The United States entered into agreements earlier this year with certain federally recognized Indian tribes to settle long-running lawsuits in which the tribes accused the Interior Department and the Treasury Department of mismanaging the monetary assets and natural resources that the United States holds in trust for the benefit of the tribes. In Notice 2012-60, the IRS advised taxpayers that the per capita payments made from the proceeds of these settlements are excluded from the gross income of tribal members who receive the payments.
The IRS and Treasury reviewed whether the per capita payments would be subject to federal income tax and concluded they would not. The exemption’s basis is rooted in the Per Capita Act (25 U.S.C. §§117a – 117c). The Act permits trust funds to be distributed by either the Secretary of the Interior or by an Indian tribe. In addition, the Act provides that these distributions are subject to 25 U.S.C. §1407, which provides a tax exemption for distributions of certain judgment funds. The IRS and Treasury concluded that the exemption found in 25 U.S.C. §1407 applies to distributions from the settlement agreements.
Per capita payments made from the proceeds of this agreement between the U.S. and tribes settling claims that the federal government mismanaged their monetary assets and natural resources are excluded from the gross income of the tribal members receiving the per capita payments. Per capita payments exceeding the amount of the Tribal Trust case settlement proceeds are included in the gross income of the members of the tribe receiving the per capita payments.
The settlement proceeds from the Tribal Trust cases must be viewed as being in lieu of amounts that would have been held in a trust fund account for the tribe that is maintained by the Secretary of the Interior, the IRS noted. Thus, for federal income tax purposes, per capita payments that any 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.
For example, if an Indian tribe receives proceeds under a settlement agreement, invests the proceeds in a private bank account that earns interest, and subsequently distributes the entire amount of the bank account as per capita payments, then a member of the tribe excludes from gross income that portion of the member’s per capita payment attributable to the settlement proceeds and must include the remaining portion of the per capita payment in gross income.
Notice 2012-60 only applies to per capita payments from proceeds of the Tribal Trust case settlements that are described in this notice and the tribes listed in the Appendix to this notice.
To read Notice 2012-60, click here.