington.
President Steele, will you please proceed with your
testimony?
STATEMENT OF HON. JOHN YELLOW BIRD STEELE, PRESIDENT, OGLALA
SIOUX TRIBE
Mr. Steele. I thank you, Senator Akaka, Senator Barrasso,
the other members of the Committee.
I have supplied you with a written testimony, and I would
say that on the back of this written testimony I supplied a
resolution from what is called the Great Plains Tribal
Chairmen's Association, and the Great Plains Tribal Chairmen's
Association, of which I am the Vice President, Great Plains
Tribal Chairmen's Association calls upon the United States to
seek legislation to correct the Internal Revenue and the
Treasury's efforts right now. So that is where I will be coming
from, is asking yourselves to possibly do legislation for us to
straighten this out.
From the Oglala Sioux tribe, one of my Tribal presidents
tells me that an IRS person went to his reservation, and when
he told him he had a treaty, he told him he can read his treaty
in prison. These field people need to be more educated. They
represent the United States Government.
Now, I think to myself, these immigrants come over from
across the sea to get away from King George's tax and his, what
were those prisons he had over there, debtor's prisons, and
they come here and want to put a Tribal leader in their
debtor's prison; what they were getting away from overseas to
come over here to this great land? It sounds a little crazy to
me. That is what he said to that Tribal president.
And to you, Senators, honorable Senators, I do not blame
you, but we pay every tax there is to pay of the Federal
Government from our reservation except for the land tax, which
the Federal Government holds in trust for us. We don't mind
paying your taxes; it means we are getting money from
somewhere. But we would pay more taxes if you were to give back
the stolen lands of the sacred Black Hills that the United
States Government unilaterally stole in 1877, and confirmed in
1980 by the United States Supreme Court. We would pay the
Government more taxes if you give back that land you stole.
But as it is now, on the reservations in South Dakota, we
number number one, number two, number three, number seven,
poorest in the whole United States in the 2010 census.
Everybody sitting in this room does not or cannot empathize
with an individual living on Pine Ridge. Where is your next
meal coming from? How do you get some gas money to take baby to
the hospital because he has an earache? Mother has cancer; she
needs to get to an appointment in Rapid City. Father-in-law
died. To give him a traditional wake, like our ancestors did,
it costs money now. There is Federal law saying you have to be
embalmed, put six feet under; and they usually stay up with the
body for anywhere from two to three nights.
Go to the tribe, get help for gas money. Go to the Tribe to
get help for the funeral. That funeral, it has run the Tribal
government quite a bit of money here, just this year, to the
tune of over $400,000; about $3,200 per individual funeral. If
we give a 1099 for that, can you imagine, next year, IRS coming
to that person and saying you owe us $1,000? Where is that
individual going to get $1,000 when he can't get enough gas
money to go to the hospital with his young one?
Senators, my daughter raised four children with no running
water, with the freezing weather, two-inch walls on a trailer
that was donated because some State upgraded their codes and
they donated it to us free.
IRS is sitting out there waiting to tax, and they are
making the Tribe the middleman with giving a 1099 to those
individuals. They do not understand that we have a treaty with
the United States Government that was ratified by two-thirds of
the Senate, that falls under the Constitution of the United
States, Article VI, supreme law of the land. We are very proud
of our sovereignty. Contrary to Hicks vs. Nevada, the Supreme
Court of the State of South Dakota says State police cannot go
onto reservations. I have an order from FCC saying we have
regulatory authority over the airwaves over Pine Ridge. We own
all the taxes there.
IRS come in to do this, treating us like an organization;
doesn't recognize our sovereignty; taking a big chip off of our
sovereignty; ordering us to help them tax our own Tribal
members who can't afford it. This, Senators, is unconscionable.
Maybe our treaties are old. Maybe the Constitution is old. They
don't want to recognize our self-determination, our
sovereignty; a sovereign within a sovereign.
The Chairman. President Steele, will you please summarize
your statement?
Mr. Steele. I have spoken. I will answer questions. Thank
you.
[The prepared statement of Mr. Steele follows:]
Prepared Statement of Hon. John Yellow Bird Steele, President, Oglala
Sioux Tribe
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you very much, President Steele, for
your testimony.
Ms. Sanchey-Yallup. would you please proceed with your
statement?
STATEMENT OF HON. ATHENA SANCHEY-YALLUP,
EXECUTIVE SECRETARY, CONFEDERATED TRIBES AND BANDS OF THE
YAKAMA NATION TRIBAL COUNCIL
Ms. Sanchey-Yallup. Good afternoon, members of the
Committee, honorable Committee. My name is Athena Sanchey-
Yallup. I am a member of the Confederated Tribes and Bands of
the Yakama Nation. I am currently the executive secretary for
my Tribal council.
I am here today to request assistance from this Committee
because the IRS is attempting to enforce a tax on Yakama Nation
per capita distributions of trust resources. We request the
Committee to confirm and clarify its intent not to tax trust
resources and trust per capita payments, and we request that
you support our efforts to compel the IRS to consult with the
Yakama Nation on a government-to-government basis before taking
any enforcement action. I make these requests and address this
Committee on behalf of my 10,400 members of the Yakama Nation.
In 1855, the Yakama Nation signed a treaty with the United
States Government. This Congress ratified the treaty with the
Yakama in 1859. The United States Constitution recognizes the
Yakama treaty as the supreme law of the land. We hold our
treaty sacred in words that cannot be conveyed. My people ceded
over 10 million acres to the United States in exchange for
promises for the 1.4 million acre reservation we reserved for
the exclusive use and benefit of the Yakama people.
The Yakamas were further promised that our annuities would
be free from burdens. Today, I was humbled to actually witness
the original treaty of my Tribe that was done in 1855. It is
really emotional for me to sit here, two hours later after
seeing that and try to understand what my ancestors did for me
to sit here today; what they had to witness, what they had to
go through, and what they actually reserved for my Tribal
members of 10,400 today.
Within that, we know we have the right for all trust
resources to be reserved for the exclusive use of my Tribal
members. Today, the IRS threatens to breach those sacred
promises to my people. For the first time in our history, the
IRS seeks to audit and tax each of Yakama's 10,400 Tribal
members' trust lands distributed to them as annuities on a per
capita basis from sale of our timber trust lands. Most of our
members currently today, as you stated earlier, live in
poverty; they receive only a few hundred dollars per year from
the dwindling timber sales on the Yakama lands. What the IRS is
now attempting to do is extraordinary; overreaching action that
is contrary to the expressed intent of this Congress and the
promise of the Treaty of 1855.
Based on the Per Capita Act and the Treaty of 1855, the BIA
has distributed trust per capita distributions to my members
for decades and done so without tax consequences, and the
Yakama Nation had the right to assume those responsibilities
under the supervision and control of the BIA per the Per Capita
Act, and also the distributions were nontaxable. However,
today, IRS is asserting they are. I have provided you a copy of
the United States Solicitor's 1957 opinion that was addressed
to my Tribe regarding the BIA position on the timber sale
proceeds for trust per capita. We have relied on this
representation from the Federal Government for decades.
In knowing that I am running out of time, Mr. Chairman, I
have written a full testimony of all of the issues that the
Yakama Nation has regarding the IRS's assumed ability to tax
trust per capita to my members. Thank you.
[The prepared statement of Ms. Sanchey-Yallup follows:]
Prepared Statement of Hon. Athena Sanchey-Yallup, Executive Secretary,
Confederated Tribes and Bands of the Yakama Nation Tribal Council
Chairman Akaka, distinguished members of the Committee, it is with
humble gratitude but with a troubled heart that I testify on the
subject of ``New Tax Burdens on Tribal Self-Determination.''
My name is Athena Sanchey-Yallup. I am an enrolled member of the
Confederated Tribes and Bands of the Yakama Nation, and the Executive
Secretary of the Yakama Nation Tribal Council. I am here today on
behalf of Chairman Harry Smiskin, who was unable to appear before you
today due to medical reasons. I have travelled from my homelands here
to bring to your attention how the Internal Revenue Service has
violated longstanding federal law establishing the tax exempt nature of
tribal trust timber property and related proceeds of the Yakama Nation.
I am here today to ask you for intercession between the IRS and the
Yakama people. I am here to discuss how all of Indian Country are under
attack by the IRS in the form of taxation on trust distributions to
tribal members.
The real threat to the Yakama Nation began in the last year and a
half when the IRS began auditing and seeking to tax per capita
distributions of trust funds to each of Yakama's 10,400 tribal members
for the first time in the history of this Nation. This is an
extraordinary action that is contrary to Congress' express intent to
exempt trust resources and trust funds from federal tax. It is contrary
to our Treaty of 1855.
We request assistance from this Committee. We believe Congress and
this Committee have clearly stated that trust resources are to be
preserved for individual Indians, and in that regard, that their trust
per capita payments are exempt from tax. The IRS is attempting to force
a tax on trust lands and resources. We request the Committee confirm
and clarify its intent not to tax trust resources and trust per capita
payments. Second, we request that you support our efforts to compel the
IRS to consult with the Yakama Nation, on a government to government
basis, before taking any enforcement actions based on this new policy
and practice of the IRS to tax trust per capita payments.
We respectfully submit the following statement supporting the
position that this new federal tax burden is without precedent, without
support of federal law, and in violation of the Yakama Treaty of 1855.
I. Yakama Nation's 1855 Treaty was Intended to Protect Tribal Trust
Resources from Federal Taxation
In order for me to speak on behalf of my people, I want to share
with this Committee the background of the Yakama Nation and the Treaty
of 1855 (12 Stat. 951). Since time immemorial, the lands of the Yakama
people extended in all directions along the Cascade Mountain Range to
the Columbia River and beyond. The ancestors of today's Yakamas were of
different tribes and bands: The Palouse, Pisquose, Yakama, Wenatchapam,
Klinquit, Oche Chotes, Kow way saye ee, Sk'in-pah, Kah-miltpah,
Klickitat, Wish ham , See ap Cat, Li ay was and Shyiks. In recognition
of the original 14 Treaty signers, a Tribal Council of 14 leaders is
elected by enrolled Yakamas by the raising of their right hand. As an
elected leader, I am bound to uphold the laws of my people, protect the
Reservation, and honor the Treaty of 1855.
The Yakama Nation Reservation comprises 1.37 million acres reserved
for our use by the Treaty of 1855. Last week, we celebrated the 157th
anniversary of our Treaty's signing. We hold our Treaty sacred, in ways
that words cannot convey. That is because my People ceded over 10
million acres to the United States pursuant to that Treaty. In
exchange, we were promised that the 10 million acres we ceded reserved
for us the ``exclusive use and benefit'' of the 1.37 million acres on
the Yakama Nation Reservation. The Ninth Circuit interpreted this
clause as reserving to the Yakamas the right to the benefits of their
trust lands free from the imposition of federal income taxes. Hoptowit
v. Commissioner, 709 F.2d 564, 566 (9th Cir. 1983). Further, the
Yakamas understood that they would suffer no injury--including the form
of taxation today--pursuant to various provisions within the Treaty,
including, but not limited to, the use of the resources set aside for
Yakamas, annuities and the saw mill. Today, the IRS threatens to breach
those sacred promises to my People in direct contradiction of judicial
precedent and decades of IRS policy.
The Yakama Nation has some of the best timber in the United States.
That is why we negotiated in our Treaty that the United States would
provide us a sawmill, which the Federal Government did not adequately
provide. Still, Yakama Nation has been involved with timber harvesting
and selling for decades. The BIA has always told us that the proceeds
from trust land timber sales are legally required to be held in trust
by the BIA for Yakama members. The BIA has also told us that those
proceeds are not subject to taxation. I have provided you a copy of the
United States Solicitor's 1957 opinion on this issue. We have relied on
this representation from the BIA for decades. We have relied on the
federal government's Treaty promise that our trust lands and resources
would be for our exclusive use and benefit.
In all this time the IRS never tried to tax those trust
distributions, until today. I ask you, the esteemed members of this
Committee, to ask the IRS: Why, after more than 50 years, are tribal
trust land distributions now taxable? What has caused the IRS to
suddenly take the hostile position against the Yakama Nation and other
tribes that tribal trust land timber distributions are taxable? There
have been no new laws by Congress or amendments to the Per Capita Act.
In negotiating the Treaty of 1855, the Yakamas never expected,
understood or intended the federal government to impose burdens on our
tribal trust resources. We would have never ceded nearly all of our
aboriginal land had we understood that we would be asked to give \1/3\
of the modest earnings from trust resources to the government in the
form of a taxes. We urge the Committee to scrutinize where the federal
trustee has been allowed to benefit from a trust under its own
fiduciary administration to Indian Tribes.
II. Federal Law Protects Timber Trust Per Capita Payments from Tax
Tribal members have always been the intended beneficiaries of the
timber trust resources, by operation of both federal law and the Treaty
of 1855. \1\ Consistent with this understanding, the BIA (then later
the Office of Special Trustee or ``OST'') regularly distributed the
timber revenues to the tribal members on a per capita basis from trust
resources (``trust per capita payments''). \2\ The BIA and OST never
considered the trust per capita payments to be subject to federal tax
and never did any tax reporting (e.g., Forms 1099 to tribal members).
In fact, in 1957 the Solicitor for the BIA issued an opinion addressing
specifically this issue with the IRS (Bureau of Internal Revenue, at
that time). The Solicitor concluded that the IRS' reliance on the
Squire v. Capoeman decision as a basis for taxing distributions of
timber trust revenues to members was misplaced, and that the right to
per capita payments is a recognition of communal individual interests
and the United States holds the property in trust for the individual
members. The Solicitor further concluded that applying trust funds to
taxation is a violation of the 1855 Treaty that reserves to the Indians
rights in property for which the funds have been substituted. The
Solicitor's opinion was in direct response to the IRS' assertion that
trust per capitas to Yakamas are subject to federal tax.
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\1\ ``Under the provisions of the treaty and established principles
applicable to land reservations created for the benefit of the Indian
tribes, the Indians are beneficial owners of the land and the timber
standing upon it and of the proceeds of their sale, subject to the
plenary power of control by the United States, to be exercised for the
benefit and protection of the Indians.'' United States v. Algoma Lumber
Co., 305 U.S. 415, 420 (1939); see also 25 U.S.C. 196; United States
v. Mitchell, 445 U.S. 535 (1980). There exists a detailed set of
regulations that govern the harvesting and sale of tribal timber. Among
the stated objectives of the regulations is the ``development of Indian
forests by the Indian people for the purpose of promoting self-
sustaining communities, to the end that the Indians may receive from
their own property not only the stumpage value, but also the benefit of
whatever profit it is capable of yielding and whatever labor the
Indians are qualified to perform.'' 25 CFR 141.3 (a)(3) (1979).
Congress thus sought to provide for harvesting timber ``in such a
manner as to conserve the interests of the people on the reservations,
namely, the Indians.'' 45 Cong. Rec. 6087 (1910) (remarks of Rep.
Saunders).
\2\ Pursuant to the Per Capita Act, the Yakama Nation assumed the
responsibility for issuing the per capita checks to tribal members from
the trust funds sometime in the mid-1980s.
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In 1983 this Congress confirmed that per capita distributions of
monies held in trust are not subject to federal tax with the passage of
the ``Per Capita Act.'' The ``Per Capita Act,'' as set forth in 25
U.S.C. 117a-117c, explicitly excludes Tribal per capita distributions
from federal taxation. The tax exemption for trust distributions is
provided in 117b(a) entitled ``Previous contracted obligations; tax
exemption,'' which states that any distribution made under the Act,
including distributions pursuant to 117a, is subject to the
provisions of 25 U.S.C. 1407. Section 1407 states that none of the
funds that are distributed per capita or held in trust pursuant to a
plan approved under the provisions of this Act shall be subject to
Federal or State income taxes. Therefore, the plain language of the Per
Capita Act exempts any per capita distribution made from trust funds to
tribal members from Federal income taxes. Note that 1957 Solicitor
opinion, referred to earlier, was circulated among the Congressional
committees at the time of their deliberations on the Per Capita Act and
relied upon by Congress regarding the tax-exempt nature of the trust
funds.
The legislative history of the Per Capita Act further supports the
conclusion that Congress intended to exempt all per capita payments
from trust funds. Congress has consistently described the purpose of
the tax exemption clause of 25 U.S.C. 117b(a) in later legislation as
exempting tribal trust per capita distributions. For instance, when
identifying the specific exceptions to taxation of Indians, Congress
stated:
One exception to this general rule is the exclusion from
income provided for income received by Indians from the
exercise of certain fishing rights guaranteed by treaties,
Federal Statute or Executive order (sec. 7873). See also 25
U.S.C. sections 1401-1407 (funds appropriated in satisfaction
of a judgment of the United States Court of Federal Claims in
favor of an Indian tribe which are then distributed per capita
to tribal members pursuant to a plan approved by the Secretary
of Interior are exempt from Federal income taxes); 25 U.S.C.
section 117b(a) (per capita distributions made to tribal
members from Indian trust fund revenues are exempt from tax if
the Secretary of the Interior approves of such distributions).
(emphasis added). 104 H. Rept. 350, 104th Congress; 1st
Session, Balanced Budget Act of 1995.
Furthermore, the same 1407 exclusion language has been
interpreted to govern per capita trust distributions to tribal members
in regards to resource exclusion for the purpose of determining
eligibility for public benefits. If the language of 1407 can be used
under the Per Capita Act to determine public benefit eligibility, it
does not follow that the other provisions of 1407 do not apply to per
capita trust distributions in the same way. The resource exclusion
language of 25 U.S.C. 1407 must be read in parity with the tax
exemption language of that clause. When describing the purpose of the
Per Capita Act,
Congress stated:
Prior to the enactment of the Tribal Per Capita Distribution
Act (P.L. 98-64), only per capita payments of Indian judgment
funds (and purchases made with an interest and investment
income accrued thereon) were excluded from consideration as
income or resources for purposes of determining the extent of
eligibility for assistance under the Social Security Act or for
Federal or federally-assisted programs. (Indian Judgment Funds
Distribution Act, P.L. 93-134, as amended by P.L. 97-458). The
Tribal Per Capita Distribution Act (P.L. 98-64) extended this
treatment to tribal per capita distributions of funds derived
from tribal trust resources.
[emphasis added]. 102 S. Rpt. 214, Bill S. 754.
While this particular legislative history addresses itself only to
increasing the resource exclusion part of 25 U.S.C. 1407, it clearly
demonstrates Congress' intent that the Per Capita Act extend the
provisions of 25 U.S.C. 1407 to funds derived from tribal trust
resources. \3\ It is contrary to Congressional intent to suggest that
the tax exemption language of 25 U.S.C. 1407 is meant to apply only
to judgment funds, but that the resource exclusion part of that clause
applies to any funds held in trust.
---------------------------------------------------------------------------
\3\ Consistent with the above statement of Congressional intent,
all federal and state agencies (HHS, SSA, BIA, Legal Services
Corporation, et. al.) have interpreted the Per Capita Act to require
them not to count per capita payments from timber revenues held in
trust as an asset or resource. See e.g., External Opinion #99-17, Legal
Services Corporation; SSA 20 CFR Part 416, 59 FR 8536; HUD, 55 FR
29905. While these agency determinations do not address the tax
exemption, their interpretation of the purpose of the Per Capita Act to
extend the provisions of 25 U.S.C. 1407 to funds derived from tribal
trust resources confirms that the purpose of incorporating 25 U.S.C.
1407 in the Per Capita Act was not just to safeguard the terms and
purposes of the Act of October 19, 1973 as the Commissioner contends.
