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IRS cites problems with use of tribal gaming revenues
Wednesday, April 6, 2005

The Internal Revenue Service is signaling concerns about the way tribal governments use gaming revenues as a Senate committee on Tuesday opened hearings on tax abuse.

The IRS is already scrutinizing tribes for using tax-exempt bonds to finance casino and hotel projects. The Seminole Tribe of Florida has been issued a negative decision affecting a $345 million bond deal for two large casino resorts.

Now, the head of the IRS has identified other "problems" in a sector that includes tribes and charities that are normally granted tax exemptions. "We see that tax abuse is increasingly present in the sector, and we intend to address it," Commissioner Everson wrote in a March 30 letter. "We will act vigorously, for to do so otherwise is to risk the loss of the faith and support that the public has always given to this sector."

The letter was written to the Senate Finance Committee, whose chairman, Sen. Chuck Grassley (R-Iowa), held a hearing yesterday that focused on the activities of charities and non-profits. "The news is not good," Grassley said of Everson's assessment.

No tribal representatives testified at the hearing although Grassley has promised a broad outreach in his efforts to reform the charity side of the sector. In his testimony yesterday, Everson mentioned tribal governments only in passing.

The letter is more specific in terms of problems alleged involving tribes. "We have found certain compliance issues in the Indian tribal government area," Everson wrote. "As stated, these arise in the context of the economic development boom enjoyed by some tribes that have entered the gaming industry."

Under the Indian Gaming Regulatory Act, some tribes offer per capita payments to their members. These payments are subject to federal taxes and must be reported every year.

But some tribes are trying to shield their members, according to the IRS. "In order to reduce the tax consequences to members, certain tribes have created mechanisms to classify [per capita] payments as general welfare programs, often through liberal interpretations of what constitutes a 'need-based' program, or have created or invested in income deferral programs," the letter stated.

Everson reported a "significant increase" in efforts to avoid paying taxes on casino payments. "While some programs may significantly achieve that goal, we are seeing an increase in abuse of tribal government programs solely to shelter income for members, as well as an increase in aggressive shelter products being marketed to tribes," he wrote.

Per capita plans must be approved by the Bureau of Indian Affairs but tribes in general are highly protective of the amount they distribute to their members. Estimates vary from $12,000 a month for members of the Pechanga Band of Luiseno Indians to $30,000 a month for members of the Santa Ynez Band of Chumash Indians.

The letter did not mention any tribes by name but some have come under scrutiny for the way they spend gaming money. The Cheyenne-Arapaho Tribes of Oklahoma halted general welfare payments to members amid a reported FBI investigation.

The Seminoles of Florida gave each council member a $2 million slush fund from casino revenues to distribute as they wished, according to news reports. The payments were the subject of testimony during a federal trial of former non-Indian employees of the tribe who were later acquitted of all charges.

As for the bond issue, the IRS is questioning whether casinos and related projects qualify as "governmental" activities that would qualify for tax-exempt bonds. In addition to the Seminoles, the Cabazon Band of Mission Indians of California is being reviewed.

Meanwhile, tribes are lobbying Congress to ensure they are included in a federal law that allows municipalities to issue tax-exempt bonds. National Congress of American Indians President Tex Hall said "tribes are subject to a stringent essential government function test that others do not face" during his State of Indian Nations address in February.

Relevant Documents:
IRS Letter | Senate Testimony