Tax Treatment of the HEARTH Act Leases

Governance and Economic Opportunities

The Helping Expedite and Advance Responsible Tribal Home Ownership Act (the HEARTH Act) was signed into law on July 30, 2012 by President Barack Obama as a way for tribal governments to negotiate and enter into their own land leasing process once their governing leasing regulations have been approved by the secretary of the interior. The HEARTH Act allows tribes to develop and implement leasing regulations to drive revenue growth and community development. 

The BIA has long encouraged tribes to set up leases as direct-pay to reduce complicated administrative procedures and more efficiently monitor lease payments. However, as ruled in 25 CFR 115.805, regulations enacted by the Department of Interior, the Office of Special Trustee (OST) cannot accept direct-pay lease funds into an OST tribal trust account. Prior Internal Revenue Service (IRS) guidance on the Per Capita Act (2015-67) addresses distributions of tribal trust revenues from an OST trust account. For tribes with direct-pay lease arrangements, the only option is to modify lease arrangements to take advantage of the federal and state tax exemptions under the Per Capita Act.

Since prior IRS guidance on the Per Capita Act only addressed distributions of tribal trust revenues made out of an OST trust account, tribes with direct-pay lease arrangements expressed concern that they would need to modify all of their lease arrangements to take advantage of the federal and state tax exemptions under the Per Capita Act as clarified by IRS Notice 2015-67. Additionally, in June 2016 the IRS issued interim guidance that made clear that BIA-approved leases of tribal trust land set up as direct-pay leases were not taxable. The interim guidance represents a significant step in the right direction; however, it suggests that it only applies to BIA-approved leases, not leases approved by tribes under HEARTH Act leasing authority. 

Current Status and Action:

NAFOA met with the IRS to request clarity on the tax treatment of HEARTH Act lease rentals that are directly payable to a tribe. Additionally, NAFOA participated on a cal with the Department of Treasury and the IRS on December 15, 2016 to discuss the income tax treatment of the HEARTH Act leases.