---------------------------------------------------------------------------
Accordingly, Yakama Nation, other federally-recognized tribes, the
BIA, and OST all believe Congress' intent has been clearly expressed to
protect trust funds from tax; and further yet, that Yakama's treaty
protects those funds from tax. Yet, the Yakama Nation today faces an
assault on their tribal trust resources and their members' pro rata
share revenues derived from those trust resources. The IRS is now
asking Yakama Nation tribal leaders, such as myself, to divulge the
names of the 10,400 plus tribal members in order to audit and tax them
on their share of trust funds. This is an overreaching action in light
of Congress' express intent to safeguard these trust funds from federal
tax. It is also an overreaching act by the IRS in light of decades of
IRS acquiescence in the non-taxation of these trust per capita
payments.
III. Past IRS Practices and Treatment of Trust Per Capitas
The IRS has never before taxed trust per capita payments made to
the Yakama Nation tribal members. The Yakama Nation, and prior to that
the OST, have been making trust per capita payments for generations.
The IRS has previously taken no formal position, as they do now, that
these payments are subject to federal tax. The IRS has had consistent
contact with the Yakama Nation over the last fifty-plus years, and has
conducted tax compliance reviews of the Yakama Nation reporting
obligations. At no time did the IRS mention that the Yakama Nation
should be reporting the trust per capita payments as taxable
distributions to tribal members. At no time has the IRS provided any
education or outreach to tribes generally to inform them of the IRS
position that trust per capita payments are taxable. Indeed, the IRS
seems now to be changing its view of the issue. Previously, the IRS
publicized its position on this issue at its website stating that per
capita distributions are exempt from federal income tax ``when there
are distributions from trust principal and income held by the Secretary
of Interior.'' The IRS recently removed this tax-exempt instruction
from the website.
More significantly, as I explained earlier, the Solicitor issued
his opinion in 1957 in direct response to an inquiry by the IRS
concerning the Yakama Nation per capita payments specifically. The IRS
never proceeded to tax the Yakama Nation per capita payments after that
1957 inquiry. The Yakama Nation has relied on the IRS' apparent
acquiescence in the non-taxable status of trust per capita payment
since that 1957 opinion. We have always understood that a legal
decision was made many years ago that trust per capita payments are not
subject to tax. The IRS must certainly be estopped from changing policy
established and relied upon by Tribes throughout the country for more
than half a century.
Adding insult to injury, IRS has ignored our requests for
consultation on the matter. The IRS' new position on this issue is a
radical change in policy and practice that directly impacts the Yakama
Nation, but IRS refuses to enter into a government-to-government
consultation with us as is required under Executive Order 13175, its
own agency rules and federal law. We have repeatedly asked for
meaningful governmentto- government consultation to understand why
there has been such a significant change in IRS policy and practice.
The IRS has simply demanded an audit, provided us their legal arguments
for taxation and denied our requests for consultation. The IRS' actions
directly violate the spirit and letter of the President's consultation
policy and no further enforcement action on their part is warranted
without prior consultation.
Thank you for the opportunity to testify before this Committee and
your willingness to consider the burdens the IRS is causing Indian
Country by auditing and taxing tribal trust land and resource
distributions. Thank you also for hearing the Yakamas call for help and
recognition of the Treaty of 1855.
The Chairman. Thank you very much, Ms. Sanchey-Yallup.
President Steele, can you describe the impact IRS audits on
general welfare programs have on the ability of the Tribes to
carry out their governmental functions and provide for Tribal
members?
Mr. Steele. Chairman Akaka, it is going to take a lot of my
staff's time to gather all the documents. The IRS wants all the
documents. It seems like they are on a fishing expedition to
find out just what we spend our money on, and this is not only
to impact my working staff, who are very limited because of the
funds that the Tribe has to do additional work, but it is going
to impact, like Gentlewoman Yallup says here, the traditional
life of my people because the money we handle is their money.
We are not unlike the Federal Government; we handle the
people's money, and when they have a need, we care for the
whole community. You passed a law, No Child Left Behind. We
have an unwritten law, No One Left Behind. So when they are in
need, we help them out.
It is going to be detrimental to both our culture, our
traditions, and be an additional burden on Tribal government, a
burden I don't know if we can handle without putting some more
people on.
The Chairman. Thank you, Mr. President.
Ms. Sanchey-Yallup. the Yakama Nation is undergoing an IRS
audit in per capita distributions of trust funds to Tribal
members. Do you see this type of audit as a change in policy by
the IRS? And, if so, what type of notification did tribes
receive regarding this change in policy?
Ms. Sanchey-Yallup. Thank you, Mr. Chairman. Again, in the
oral report I reference a 1957 opinion, as well as in my
written statement, and the question regarding is this a change
by IRS, I would have to say yes. Also, before BIA did
administer their distribution of trust per capita, which was
assumed by the Yakama Nation government, again, by our right,
they were non-exempt, they were not taxable.
However, IRS did change somewhere and on the IRS website it
did have a notation for the frequently asked questions as we go
out there and look at it. The trust distribution is non-
taxable. On the website of November 18th, 2011, it said that.
Later on in the IRS frequently asked questions, again,
regarding the issue of distribution, April 3rd, 2012, the trust
distribution was removed, again, without any change in law;
again, without any true honest government-to-government
consultation to the Yakama Nation.
The Chairman. Thank you.
President Steele, culture and tradition are vital to our
Native communities.
Mr. Steele. Yes, sir.
The Chairman. And preserving culture is a critical
component of self-determination. Can you elaborate on the
effect that taxation of traditional Tribal cultural activities
has on the Tribe and its Tribal members?
Mr. Steele. Yes, Senator. The people would have to give up
their traditional method of letting their loved one go to the
spirit world and staying up with them two or three nights
physically and feeding all the attendees to what we call wakes.
That is a cost and that will probably the interrupted, the
traditional way we let the loved ones go to the spirit world.
Secondly, I don't know if our Tribal members would want to
take back to school clothes from us. A child does not want to
go to school if he doesn't have a new tee-shirt and some new
tennis shoes, a pair of pants, and the parents know that that
child needs to go to school to get breakfast and dinner or
lunch. And you try to get that child in that classroom on the
first day, and for that child to go to that classroom on the
first day, he is going to want at least something to wear that
is good. So we give them back to school clothes money. That is
not traditional, but it is something that would impact the
children going to school.
Other things are our powwows. IRS wants to tax a person if
he wins any monetary value as a prize; give him a 1099. This is
overextending, in our belief, IRS's authority. They are acting
more on value judgment than any law. That is why we request
legislation, possibly, to straighten IRS up. They just don't
know what--they are treating us like an organization.
The Chairman. Thank you very much, President Steele.
Senator Johnson, for your questions, please.
Senator Johnson. Welcome, President Steele. Can you share
with the Committee some examples of the types of assistance
that the Tribe has provided?
Mr. Steele. Senator, the IRS hasn't been to Pine Ridge yet.
We got their letter that they are coming, and they want us to
put these certain documents together, and it is all of our
banking documents plus a lot of our expenditures in different
areas. But we give, like I said, funeral expenses, back to
school clothes. We give energy assistance.
We fix houses, Senator. And they want us to put a value on
how much that lumber costs to patch a hole in the roof or the
floor or put a little shingling on. They want us to put a value
on that and give that person a 1099. Our weather gets quite
cold in South Dakota and some of the homes just have wood heat,
they don't have furnaces, so it is imperative that the Tribe
help them out with energy assistance in either buying a pickup
load of wood, helping to pay a light bill or buy some propane.
And 1099s to all of these people, Senator? It is so much
needed. They ask for a little food. We give them a 1099 with
the food? This kind of stuff, Senator, is, to me, the next
year, where are those people going to find the money to pay
IRS?
Senator, I am sorry, but we are about 89 percent unemployed
on Pine Ridge. About 40 percent live under the poverty level.
It is difficult.
Senator Johnson. In the past, have you provided drinking
water to any individual Natives who wouldn't otherwise have
water?
Mr. Steele. Yes, Senator, and we did it through either the
Tribe before, then the real water program, where we hauled
water to their homes. That was quite an expense. I don't know
if IRS would want to tax the expense of giving water to homes
to wash their faces and cook their dinners, but you know we
still haul water to people's homes.
Senator Johnson. I am aware of that. President Steele, can
you provide examples of how IRS auditing has limited or slowed
economic development in Pine Ridge potentially?
Mr. Steele. Well, Senator, we haven't had the audit, as I
said, yet. We got the letter telling us to put all these
documents together for them so they can come down and audit us.
They have been up to Cheyenne River, they have been to Crow
Creek, they have been to Sisson Wapton. They are making their
rounds. They have letters to ourselves, up to Turtle Mountain,
down to Winnebago that they are coming in and they want us to
put these certain documents together.
It hasn't impacted us that they are there yet, but we are
getting prepared for them to come in, and, Senators, it is just
that they are intruding upon our sovereignty and they are
attacking the poorest of the poor. When I look on TV and see
whether or not the millionaires should receive any tax, and
they are down there wanting to give 1099s to people who are
just so poor.
Senator Johnson. Ms. Sanchey-Yallup, you stated that the
IRS were not able to help the Yakama Nation in understanding
its new status of trust per capita payments. How can the IRS
improve its government-to-government relations?
Ms. Sanchey-Yallup. Thank you, Mr. Chairman, if I may. For
IRS to improve their relationships with the Yakama Nation, they
truly have to have a government-to-government relationship with
us. As Mr. John Yellow Bird Steele has stated, we received a
letter. An audit letter is not consultation. President Obama
has Executive Order 13175 for all Federal agencies to
communicate on a government-to-government level with all
tribes. I consider a letter not a government-to-government
consultation. The Yakama Nation has requested a formal
government-to-government consultation with IRS. Again, we did
not receive that. And, truly, they should have a government-to-
government consultation on my lands, at Yakama.
Senator Johnson. Is it your position that the IRS should
come to face-to-face conversations with you about how they want
to tax you and when that tax begins?
Ms. Sanchey-Yallup. Mr. Chairman, if I may, government-to-
government consultation, to me, is face-to-face. Even though it
is technology today, emails and all the other means of media,
government-to-government is sitting down with my 14 elected
officials and having a discussion. Again, my trust resources
are not taxable. That was retained in my treaty with all
exclusive rights within the 1.4 million acres of land, to me,
as a Yakama member, and all 10,400 members, that is what we
hold as trust resources to us. And, again, we ceded over 10
million acres of my territory of Washington to the United
States Government so that trust will stay Yakama Nation trust,
non-taxable.
Senator Johnson. My time has expired. Thank you.
Ms. Sanchey-Yallup. Thank you.
The Chairman. Senator Udall, your questions.
Senator Udall. Just to follow up on Senator Johnson's
question. Has there been any consultation at all with the IRS
on the issues that you made the initial request?
Ms. Sanchey-Yallup. Mr. Chairman, if I may, their assumed
consultation to me as a Tribal leader for the Yakama Nation is
a letter.
Senator Udall. Yes. And that is it?
Ms. Sanchey-Yallup. That is it.
Senator Udall. That is all you have received?
Ms. Sanchey-Yallup. I am sorry to interrupt you.
Senator Udall. No, please go ahead.
Ms. Sanchey-Yallup. After we received that, then they
showed up and said we want to review the documents. We did not
allow that type of situation to happen, and, again,
consultation to the Yakama Nation is truly a face-to-face, sit-
down discussion with the 14 elected Tribal council of the
Yakama Nation.
Senator Udall. And you have requested that, but haven't
received that as of this date?
Ms. Sanchey-Yallup. Mr. Chairman, if I may answer, yes. A
true and honest consultation with the Yakama Nation.
Senator Udall. And that hasn't occurred.
Ms. Sanchey-Yallup. No, it has not.
Senator Udall. Okay. Thank you very much for your
testimony.
Thank you, Mr. Chairman. I don't have additional questions.
The Chairman. Thank you, Senator Udall.
Let me ask one question to Ms. Sanchey-Yallup. The
Department of the Interior and Department of Justice are
currently engaged in an historic effort to settle longstanding
trust management lawsuits. Do you think current efforts by the
IRS to tax per capita trust payments will affect these
settlements moving forward?
Ms. Sanchey-Yallup. Thank you, Mr. Chairman. Yes, it will
affect the trust per capita going forward. And I know we are
not here to speak about that trust mismanagement issue, but we
feel that is truly inconsistent with the treaty right of the
Yakama Nation and it damages the Yakama Nation in ways that you
cannot really document or speak of if they choose to continue
forward with assuming that is taxable.
And, again, we sit here as a treaty Tribe and we are asking
for this Committee's assistance to compel IRS to understand my
trust resources that were not truly given, but we are borrowing
from Mother Earth, that it is the Yakama Nation's way of
honoring and being trustworthy to Mother Earth by the trust
resources and the payments to the Yakama members are non-
taxable. And there has been no change in law and there has been
no government-to-government consultation with the Tribe of the
Yakama Nation.
The Chairman. Thank you very much.
Are there any further questions? Senator Johnson?
Senator Johnson. I have one more question for President
Steele.
So far this year, can you estimate how much the Tribe has
provided in welfare assistance?
Mr. Steele. Yes, sir. All welfare assistance I think has
cost the Tribe over $1 million. And, Senators, we do get some
money from Venezuela through Joe Kennedy for energy assistance,
and it passes through the Tribal ledgers, and IRS will probably
tax them for that too.
Senator Johnson. I have no further questions.
The Chairman. Thank you.
Well, I want to thank this panel very much for your
testimony, as well as your responses, and want to thank you for
highlighting some of the problems that we have. So I want to
thank you very much and thank you for coming to this hearing.
Mr. Steele. We thank you, honorable Senators.
Ms. Sanchey-Yallup. Thank you, Chairman.
The Chairman. Now I would like to call the next panel.
Mr. Aaron Klein, Deputy Assistant Secretary for Economic
Policy Coordination at the Department of Treasury; and Ms.
Christie Jacobs, Director for the Office of Indian Tribal
Governments at the Internal Revenue Service.
Mr. Klein, thank you for being here. Will you please
proceed with your testimony?
STATEMENT OF AARON KLEIN, DEPUTY ASSISTANT
SECRETARY, OFFICE OF ECONOMIC POLICY, U.S.
DEPARTMENT OF THE TREASURY
Mr. Klein. Thank you very much, Chairman Akaka, Vice
Chairman Barrasso, Senator Johnson, Senator Udall. Thank you
very much other members of the Committee and the staff. It is
an honor and a privilege to be here testifying before this
Committee in the United States Senate today.
I am going to focus on the Treasury Department's Tribal
Consultation program and discuss our most recent consultation
efforts to clarify and improve the application of the general
welfare doctrine.
In 2000, President Clinton signed Executive Order 13175,
which requires all Executive Branch departments and agencies to
engage in Tribal consultation and to establish a single point
of contact for Tribal consultation, a position I hold at the
Treasury Department.
In November 2009, President Obama issued a memorandum to
all agencies and departments requesting that agencies be
actively engaged in Tribal consultation, that they review and
consider revising their Tribal consultation policies, and that
they consult with Tribal governments as they do so.
During those initial conversations with Treasury, Tribal
leaders raised three key issues: first, they asked for a better
process for improved Tribal consultation and enhanced dialogue
going forward. Tribal leaders raised concerns about various tax
code issues, some of which you have heard today, and in this
context they frequently raised concerns about the application
of the general welfare doctrine. Finally, tribes raised a
number of issues regarding their access to capital for economic
development.
Treasury took these comments to heart. We have engaged in a
series of meaningful actions in response to Tribal leaders
concerns, and I would like to update the Committee on our work.
Treasury took a series of steps to enhance our Tribal
consultation process. Tribal consultation must take place from
an understanding that conversations between the Federal
Government and Tribal governments are conducted on a
government-to-government basis, which is predicated on a mutual
understanding and respect for Tribal sovereignty, as you well
articulated, Mr. Chairman, and the witnesses before me.
We share that opinion. We share that factual belief and we
have tried to create a strong consultation process predicated
on that. We have tried to open up lines of communication in
both directions. We have set up several institutional
structures to improve our communication effort, leveraging
technology, as well as making sure that we are in frequent
contact with Tribal leaders and organizations both in
Washington and in Indian Country.
During the course of our consultation efforts, Tribal
leaders repeatedly raised concerns regarding whether certain
payments or benefits provided by the Tribe to members are
excludable from taxable income under the general welfare
doctrine. This exclusion governs the types and kinds of
benefits that tribes can provide to their members without
creating a taxable event. To be clear, it does not govern what
benefits a Tribe can provide its members. Tribes are free to
provide benefits on whatever basis they see fit, subject to
other provisions of law. What this exclusion does govern is
whether the provision of such a benefit constitutes taxable
income on the part of the recipient.
Treasury and the IRS listened to and considered the
requests of Tribal leaders for increased clarity on the
application of the general welfare doctrine. We agreed to begin
a consultation process dedicated exclusively to this question.
Treasury and IRS have held a series of joint consultation
meetings with Tribal leaders. We invited comments concerning
the application of the general welfare exclusion to Indian
Tribal government programs. I am pleased to report to the
Committee that we received over 85 comments from tribes and
Tribal leaders on this issue.
Through our review of the written comments, our direct
consultation efforts, and our own internal analysis, it is
clear to us that additional guidance and clarity on the general
welfare doctrine is warranted. Treasury and the IRS have now
publicly committed to issue new written guidance on this
subject. In doing so, we will remain mindful of the comments
and positions thoughtfully articulated by tribes and Tribal
leaders.
Another critical issue raised repeatedly by tribes and
Tribal leaders is their access to capital. Treasury is actively
engaged in trying to address this issue. The Native American
CDFI Program, or NACA, focuses exclusively on establishing and
growing CDFIs in American Indian, Alaskan Native, and Native
Hawaiian communities. I believe the NACA program represents one
of the most successful programs in promoting access to capital
in Indian Country.
As an economist, I like to measure the success of a program
by its demand. Certified Native CDFIs have grown by almost 40
percent since just 2009 and have increased fivefold since 2001.
Clearly, the demand is there. I would especially like to thank
Chairman Akaka, members of the Indian Affairs Committee,
especially Banking Committee Chairman Johnson, and others for
their strong support for the NACA program.
Treasury has also worked with tribes to improve their
access to the capital markets. As many of you are aware, under
current law, tribes have a more limited authority to issue tax-
exempt municipal debt than States and localities. Many tribes
have argued against this policy on a variety of grounds. The
Recovery Act responded to these concerns by granting Treasury
the authority to allocate $2 billion of Tribal Economic
Development Bonds to Tribal governments.
The Act also required Treasury to study the program on the
issues surrounding tribes' ability to issue tax-exempt debt. We
consulted as our first step in this process, received 27
written comments for the record. We took those to heart, we
thought through the issue, and we submitted our report to
Congress last year.
Treasury's conclusion that Congress should generally adopt
the State or local government standard for tax-exempt
government bonds on a permanent basis for Tribal governments
was broadly consistent with the comments we received throughout
consultation.
In conclusion, Treasury really remains deeply committed to
working with tribes and Tribal leaders throughout our
consultation process. In my view, our consultation on the
general welfare doctrine is a perfect example of the process
working at its best. Tribal leaders raised this issue to
Treasury in general consultation, we did our own internal
analysis and listened to what they were saying, we decided to
engage in a specific consultation on this issue, and we have
engaged in a very thoughtful, respectful, and valuable dialogue
which will culminate in new published guidance to try and
improve the administrability in fairness to the tax code, while
providing tribes and Tribal members greater certainty for
compliance.
That concludes my testimony, and I look forward to
answering any questions you may have.
