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IRS ruling boosts tribal sovereignty

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MASHANTUCKET, Conn. - A tax agent's failed attempt to squeeze revenue from the Mashantucket Pequot's child development center gives a boost to tribal sovereignty.

The Internal Revenue Service issued a ground-breaking ruling saying tribal members receiving educational benefits are exempt from taxes on them, as are citizens of states and municipalities.

"The IRS is telling its agents that Indian tribal governments should be treated no worse than state governments, which is very good," said Washington tax attorney Eric Facery, who is representing the Oneida Nation on similar issues.

The memo is just one sign of the friendlier face the IRS is turning toward tribal nations, officials say. The service is launching a new office of Indian Tribal Governments, with five regional divisions, to provide tax guidance and move away from audits and the tensions they raise.

The Pequot issue arose about two years ago during the previously undisclosed IRS tax audit of the Mashantucket tribal government. The tax agent was trying to tell tribal members they had to pay income taxes on the equivalent of tuition, if they sent their children to the preschool center the Pequots provided without charge.

The agent wanted to present a tax bill to those receiving free remedial tutoring or sending their children to a summer youth program or a boarding school for students with learning disabilities.

His argument was that these programs were funded by casino revenues, officials said. Under the Indian Gaming Regulatory Act, all per capita distributions of gaming profits were subject to the income tax.

John Guevremont, Washington representative for the Mashantucket Pequots objected, saying when a community provides education for its citizens, "it's paid for from government revenues for the benefit of the citizens and shouldn't be taxable.

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"We were dealing with the IRS for a couple of years on it," he said. "We went for a private ruling."

In doubtful cases, the tax agent and the taxpayer can cooperate in asking for "technical advice" from IRS headquarters in Washington.

"We went through the expense and time to make the argument of tribal sovereignty," Guevremont said. "This is something that benefits all Indian country."

In response to the request, the IRS issued the recently published "Technical Advice Memorandum." The IRS said education programs "are basic governmental services" substantially similar to federal, state and local government programs.

"In general, where Indian tribal governments act in this capacity to provide the types of benefits traditionally provided by a government to its citizen, for example, as in the present case, providing a full array of educational benefits to the children of the community, tax treatment should be analogous."

Although these letters claim not to set precedents, Facer said they have great influence with lawyers handling similar cases. Reading between the lines of this letter, he said, "The IRS is saying if a benefit is offered by the state, local or federal government, we wouldn't try to collect tax on it if it is offered by a tribe."

"It's of great significance that the IRS is recognizing that Indian nations are governments."

Facer said this memo may be the first one dealing with tribal education benefits but he said the law for what are technically called "general welfare benefits," remains a gray area. "This is not the last chapter. This is the first chapter."