IRS Issues Guidance for Native Americans Regarding Tribal Trust Settlements

Mar 01, 2013   

The IRS recently issued guidance in the form of Notice 2013-1, available here, that provides guidance on federal tax treatment of certain per capita payments made to members of Indian tribes. The background for the Notice is as follows:

The United States has entered into agreements with federally recognized Indian tribes, settling litigation in which the tribes alleged that the Department of the Interior and the Department of the Treasury mismanaged monetary assets and natural resources the United States holds in trust for the benefit of the tribes (“Tribal Trust cases”). Upon receiving the settlement proceeds, the tribes will dismiss their claims with prejudice. See Press Release, U.S. Department of Justice, Attorney General Holder and Secretary Salazar Announce $1 Billion Settlement of Tribal Trust Accounting and Management Lawsuits Filed by More Than 40 Tribes (April 11, 2012), available here.

Although agreeing to settlements, the United States has admitted no liability and has no fiduciary responsibilities over the Tribal Trust case settlement proceeds that the tribes receive and that are deposited into accounts at private banks or other third-party institutions.

The applicable law is as follows.

Section 61(a) of the Internal Revenue Code, available here, provides that, except as otherwise provided by law, gross income means all income from whatever source derived. Native Americans are citizens subject to the payment of income taxes; see Squire v. Capoeman, 351 U.S. 1, 6 (1956), available here. The Per Capita Act, Pub. L. No. 98-64, 97 Stat. 365, available here, and 25 U.S.C. §§ 117a through 117c, available here

provide authority to Indian tribes to make per capita payments to Indians out of tribal trust revenue. The Indian Tribal Judgment Funds Use or Distribution Act, 25 U.S.C. §§ 1401 through 1408, available here, concerns the distribution of certain judgment funds to Indian tribes. Under 25 U.S.C. § 117b(a), available here, funds distributed under 25 U.S.C. § 117a are subject to the provisions of 25 U.S.C. § 1407. Under 25 U.S.C. § 1407, the funds described in that section, and all interest and investment income accrued on the funds while held in trust, are not subject to federal income taxes. For federal income tax purposes, per capita payments that an Indian tribe makes from the tribe’s Tribal Trust case settlement proceeds are treated the same as per capita payments from funds held in trust by the Secretary of the Interior under 25 U.S.C. § 117a

The IRS announced that under 25 U.S.C. § 117b(a), per capita payments made from the proceeds of an agreement between the United States and an Indian tribe settling the tribe’s claims that the United States mismanaged monetary assets and natural resources held in trust for the benefit of the tribe by the Secretary of the Interior are excluded from the gross income of the members of the tribe receiving the per capita payments. But per capita payments that exceed the amount of the Tribal Trust case settlement proceeds and that are made from an Indian tribe’s private bank account in which the tribe has deposited the settlement proceeds are included in the gross income of the members of the tribe receiving the per capita payments under § 61.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience litigating against the IRS and the U.S. Department of Justice and have appeared before the U.S. Tax Court, the various U.S. District Courts, the U.S. Court of Federal Claims, and the various U.S. Courts of Appeal. You can contact an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.