[The prepared statement of Mr. Klein follows:]
Prepared Statement of Aaron Klein, Deputy Assistant Secretary, Office
of Economic Policy, U.S. Department of the Treasury
Introduction
Good afternoon, Chairman Akaka, Vice Chairman Barrasso, and members
of the Committee. I appreciate the opportunity to testify before you on
the Treasury Department's Tribal Consultation program with a focus on
our most recent consultation efforts to clarify and improve the
application of the general welfare doctrine for Tribes for tax
purposes.
Tribal Consultation
In 2000, President Clinton signed Executive Order 13175, which
required all executive branch departments and agencies to engage in
Tribal consultation on policies that have Tribal implications. EO 13175
also required each agency to establish a single Point of Contact for
Tribal Consultation, a position I hold at the Treasury Department. In
November 2009, President Obama issued a Memorandum to all agencies and
departments requesting that agencies be actively engaged in Tribal
consultation, that agencies review and consider revising their Tribal
consultation policies, and that they consult with Tribal governments as
they do so.
During those initial conversations with Treasury, Tribal leaders
raised three key issues. First, they asked for a better process for
improved Tribal consultation and an enhanced dialogue going forward.
Specifically, they stressed the importance of Tribal sovereignty and
that true consultation can only take place with the understanding that
the relationship between Tribes and the Federal government is a
government-to-government relationship. Second, Tribal leaders raised
concerns about various tax code issues related to Tribal governments,
Tribal corporations, and Tribal members. Among the many tax issues
highlighted by Tribal leaders, concerns about the application of the
general welfare doctrine were the most frequently raised. Finally,
Tribes raised a number of concerns regarding their access to capital
for economic development. Within this area, issues relating to Tribal
Economic Development Bonds as well as the Community Development
Financial Institutions (CDFI) Fund's Native American program were the
two most significant.
Treasury took the comments raised by Tribal leaders to heart. We
have engaged in a series of meaningful actions in response to Tribal
leaders' concerns, and I would like to update the Committee on our
work.
Consultation Efforts
Treasury has taken a series of steps to enhance our Tribal
consultation process. First, Treasury developed an internal Tribal
consultation process as required by the Presidential Memorandum. This
process is in accordance with EO 13175 and has three main principles:
The Treasury Department is committed to the establishment of
a comprehensive consultation process leading to meaningful
dialogue with Indian Tribes on Treasury policies that have
implications for such Tribes, and in particular those
regulations and legislative proposals that have a direct and
identifiable economic impact on Indian Tribes or preempt Tribal
law.
Tribal consultation will assist Treasury's development of
policy, regulation, and legislative activities, as it will
increase Treasury's understanding of the issues and potential
impact of activities on Tribes and American Indians and Alaskan
Natives.
The Treasury Department is committed to developing and
issuing regulations and guidance in a timely and efficient
manner.
Tribal consultation must take place from an understanding that
conversations between the Federal Government and Tribal governments are
conducted on a government-to-government basis, which is predicated on
mutual understanding and respect for Tribal sovereignty.
A strong consultation process requires open lines of communication
in both directions. Tribal leaders need to be able to easily contact
Treasury, whether to request a meeting, ask about a specific program,
or submit their views on a particular issue. Treasury needs to be able
to communicate with Tribal leaders in a clear, consistent, and
transparent manner, and easily solicit Tribal views on policy issues.
To accomplish these objectives, we have set up several institutional
structures to improve our communication. First, we have created an
email address for any Tribal leader to send a Tribal consultation
request, [email protected]. Moreover, we have established a
specific webpage dedicated to Tribal consultation which is regularly
updated with the latest Tribal consultation requests, policy
statements, and reports to Congress (http://www.treasury.gov/resource-
center/economic-policy/tribal-policy/Pages/Tribal-Policy.aspx). We have
also released our Tribal consultation plan so that any Tribe or
interested party can see how Treasury is fulfilling our Tribal
consultation requirement.
Since adopting our new Tribal consultation process, Treasury has
engaged in multiple consultation processes over a wide variety of
issues, including Tribal Economic Development Bonds and the application
of the general welfare doctrine. In addition, we have continued to hold
general consultation and listening sessions to solicit input from
Tribal leaders as well as to enable Tribal leaders to ask detailed
questions directly to Treasury officials.
Consultation can and must take place both in Washington, D.C. and
in Indian country. I have engaged in consultation and listening
sessions in South Dakota, Oregon, and Louisiana. Other Treasury
officials have travelled across the country to conduct specific
outreach efforts, including a series of conferences and events
regarding access to capital, which were sponsored by the CDFI Fund
along with the Federal Reserve Banks of Minneapolis and San Francisco
and other federal agencies. My colleagues at the IRS have also
regularly held consultation sessions across the country.
Tribal leaders often raise issues that concern both Treasury and
IRS. To best address these concerns, we have regularly held joint
consultation sessions where Tribal leaders engage with senior officials
from both Treasury and IRS simultaneously. This not only maximizes
efficiency but also encourages a more collaborative process so that
everyone is hearing and responding to all parties.
General Welfare Doctrine
During the course of our consultation efforts, Tribal leaders
repeatedly raised concerns regarding whether certain payments or
benefits provided by the Tribe to members are excludable from taxable
income under the general welfare doctrine. This exclusion governs the
types and kinds of benefits that Tribes can provide to their members
without creating a taxable event. To be clear, it does not govern what
benefits a Tribe can provide its members. Tribes are free to provide
benefits on whatever basis they see fit, subject to other provisions of
law. What this exclusion does govern is whether the provision of such a
benefit constitutes taxable income on the part of the recipient.
Treasury and IRS listened to and considered the requests of Tribal
leaders for increased clarity on the application of the general welfare
doctrine. We agreed to begin a consultation process dedicated
exclusively to this issue late last year, holding our first
consultation meeting on November 30, 2011, in conjunction with the
President's Tribal Nations summit. On March 8, 2012, we held another
consultation session hosted by the National Congress of American
Indians in conjunction with their annual conference. To provide an
opportunity for direct dialogue for all Tribal leaders who were not
able to make the earlier in-person consultation sessions, we also held
a national phone call just two weeks ago on May 30, 2012. In all of
these meetings, Treasury and IRS participated jointly, and while exact
attendance figures are not known, it appears that approximately 300
people in total attended these events.
Our Tribal consultation on this issue was not limited to just these
in-person meetings. The IRS issued Notice 2011-94 on November 15, 2011,
which invited comments concerning the application of the general
welfare exclusion to Indian Tribal government programs. When various
Tribal leaders requested additional time to submit comments, we
accommodated their requests by extending the deadline by an additional
30 days. I am pleased to report that we have received over 65 comments
from Tribes and Tribal leaders within the official comment period, and
more than 20 additional comments since then.
Through our review of the written comments, our direct consultation
efforts, and our own internal analysis, it is clear to us that
additional guidance and clarity on the general welfare doctrine is
warranted. Treasury and the IRS have now publicly committed to issue
new written, published guidance on this subject. In doing so, we will
remain mindful of the comments and positions thoughtfully articulated
by Tribes and Tribal leaders during the consultation process.
Access to Capital
Access to capital is another critical concern raised repeatedly by
Tribes and Tribal leaders. Treasury is actively engaged in helping
Tribes access capital to grow their local economies. Within the CDFI
Fund, a bureau of Treasury whose mission is to expand the capacity of
financial institutions to provide credit, capital, and financial
services to underserved populations and communities in the United
States, the Native American CDFI Assistance Program (NACA) focuses
exclusively on establishing and growing CDFIs in American Indian,
Alaskan Native, and Native Hawaiian communities. I believe the NACA
program represents one of the most successful programs in promoting
access to capital in Indian Country. There are 70 certified Native
American CDFIs in operation all around the country, hopefully serving
many of the Tribes represented here today. As an economist, I like to
measure the success of a program by demand. Certified Native CDFIs have
grown by over 38 percent since 2009 and have increased five-fold since
2001, when there were just 14. Clearly there is demand among American
Indians, Native Alaskans, and Native Hawaiians for CDFIs.
We are trying to keep pace with demand for Native American CDFIs.
In March of this year, Treasury announced the results from our most
recent round of funding for the NACA program. There were 71 applicants
for over $23 million in funds. This included 25 existing certified
Native CDFIs that applied for more than $16 million in grants along
with 46 potential new Native CDFIs, certified Native CDFIs, and
Sponsoring Entities that applied for over $6 million in technical
assistance grants. Over the lifetime of the NACA program, Treasury and
CDFI have awarded over $57 million to more than 250 applicants.
Given its success, there is also strong support for the NACA
program in Congress, and I would like to thank Chairman Akaka, members
of the Indian Affairs Committee, especially Banking, Housing, and Urban
Affairs Committee Chairman Johnson, and others for their continued
strong support for the NACA program. This is program is one of the most
powerful and effective tools to promote economic development and bring
basic financial services into Indian Country, and we are committed to
working with Tribes and Tribal leaders to ensure its continued success.
Treasury has also worked with Tribes to help improve their access
to the capital markets. As many of you are well aware, under current
law Tribes have a more limited authority to issue tax-exempt municipal
debt than states and localities. Many Tribes have argued against this
policy on a variety of grounds, including that it has inhibited
economic development, hampered Tribes' access to the capital markets,
and was unfair when compared to the broad authority granted to State
and local governments. The American Recovery and Reinvestment Act
(Recovery Act) responded to these concerns by granting Treasury the
authority to allocate $2 billion of Tribal Economic Development Bonds
(TEDBs) to Tribal governments. These allocations would grant Tribes the
authority to issue tax-exempt debt for a wide range of projects that
previously would not have qualified. Treasury acted quickly, allocating
the funds in two different $1 billion tranches and giving awards to 134
applicants.
Treasury was also given an opportunity in the Recovery Act to study
the TEDB program and report back to Congress on both the program and,
more broadly, on the issues surrounding Tribes' ability to issue tax-
exempt debt. Our first step in this process was to act in accordance
with Executive Order 13175 and begin a consultation process with
Tribes. Through that process we received written comments from 27
Tribes, Tribal organizations, and interested parties from our open
Notice in the Federal Register as well as many other comments and
insights through various consultations. The input that we received
through the consultation process proved invaluable as we sifted through
the various policy options available. Broadly speaking, the comments
indicated the strong desire to grant Tribal governments permanent and
indefinite authority to issue tax-exempt debt similar to the authority
enjoyed by state governments.
Treasury submitted its congressional report on TEDBs in December
2011, in which we concluded:
``For reasons of tax parity, fairness, flexibility, and
administrability, the Department recommends that Congress adopt
the State or local government standard for tax-exempt
government bonds . . . on a permanent basis for purposes of
Indian Tribal government eligibility to issue tax-exempt
governmental bonds, without a bond volume cap.''
That is we recommended that Congress make permanent the experiment
begun in the Recovery Act and allow Tribal governments to have access
to tax-exempt bonds on their own terms as consistent with the TEDB
program. This conclusion is broadly consistent with the positions
articulated by many Tribes and Tribal leaders.
While Treasury has made this recommendation for parity on tax-
exempt debt, it will not become law until Congress acts. In the
meantime, TEDB allocations from the original $2 billion still exist and
Treasury and the IRS are working to reallocate the existing authority.
In that endeavor we have continued to seek Tribal input and hope to
announce our plans for reallocation in the very near future.
Conclusion
Treasury remains committed to working with Tribes and Tribal
leaders through our consultation process. In my view, our Tribal
consultation on the general welfare doctrine is a perfect example of
this process working at its best. Tribal leaders presented these issues
to Treasury and IRS through general consultation and Treasury and IRS
examined the issues and agreed to a more in-depth specific
consultation, resulting in an extensive and highly productive dialogue.
Consequently, the new guidance will improve the administrability and
fairness of the tax code while providing Tribes and Tribal members
greater certainty for compliance. That concludes my testimony, and I
look forward to answering any questions you may have.
The Chairman. Thank you very much, Mr. Klein.
Ms. Jacobs, will you please proceed with your statement?
STATEMENT OF CHRISTIE J. JACOBS, DIRECTOR, OFFICE
OF INDIAN TRIBAL GOVERNMENTS, INTERNAL REVENUE
SERVICE, U.S. DEPARTMENT OF THE TREASURY
Ms. Jacobs. Good afternoon, Chairman Akaka and members of
the Committee. I appreciate the opportunity to be here this
afternoon to discuss how the general welfare exclusion applies
to Tribal programs.
As I begin, I want to acknowledge that the United States
has a unique government-to-government relationship with Indian
tribes, as set forth in the Constitution of the United States,
treaties, statutes, executive orders, and court decisions. The
Office of Indian Tribal Governments within the Internal Revenue
Service was created in response to requests by Tribal leaders.
This office exists to facilitate the government-to-government
relationship and to assist tribes in meeting their Federal tax
obligations.
The principal issue for discussion today is the general
welfare exclusion. Tribes, like all governments, sponsor
programs designed to support their members. To be very clear,
whether this exclusion is or is not applied does not limit what
benefits or social programs tribes can provide to their
members. The question is whether payments made through those
programs are excludable from the income of the recipient under
the general welfare doctrine.
There are two key tax concepts: first, Internal Revenue
Code Section 61 provides that gross income includes all income
from whatever source derived, unless a specific exception in
the Code applies; second, the general welfare exclusion is a
non-Code exception, an administrative exclusion that has
developed in official IRS guidance and recognized by courts and
Congress for more than 50 years.
Despite the statutory breadth of Section 61, the
administrative rulings show that payments made by government
units, Tribal or non-Tribal, can be excluded from a recipient's
gross income under the general welfare doctrine if the payments
are: made under a government program; for the promotion of the
general welfare based generally on individual, family, and
other needs; and do not represent compensation for services.
The IRS does not have, and never has had, a special program
for examining Tribal government social welfare programs. The
question may arise if the Tribe seeks a letter ruling about a
specific program. It can also arise during an IRS review of a
Tribal government's tax reporting compliance. The Code requires
all persons, including Indian Tribal governments, to report to
the IRS certain payments of $600 or more. During an
examination, records may show such payments to Tribal members
requiring further inquiry as to whether the general welfare
exclusion applies. If so, those payments do not need to be
reported.
The IRS always examines a program using the same three-
pronged analysis. Comments from the Tribal community have
focused on two of those prongs: whether the payments are being
disbursed based upon the needs of the recipient and whether the
payments constitute compensation received for services.
While there are many Tribal and non-Tribal examples in
administrative rulings, the difficulty has been that each
application is fact-specific, and the historical and cultural
context within the Tribal government environment adds a layer
of complexity.
In response to concerns raised by various tribes and Tribal
leaders, the IRS issued Notice 2011-94 last November, inviting
comments concerning the application of the general welfare
exclusion to Indian Tribal government programs and beginning a
specific consultation process with tribes on how to find a
solution that addresses their concerns and improves clarity and
consistency of the tax law.
Since then, the IRS has received numerous, as you have
heard, written comments from tribes and Tribal leaders, which
we are currently reviewing, and the IRS and Treasury have
engaged in multiple consultation sessions, such as in November
during the White House Tribal Nations Conference, in March
during the National Conference of American Indians annual
meeting, and a national consultation session conducted through
teleconference to facilitate participation.
In addition, on June 6th, the Advisory Committee on Tax
Exempt and Government Entities, which is made up of
representatives from the public, including representatives of
the Tribal community, issued a report on the General Welfare
Doctrine as Applied to Indian Tribal Governments and Their
Members. We are currently reviewing the recommendations of that
report and we expect to continue receiving input as we move
forward.
The IRS plans to publish written guidance that will address
issues and respond to concerns raised by tribes in their oral
and written comments. Our intent is that this published
guidance, along with improved internal coordination procedures,
will provide increased clarity and consistency of the
application of the general welfare doctrine. Tribal concerns
are very important to us and we look forward to continuing to
work with tribes on this item in the future.
I am aware of the Administration's commitment to strengthen
and build the government-to-government relationship between the
United States and Tribal Nations, and I appreciate the
Committee's interest in these matters.
Thank you. This concludes my testimony, and I would be
happy to answer any questions.
[The prepared statement of Ms. Jacobs follows:]
Prepared Statement of Christie J. Jacobs, Director, Office of Indian
Tribal Governments, Internal Revenue Service, U.S. Department of the
Treasury
Introduction
Good afternoon, Chairman Akaka, Vice Chairman Barrasso, and members
of the Committee.
I appreciate the opportunity to be here this afternoon to discuss
how the general welfare exclusion applies to tribal programs.
At the opening of my testimony, I want to acknowledge that the
United States has a unique government-to-government relationship with
Indian tribes as set forth in the Constitution of the United States,
treaties, statutes, executive orders, and court decisions. The Office
of Indian Tribal Governments within the Internal Revenue Service (IRS)
was created in response to requests by tribal leaders. This office
exists to facilitate the government-to-government relationship and to
assist tribes in meeting their Federal tax obligations.
General Welfare Exclusion
The principle issue for discussion today is the general welfare
exclusion. Tribes, like all governments, sponsor social welfare
programs designed to support their members. Of principal relevance to
the IRS is whether payments made through those social welfare programs
are taxable. To be very clear, whether this exclusion is or is not
applied does not limit what benefits or social programs tribes can
provide to their members. The question is whether the provision of
those benefits is excludable from gross income under the general
welfare doctrine.
In order to provide context to this discussion I would like to
briefly explain certain tax principles that apply to government social
welfare programs, how the IRS has applied these principles in the past
to tribal social welfare programs, and what the IRS is doing in order
to address the concerns of the Indian tribal community on this topic.
Brief Explanation of Tax Principles
The two concepts relevant to this discussion are gross income and
the IRS's administrative general welfare exclusion from gross income.
Section 61 of the Internal Revenue Code (Code) provides that gross
income includes all income, from whatever source derived, unless a
specific exception in the Code applies. This provision establishes the
general rule that income will be taxed unless it is expressly excluded
from taxation.
The general welfare exclusion is, however, a non-Code exception. It
is an administrative exclusion that has been developed in official IRS
guidance and recognized by the courts and Congress over a fifty-five
year period. 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).
Some have expressed a concern that guidance on the general welfare
exclusion lacks clarity because it is not found in the Code but in
these other forms of administrative guidance and court decisions that
stretch over five decades.
It is clear that the exclusion can apply 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 IRS
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 includible
in a recipient's gross income. 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 under a governmental program, (2) be for the promotion of
general welfare (i.e., be based generally on individual, family or
other needs), and (3) not represent compensation for services.
I'd like to emphasize that the general welfare exclusion applies
equally to general welfare program payments of all governments, tribal,
federal, state, and local.
Past Application of the Exclusion to Tribal Programs
The IRS does not have and never has had a special program for
examining tribal government social welfare programs. Historically,
there were two primary ways that the IRS came to analyze tribal social
welfare programs and whether payments made through these programs
qualified for the general welfare exclusion.
One way that the IRS may come to examine a tribal program is for
the tribe to seek a letter ruling from the IRS on the tax implications
of a certain program. The IRS has historically provided all
governments, tribal and non-tribal, with the opportunity to seek a
letter ruling to determine if a certain program qualifies for the
general welfare exclusion. Some tribes have availed themselves of this
process. However, the expense, time needed, and the limited reliance
provided by a letter ruling may have discouraged tribes from seeking
letter rulings for their programs.
The second way tribal social programs may come under review is
through an examination of a tribal government's tax reporting
compliance. The Code requires all persons, including Indian tribal
governments, to report certain payments of $600 or more to the IRS.
