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IRS Provides Narrow Final Guidance on Tax Treatment of Per Capita Distributions

September 21, 2015

The Internal Revenue Service (IRS) has issued final guidance (Notice 2015-67) on the per capita distribution of funds held in trust by the Secretary of the Interior. 

The final guidance provides clarity that per capita distributions made from funds held by the Secretary of the Interior or by an Indian tribe as part of a tribal trust are excluded from the gross income of tribal members. The final guidance does not; however, provide clarity on funds "directly derived" from trust land or restricted fee land. It also lacks clarification on what constitutes a "trust resource." Both of these significant issues were raised by tribes in consultation with the IRS and in previously submitted comments.

The final guidance lists eligible payments that are not subject to federal income tax as:

  • Payments resulting from money directly derived from title conveyance (e.g. sale, probate, condemnation) or use of trust lands or trust resources, including late payment penalties.
  • Payments resulting from penalties for trespass on trust lands or restricted fee lands.
  • Payments resulting from a final order from a court of competent jurisdiction for a cause of action related to trust assets.

The final guidance also states that if a trust account is used to mischaracterize taxable income as nontaxable per capita distributions, those distributions will constitute as taxable. For example, per capita distributions to tribal members from Indian gaming activity that are subject to the Indian Gaming Regulatory Act (net gaming revenues).

It should be noted that the final guidance does not affect taxation of distributions made from individual Indian trust accounts. The final guidance only applies to distributions made directly to members of the tribe through a trust account.

NAFOA will continue to work with the Office of the Special Trustee for American Indians and the IRS to expand the scope of the per capita distribution guidance.

For questions or comments please contact Jennifer Parisien at Jennifer@nafoa.org  or (202) 558-8040. 

Resources:

Notice 2015-67

List of Funds Accepted into a Tribal Trust Account (25 C.F.R. § 115.702) 

Per Capita Act (25 U.S.C. §§117a-c)