By Kenneth Parsons and Kathleen Nilles
Many tribes are able to make distributions out of net gaming revenues to their tribal members on a per capita basis. But because per capita distributions from gaming revenues are fully taxable at ordinary income tax rates, the taxman takes a big bite. Fortunately, there are a few actions that tribal leaders can take to reduce federal and state taxes on tribal member income:
Make Distributions from Nontaxable
Sources of Tribal Revenue
Based on IRS guidance interpreting the Per Capita Act of 1982, the following sources of income may be earned by an Indian tribe and distributed to tribal members free of tax:
• income from leases, easements and other uses of federal trust land
• income from trust resources, such as timber, mineral deposits, oil and gas
• income from the sale of trust land or from damage awards related to trust land
Published IRS guidance limits the tax exemption to amounts held in a tribal trust account administered by the Bureau of Indian Affairs. However, several tribes and their representatives are working to broaden the IRS guidance to amounts received from tribal leases and trust resources even when such amounts are not held in a tribal trust account.
Make Payments Pursuant to General Welfare Programs
Section 139E of the Internal Revenue Code is specifically designed to exempt certain payments made by an Indian tribe to its members, spouses and dependents of tribal members. This provision allows tribal governments to provide a wide range of excludable benefits, ranging from education and housing to elder care and cultural programs.
To maximize the potential tax savings, a tribal program inventory should be undertaken to ensure that the tribe’s existing programs and procedures comply with the statutory requirements for exclusion from income and to consider the establishment of new programs to meet the needs of the tribal membership.
Adopt a Deferred Per Capita Savings Plan
As noted above, per capita distributions are taxable at ordinary income rates. Further, since such distributions are not considered “earned income,” no portion of the revenues can be contributed by the tribal member into a 401(k) plan or other type of deferred compensation plan. However, IRS administrative guidance provides a roadmap for tribes to establish a deferred per capita savings plan that allows tribal members to voluntarily defer receipt of a portion of their per capita distribution by having it placed in a grantor trust owned by the tribe where it grows tax-free until distribution.
Of course, there are many reasons in addition to income tax savings that a tribal member might voluntarily decide to defer receipt of a portion of a per capita payment. Most tribal leaders have found that members appreciate having options, and this is one that a tribe can establish for its members at minimal expense.
Conduct a Tax-Efficiency Audit of the Tribeís Minors Trust
Although most tribes have already established trusts to hold gaming revenues for their minor members, tribal leaders should make sure the trust complies with current IRS guidance and accomplishes the tribe’s goals. The benefits of a minors trust include:
• simplified tax compliance for the minor members and their parents by deferring taxation until actual distributions are made
• tax-free compounding of investment returns, which generally offsets the potentially higher effective tax rates applicable to the cash distributions made at age 18 or older
Staggering distributions over a period of years provides enhanced tax deferral and investment returns, as well as reducing the impact of the Kiddie Tax by delaying some or all of the distributions beyond the age at which the tax applies.♦