During an examination, a review of an Indian tribal government's books
and records may show payments of $600 or more to tribal members for
social programs. These payments require further consideration, because
payments to which the general welfare exclusion applies do not have to
be reported.
The IRS always examines a program using the same three prong
analysis of the general welfare exclusion. There has not been
significant concern voiced to us regarding the first prong of this
analysis: whether payments are being made from a government fund or
not. The comments we have received on the application of the general
welfare exclusion within the tribal context have been on the second and
third prongs of the analysis: whether the payments are being disbursed
based upon the needs of the recipient and whether the payments
constitute compensation received for services.
For example, in one private letter ruling, a tribe provided certain
educational assistance and benefit payments to its members who attended
institutions of higher learning and vocational or occupational
training. Most tribal members qualifying for assistance had an income
below the national family median income level. In this instance, it was
determined that the educational assistance payments were made to
enhance educational opportunities for students from lower-income
families and, therefore, were excluded from gross income because the
payments were for the promotion of the general welfare.
In another ruling, it was determined that payments to participants
in a tribal program designed to train unemployed and underemployed
residents in construction skills were excluded from income under the
general welfare exclusion because the primary purpose was training,
which is based on the need for additional skills to prepare for the job
market, and was not a payment for the compensation of services.
The difficulty in these examples and in applying the general
welfare exclusion has been that each application is fact-specific and
requires an independent analysis. The historical and cultural context
within the tribal government context adds a layer of complexity to this
analysis. Historically, tribes have expressed their concern to us that
the IRS has not consistently applied the general welfare exclusion.
The IRS Response to Tribal Concerns
At various points, different tribes and tribal leaders have voiced
concerns over the application of the exclusion provided under the
general welfare doctrine. This issue came up through various levels of
consultation and outreach with tribes and tribal leaders.
In November, 2011, in response to these consultation sessions,
various meetings and general outreach with tribes and tribal leaders,
and internal IRS and Treasury discussions, the IRS issued Notice 2011-
94, which invited comments concerning the application of the general
welfare exclusion to Indian tribal government programs. The purpose of
the Notice was to begin a specific consultation process with tribes on
how to find a solution that addressed their concerns and improved
clarity and consistency of the tax law.
The IRS has received over 80 written comments from tribes and
tribal leaders submitted in response to Notice 2011-94. We are still
reviewing those comments as we consider the next step in this process.
Additionally, the IRS and Treasury held a general welfare-specific
consultation session in conjunction with the White House Tribal Nations
Conference on November 30, 2011. It was attended by over one hundred
tribal representatives. On March 8, 2012, Treasury and the IRS
participated in a consultation session hosted by the National Congress
of American Indians in conjunction with their annual conference and
attended by approximately forty tribal representatives. On May 30,
2012, Treasury and IRS held a national phone forum that had over 150
participants. Recently, on June 6, 2012, the Advisory Committee on Tax
Exempt and Government Entities, which is made up of representatives
from the public including representatives of the tribal community,
issued a report on the General Welfare Doctrine as Applied to Indian
Tribal Governments and Their Members. We are currently reviewing the
recommendations of the report and we expect to continue receiving
comments as we move forward.
The IRS plans to publish written guidance that will address issues
raised by tribes in their comments. Our intent is that this published
guidance, along with improved internal coordination procedures, will
provide increased clarity and consistency of the application of the
general welfare doctrine. In the process of doing so, we will respond
to many of the concerns which we have heard through the written and in-
person consultation sessions. Our goal is to publish guidance as soon
as possible. Tribal concerns are very important to us and we look
forward to working with tribes on this item in the future.
This concludes my testimony and I would be happy to answer any
questions you might have.
The Chairman. Thank you very much, Ms. Jacobs.
Mr. Klein, the Treasury Department has been holding
consultations on the application of the general welfare
doctrine to Tribal governments. What will be the end product of
those consultations and what is the time frame for publishing
the end product?
Mr. Klein. Thank you, Chairman Akaka. As was noted, we
began this direct consultation last November on this specific
issue and we have held several meetings. I think some of the
milestones along the way here have been the 85 comments that
have come in.
We have stated, as the time frame going forward, that we
are going to publish this written guidance. I don't have an
exact time as to when. There is an inherent tension, as you
heard from witnesses in the first panel, as I am sure you have
heard from others and as we have heard. These are real concerns
about programs that are going on and affecting real people
every day, so we want to address this as quickly as possible.
On the other hand, engaging in consultation in this
productive dialogue takes time in the back and forth. It takes
time to go through the comments; it takes time to think through
some of these complicated issues, because as we are setting
their unique concerns that face Indian Country, but they are
also precedent that would affect other governmental entities
that fall under this.
It would be my hope that we are able to balance those sets
of competing interests and issue published guidance in the not
too distant future. That being said, I don't view that as an
endpoint to the process; I view it as a continual process and a
continual chance for enhanced dialogue on this, because these
issues, given their complexity, will continue for quite some
time.
The Chairman. Can the Treasury keep the Committee informed
of the programs on this that you are talking about?
Mr. Klein. Absolutely, Mr. Chairman.
The Chairman. Thank you.
Ms. Jacobs, taxation of Tribal social programs or benefits
interfere with a tribe's ability to provide those benefits to
its members. What do you say to someone like President Steele,
who has testified that a tax bill to someone on his reservation
may mean the difference between complying with an IRS payment
or providing food stamps to their family?
Ms. Jacobs. Thank you for that question, Mr. Chairman.
During the consultation sessions that we have been having, we
have heard these concerns from a variety of tribes, and part of
the issue they have raised is consistency with these programs.
We have now instituted better internal procedures. I have
issued instructions to my field staff that they must coordinate
all of these general welfare questions with our technical staff
so that we can have a better communication and have a better
effort at ensuring consistency in these matters.
This is an issue for all governments because the general
welfare exclusion applies equally to State and local
governments, as it does to Tribal governments, as they all seek
to take care of the welfare of their citizens and members. It
is the same doctrine, and at times we say yes or no to a State
or local government, as we may have to say yes or no to a
Tribal government on their programs. I believe those
governments share the same concerns about their citizens and we
are cognizant of that and continue to listen to the tribes'
concerns as they raise their unique circumstances to us.
The Chairman. Thank you.
Mr. Klein, one of the major issues that the tribes have
brought to my attention is that the field examiners are often
unaware or dismissive of Tribal culture and the unique status
of tribes as governments. What type of training do your
examiners undergo prior to interacting with Tribal governments
to ensure they are respectful of the unique cultural, social,
and governmental status of tribes?
Mr. Klein. Thank you, Chairman, for that question. You are
absolutely right, the importance of first recognizing the
government-to-government nation and respect of sovereignty, as
well as understanding the added layer of complexity that
cultural programs provide for Tribal governments and their
members is incredibly important.
When we went out for this notice for comments, we actually
specifically mentioned cultural programs as an area where we
were seeking further understanding and information in terms of
what benefits tribes provide, because in that area they are
very different from other governments, and we need to respect
and understand that is the purpose of the Tribe and we need to
understand, as we go forward in this guidance process, how we
can best provide that type of guidance for tribes for their
cultures.
In terms of the IRS training, I will turn, if you don't
mind, over to Ms. Jacobs for her office, since that is really
under her responsibility.
The Chairman. Thank you.
Ms. Jacobs. Well, thank you, Mr. Chairman, for allowing me
to add to Mr. Klein's answer.
When the Office of Indian Tribal Governments first came
into existence around 12 years ago, we worked very closely with
a variety of tribes from across the Country and ended up
working directly with a Tribally owned entity to develop some
training that not only focused on Indian law, but also on
protocol training, cultural training in the general sense, not
specific to the general welfare exclusion. All of our employees
go through that training and are expected to have a knowledge
of the tribes that they are assigned to assist in the field,
and those training efforts continue to be ongoing and refined
as we gain experience in working with the tribes from the
Internal Revenue Service.
The Chairman. Thank you very much.
Senator Johnson, your questions.
Senator Johnson. Ms. Jacobs, when did you first begin to
demand 1099s?
Ms. Jacobs. Senator, 1099 reporting has been in the tax
code for a time that I cannot speak to. I could get back to you
with the date that that started. In the general welfare area
this comes up if a program is determined to result in a tax
consequence to an individual, then a 1099 would be issued. It
also comes up most generally in the employment tax context for
vendors and that sort of payment.
Senator Johnson. I was under the impression that 1099s were
not required in Indian Country previously.
Ms. Jacobs. Senator, I would be happy to provide your staff
with a more detailed analysis of the 1099 requirements, but as
I stated in my testimony, all persons, including Tribal
governments, State and local governments, are required to file
1099s on the payments to which 1099s apply.
Senator Johnson. They always have been?
Ms. Jacobs. I would have to get back to you on that.
Senator Johnson. Is there any other way you can imagine
that you could avoid the 1099 situation?
Ms. Jacobs. Senator, I believe that in these ongoing
consultations on the general welfare doctrine, this is an issue
we have been discussing. What are the understandings of the
programs that are out there in Indian Country, what ways are
the tribes administering them and how we can work with them on
the administrative issues, as well as the delivery of the
programs that they are engaged in. I think our ongoing dialogue
with the tribes to explore those issues is something that we
could then take into account as we move forward in developing
some sort of published guidance so that we are all in a
situation of further clarity and consistency in administering
the tax law in this area.
Senator Johnson. Is there any way you could arrive at the
de minimis number in dealing with the amount spent?
Ms. Jacobs. Thank you, Senator. That is also one of the
concerns and issues that we have been discussing with the
tribes through the consultation, and a concern that we will
certainly take into account as we continue the dialogue on
developing further guidance for both the tribes and other
governments who are affected by the general welfare exclusion.
Senator Johnson. I have no further questions.
The Chairman. Thank you very much.
Senator Udall, your questions, please.
Senator Udall. Thank you, Chairman Akaka.
Ms. Jacobs, can you tell us the number of audits the IRS
conducted of Indian tribes last year?
Ms. Jacobs. Senator, thank you for that question. I do not
have that sort of data available to me, but we would be happy
to take your question back and get back to you with that.
Senator Udall. Okay. And I would also be interested in has
the trend changed over the last five years. So those two
answers to those questions.
In your testimony you mentioned that tribes can avail
themselves of a letter ruling to certify that a program
qualifies for the general welfare exception. Approximately how
many of these are requested annually, and has that number
stayed relatively consistent over the last five years? Is that
in the same category?
Ms. Jacobs. Yes, Senator. The precise numbers would be in
the same category, but may I explain a bit? The private letter
program is something available to any government or any other
company, individual through our chief counsel's office, where
you can present your situation and receive a ruling on those
tax consequences. I am not sure whether the chief counsel's
office is able to delineate between one sort of government
asking the questions versus another, so I am not sure if we
will have those numbers.
The other item I might mention is that when anyone comes in
for a private letter ruling, they have the opportunity to
withdraw that request if the answer we give them a preliminary
answer and it is counter to their position. If it is negative,
they can withdraw that request and it won't be published. So it
may also not be possible to completely give you the landscape,
but we will do our best to describe those situations for you.
Senator Udall. Thank you. Your testimony cites two examples
of where the general welfare exemption was applied to Tribal
programs. Can you share an example of a program or tax event
where the general welfare exemption was denied?
Ms. Jacobs. Well, Senator, as I have said, one of the
issues with the general welfare exception is that it is very
fact-specific. It has developed over 50 years as a facts and
circumstances test, and I think there is a lot of information
and misinformation out there on some of the issues involved
with governments and the general welfare exception.
It is difficult to describe when a situation might be
allowable versus not; often the facts appear to be very
similar. For example, in a housing program, once one delves
into whether the individuals actually have the benefits of
ownership and are therefore able perhaps to have their house
improved in a way that then allows them to sell that property
and gain a benefit, versus a situation that might occur on
Tribal trust land where an individual would not own the land
and, therefore, not be able to sell it and have that benefit
could be an example of where things look similar but might not
be.
Senator Udall. Might not be. Let me ask about, and I am not
asking for a ruling here because I understand it is fact-
specific. There is a tradition in New Mexico of feast days, and
this goes way back to the idea of the individual pueblo and
households in the pueblo inviting everybody in. I mean, it is a
very broad invitation. If you are within 100 miles or
something, you decide you are going to go to the Jemez Pueblo
or the Zuni Pueblo or something like that, and come to a feast
day, when it is publicly announced. We have heard of an
incident of a field agent issuing 1099s to Tribal members for
distributions that pueblo governments give to heads of
households to help offset feast day costs.
The fee state, sometimes you can have anywhere from 50 to
100, 200 people come through. The people that hold these feasts
are of modest incomes, so the Tribe is trying to help them
incur some of the costs, but also remain true to the tradition.
So if you follow your example here, to qualify under the
general welfare exclusion, payments must, number one, be made
under a government program. I assume what the Tribe should do
here is that if they had a program like this on feast days,
that they would make it official through the council or
something, and say there is a program for giving out money to
support the feast days, and that makes it more credible, Mr.
Klein seems to be nodding, that makes it more credible in terms
of how the money is allocated.
Then your second criteria is for the promotion of the
general welfare, be based generally on the individual, family,
or other needs, it would seem like it would qualify there, and
not represent compensation for services.
But it seems the key in this kind of situation is having a
program in place where the money that goes from the Tribe to
the individual to support the feast day is something that is
recognized by the governing body and then it has a much better
chance to make it into the general welfare exemption or
exclusion. Would that be fair? Not asking you to make any
ruling, but just knowing what the facts are there.
Ms. Jacobs. Senator, obviously, I can't speak to any
particular situation, but these are exactly the sorts of things
that we are appreciating in our consultation with the tribes,
describing the reality of the situations to us so that we can
work together to come up with guidance on those situations.
Senator Udall. Yes. And we really appreciate you doing
that, because I think when you and Mr. Klein are in these
consultations, that you sit down with the tribe, as some of the
previous witnesses talked about, learn about their traditions,
learn about the culture, learn what it is that they have done
for hundreds of years, maybe thousands of years.
Then I think you are better able to apply this particular
exemption to their circumstances and situation, and give them
some guidance. Just like I was talking about here, you know, it
might make it a little stronger if you actually set up, under
the governing body, a program so that monies that would flow
would do for the following reasons.
Mr. Klein, did you have a comment on that?
Mr. Klein. I think that is exactly right, Senator. I think
when there are established programs, especially those that have
gone through, the Tribal government is a self-governing
organization, and programs that have been adopted and ratified
by Tribal council through that process clearly become a
stronger program with respect to the general welfare doctrine.
Senator Udall. Thank you.
Sorry for going over, Chairman Akaka, but I just wanted to
focus in on that. Thank you very much.
The Chairman. We will have another set of questions.
Let me begin this second part here.
Ms. Jacobs, can you tell the Committee, is the audit
examination process the same for all government entities? Is
there parity with the State and local governments?
Ms. Jacobs. Well, thank you for that question, Mr.
Chairman. I would say that all governments are subject to the
verification of their reporting requirements. In all
governments, generally the primary issue that we, the IRS have,
relates to employment tax compliance. All governments,
including Tribal governments, are employers and the rules about
employment tax is generally the same for all of those
governments, and that is generally what we would be looking at
with them. So in that respect, other than the specific rules
that are different for tribes and specific rules that might be
different for States, the general process is the same, yes,
sir.
The Chairman. Now, to the panel, are you aware that the
Obama Administration has made it a priority to settle
longstanding trust cases? Tribes are now concerned that
distribution of those settlements to individual Tribal members
will be considered taxable income. This seems contrary to the
Per Capita Act. Do you view distribution of these settlements
as taxable income? And how do you reconcile the prior
interpretations of the Per Capita Act?
Mr. Klein. Chairman, to answer the first part of your
question, yes, we are aware of the longstanding desire to
settle these claims. We are aware and have become increasingly
aware in a variety of venues about tribes' concerns about the
tax status of not just the settlement, but other income derived
from Tribally trust land.
I will defer to the expert on the panel on the tax status
and nature of those things, but we have become aware and tribes
are continuing to increasingly bring it to our attention.
Ms. Jacobs. Mr. Chairman, yes, to echo Mr. Klein, we have,
in various situations, consultation sessions, as well as
individual inquiries, become more aware that tribes are
concerned regarding the general landscape of the taxability of
trust assets and distributions of those assets. Because of that
concern, I think we are interested in starting a dialogue with
the tribes so that we can fully understand their concerns and
make sure that we have consistency in administering the rules
that are related to those distributions.
As has been raised, sometimes the statute allows exemption
and sometimes it does not, and there has been no change in the
law in that area, nor has there been a change in the policy in
that area. So we would like to work together, Treasury and IRS,
and obviously in consultation and collaboration with the
tribes, as well as the Department of Interior, to ensure that
we are administering as they come into being, the new
settlements in the most effective manner and consistent with
the law.
The Chairman. Well, I want to thank both of you so much for
your testimony and your responses, as well. Thank you for
highlighting some of the concerns that there are. And let me
finally say I want to commend you for working together on these
issues, and hope you continue to do that, and also to be sure
the tribes are consulted, as you are. I am glad to hear about
your training programs, because that also adds to it. So,
again, thank you very much.
Mr. Klein. Thank you, Mr. Chairman.
Ms. Jacobs. Thank you, Mr. Chairman.
The Chairman. Let me invite the third panel to the witness
table. Serving on the third panel is Ms. Lynn Malerba, Chief of
the Mohegan Tribe on behalf of the United South and Eastern
Tribes in Nashville, Tennessee; and Mr. William Lomax,
President of the Native American Finance Officers Association
in Washington, D.C.
I want to welcome both of you to the hearing and ask Ms.
Malerba to please proceed with your testimony.
STATEMENT OF HON. LYNN MALERBA, CHIEF, MOHEGAN TRIBE; ON BEHALF
OF THE UNITED SOUTH AND EASTERN TRIBES, INC.
Ms. Malerba. Thank you, Chairman Akaka and also to the
other members of the Committee. I am sure that they will be
reading this testimony, as well as to the staff here today. I
am honored to be able to provide this testimony on behalf of
the United South and Eastern Tribes, USET.
USET has united with other respected Tribal organizations
in the InterTribal Organization Tax Initiative to jointly
address the tax policy priorities of tribes. One of the reasons
the Initiative formed was due to widespread concern that the
Internal Revenue Service examinations and audits of Tribal
general welfare program benefits are being carried out in a
manner that is incompatible with Federal law, treaties, trust
responsibility, and the self-determination policy.
As Chairwoman of the Tribal Self-Governance Advisory
Committee, it has been my privilege to work with tribes on
issues of self-governance throughout Indian Country and to have
gained understanding for their goals for their communities.
On behalf of USET and the members of the Initiative , I
want to express our appreciation that you have called this
oversight hearing. As you have heard from the Tribal panel
today earlier, IRS field auditors with limited understanding of
Indian law and policy, and the governing traditions of the
specific Tribal communities they are evaluating, are conducting
audits of tribes that have the effect of vetoing the
legislative actions of Tribal governments and second-guessing
the policy determinations of the U.S. Congress.
USET Resolution 2012-35 calls for congressional
investigation and oversight of IRS audit practices, and for
suspension of audits until proper guidance is issued. Since
November 2011, USET and Initiative members have participated in
a consultation process with Treasury and IRS on the application
of the general welfare exclusion to Tribal government program
benefits. We have witnessed positive developments through
dialogue with Treasury and IRS on the general welfare doctrine.
We respect the enlightened comments of Mr. Aaron Klein and
other Federal representatives in our March 8th and May 30th
dialogues to show that considerable growth and reflection since
our first meeting.
