SECTION III DISTRIBUTIONS — 0919 Publ 3908 (PDF)

Per Capita Payments

When a tribe distributes revenue to all its members or groups of members, it has provided a per capita payment. Under IGRA, a federally recognized Indian tribe may use net revenues from Class II or Class III gaming activities to make per capita payments to its tribal members only if four conditions are met:

It must prepare a plan to allocate revenues only for IGRA authorized uses to:

ú fund tribal government operations or programs,

ú provide for the general welfare of the Indian tribe and its members,

ú promote tribal economic development,

ú donate to charitable organizations, or

ú fund local government and agency operations.

The Secretary of the Interior must approve the revenue’s use, particularly when it’s for funding tribal government operations or programs and for promoting tribal economic development.
The tribe must protect and preserve minors’ and other legally incompetent persons’ interests who are entitled to receive any of the per capita payments. The tribe disperses these payments to their parents or legal guardian for their health, education or welfare, under a plan approved by the Secretary and the tribe’s governing body.
The per capita payments are subject to federal taxation and tribes notify members of this tax liability when payments are made.

Guidelines for Per Capita Distribution Plans

The Department of Interior issues guidelines to govern the review and approval of per capita distribution plans also known as revenue allocation plans (RAP). Tribal governments can make periodic or occasional distributions by ordinance or resolution in the absence of a RAP. These guidelines provide procedures for how tribes must submit tribal revenue allocation plans or ordinances for review and approval. These plans and ordinances contain information about how tribes distribute net revenue distributions that comes from a gaming activity. For approval, the allocation plan must provide enough detail indicating it complies with the guidelines and IGRA. The tribe must also provide a percentage breakdown of how it intends to use and allocate its net gaming revenues. The allocation plan must provide that the tribe plans to dedicate a significant portion of its net gaming revenues to one or more purposes as cited in the guidelines.

Gaming Distributions to Minors

The IGRA requires protections of the minors’ interests for gaming revenue distribution. To satisfy this requirement, many tribes establish trusts for minors and legal incompetents. A tribe may serve as the grantor and owner of the trust.

Revenue Procedure 2011-56 clarifies that deposits into a trust are taxable at the time the deposits are made. If the funds are left in the trust account until the beneficiary reaches the age of majority the principal and interest are not reported as taxable income to the beneficiary. The revenue procedure states that when an IGRA trust earns money or receives a deposit, the beneficiaries are not required to include those amounts in their gross income. However, beneficiaries who receive trust distributions would include the amounts as taxable income when actually or constructively received. ²

2When a beneficiary has the unqualified right to the funds in a trust, the beneficiary must include it as taxable income.

Gaming Tax Law and Bank Secrecy Act Issues

Example: Jane, a minor, is a member of a federally recognized tribe. The tribe creates a trust for her. She cannot receive any distributions from the trust before she reaches age 18. Therefore, Jane does not include the trust’s income as part of her gross income. She is not in constructive receipt of the funds placed in trust or income earned by the trust, because she doesn’t have the unqualified right to receive immediate payment. As a result, the accumulated per capita distributions and the related income are not taxable. However, if the tribe gives the trustee (Jane’s legal guardian) approval to access the funds, those funds become taxable.

Withholding Requirements of Distributions from Net Gaming Revenue

Per capita distributions from gaming are subject to federal taxation under IRC Section 3402(r). Tribes must notify its members of the tax liability when it makes the payments, reporting the per capita distributions on Form 1099-MISC, Miscellaneous Income. When the tribal members receive their Forms 1099-MISC, they report the income on the “Other Income” line of their Form 1040, U.S. Individual Income Tax Return, and include a description as “Indian gaming profits.” These distributions are also subject to withholding. The Social Security number of all payees should be secured prior to making payments. Otherwise, the tribe is potentially liable for backup withholding provisions under IRC Section 3406. See Reporting and Withholding Gaming Winnings of this publication and Form 945 filing requirements for more information. In the payments section of Form 1040, the payee should report any withholding reflected on Form 1099 as “federal income tax withheld from Forms W-2 or 1099.” The tribe determines the withholding amount based on the total payment to the tribal member for the year. Publication 15-A, Employer’s Supplemental Tax Guide, contains the withholding tables (identified as “Tables for Withholding on Distributions of Indian Gaming Profits to Tribal Members”). The tribe is potentially liable for the difference between the amount required to be withheld under the tables and the amount actually withheld.

The withholding tables are revised each year and generally published in January. There is a threshold for requiring withholding which often changes annually. Once the threshold distribution amount is reached, withholding is required between 10-24%.

Example: A tribe distributes $31,000 of per capita payments to tribal members during 2018. A regular monthly per capita payment of $2,000 is issued during the months January through December. During December, an additional per capita payment is made of $7,000, for a cumulative distribution of $9,000.

The computation for withholding on monthly per capita payments would be based on the $2,000 monthly payment for January to November and for December, the aggregate payment amount of $9,000. Using the tables for 2018 for monthly distributions, payments of $2,000 are subject to 10% withholding on the amount over $1,000, or $100 (.10 x $1,000). The December payment would be $1,174.12 plus 24% of the amount over $7,875 or $1,444.12 (1,174.12 + 270 (.24 x ($9,000 - $7,875))).

To avoid incorrect withholding, payments during a chosen distribution period should be aggregated as in the example above.

Gaming Tax Law and Bank Secrecy Act Issues