On June 3, 2014, the Internal Revenue Service issued Revenue Procedure 2014-35 as final guidance on the application of the general welfare exclusion. The guidance clarifies the safe harbor rules for tribal government programs that satisfy the individual need requirement of the general welfare exclusion. To qualify for exclusion under the safe harbor, the tribal government program must meet the following requirements:
• The benefit is provided pursuant to a specific Indian tribal government program;
• The program has written guidelines specifying how individuals may qualify for the benefit;
• The benefit is available to any tribal member, qualified nonmember, or identified group of tribal members or qualified members (for example veterans) who satisfy the program guidelines, subject to budgetary restraints;
• The distribution of benefits from the program does not discriminate in favor of members of the governing body of the tribe;
• The benefit is not compensation for services; and
• The benefit is not lavish or extravagant under the facts and circumstances.
The final guidance also broadens the list of benefits for which the Internal Revenue Service will conclusively presume that individual need is met for each tribal member or qualified member (spouse, former spouse, legally recognized domestic partner or former domestic partner, ancestor, descendant, or dependent of a member of an Indian tribe) receiving the benefit. If a benefit is not expressly described in the revenue procedure, the benefit may qualify for exclusion if it satisfies the safe harbor requirements.
Finally, the revenue procedure establishes a presumption for certain benefits that will not be treated as compensation for services. This special presumption applies to benefits of cultural significance provided under an tribal government program that are “not lavish or extravagant under the facts and circumstances, or nominal cash honoraria provided to religious or spiritual officials or leaders (including but not limited to medicine men, medicine women, and shamans) to recognize their participation in cultural, religious, and social events (including but not limited to pow wows, rite of passage ceremonies, funerals, wakes, burials, other bereavement events, and subsequent honoring events).” The Service will conclusively presume that the individual need requirement is met for the religious or spiritual official/leader receiving the benefits and that the benefits are not taxable as compensation for services.
Revenue Procedure 2014-35 offers favorable guidance for tribes to create new programs or modify existing programs that are covered by a safe harbor. The revenue procedure does not alter the general welfare doctrine established by prior Internal Revenue Service rulings or case law, however, a program that satisfies the safe harbor requirements will provide tribes and tribal members greater assurance of the exclusion of benefits from gross income. We note that there has been legislative effort to make the general welfare exclusion part of the Internal Revenue Code, but this ruling accomplishes the same goal without the years of delay associated with any legislative action.
To ensure compliance with Treas. Reg. 31 CFR Part 10, we inform you that any tax advice contained in this correspondence is not intended or written to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.
Susan L. Allen
The Jacobson Law Group
Jacobson, Magnuson, Anderson & Halloran, P.C.
T (651) 644-4710
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