It would be highly unfortunate if unbridled IRS field
audits and examinations undermine the collaborative spirit of
dialogue and the important mutual understandings reached today
between Treasury and tribes. Let me further explain the context
of USET's concerns.
Tribes operate in unique context and face needs that are
unlike those addressed by other governments' general welfare
programs. Throughout history, American Indian, Alaskan Native,
and Hawaiian Native Tribal leaders have ensured the continued
survival of their people against overwhelming odds. Each
indigenous Nation in what is now known as the United States has
long been recognized as a sovereign government with a unique
history, culture, land base, and citizenry. Unlike State and
local governments, Indian tribes are simply not just
governmental entities; they are also communities of familial
relations who hold property and resources communally. Their
leaders have been charged with responsibility to maintain and
foster culture and traditions.
Tribal Nations have endured colonization, removal,
termination, and other difficult periods in the United States
history. The consequences of these policies have resulted in
difficulties in maintaining traditional ways of life, poor
health status, shortened life spans, limited educational
opportunities, high unemployment, abject poverty, and inferior
living conditions. Tribes are addressing these needs through
general welfare programs tailored to the unique circumstances
facing their communities pursuant to legislative action of
their own Tribal governments. Tribal leaders work for the
communal good of their people to address the present day
impacts of failed Federal Indian policies. These
responsibilities and programs represent core governmental
activities of sovereign nations.
In announcing United States support for the U.N.
declaration on the rights of indigenous people, the
Administration affirmed that the United States supports,
protects, and promotes Tribal governmental authority over a
broad range of internal and territorial affairs, including
membership, culture, language, religion, education,
information, social welfare, community and public safety,
family relations, economic activities, land and resource
management, environment, and entry by non-members, as well as
ways and means for financing these autonomous governmental
functions.
Further education and training of IRS personnel is required
as to these fundamental Federal policies and principles. The
consultation process must facilitate greater understanding and
Federal policy implementation consistent with the trust
relationship and self-determination policy.
The Initiative has called upon the IRS and Treasury to
establish general welfare guidance in which the Service will
defer to Tribal policy decisions as to the determination of
need and exclude such program benefits from taxation. At this
moment, even the existing general welfare framework has been
interpreted extremely narrowly by the IRS in its Tribal audits.
For instance, Tribal program benefits are deemed non-taxable
only when interpreted extremely narrowly by the IRS in its
Tribal audits.
Indeed, Indian tribes are not interested in poverty-based
models or providing general welfare assistance based on
measurements of financial need. Means testing program models
for program eligibility tend to create disincentives and
divisions among Tribal members and reinforces stigmatization
that Indian tribes are trying to counteract through their
cultural, social, and governmental programs.
The IRS has challenged benefits provided to Tribal cultural
leaders who participate in activities that transmit Tribal
culture as being taxable compensation for services provided.
IRS has frequently initiated its audits on the presumption that
Tribal general welfare benefits are actually disguised per
capita payments from Tribal gaming revenues. IRS field auditors
begin examinations with an over-bias and presumption of guilt
until proven innocent. IGRA specifically authorizes gaming
revenues to fund general welfare programs and limits taxations
only to per capita distributions under a federally-approved
revenue allocation plan.
In spite of the controversy underlying these issues, USET
perceives areas of agreement where general welfare guidance
could issue in the very short term. It is imperative that the
mutual understanding between tribes and Treasury and IRS
extends to all levels, not just headquarters staff.
This Committee has long recognized that Tribal Nations
themselves are in the best position to determine how to provide
for their people in the context of their unique histories and
their unique needs. Guidance on the general welfare doctrine
must respect those determinations and not interfere with Tribal
efforts to address those needs.
In conclusion, USET respectfully puts forward the following
request to the Committee: affirm that IRS should defer Tribal
determinations of community need and establish the presumption
of Tribal general welfare program benefits are to be excluded
from the income of recipients; call for the suspension of IRS
field audits until new guidance is issued; encourage issuance
of partial guidance on Federal Tribal agreement items while
further Tribal Federal dialogue continues; ensure that tribes
have the opportunity to review the draft guidance before
published; endorse the creation of a Treasury-IRS Tribal
advisory committee; and remind Treasury and IRS that the
published guidance must conform to the Federal trust
responsibility and the self-determination policy.
USET thanks this Committee to offer its testimony and looks
forward to working with you in addressing these oversight
issues. Thank you.
[The prepared statement of Ms. Malerba follows:]
Prepared Statement of Hon. Lynn Malerba, Chief, Mohegan Tribe; on
Behalf of the United South and Eastern Tribes, Inc.
Introduction
Chairman Akaka, Vice Chairman Barrasso and members of the
Committee, I am honored to be able to provide this testimony on behalf
of the United South and Eastern Tribes (USET). USET is an inter-tribal
organization representing 26 federally recognized Tribes, including my
tribe, the Mohegan Tribe. USET has united with the National Congress of
American Indians (NCAI), the Native American Finance Officers
Association (NAFOA), the Affiliated Tribes of Northwest Indians (ATNI),
and the California Association of Tribal Governments (CATG) in the
Intertribal Organization Tax Initiative (``the Initiative'') to jointly
address the tax policy priorities of tribes. The Initiative formed in
April 2011 in large part because of the widespread concern of tribes
that Internal Revenue Service (IRS) examinations and audits of tribal
general welfare program benefits are being carried out in a manner that
is incompatible with federal law, treaties, the trust responsibility
and the self-determination policy.
Additionally, in my role as Chairwoman of the Tribal Self-
Governance Advisory Committee, it has been my privilege to work with
tribes on issues of self-governance throughout Indian Country and to
have gained understanding of their goals for their communities. Self-
Governance tribes dedicate their own resources to supplement federal
funding for programs intended to benefit tribes and their members. Yet,
in recent years, the IRS has increasingly sought to tax what were
previously understood as non-taxable benefits provided by tribes to
their members.
On behalf of USET and the members of the Initiative, I want to
express our appreciation that you have called this oversight hearing.
As you have heard from the tribal panel earlier today, IRS field
auditors--who may have limited understanding of applicable federal
Indian law and policy and who have little or no knowledge of the
governing traditions of the specific tribal communities they are
evaluating--are conducting examinations and audits that have the effect
or vetoing the legislative actions of tribal governments, second-
guessing the policy determinations of the U.S. Congress and undermining
principles of comity enshrined in U.S. Constitution.
The oversight of this Committee is critical to ensure these agency
excesses are curtailed and that policy is developed and executed in an
equitable, transparent and consistent manner.
While USET has witnessed some positive developments through
dialogue with Treasury and IRS on the general welfare doctrine, overly-
aggressive IRS audits continue to taint the atmosphere. It would be
highly unfortunate if unbridled IRS field audits and examinations
undermine the collaborative spirit of dialogue and the important mutual
understandings reached to date between Treasury and the tribes. Let me
further explain the context and USET's concerns.
Tribes Operate in Unique Contexts and Face Needs That are Unlike Those
Addressed by Other Governments' General Welfare Programs
Throughout history, American Indian/Alaska Native Tribal leaders
have endeavored to ensure the continued survival of their people. Each
indigenous nation in what is now known as the United States has long
been recognized as a sovereign government with a unique history, a
unique culture, a unique land base and a unique citizenry. Unlike state
and local governments, Indian tribes are not simply governmental
entities; they are also communities of familial relations who hold
property and resources communally and their leaders have been charged
with responsibility to maintain and foster culture and traditions.
The leaders of these nations work toward the communal good of their
people, ensuring that the cultural, physical, social, educational,
basic living and emotional needs of their communities are met to the
best of their abilities. Each tribal leader is eminently responsible to
its members and is held accountable for his/her ability to ensure the
long term well-being and continued existence of their extended tribal
family.
Tribal nations have survived against overwhelming odds. They have
endured colonization, removal, termination and other difficult periods
in the United States history which in turn affected their communities.
Indian Tribes and Alaska Natives have endured the consequences of these
policies that have resulted in poor health status, shortened life
spans, limited educational opportunities, high unemployment, abject
poverty and inferior living conditions. Although some tribes have
managed to generate significant revenues, this change has come about
recently and is only beginning to address longstanding social needs.
Tribes view their general welfare programs as supplemental to
inadequate federal programs based in the trust responsibility or treaty
rights, and that these rights belong to all tribal members. In general,
Indian tribes are not interested in poverty-based models of providing
general welfare assistance based on measurements of financial need.
Indeed, means-testing models for program eligibility tend to create
disincentives and divisions among tribal members, and reinforce the
stigmatization that Indian tribes are trying to counteract through
their cultural, social and government programs.
Tribes are addressing these needs through general welfare programs
tailored to the unique circumstances facing their communities pursuant
to legislative action of their governments. Tribal governments must
address the need to keep traditional culture alive, the need to keep
tribal languages alive, and the need to keep tribal religion and
customs alive, as well as to assure effective programs to address
health, education, unemployment, housing and other welfare needs.
Guidance Applying the General Welfare Exclusion to Tribes Must Respect
Tribal Community Needs and Provide for Deference to Tribal
Determinations
The General Welfare Exclusion as applied by the IRS is an
administrative doctrine that has evolved from rulings addressing state
and local government benefit programs. State and local government
relationships with their citizens are different from those of the
tribal government and their members. Neither tribes nor individual
tribal members should be penalized for providing general welfare
benefits for a much wider range of ``need'' than citizens of a State or
local government.
The IRS has applied the general welfare exclusion to find that
payments to individuals from a governmental welfare fund, under
legislatively provided social benefit programs for promotion of the
general welfare are excludable from the recipient's gross income.
According to the IRS, to qualify under the exclusion, the payments in
question must: (1) be made under a governmental program; (2) be for the
promotion of the general welfare (based on need); and (3) not represent
compensation for services.
The problems being addressed in the tribal-federal consultation on
the general welfare exclusion are multi-dimensional. The existing
general welfare framework in recent years has been interpreted
extremely narrowly by the IRS in its tribal audits. For instance,
tribal program benefits are deemed non-taxable only when ``need'' is
based upon financial need established pursuant to income-based
criteria. This new requirement of means-testing offends tribal leaders'
efforts to work for the common good of all, based upon tribally-
determined needs that are may also be culturally-established or to
implement programmatic commitments the federal government has failed to
fulfill.
The IRS has challenged the benefits provided to tribal cultural
leaders who participate in activities that transmit tribal culture as
being taxable compensation for services provided. For a tribal official
to have to issue a form 1099 to a spiritual leader for the conduct of a
traditional ceremony is not only burdensome, but also culturally
offensive. The Service's lack of flexibility in interpretation and
outright misinterpretation call for published guidance built upon core
principles of tribal sovereignty and tribal self-determination rather
that narrow illustrations based upon the practices of state and local
governments.
USET and Initiative members have called on Treasury and the IRS to
establish general welfare guidance in which the Service will defer to
tribal policy decisions as to the determination of need. USET further
embraces the recommendation issued last week by the Advisory Committee
on Taxation (ACT) that general welfare guidance establish a presumption
that tribally-established welfare programs that address tribal needs
are not taxable to the recipient and do not require reporting by the
tribe. We believe these principles of deference to tribes and the
presumption of tax exclusion could be incorporated not only into the
guidance that Treasury and the IRS will hopefully publish in the near
future, but that could be immediately applied nationwide at all levels
as a means to defuse tension with respect to ongoing audits even before
formal guidance is published. The IRS can and must educate its field
staff to implement IRS responsibilities in conformity with established
policy, not based on uninformed or subjective impressions.
Tribes have pointed out to Treasury and the IRS that built into
these tribally-administered programs are internal controls for
accountability grounded in tribal culture and pursuant to federal
requirements. This direct and local accountability is also exercised by
tribal governments and their members in carrying out their general
welfare programs. Deference to tribal authority should be incorporated
into the IRS and Treasury GWE guidance in recognition of the
accountability mechanisms in place that are based on tribal community
values, reciprocal responsibilities and programmatic objectives. Tribal
representatives and tribal members understand and can identify when
general welfare programs are not accomplishing their objectives. They
can identify shortcomings or abuse with an immediacy that federal
agents will never attain. The IRS and Treasury could recognize tribal
systems for local accountability by expressly making reference to
tribal internal controls as part of the general welfare exclusion
guidance.
Another alarming defect in the IRS interpretation of tribal general
welfare programs is that the IRS has frequently initiated its audits on
the presumption that tribal general welfare benefits are actually
disguised per capita payments. Given this overt bias of the IRS field
staff in these examinations, it appears absolutely necessary that the
guidance contain explicit terms to convey that the Indian Gaming
Regulatory Act (IGRA) expressly authorizes gaming revenues to be used
by the tribal government for the general welfare of tribal members and
that only the per capita distributions of gaming revenue under a
federally-approved revenue allocation plan may be taxed.
Further Tribal-Federal Dialogue is Needed, but Guidance Should Issue as
Soon as Agreements Have Been Achieved
In spite of deep controversy between the IRS and the tribes as to
audits, USET has seen greater understanding arise from federal
counterparts over the course of the three consultation sessions so far.
We respect and appreciate the enlightened comments and perspectives
expressed by Mr. Aaron Klein and other federal representatives in our
March 8 and May 30 dialogues. The comments show a serious level of
study, reflection and analysis from Treasury and the IRS since our
first meeting in November 2011. While we may still have a long way to
go to close gaps between tribal and federal perspective, USET and other
members of the Initiative perceive areas of agreement where general
welfare guidance could issue in the very short term. Prompt issuance of
guidance on agreed-upon principles and approaches could eliminate areas
of uncertainty, enhance trust between the Department and tribes and
allow for focused federal-tribal dialogue to continue developing
principles that will guide policy on the more complex issues.
For USET and the other members of the Initiative it is imperative
that mutual understanding between tribes and Treasury/IRS extends to
all levels--not just the headquarters staff. What has been established
through the consultation is a mutual understanding that, as currently
implemented by the IRS field staff, tribes lack certainty as to whether
elements of its general welfare program are taxable or not. Treasury
and the IRS have expressed a commitment to work with tribes to
establish guidance that provides for such certainty.
Still problematic, however, is that IRS--at this moment--is
auditing and examining tribal governments based on analyses that are
incompatible with the longstanding understandings of the scope of the
general welfare exclusion. As evident in the testimony from the tribal
panel earlier today, provocative and unrestrained IRS examinations and
audits threaten to contaminate what has otherwise been a positive and
productive government-to-government dialogue. The Initiative has
consistently requested suspension of these audits until guidance
issues, but Treasury and IRS have alleged they lack authority to
suspend the process.
USET fails to see rationale in continuing to subject tribal
governments to the expense of preparing and collecting extensive
documentation for submission and review of tribal general welfare
policies, when neither the tribes nor the agents have sufficient
guidance that establishes what it is they are looking for. Furthermore,
the combination of increased audits and insufficient IRS guidance
recognizing the important role played by tribal programs under the
general welfare doctrine is increasingly placing tribal governments in
the position of having to cut back or eliminate needed programs in
order to devote limited resources to defending those programs in
audits. USET asks this Committee to call upon the IRS to suspend its
audits until guidance issues.
Consultation is Best Served When Tribes Review the Draft Guidance and
Participate in Policy Development in a Sustained Manner
Given well-founded concerns that the published Treasury/IRS
guidance could narrowly limit tribal programs eligible for the general
welfare exclusion only to tribal means-tested programs and that would
tax benefits to members extended through educational, cultural ,or
other tribal programs, tribes have called for the opportunity to review
and comment on any draft guidance Treasury and the IRS produce. USET
and the Initiative members view such opportunity to comment as integral
to government-to-government consultation that ensures policies
affecting Indian country take into account the needs of the tribal
nations and their differences across the regions of the United States.
This Committee has long recognized that tribal nations themselves
are in the best position to determine how to provide for their people
in the context of their unique histories and unique needs. Respecting
the voice of tribes in determining federal policies has been observed
consistently over the past forty years of federal Indian policy. In
1970, President Nixon stated:
``Both as a matter of justice and as a matter of enlightened
social policy, we must begin to act on the basis of what the
Indians themselves have long been telling us. The time has come
to break decisively with the past and to create the conditions
for a new era in which the Indian future is determined by
Indian acts and Indian decisions.''
Richard Nixon, Special Message to Congress, July 8, 1970,
Public Papers of the President of the United States (1970), p.
564 (emphasis added).
President Obama recently echoed these same themes:
``History has shown that failure to include the voices of
tribal officials in formulating policy affecting their
communities has all too often led to undesirable and, at times,
devastating and tragic results. By contrast, meaningful
dialogue between Federal officials and tribal officials has
greatly improved Federal policy toward Indian tribes.
Consultation is a critical ingredient of a sound and productive
Federal-tribal relationship.''
President Obama, Memorandum on Implementing Tribal Consultation
under Executive Order 13175 (Nov. 5, 2009).
Tribal leaders in the November 30, 2011, consultation with IRS
stressed that simply convening one session of tribal discussion cannot
sufficiently address the complex elements that comprise the tax
implications of the general welfare activities of tribes. Ongoing
dialogue is required. Treasury and the IRS have provided for a more
enriching dialogue by participating in three discussions so far. While
an improvement, further sustained interaction is needed for the
government to understand and adequately reflect tribal views. The
Initiative has proposed a Tribal Advisory Committee to serve as a forum
for tribes and Treasury/IRS to discuss issues and proposals for changes
to Treasury/IRS regulations, policies and procedures. Additionally the
Advisory Committee on Taxation (ACT) has recommended that Treasury
establish the position of Undersecretary for Tribal Affairs.
USET requests that the Committee support these sustained
consultation concepts. We further request that the Committee provide
its own input to the consultation process to set forth the need that
the published guidance must conform to the federal trust responsibility
and the self-determination policy. The Committee's resolution or
statement affirming that these fundamental principles demand federal
deference to tribal determinations of community need and a presumption
that tribally-established general welfare program benefits are to be
excluded from the income of recipients.
Conclusion
USET thanks the Committee to offer its testimony and looks forward
to working with you in addressing these oversight issues. I will gladly
respond to your questions.
The Chairman. Thank you very much for your testimony.
Mr. Lomax, will you please proceed with your testimony?
STATEMENT OF WILLIAM LOMAX, PRESIDENT, NATIVE AMERICAN FINANCE
OFFICERS ASSOCIATION
Mr. Lomax. Aloha, Chairman Akaka.
The Chairman. Aloha.
Mr. Lomax. My name is William Lomax and I am a member of
the Gitxsan Nation and President of NAFOA. At NAFOA we serve
the interests of Indian Country by working on a wide range of
tax, finance, and other economic policy. Rarely do we see tax
issues generate so much united and widespread Tribal concern as
this does.
We firmly believe that the IRS, in carrying out its duties
as a regulatory agency, is wrongly interpreting and enforcing
the general welfare doctrine as it applies to Tribal
governments. More recently, we believe the IRS has improperly
shifted policy when it began to pursue taxing trusts and
possibly settlement distributions to individuals.
We understand the IRS has a difficult task when enforcing
the tax code and collecting what may be owed to the Federal
Government, but that is not what is at stake here today. At
stake today is something much greater. The IRS is using the
full force of its agency to interpret the validity of Tribal
programs and aggressively deter, through enforcement, the
establishment or expansion of much needed Tribal programs and,
as a result, Tribal self-determination.
Even more alarming from a Tribal perspective is that the
IRS is making these determinations case-by-case, without
integrating Federal Indian policy into their decisions. This
has the effect of placing Tribal well-being, culture, and
values in the hands of field agencies who routinely make these
determinations, instead of duly elected Tribal leaders,
Congress, and the Administration.
