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IRS Allows Tribal Gaming Income to be Placed in Trust Free of Tax

March 2001
By Marvin A. Kirsner, Greenberg Traurig, Boca Raton Office

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A recent item published by the IRS presents a Federal income tax planning possibility for tribal members that receive per capita income from gaming operations. The Technical Advice Memorandum ("TAM") concludes that tribal gaming income held in trust for minor and incompetent tribal members is not immediately taxable to the beneficiary. This TAM might be used as a planning technique to defer Federal income tax on a tribe member’s per capita share of gaming income.

Marvin A. Kirsner
"The tax benefits of this trust mechanism would be very similar to an Individual Retirement Account"

TAM 200106007 concludes that per capita amounts of gaming income put into a revocable trust for minor and incompetent tribal members avoids current income taxation when the trust is funded with the beneficiary’s share of the tribe’s gaming income. This TAM signals a reverse of course by the IRS because it reaches a conclusion opposite to Private Letter Ruling 199906015 (the "Prior Ruling"). The Prior Ruling held that a beneficiary of a similar trust was taxable when the gaming proceeds were put into the trust. It appears that the only significant distinction between the Prior Ruling and the new TAM is that the trust in the Prior Ruling was irrevocable; i.e., the trustees did not have the power to revoke and the trust described in the more recent TAM was revocable, meaning the trustees had the power to revoke. Although it is not certain, it appears that the trustees of the revocable trust consisted of representatives of the governing tribal counsel.

Although the new TAM does not specifically state it, it appears that the income would be reportable by the beneficiary of the trust only as the income is distributed from the trust, allowing for substantial tax savings as a result of the deferral of the payment of income taxes. An additional benefit is that the principal of the trust should compound tax free, meaning that no tax is due on the income earned on the trust principal while it remains in trust. This would result in a much greater rate of growth for the principal of the trust. The tax benefits of this trust mechanism would be very similar to an Individual Retirement Account – no payment of tax until taken out of the IRA, and a greater growth rate due to tax free compounding.

Although the trust in this TAM was for the benefit of minor and incompetent tribal members, it is possible that similar treatment could be obtained for a trust for the benefit of any tribal member. Although a tribal member might be reluctant to allow his share to be held in a trust that could be revoked, if he has confidence in the trustees, this could afford substantial immediate tax savings, especially where there is no immediate need for the funds. Once again, the trustees could consist of a group of the tribal leadership.

Since the TAM cannot be cited as precedent, any tribe seeking this Federal income tax deferral technique should request their own Private Letter Ruling. Please contact one of the following members of Greenberg Traurig to discuss:

 

© 2001 Greenberg Traurig


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