[Senate Hearing 112-674]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-674

              NEW TAX BURDENS ON TRIBAL SELF-DETERMINATION

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

                                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

                              ----------                              
                                                                   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

                              ----------                              


                        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



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    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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/
---------------------------------------------------------------------------
        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.
                                 ______
                                 
Prepared Statement of Hon. Gregory Mendoza, Governor, Gila River Indian 
                               Community


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                                 ______
                                 
 Prepared Statement of the National Congress of American Indians (NCAI)


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