A few brief examples to illustrate the point. First, when a
Tribe funded a trip for their elders to cultural and historical
sites, including to Native focused historic battlefields,
parks, and sacred landmarks, an IRS agent determined the value
of the trip to be taxable to the elders. I don't recall anyone
else ever receiving a 1099 for a field trip or for attending a
church activity.
In the second example, an IRS agent ruled that Tribal
citizens who benefitted from government programs should be
taxed on the part of the revenue that was generated from gaming
proceeds. The same benefits funded from other revenue were
considered exempt. This example shows the intent of the IRS to
interpret the source of the revenues more relevant than the
program itself. In addition, the agent ruled that the Tribe
should have withheld taxes, which led to significant penalties.
The IRS is quick to point out that these activities may
still be carried out, they will just be subject to taxation.
But the true deterrent lies in the enforcement effort and the
uncertainty of what IRS may consider a taxable trigger. Five
years ago and IRS commissioner testified to the fact that his
agency had conducted 139 examinations during the past two years
that focused specifically on the use of net gaming revenues. At
that rate, all tribes in the lower 48 would have been on track
to have been examined by now.
For 2011, Indian Tribal Government Work Plan states that
one of its primary focus areas is reviewing the taxability of
Tribal member distributions. Yet, in the IRS's 2011 Work Plan
for Federal, State, and local government, the taxability of
benefits provided by State and local government is not even
mentioned.
The fact that Tribal governments are being examined at a
high rate is not a simple matter for the tribes to deal with.
An examination costs a Tribe a significant amount of scarce
time and resources, especially when the agent's objectives are
unclear and open-ended. More costly for a Tribe is a ruling
that a government should have withheld taxes. This action costs
significant sums of money because penalties are proportionate
to the number of beneficiaries.
There are a number of other apprehensions that Congress and
the Administration should have about the IRS approach and
wisdom of using taxation as a deterrent for this purpose.
First, many Tribal programs are making up for the prior adverse
effects of centuries of attempted cultural assimilation and
failed Federal policies. Second, it is difficult to imagine the
revenue benefit to the IRS outweighing the harm done to Tribal
governments through the creation of greater uncertainty, the
increased expense on already strained governments, and the
potential loss of cultural practices.
Third, as this Committee knows, the practice clearly goes
against congressional intent and overall administrative policy
of honoring self-determination and fairness in taxation. And,
finally, the extensive need in Indian Country for education,
health care, housing, and other basic services, along with
years of unmet and unfulfilled Federal obligations, it stands
to reason that the Federal Government should be doing all it
can to support and incent these programs, not deter them
through taxation.
In addition, the IRS has also embarked on a disturbing
effort to tax per capita payments made to Tribal members from
trust funds. Per capita payments from Tribal trust funds are
specifically excluded from both Federal and State taxes under
the Per Capita Act of 1983. Long before 1983, this tax
exclusion existed in Federal law because it is derived from
Indian treaties and the Federal trust responsibility.
The IRS has the opportunity to do the right thing and honor
Federal policy. When they issue guidance on general welfare, it
should firmly support self-governance and Federal Indian
policy. After the IRS announced formal comments on general
welfare six months ago, they received about 90 comments and
hundreds participated in the three consultations that they
held. A report submitted by the IRS Advisory Committee on
general welfare affirms and supports Tribal self-determination,
greater inclusion by tribes on IRS policy decisions, and that
Federal Tribal policy should be included in guidance.
We are hopeful that the views expressed during this
hearing, and Tribal comments in the IRS advisory report will be
carried forward. In the absence of this, we strongly request
Congress to act to uphold fairness and its Federal trust
responsibility.
In addition, we are calling on Congress to put an immediate
end to the current aggressive IRS activities of determining
Tribal welfare and taxing trusts and settlement assets until
these issues are resolved. After all, these are internal
administrative IRS decisions that can be reversed without a
regulatory change, let alone a legislative fix.
There is a saying in my Tribe that if you take a bucket of
water out of the Skeena River, it keeps on flowing. The IRS in
this case is not just reaching in to take a bucket of our
resources; it is effectively changing the course of the river.
Thank you, Chairman Akaka, for your time.
[The prepared statement of Mr. Lomax follows:]
Prepared Statement of William Lomax, President, Native American Finance
Officers Association
NAFOA serves Indian Country by developing tribal financial capacity
and building the essential partnerships necessary to advance tribal
economic development. In addition, NAFOA serves tribal leadership and
practitioners by supporting sound tax, finance, investment, banking,
and economic policy. We are pleased to present testimony on one of the
leading concerns of Indian Country--the Federal Government utilizing
administrative tax policy to deter tribal self-determination and
cultural preservation.
In particular, our testimony will focus on the principal concerns
that directly impact self-determination. The concern is how the
Internal Revenue Service (IRS) is applying the General Welfare Doctrine
as it applies to tribal governments, in sharp contrast to the
principals of tribal sovereignty and self-determination and long-
standing federal Indian policy; and, the concern that the IRS has
shifted policy to begin taxing distributions from tribal trust assets
and settlements.
While guidance from the IRS is currently in progress, there is
valid concern from tribal leadership based on direct agency contact
with tribes and their members that the IRS may not move to fully
support the unique status of tribes and the government-to-government
relationship that exists between tribes and the Federal Government. If
that status is not respected, it will impede the Federal Government's
trust responsibility, hard-fought treaty rights, and over a century of
judicial, administrative, and congressional federal Indian policy, not
to mention, the current Administration's objectives of ensuring
fairness in tax policy and application. NAFOA is requesting the
Committee, in its oversight role:
1. Place a moratorium on any examinations of tribal general
welfare programs until clear and consistent guidance or
legislation is enacted.
2. Ensure sovereignty and federal policy, including self-
determination, is upheld and supported in the creation of a
general welfare doctrine for tribes.
3. Ensure tribal leader input, advisory committee input, and
congressional intent be incorporated into the guidance
document.
4. Ensure tribal leadership has the ample opportunity to review
any formal or informal guidance prior to implementation and
have meaningful input in this and other IRS policy that
directly affects tribes.
5. End the abrupt change in IRS policy to begin taxing trust
and settlement distributions to individuals.
6. Be prepared to step in with statutory language should the
IRS' final guidance fail to uphold the core tenants of federal
Indian policy.
The General Welfare Doctrine
The IRS generally begins with the presumption under Section 61 of
the Internal Revenue Code which provides that, except as otherwise
provided by law, gross income means all income from whatever source
derived. Furthermore, the agency assumes that tribal income, not
otherwise exempt, is includable in the gross income of the Indian
tribal citizen when distributed or constructively received, unless
excluded by a specific statute or treaty.
Although the IRS Code under Section 61 is very broad, the IRS does
exclude certain government services, payments, and benefits. At the
start, a broad array of government services are typically excluded from
income, including education, public safety, court system, social
services, public works, health services, housing authority, parks and
recreation, cultural resources, and museums. In addition, payments made
by federal, state, local, and Indian tribal governments under a
legislatively-provided social benefit program for promotion of the
general welfare receive a particular administrative exception to the
general rule of broad income inclusion and would fall under the General
Welfare Doctrine (GWD) or General Welfare Exclusion (GWE).
This is a seemingly broad statement of exclusion for government
payments that promote the general welfare of a government's citizens.
However, the IRS has further refined the circumstances to which the
doctrine is limited. The IRS generally focuses on the following three
factors when considering whether a payment is excluded pursuant to the
General Welfare Doctrine: (1) was it made by a governmental unit?, (2)
was it for the promotion of general welfare?, (3) were services
rendered for such payment?
The second requirement--that the payment be made to promote the
general welfare--has received the most attention. In the past, the IRS
has found a large variety of government programs to be for the
promotion of general welfare. Programs that meet health needs,
educational needs, job training needs, economic development needs, and
several other needs were determined to be for the promotion of general
welfare. For example, the IRS ruled that government provided health
care benefits for the elderly, commonly known as Medicare benefits,
were not taxable to recipients because the Medicare program furthered
the social welfare objectives of the Federal Government.
Disparate Treatment
While the IRS strives to treat all governments the same, a review
of the IRS's 2011 Work Plans indicates that some notable differences
remain. The IRS's 2011 Indian Tribal Government Work Plan states that
one of its primary focus areas is reviewing the taxability of tribal
member distributions. Yet, in the IRS's 2011 Work Plan for Federal,
State and Local Governments, the taxability of benefits provided by
state and local governments is not even mentioned.
Indian Tribal Governments may assert different priorities on values
such as cultural preservation and use a different model for delivering
their services, but the services provided are not any more numerous or
altogether unlike in their overall objectives than those programs and
services provided by state and local governments.
What is different, however, is how the IRS has interpreted the
validity of tribal programs and how they have aggressively enforced,
and therefore, deterred the establishment or expansion of tribal
programs; and as a result, tribal self-determination. And even more
alarming, from a tribal perspective, is that the IRS is making these
determinations without the full understanding, or at very least
integrating, federal Indian policy into their determinations. This has
the effect of placing tribal well-being, culture, and values in the
hands of field agents who routinely make these determinations instead
of with duly elected tribal leadership, Congress and the
Administration.
Two examples (among others received) illustrate this concern.
First, when a tribe funded a trip for their elders to cultural and
historic sites, including to an historic battlefield involving the
ancestors of the tribal elders, an IRS agent determined the value of
the trip to be taxable to the elders. A second example shows the intent
of the IRS to focus on the source of the revenue rather than the
program. An IRS agent ruled that the tribal members who benefitted from
government programs should be taxed on the part of the revenue that was
generated from gaming proceeds with the same benefits derived from
other revenue considered exempt. In addition, the agent ruled that the
tribe should have withheld taxes.
The Indian Gaming and Regulatory Act (IGRA) requires withholding
only when payments are made per capita from net gaming revenue and as
approved by the Department of Interior in a filed Revenue Allocation
Plan. In addition IGRA is clear that any other typical government or
charitable use is allowable, including specifically authorizing net
revenues from Class II and III gaming activities conducted by Indian
tribes: (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.
This interpretation that the source of revenue is suspect would be
dismissed if it were only one agent's interpretation that the revenue
source of tribal governments is the determinant of taxability and
withholding requirements. However, national and inter-tribal
organizations have heard from enough tribal leaders to make an informed
conclusion that tribes are being targeted for examinations at an
extremely high and disproportionate rate.
It appears the IRS Commissioner has taken a similar inequitable
view that tribal government revenue is somehow more suspect than state
revenue derived from the same source and used for similar purposes of
general welfare.
Five years ago Steven Miller, when testifying in front of the
Committee on Finance stated, ``To reduce the tax consequences to tribal
members, some tribes have created mechanisms to classify what should be
taxable per capita payments as general welfare program payments,
excludible from income, often through liberal interpretations of what
constitutes a needs-based program. Others have created or invested in
purported income deferral programs . . . .
To address this problem we have engaged in educational and
enforcement activities. We also initiated 139 examinations during the
past two years that focused specifically on the use of net gaming
revenues.''
This statement clearly expresses the IRS view that federal Indian
policy and tribal self-determination are nothing more than ``liberal
interpretations of what constitutes a needs-based'' program and
something to be shut down. And, possibly more troubling, a clear effort
on behalf of the IRS to use significant agency resources to enforce
this view and deter tribes from utilizing tribal revenue for the
benefit of their citizens by conducting 139 examinations in two years.
At that rate and at that time, the IRS was on track to examine every
tribal government in the lower 48 to ensure their view of federal
Indian policy was carried out.
It is worth noting states that conduct gaming activities to benefit
schools, roads and shore up or augment general funds have not received
the same scrutiny.
The IRS and Treasury are quick to point out that these activities
may still be carried out; they will just be subject to taxation. But
the true deterrent lies in the entirety of the enforcement effort and
the uncertainty of what IRS may consider a taxable trigger--uncertainty
even surrounds programs that have been carried out in some form for
generations such as funeral ceremonies and language preservation.
The fact that tribes are being examined at a disproportionate and
alarming rate is not a simple matter for tribes to deal with. An
examination costs a tribe significant time and resources, especially
when the agent's objectives are unclear and open ended. More costly for
a tribe is a ruling that a government should have withheld taxes. This
action costs significant sums of money because penalties are
proportionate to the number of beneficiaries.
In addition to the costs associated with the agency's actions,
there are a number of other apprehensions about the IRS approach and
wisdom of using taxation as a deterrent for tribal governments to
advance the quality of life of their citizens and within their
communities that should cause concern for Congress and the
Administration.
First, tribal programs are making up for the prior adverse effects
of centuries of attempted cultural assimilation and failed federal
policies. Second, it is difficult to imagine the revenue benefit to the
IRS (as an agent of the Federal Government) outweighing the harm done
to tribal governments through the creation of greater uncertainty,
increased expenses on already strained governments, and the possible
loss of cultural practices. And, finally, given the extensive need in
Indian Country for education, health care, housing, and other basic
services, along with years of unmet and unfulfilled federal
obligations, it stands to reason that the Federal Government should be
doing all it can to support and incent these programs and not deter
them through taxation and through the administrative expenses required
to implement and comply with new and undefined IRS standards.
Congressional Intent
It is the last concern that caused this very Committee to use its
oversight role to ensure federal Indian policy was considered valid
criteria for carrying out the General Welfare Doctrine.
The Committee on Indian Affairs held an oversight hearing during
the previous Congress in September of 2009. Shortly after, in an
affirmation of support for tribal general welfare programs, Congress
acted to support the exclusion from income the value of health care
benefits provided by tribal governments to their citizens under the
Affordable Care Act. In addition to actively addressing the issue in
the Affordable Care Act, this Committee, during this Congress, moved to
place language in the Early and Secondary Education Act draft that
would exclude from income the value of education and cultural programs
and services provided by tribal governments to its members.
During the 2009 Committee on Indian Affairs hearing entitled
``Oversight Hearing to Examine the Federal Tax Treatment of Health Care
Benefits Provided by Tribal Governments to their Citizens,'' tribal
leaders expressed offense at the idea that the Federal Government would
provide a disincentive for tribes to provide health benefits to their
members since they were providing a service that the Federal Government
failed to deliver. In addition, taxing health benefits was also
counter-intuitive at best for the Federal Government since tribes
relieved the Federal Government of an expense and obligation when
participants were removed from an already strained Indian Health
Services (IHS) system.
During the same hearing, leadership voiced their concern that
excluding health care benefits may lead to the IRS incorrectly
concluding that all other general welfare programs specifically not
excluded by law would then be open to challenge. To remedy the IRS from
taking an aggressive approach of targeting other general welfare
benefits, tribal leaders recommended that Congress include ``no
inference'' language in the law and in report language, and that
Congress continue to insert its oversight role.
Although no inference language was included in the law, it did
little to dissuade IRS field agents from examining--through audits and
information requests--general welfare programs implemented by tribes
formally through legislatively established programs or informally
through traditional practices. Tribal leaders' concerns were well
justified, and in hindsight, they may have underestimated how
aggressively the IRS would pursue tribal general welfare programs
relative to other state and local government programs during the period
since the hearing.
Since the passage of the tribal health care exclusion in the
Affordable Care Act, most tribes still struggle to navigate the federal
health care system administered through IHS. And, those few tribes that
have experienced continued economic success have continued to
administer their own programs to improve the quality of life for their
citizens. There has not been a rush by tribal governments to provide
health care benefits after the legislation was passed. This is because
tribal leaders, vested with responsibility of making sound long-term
decisions, have weighed the legacy costs and economic factors in the
same manner as other government leaders and have made determinations
that fit their respective tribe's priorities and long-term obligations.
This practical experience should have gone a long way in informing
the Internal Revenue Service decision to subsequently focus on other
general welfare benefits provided by tribal leadership.
As mentioned before, Congress, in the Indian Gaming Regulatory Act
(IGRA), provided clear intent that any distributions made from net
gaming revenues on an approved per capita basis would be subject to
federal taxation with tribes carrying the responsibility of reporting.
Conversely, Congress was silent on taxing net revenue retained for
clearly governmental or social purposes including net revenue used: (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.
IRS Outreach and IRS Opportunity for Tribal Inclusion
NAFOA is requesting that prior congressional intent and the
attributes of two recent works developed from IRS outreach be
considered in the development of guidance. The first is the joint
comments provided by the Tribal Tax Working Group in response to IRS
Notice 2011-94 which called for input for the development of guidance
on the general welfare exclusion as it applies to Indian tribal
governments and their social welfare programs benefitting tribal
members. The second is from the Advisory Committee on Tax Exempt and
Government Entities (ACT) report entitled ``Indian Tribal Governments:
Report on the General Welfare Doctrine as Applied to Indian Tribal
Governments and Their Members.''
The IRS announced, in IRS Notice 2011-94, the formal request for
comments on the General Welfare Doctrine as it applies to tribal
government programs on November 15, 2011. Shortly after, the IRS hosted
its first consultation on the issue on November 30, 2011. The
consultation coincided with the President's tribal leader meeting.
Subsequently, the IRS hosted a second consultation, also in Washington,
DC in March and just a few weeks ago hosted a phone consultation that
was heavily attended. The initial deadline for comments was extended
from February 13, 2012 to March 14, 2012. However, the IRS continued to
encourage comments after the deadline leading up to the phone
consultation. Almost ninety comments were received on the issue.
Joint comments were developed in response to IRS Notice 2011-94
which called for input for the development of guidance on the general
welfare exclusion as it applies to Indian tribal governments and their
social welfare programs benefitting tribal members. These comments were
developed by the Tribal Tax Working Group. (The Tribal Tax Working
Group includes the broad-reaching coalition of NAFOA, the National
Congress of American Indians (NCAI), United South and Eastern Tribes
(USET), California Association of Tribal Governments (CATG), and the
Affiliated Tribes of the Northwest (ATNI) among others formed to
address what tribal leaders are calling one of the most recent and one
of the more serious affronts to tribal sovereignty, taxation issues.)
While NAFOA and the Tribal Tax Working Group do not represent all
tribes, the following are what we consider common tribal considerations
learned from the consultations, input, and outreach on the issue.
Please see attached Joint Comments for Notice 2011-94 for
the complete comments. *
---------------------------------------------------------------------------
*The information referred to has been retained in Committee files.
Please see the report in its entirety at http://www.irs.gov/
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pub/irs-tege/tege_act_rpt11.pdf].
The joint comments emphasized: Deference to tribal leadership and
self-governance in carrying out tribal programs based on their
respective community need and values; The inclusion of federal Indian
policy; consistency in terms, concepts, and process; Needs should be
based on tribal considerations; Exclusion of any program that
supplements federal trust responsibility; and, Privacy of information.
These constructive comments, carefully weighed by tribal
leadership, carry forward the current expectations of self-
determination, federal policy, and the roots of protecting sovereignty.
In addition to the tribally-generated comments, the Advisory
Committee on Tax Exempt and Government Entities (ACT), submitted its
annual report and presented its findings last week on June 6, 2012. The
ACT consists of three appointed members charged with engaging with and
reporting to the IRS on a timely issue that is important to the IRS and
their respective constituents. This year the issue was to add insight
into whether payments made by the tribal government to its members
under a tribal program designed to promote the general welfare of the
tribal citizens is includable in the income of those recipients.
The ACT report is a comprehensive assessment that includes the
history of the general welfare doctrine, the doctrine's exclusions, the
doctrine's prior application for tribes, tribal views on the doctrine,
and two very significant findings. The first finding is that there is a
clear case for modifying the general welfare exception. The second
finding specifically calls for clear methods for greater deference to
tribal governments along with greater tribal involvement.
