Greenberg Traurig Alert
IRS Allows Tribal Gaming Income to be Placed in Trust Free of Tax
By Marvin A. Kirsner, Greenberg
Traurig, Boca Raton Office
View or download the PDF version of this Alert
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.
|"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:
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