Both tribal leadership, in their comments, and the advisors in the
IRS ACT report reached substantially similar conclusions in regard to
taxation of tribal benefits used to advance general welfare. However,
the Act Report calls for much more substantial tribal inclusion in the
decisionmaking process. This inclusion calls for consultation, even in
informal decisions that result in a policy change, a high-level
appointment in Treasury to serve as a resource and ensure federal
Indian policy is considered, and the formation of an external advisory
group.
Both the joint comments and the ACT Report findings are summarized
in the Appendix.
While Congress should do its best to immediately remedy the impacts
of recent IRS actions regarding the General Welfare Doctrine as it
applies to tribal governments; the Committee should also work toward
fulfilling the longer-term recommendations made in the ACT Report.
Having an advisory committee in place, a high-level appointee, or
carrying out consultation when the agency's decisions impact tribes
would have likely negated the latest IRS efforts to begin taxing
revenue derived from tribal trust assets such as timber and other
resources.
Taxation of Tribal Trust and Settlements
In addition to deterring self-determination, the IRS has embarked
on a disquieting effort to tax per capita payments made to tribal
members from trust funds. Per capita payments from tribal trust funds
are specifically excluded from both federal and state taxes under the
Per Capita Act of 1983. Long before 1983, this tax exclusion existed in
federal law because it is derived from Indian treaties and the federal
trust responsibility.
Besides being supported by federal treaties and law, the
Administration, through the Department of Interior, at least since the
1950's, has made per capita payments from tribal trust funds and has
not reported them as income for federal tax purposes. They have also
vigorously defended their tax exempt status. The Interior regulations
at 25 C.F.R. 115 were revised in 2000 and continued to provide
procedures for making these payments without provision for tax
reporting.
The Obama Administration is currently engaged in a historic effort
to settle a significant number of lawsuits brought by Indian tribes for
mismanagement of tribal trust funds. Many of the tribes settling these
lawsuits are considering the payment of some portion of the settlement
funds in per capita payments to tribal members. The IRS change in
policy on the taxability of these payments is salt on a wound created
by historic and unprecedented unfair dealing by the United States. The
settlements attempt to make tribes and their citizens whole from
fraudulent activities perpetuated by the Federal Government. Does the
Federal Government really want to tax, in any manner, a settlement
based on their own historic transgression?
Conclusion
The Internal Revenue Service (IRS) interpretation of the
application of the general welfare doctrine and taxing trust assets and
settlements has far-reaching impacts on tribal sovereignty. So far, the
IRS has used the authority of the agency as a deterrent to tribal
efforts to improve the quality of life for all citizens through methods
appropriate for each respective tribe. They have also shown their
intent of continuing to target tribal governments and ignoring long-
standing federal policy by reaching in to tax settlements and trust
assets.
All of these actions clearly call for Congress to oversee an agency
that has not been accountable and acted independently of Administrative
and congressional intent. The result of this IRS effort has been to
cause confusion, place a strain on already limited personnel and
financial resources, and, to have tribes once again feeling as if their
cultural practices are under scrutiny.
The IRS has the opportunity to use the authority of the agency to
incent such activity. When they issue guidance, it should firmly
support self-governance and federal Indian policy.
We are hopeful that the views expressed during this hearing, in
tribal comments, and in the ACT Report will be carried forward. In the
absence of this, we strongly request Congress to act to uphold fairness
and its federal trust responsibility. In addition, we are calling on
Congress to put an immediate end to the current aggressive IRS
activities of determining tribal welfare and taxing trust and
settlement assets until these issues are resolved. After all, these are
internal administrative IRS decisions that can be reversed without a
regulatory change, let alone a legislative fix.
Appendix
The major provisions of the Joint Comments provided by the Tribal
Tax Working Group in response to IRS Notice 2011-94 and the Advisory
Committee on Tax Exempt and Government Entities (ACT) report entitled
``Indian Tribal Governments: Report on the General Welfare Doctrine as
Applied to Indian Tribal Governments and Their Members.''
Joint Comments Provided by the Tribal Tax Working Group in Response to
IRS Notice 2011-94
1. Honor Tribal Sovereignty, the Federal Trust Responsibility, and
Deference to Tribal Self-Government
Any guidance the IRS develops on the application of the general
welfare exclusion to benefits provided by tribal governments to their
members must take into account the backdrop of inherent tribal
sovereignty, federal treaties and the trust responsibility, tribal
history and social and economic conditions, the federal policy of
tribal self-determination, as well as tribal authority for program
administration under the Indian Self-Determination and Education
Assistance Act and numerous other laws establishing a mechanism for
tribal administration of federal programs (housing, child care, elder
care, family services). These laws cover a broad range of federal
program and services that have been consistently underfunded and
understaffed. The resource pool is finite; tribes compete for these
funds annually, and tribes that supplement or supplant federal funding
are working.
2. Developing Substantive Guidance Consistent with Federal Indian Law
and Policy
General Statement of Doctrine--The general welfare doctrine has
been described in various forms of guidance over the years. Not all
forms describe it alike, and some emphasize different elements. To
promote tax compliance and allow tribes greater predictability in
structuring their programs, we urge IRS and Treasury to adopt the
following statement of the doctrine:
The general welfare exclusion (as applied to Indian tribes
and their programs) provides for the exclusion of payments that
are (1) paid by or on behalf of an Indian tribe (2) under a
social benefit program, that is based on either needs of the
Indian community as a whole or upon the needs of individual
recipients (which need not be financial in nature), and (3)
that are not compensation for services or per capita payments.
Given the recent tendency by some IRS auditors in the field to
interpret the doctrine narrowly by focusing largely on individual
income determinations, it is critical to recognize non-financial needs
in the guidance itself. The guidance should expressly affirm that the
doctrine recognizes that the needs criteria can be both individual and
community-based.
3. Consistency and Certainty in Key Definitions and Concepts
Even in cases where there is general agreement between tribes and
IRS auditors on the GWE itself, there is often disagreement on how key
terms and definitions within the doctrine are to be construed. We urge
IRS and Treasury to adopt key definitions that are sufficient to
promote tax compliance yet flexible enough to accommodate the broad
range of tribal services impacted by the doctrine. For example:
a. Community needs should reflect that certain programs are so
important to self-determination and the preservation of culture
and tradition that they may qualify for general welfare
protection regardless of individual financial need. Without
limitation, these may include education, housing, health care,
maintenance of language and traditions, and promotion of the
tribal community's financial well-being and long term goals. In
doing so, the guidance would respect that each tribal
government, through its own policy setting process, is best
situated to determine the needs of the tribe and its members
and the policy solutions.
b. Social benefit should be defined with reference to a goal
or goals established by the tribal council or governing body of
each tribe. Each tribe has its own checks and balances in place
for the approval of programs and those processes should be
given deference in IRS field audits, even where the particular
tribal program does not have a federal or state counterpart.
IRS agents cannot substitute their personal judgment for
decisions that are made pursuant to a political process and
form of government recognized by treaties, Congressional acts
and Presidential executive orders spanning more than a century
of tribal-federal relations. The guidance must recognize the
Federal Government's interests and responsibility to support
tribal programs designed to provide for the well-being of their
members and to ensure the continuance of tribal cultures in
accordance with the priorities of each tribal government. There
must be deference to programs that emerge and are implemented
pursuant to this concept, even if those programs do not have a
federal or state counterpart.
c. Income guidelines used to establish individual financial
need, when required, should not be dictated with reference to
specific federal or state statistics (such as median income or
poverty thresholds). While tribal governments may look to state
and federal income guidelines as a starting point, GWE guidance
should ultimately defer to the political process within each
tribe. When required, income guidelines should be recognized as
a ``safe harbor'' only, with the ability of tribal governments
to consider the individual facts and circumstances of each
recipient (e.g., income far above the median, for example, may
still be insufficient to address a catastrophic loss or
displacement caused by a hurricane, fire or flood).
d. Compensation for services used to disqualify a payment from
exclusion under the GWE should not apply to bona fide programs
with community service ties. For example, tribal governments
should be able to condition tax free educational assistance on
a commitment by the recipient to serve the tribal community for
a period of time during or after completion of course work in
professions needed within the community. Tribal governments
should be able to establish summer youth leadership programs
that offer tax free food, housing and transportation to young
members who develop a sense of community, for example, by
mending fences, repairing reservation homes, cleaning trash
from the roads or doing other tasks that teach responsibility
and citizenship. In recent years, some IRS examining agents
have construed tribal activities such as service on cultural
preservation boards and summer youth work program offering
nominal stipends or benefits as ``employment.''
e. Per capita payments should be limited to amounts designated
as per capita payments under a federally approved revenue
allocation plan in accordance with the Indian Gaming Regulatory
Act (IGRA). Recipients of per capita payments are not
restricted on how those funds are spent. In recent audits,
however, some IRS agents have attempted to reclassify social
welfare payments and in-kind benefits as taxable IGRA per
capita distributions subject to tax and withholding under
Section 3402(r) of the Code. The GWE guidance should confirm
that IRS will respect the IGRA revenue allocation plan
designations, and that payments made under a bona fide social
benefit program are not per capita payments even if the
benefits are provided on a community-wide or tribal-wide basis.
A tribal government should be able to implement education or
housing assistance, for example, on a universal basis without
triggering per capita reclassification.
f. Deference to tribal determinations of community needs is a
key concept for tribal leadership, but IRS officials have
suggested in discussions that some standards are needed to
prevent abuses. In the discussion, a suggestion was made that a
narrative standard could be developed that would defer to
tribes to develop programs consistent with their own social
and/or community needs, except where the programs are ``lavish
or extravagant under the circumstances,'' a standard that
applies to deduction of business expenses. We would encourage
further discussion of this concept. The concept offers a
guiding principle for general deference to tribal decisions,
but there is some skepticism among tribal leaders that IRS
agents have sufficient understanding of tribal circumstances,
such as cultural programs and cultural travel.
4. Means Testing
As noted above, a recurring theme from discussions with tribal
leaders is the need to dispel the notion that the GWE applies only to
programs that are individually means tested. IRS guidance on the GWE
should expressly acknowledge the right of tribal governments to provide
community-based programs that are not means-tested, and programs that
are based on non-financial needs.
5. Programs that Implement and Supplement Federal Responsibilities
The Federal Government, as a result of its treaty obligations and
trust responsibility, has committed to providing education, housing,
clean water and many other basic needs for Indian people. Through a
conscientious shift in policy in recent decades, the Federal Government
has encouraged the tribes themselves to provide for such needs in
partnership with the Federal Government and, increasingly in recent
years, instead of the Federal Government. Taxing benefits from tribes
that would not be taxed if provided under a federal program is
counterproductive to this government-to-government partnership.
6. Privacy/Information Sharing
The guidance should recognize that tribal governments are a partner
in the goal of tax compliance and there should be a ``government-to-
government'' level of deference in the scope of review that the IRS
undertakes with regard to tribal general welfare issues.
Advisory Committee on Tax Exempt and Government Entities (ACT) report
entitled ``Indian Tribal Governments: Report on the General
Welfare Doctrine as Applied to Indian Tribal Governments and
Their Members.''
1. The Case for Modification of the General Welfare Exclusion as
Applied to Indians
To resolve the General Welfare Exclusion issue, it may be
appropriate to develop a general welfare exemption that applies
specifically to tribal governments and their individual members. The
U.S. has committed to protecting tribes as separate sovereigns. One
expression of that commitment is the rule that federal laws should not
be interpreted to invade upon a tribe's internal affairs--i.e., in this
instance, its determination of general welfare needs of its members.
Naturally, when the IRS asserts that a tribal government's distribution
of cash or in-kind benefits is not made to promote general welfare of
its members, this is perceived as a federal intrusion into the internal
affairs of a sovereign tribe. On the other hand, the IRS is tasked with
enforcing the federal tax laws, which entails seemingly intrusive
audits to determine the form and substance of a transaction for tax
purposes. Accordingly, there is cause to develop an administrative tax
exemption that takes into account the unique circumstances of tribes
and their sovereign authority over internal affairs, while at the same
time promoting effective tax administration.
It is in the best interests of both the tribes and the IRS to seek
a more cost-efficient and predictable means of testing tribal general
welfare programs for tax exemption. Tribes require a predictable test
or safe harbor for establishing their programs to maximize tax
exemption and tax-favored opportunities.
2. Methods for Tribal Deference & Inclusion Going Forward
ACT made three recommendations for meaningful tribal inclusion and
included justifications for the following:
a. Create a Rebuttable Presumption in Favor of Tribal General
Welfare Programs
The ACT submits that it is important for Treasury to explore
avenues for addressing the issue in a proactive manner, and to
reduce the necessity of audits. The process must also achieve
some certainty, while at the same time providing flexibility
for tribes. There is, of course, an advance ruling process that
can be implemented. But, this can be quite costly for tribes.
Instead, the ACT suggests that Treasury (in consultation with
tribes) explore the development of a process which permits
tribes to take affirmative steps to develop their general
welfare programs in a way that will provide either a safe-
harbor or rebuttable presumption to shift the burden of proof
to the IRS to establish that the particular tribal program has
not met the General Welfare Exclusion.
b. Modify IRS Approach to ``Disguised'' or ``Deemed'' Per
Capita Payments under IGRA
The ACT further submits that a review and modification of the
IRS application of Code Section 3402(r) withholding
requirement, as it relates to general welfare payments, is
necessary. In that regard, the ACT submits that it is improper
and contrary to the intent of IGRA to re-characterize a general
welfare program distribution as a deemed per capita subject to
tax withholding under Code Section 3402(r). Such a presumption
is likely to vitiate the Revenue Allocation Plan that has been
approved by the BIA, particularly when the tribe has already
distributed the total allocable percentage of per capita
payments under its Revenue Allocation Plan for the year. To
suggest that any distributions above that allocable per capita
percentage are deemed per capitas subject to Code Section
3402(r), would arguably violate the Revenue Allocation Plan
limits on per capita payments. It is the exclusive jurisdiction
of the Bureau of Indian Affairs to determine allowable per
capita uses of gaming revenue; IRS re-characterization of
program uses of net gaming revenue obviates BIA's exclusive
jurisdiction.
c. Develop a Treasury Level Advisory Committee/Undersecretary
of American Indian Alaska Native Affairs/Tribal Consultation
Policy Amendment
The United States has a unique legal and political
relationship with Indian tribal governments, established
through and confirmed by the Constitution of the United States,
treaties, statutes, executive orders, and judicial decisions.
In recognition of that special relationship, pursuant to
Executive Order 13175 of November 6, 2000, executive
departments and agencies are charged with engaging in regular
and meaningful consultation and collaboration with tribal
officials in the development of federal policies that have
tribal implications, and are responsible for strengthening the
government-to-government relationship between the United States
and Indian tribes.
The Treasury/IRS STAC purpose would be to seek consensus,
exchange views, share information, provide advice and/or
recommendations; or facilitate any other interaction related to
intergovernmental responsibilities or administration of
Treasury/IRS programs, including those that arise implicitly
under policy or rule, or explicitly under statute, regulation,
or Executive Order. This purpose will be accomplished through
forums, meetings, and conversations between federal officials
and elected tribal leaders in their official capacity (or their
designated employees or national associations with authority to
act on their behalf).
The Undersecretary for Tribal Affairs office should be
established to serve as the official point of contact for
tribes, tribal governments, and tribal organizations wishing to
access the Department of the Treasury. The Tribal Affairs
office, to be effective, must be established within the
immediate Office of the Secretary, report directly to the
Secretary, and be the Departments' lead office for tribal
consultation in accordance with Executive Order 13175--
Consultation and Coordination with Indian Tribal Governments.
The Chairman. Thank you very much, Mr. Lomax.
Ms. Malerba, the tax initiative that you set to help to
form to address tax issues in Indian Country is a relatively
new group?
Ms. Malerba. It is a new group.
The Chairman. What changes have you seen at the IRS that
made formation of this group necessary?
Ms. Malerba. Well, I think Tribal governments have
struggled to provide for their people, and now that we finally
are able to provide for our people, I think that the IRS hasn't
really known how to deal with us, necessarily; and I know that
that is why the office was instituted.
But I think that what we have seen is there has been kind
of tax policy applied inconsistently and also that court
decisions also have been inconsistent. So the tax initiative
group got together to provide some good feedback to really talk
about these issues and to work with the Treasury and IRS on the
topic, because there is not a one-size-fits-all in Indian
Country, as you know; the regions are very different, the
tribes are very different, everyone has a different history.
So we have taken it upon ourselves to try to start working
through these issues and educate the governmental partners that
we have to make sure that there is fairness throughout Indian
Country and that tribes are given the benefit of the doubt. And
if you go back to the Marshall trilogy, it was that laws and
regulations should be interpreted in the manner most favorable
to the tribes, and we are not sure that is necessarily
happening all the time.
The Chairman. Thank you.
Mr. Lomax, in your testimony, you called on Congress to
step in to put an immediate end to the IRS activities
surrounding examinations of the general welfare doctrine and
trust distributions until certainty in application exists. Is
it your view that statutory language is needed, or can this be
achieved administratively?
Mr. Lomax. Thank you for the question, Chairman Akaka. We
believe that the best case for this is to be resolved
administratively, but we are waiting to see whether or not it
will be. There are a number of issues around that that we see.
We think the IRS has a great opportunity to work with Tribal
leaders on this issue; however, we haven't seen that kind of
work, from our experience, happening.
It was mentioned earlier in testimony today that tribes
have the opportunity to, for example, get a private letter
ruling. I think tribes look at that as actually a veiled attack
on sovereignty, because that puts the IRS, then, in the
position of being the arbiter of whether or not any particular
Tribal program has validity or whether it should be taxed.
That, from Tribal perspective, we believe is very much the
wrong way to be going. Tribal Nations shouldn't have to be
seeking a private letter ruling to find out whether or not they
can go on a field trip with their elders.
We believe that oversight is necessary from the Committee,
and in the event that oversight does not bring the IRS into
compliance, we believe that, then, legislation should be
sought.
The Chairman. Thank you.
Ms. Malerba, in your testimony you recommend that the IRS
defer to Tribal policy and determining need in certain
applications of the general welfare doctrine. Given Treasury's
concern and concerns about treating all taxpayers the same, do
you think it is practical for Treasury to defer to each Tribe
on this issue?
Ms. Malerba. Thank you for your question, Chairman. Perhaps
I am a little biased, having been the chairwoman of the Tribal
Council in my previous role, but I don't believe that tribes
should be treated like State and local governments. Tribes are
different. Tribes are families; they are about communal good.
They have experienced so much devastation that they are now in
the process of rebuilding their communities. And all of the
programs that the tribes are administering are in the absence
of funding for Federal Government programs, so tribes are
assuming the responsibility of Federal Governments.
Tribes are very personal and they are up close and
personal, and Tribal leaders are very accountable to their
citizens. They know best what their citizens need, because if
they aren't aware what their citizens need, their citizens are
going to make it known to them. And they are very, very careful
about developing the programs that are in the best interest of
their people. They know best. It is government at the local
level and it is the best government that you can have.
The Chairman. Thank you.
Mr. Lomax, the IRS has indicated that its treatment of
tribes under the general welfare doctrine is the same as its
treatment of States and other local governments. In your
testimony you indicate tribes are being singled out. Can you
elaborate on that?
Mr. Lomax. Thank you for the question, Mr. Chairman.
Yes, absolutely. As I mentioned in testimony, it is very
clear that the IRS is treating tribes quite differently in this
manner. As I mentioned, the work plan for Tribal governments
shows that the IRS is very intent on focusing on Tribal
governments. Yet, when they look at the work plan for Federal,
State, and local governments, taxability of benefits provided
by State and local governments is not mentioned. So that is one
thing.
But there are just too many stories from tribes right now.
Tribes are very used to and see very clearly when they are
getting different treatment, from years of experience, and we
are just hearing too many stores from tribes about how the
enforcement is arbitrary and increasing from the IRS on the
general welfare type exclusion. We have seen tribes coming
together in an almost unprecedented way to form this
organization that Chief Malerba was discussing.
We heard from Commissioner Miller, actually stating that in
an examination five years ago he has already examined 139
tribes. I would be curious to know if they had examined 139
State and local governments during that same time frame. I
think the answer would clearly be no. I don't have anything to
base that on, but I would be surprised if that were the case.
So when you think about how tribes are being treated vis-a-vis
the State and local governments, I think it is very clear that
they are being treated quite differently.
The Chairman. Well, thank you very much for your testimony
and your responses. This has been helpful to us as we continue
to look into this. Looking forward to even organizations like
yours working together in trying to deal with some of the
concerns of the tribes. But I want to say thank you. Thank you
so much for being here. Mahalo to all of our witnesses as well.
This has been a very informative discussion for the Committee.
As the IRS and Department of Treasury move forward on this
issue, I would like to stress again the importance of the
unique government-to-government and trust relationship between
Native Nations and the Federal Government. The Federal
Government owes a legal duty to tribes to respect their
sovereignty and self-determination, especially in the area of
taxation.
As part of the strong history of treaties and legal
relationships, the Federal Government is legally bound to
provide health, education, and other services to tribes and
their citizens; however, Federal assistance will never be
enough to meet the serious need in Native communities. That is
why we must support, not hinder, Tribal self-determination
programs that fill in the gaps where the Federal Government has
fallen behind in its trust responsibility. We need to be aware
of that and continue to try to work together on these concerns.
I am encouraged that the agencies have taken steps to build
a relationship with tribes and urge that dialogue to continue
so that better understanding of Tribal government can occur.
I would like to again thank all of our witnesses for
traveling here today. I would also like to remind you that our
hearing record will be open for two weeks after today for you
to submit further comments. We look forward to that as we
continue to deal with the concerns that we all have.
So mahalo. Thank you very much and much aloha to all of
you. This hearing is adjourned.
Mr. Lomax. Thank you, Chairman Akaka.
Ms. Malerba. Thank you.
[Whereupon, at 4:00 p.m., the Committee was adjourned.]
A P P E N D I X
Prepared Statement of Herman Dillon, Sr., Tribal Council Chairman,
Puyallup Tribe of Indians
I. Introduction
As Chairman of the Puyallup Tribal Council, the elected governing
body of the Puyallup Tribe of Indians, I am pleased to submit this
testimony for the record. We appreciate very much the opportunity to
present our testimony regarding the impact of the Internal Revenue
Service (IRS) policies and actions on Tribal Self-Determination. In
particular, I would like to discuss the Tribe's experience with the
IRS's application of the general welfare exclusion doctrine.
II. The Puyallup Tribe
The Puyallup Tribe of Indians is a federally recognized Tribe
located in Pierce County, Washington along the shores of Commencement
Bay, a large inlet of Puget Sound. The Puyallup Tribe is a signatory to
the Treaty of Medicine Creek, 10 Stat. 1132. Under this Treaty, the
Tribe reserved the lands for its Reservation, which was established by
two subsequent Executive Orders. Executive Order of Jan. 20, 1857;
Executive Order of Sep. 6, 1873. Over the next fifty years,
notwithstanding the establishment of the Tribe's Reservation, the Tribe
lost ownership of most of the land within its Reservation as a result
of Acts of Congress authorizing allotment and sale of reservation land,
court decisions and other private and federal actions. See H.R. Rep.
No. 101-57, at 3 (1989). With the enactment of the Indian
Reorganization Act, 25 U.S.C. 461-479, the Tribe adopted a
constitution and organized its Tribal government, which then set out to
restore the Tribal land base and develop programs to better serve its
tribal members.
In 1983, a federal court confirmed the Tribe's title to the bed of
the Puyallup River and adjacent exposed lands, including lands within
the Port of Tacoma. Puyallup Tribe v. Port of Tacoma, 717 F.2d 1251
(9th Cir. 1983). This decision gave rise to an historic Settlement
Agreement between the Tribe, the City of Tacoma, the Port of Tacoma,
the State of Washington and the Federal Government which Congress
enacted into law. Puyallup Tribe of Indians Settlement Act of 1989,
Public Law 101-41, 25 U.S.C. 1773-et seq. (1989). The Settlement
Act restored to the Tribe nearly 1,000 acres of land, including lands
within the Port of Tacoma. In addition, the Act included a provision
recognizing the right of the Puyallup Tribe to engage in foreign trade
consistent with Federal law, notwithstanding a provision of the Treaty
of Medicine Creek which prohibits such trade. 25 U.S.C. 1773f(b).
Today, the Puyallup Reservation consists of approximately 28 square
miles in Pierce County, Washington, and includes the cities of Tacoma
and Fife. The Tribe has a membership of more than 4,000 people. Since
the Settlement Act, the Tribe regained title to more than 2,000 acres
of trust land within the Reservation, including 200 acres of land in
the Port of Tacoma. In 2008, the Tribe entered into an Agreement with
SSA Containers for the development of a new international container
terminal facility that, when fully constructed, will be the largest in
the Pacific Northwest. As a result of this Agreement and the Settlement
Act's recognition of the Tribe's right to engage in international
trade, the Puyallup Tribe anticipates developing relationships with
international trade partners in the Pacific Rim and around the world.
Because the City of Tacoma was a primary Indian relocation
destination for the federal government in the 1940s and 1950s, the
Tribe also provides services to the more than 25,000 Native Americans
from over 355 federally recognized Tribes and Alaskan Villages who now
call the territory of the Puyallup Tribe home. These services include
law enforcement services, elder services, health care services, a
school system, and other educational services. The Tribe was one of the
first Tribes in the United States to enter into a Self-Determination
Act contract to assume the operation of a federal health care program
on a reservation. This Clinic is now one of the most utilized tribal
clinics in the Country.
III. Self-Determination And The Trust Obligation
The IRS must implement the Self-Determination policy and the
corresponding federal trust obligation, which are the bedrock of the
government-to-government relationship between Tribes and the federal
government. The Service must do more than superficially acknowledge
these foundational principles, but rather it must give them effect in
every aspect of its relationship with Tribes. Thus, whether it is the
development of policy, the drafting of guidance, the publication of a
rule, an investigation; or an enforcement action, the IRS approach to a
matter involving a Tribe must reflect that it is dealing with a
government to which it has a unique trust obligation.
The federal Self-Determination policy is at the heart of the
federal policy governing Indian affairs overall. The policy recognizes
and supports tribal self-government. Since the earliest days of the
Republic, federal law has recognized that tribes are sovereign entities
with the power of self-government. In Cherokee Nation v. Georgia, 30
U.S. (5 Pet.) 1 (1831), the Supreme Court held that an Indian tribe is
a ``distinct political society.capable of managing its own affairs and
governing itself.'' Id. at 16. In Worcester v. Georgia, 31,US. (6 Pet.)
515 (1832), Chief justice Marshall, writing for the Court, held that
Indian Tribes are distinct, independent political communities, ``having
territorial boundaries, within which their authority [of self-
government] is exclusive . . .'' Id. at 557. By entering their
treaties, the Court held, tribes did not ``surrender [their]
independence-[their] right to self-government . . .'' Id. at 561.
The Self-Determination policy has guided the federal government's
relationship with tribes since 1970 when President Nixon announced in a
special message to Congress:
It is long past time that the Indian policies of the federal
government began to recognize and build upon the capacities and
insights of the Indian people. Both as a matter of Justice and
as a matter of enlightened social policy, we must begin to act
on the basis of what the Indians themselves have long been
telling us. The time has come to break decisively with the past
and to create the conditions for new era in which the Indian
future is determined by Indian acts and Indian decisions.
Richard Nixon, Special Message to the Congress on Indian Affairs,
213 Pub. Papers 564 (July 8, 1970). Indian Self-Determination is the
foundation of modern legislation involving Indian affairs including the
Indian Self-Determination and Education Assistance Act, 25 U.S.C. 450
et seq., and the Indian Trial Governmental Tax Status Act, 26 U.S.C.
7871; see also Rev. Rul. 86-44, 1986-1 C.B. 376; Rev. Proc. 86-17,
1981-1 C.B. 550.
The Supreme Court has also repeatedly ``recognized the distinctive
obligations of trust incumbent upon the Government in its dealing with
these dependent and sometimes exploited people.'' Seminole Nation v.
United States, 316 U.S. 286, 296 (1942) (citations omitted), as well as
reaffirmed the ``undisputed existence of a general trust relationship
between the United States and the Indian people,'' United States v.
Mitchell, 463 U.S. 206, 225 (1983). The trust relationship is also the
basis of the well-established rule that Congress will not be presumed
to have abridged Indian treaty or property rights absent a clear
express of intent, e.g. United States v. Dion, 476 U.S. 734, 738-40
(1986). These principles are fully acknowledged in the IRS's
consultation policy implementing the Executive Order 13175.
The importance of embracing and fully implementing these principles
is no more evident than in the IRS's application of the general welfare
exclusion doctrine with regard to Tribal programs and services provided
for the benefit of tribal members and the community at large. Under the
general welfare exclusion doctrine, the IRS does not require that
payments received by an individual under certain government social
benefit programs be included in the calculation of income for tax
purposes. However, as discussed in detail below, while the IRS has
applied this exclusion to some benefits provided by tribal governments,
it has not applied it to others, despite the similarities of the
program to state and federal programs. Nor has the IRS consistently
applied this policy through the prism that is the Self-Determination
policy and the federal government's unique obligations to Tribes. This
greatly impacts the Puyallup Tribe's ability to exercise our
governmental responsibility to meet the needs of our members.
IV. General Welfare Exclusion Doctrine
The Puyallup Tribe has a number of assistance programs. We provide
support to people for a wide variety of needs, including housing,
medical care, funeral arrangements, emergency survival and safety
issues, education, youth programs, and small business programs. The
Tribe also has programs and initiatives intended to preserve and pass
on the Tribe's unique culture. The goal of all of these programs, as
with any governmental program, is to improve the overall health and
status of the community and its citizenry. Yet, in many instances the
IRS considers the assistance provided pursuant to these Tribal programs
to be taxable income for the tribal member beneficiaries.
The IRS's treatment of many of the Tribal programs is inconsistent
with its treatment of not only federal programs but state programs as
well. States and municipalities provide a number of programs and
services that are available to all citizens without respect to
financial means or other individual needs testing, such as public
education, recreation programs, support for foster parents and other
children's programs, concerts, parks, libraries, museums, and similar
community services, programs and events. The IRS does not seek to audit
and investigate cities or states providing these benefits because these
are public benefits that are not directed to specific individuals, and
IRS treats them as nontaxable. Likewise, benefits provided through
similar tribal programs, particularly education and cultural programs,
which are focused on community needs and benefits, rather than
individual circumstances, should be excluded from income without any
individual needs assessment.
Of particular concern to the Puyallup Tribe is the treatment of
cultural programs, which are directed to the needs and interest of the
community as a whole, rather than the benefit of any individual. Such
cultural programs may include language instruction; youth camps with
cultural focus, support for attendance at culturally related youth,
elder and other tribal or inter-tribal events, which provide a means of
teaching and preserving tribal culture.
One example of the IRS overreach in this area involves our annual
Tribal pow-wows. These kinds of events have existed for generations
where a Tribe invites other Tribes and people from other regions to
come together and celebrate with songs and dances. There have always
been competitions associated with these events. Our traditional stories
tell us that these competitions are the reasons there is daylight and
night; why human beings have dominion over animals; and why blue jay
hops.
There was once a period in history when it was illegal for our
people to practice these celebrations. See http://
rclinton.files.wordpress.com/2007/11/code-of-indian-offenses.pdf. Yet,
notwithstanding the fear of prosecution, these songs and dances were
preserved. Now it is the federal policy to support, foster and
encourage these songs and dances as a part of the federal trust
obligation and the government-to-government relationship. American
Indian Religious Freedom Act, 42 U.S.C. 1996 ; Native American
Graves Protection and Repatriation Act, 25 U.S.C. 3001 et seq.;
and the Native American Languages Act, 25 U.S.C. 2901 et seq.
Today, instead of the prizes of daylight and dominion that the Creator
awarded our ancestors, our competitions now only have monetary prizes
to award. In our view, when we entered into our treaty with the United
States we preserved our right to continue to exercise our way of life
free from unnecessary intrusion of the federal government, and just as
federal law exempts from taxation income earned from treaty fishing, so
too should it exempt any income earned from treaty-protected cultural
activities. See 26 U.S.C. 7873.
However, that is not the case. Instead, the Tribe's accounting
department must be present at every pow-wow and issue a 1099 form to
any person receiving a prize or other remuneration during the pow-wow.
While the Puyallup Tribe may have the resources to undertake this
effort, it is a substantial burden on the Tribe and causes a great deal
of hardship for the pow-wow dancers who have never before had to
consider the prizes from their cultural activities as income on their
taxes. This activity is not their job and the awards are not intended
to compensate them for their dancing. Rather these awards are to
provide support to dancers for coming to the event and to celebrate the
very best of those who seek to preserve our culture. In some instances,
the awards are only sufficient to cover the expenses of traveling to
attend the pow-wow. Consequently, for some dancers, a prize means they
are negatively impacted, because as a result of attending and getting
the prize, they are out of pocket not only the expense of going to the
pow-wow, but they now owe the IRS money. The implementation of the law
in this manner is inconsistent with the Tribal Self-Determination
policy and the federal trust obligation to tribal governments. Instead,
the IRS should allow Tribe's latitude in the design and execution of
their tribal cultural programs and activities.
Finally, the heart of the Indian Self-Determination and Education
Assistance Act (ISDA) is the provisions of the Act that encourage and
support Tribal governments stepping into the shoes of the federal
government to carry-out federal programs. This principle has been
embraced not only with specific programs operated pursuant to ISDA
contracts and compacts, but other programs like housing, child care and
economic development. In this regard, there should be a blanket
exception for assistance provided by a Tribal program that is carried
out pursuant to the requirements of a federal program, regardless of
whether those programs are done pursuant to an ISDA contract or compact
or whether those programs are supplemented by tribal governments. It is
well documented that programs intended to benefit Tribes and Indian
people are woefully underfunded. See The U.S. Commission on Civil
Rights, A Quiet Crisis: Federal Funding and Unmet Needs in Indian
Country (2003) (``A Quiet Crisis''). Thus, that a Tribe can operate and
fully fund these programs should not be the basis for the IRS treating
the benefits differently than when a state or the federal government
operating these federal programs.
For example, the Tribe operates and receives funding pursuant to
the Child Care Development Block Program. 42 U.S.C. 618. The Tribe
is able to expand this program to serve more people, and because of
this the IRS considers taxable the child care assistance that we
provide our Tribal member parents. This has a harsh impact on the
Tribal member because the payments are made directly to providers and
thus, the Tribal member does not have any additional income to pay the
assessed tax.
The goal of this program is to provide assistance to parents to
enter the workforce or get an education, which is consistent with the
CCDBG program. The fact that the Tribe can assist more of its citizens
than the federal government mandates does not make this assistance
income to the member. Rather it is simply a governmental decision as to
the best allocation of our limited resources. The federal government
has the ability to mandate the expansion of services beyond the poorest
of the poor. See e.g. P.L. 111-3, 123 Stat. 28, 42 U.S.C.
1397bb(a)(b) (authorized the expansion of the federal Children's Health
Insurance Program). So too must Tribes have the ability to mandate that
our programs provide services beyond the poorest of its citizenry.
Tribes more than any other governments understand when you extend a
hand out to pull a person up, not only does that person rise, but the
entire community rises with her. The IRS should not undermine a Tribe's
effort to extend the hand to pull up its community, as this is the
truest fulfillment of the self-determination policy.
Another example is the Tribe's education assistance program. The
Tribe provides assistance for post-secondary and graduate degrees,
which includes not only tuition assistance, but also living expenses
for the eligible students. In our view, federal law should not tax
support provided to a tribal member under a program whose purpose is to
help with basic living expenses while the recipient pursues his/her
education. The Tribe has made the governmental decision that this is
the best way to address the identified need of the effects of
historically inadequate educational opportunities and achievement.
Relatedly, the IRS's consideration of general welfare exclusion
relies heavily on individual need. We submit that in order to support
Tribal Self-Determination the IRS must consider need in the broader
context of the entire Tribal community. In our view, the determination
of need for general welfare exclusion purposes must recognize the
historical damage done to tribal economies, cultures and identities,
the chronic poverty and unemployment many tribes have experienced, and
the remote and marginal lands upon which many tribes were forced to
locate and maintain their communities. The U.S. Commission on Civil
Rights concluded in A Quiet Crisis that:
In exchange for land and in compensation for forced removal
from their original homelands, the government promised through
laws, treaties, and pledges to support and protect Native
Americans. However, funding for programs associated with those
promises has fallen short, and Native peoples continue to
suffer the consequences of a discriminatory history. Federal
efforts to raise Native American living conditions to the
standards of others have long been in motion, but Native
Americans still suffer higher rates of poverty, poor
educational achievement, substandard housing, and higher rates
of disease and illness. Native Americans continue to rank at or
near the bottom of nearly every social, health, and economic
indicator.
Id. at ix.
Even Tribes that have developed successful gaming, natural resource
or other industries continue to confront substantial economic,
educational and other deficits resulting from historical scars. A few
years of success cannot erase the social problems resulting from many
decades of historical wrongs, discrimination and economic and social
disruption. Unfortunately, the federal government has not lived up to
its obligation to provide resources and other assistance to tribes to
meet these challenges.
The Civil Rights Commission further concluded:
there persists a large deficit in funding Native American
programs that needs to be paid to eliminate the backlog of
unmet Native American needs, an essential predicate to raising
their standards of living to that of other Americans. Native
Americans living on tribal lands do not have access to the same
services and programs available to other Americans, even though
the government has a binding trust obligation to provide them.
Id.
Any attempt to define need for purposes of tribal general welfare
programs only by current income tests misses the big picture of the
tribal experience, and the deep and severe problems that remain as part
of that legacy. This is particularly so for segments of the tribal
population such as elders who have suffered through severe social and
financial problems throughout most of their lives, and in some tribal
communities are only beginning to have personal resources to address
their needs. In our view, the taxation of these assistance payments is
counterproductive. As taxing the payments reduces the Tribe's ability
to assist its members and others in the Indian community, which in turn
results in a greater burden on federal and state programs to provide
the assistance the Tribal program would provide in the absence of
taxation.
V. Conclusion
The Puyallup Tribe has worked with the IRS with regard to a number
of programs and has reached a resolution on some aspects, like gifts
presented to cultural leaders, emergency housing assistance, and
tuition assistance, that we are pleased with. For this we want to
commend the IRS. However, as we discussed above, we believe there are
still areas where the IRS must take a broader view of the intent and
benefits of a Tribal program. Thus, we urge that the agency and the
Congress strive to maintain the elements of the process and the legal
standards that have created a positive working relationship between our
Tribe and the IRS, while fixing the problems that result from the
ambiguity and uncertainty that exist in the standards under which the
general welfare exclusion is currently applied.
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Prepared Statement of Hon. Gregory Mendoza, Governor, Gila River Indian
Community
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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Prepared Statement of the National Congress of American Indians (NCAI)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]