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On sovereignty ? tax-free harvests are at hand

For some time now, it has appeared to me that self-determined tribal sovereignty is on firm ground. Although every Native person in the United States knows it will never do to sit on our hands and assume that all is well, still and all, it is hard to see how self-determined tribal sovereignty can be turned back as long as tribes continue to use it.

We tend to think in terms of the political exercise of sovereignty because the high profile disputes ? highway jurisdiction, gaming, land rights ? so often end up in political arenas. And because tribal sovereignty does not inure to individuals but is always vested in the tribe, we are sometimes slow, on the other hand, to connect tribal sovereignty with the direct benefit of individuals, which may seem to be more in the bailiwick of federal agencies.

But as tribal sovereignty comes into its own again after decades and even centuries in eclipse, we will see more and more that individuals can expect to benefit directly from tribal decisions. It is no exaggeration to say we have lived to reap the second harvest of sovereignty. With proper decision-making by tribes, that harvest can be both large and long-lived, for ourselves and for the seventh generation.

Among the least familiar of sovereignty decisions that can be made to help the harvest along are those involving taxation. So at First Nations, we thought it would be timely to emphasize the many benefits tribal members stand to gain from careful decisions on tax structure. These benefits are the direct result of a tribe's status as a sovereign government that cannot be taxed.

But before I even get started on a subject so rich with potential ? potential benefit but also potential for second thoughts and second guesses! ? let's rest assured that I have consulted with a tax attorney, Kathleen M. Nilles of Gardner, Carton & Douglas in Washington, D.C. And so should you consult a tax attorney before implementing any of the information in this column, because in this field the slightest distinctions can be significant. In addition, bear in mind that many of our conclusions here take their lead from private letter rulings of the Internal Revenue Service. Private letter rulings explain IRS interpretations of specific circumstances; as such they should never be relied on as legal precedent, for circumstances may differ slightly from those that provoked the private letter ruling. But a private letter ruling from the IRS can serve as a reliable guide.

Now with all that understood, here is the unvarnished good news ? many options are available to tribes that wish to establish governmental programs that would provide tax-free benefits to tribal members. Foremost among them is a "grantor trust" structure for a possible tax-free tribal deferred income plan. The trust ? income and assets ? must be transferred into the fund by the tribe and held for the benefit of future tribal members. It cannot be distributed for at least 10 years. At that time, trustees ? including trustees independent of the tribe ? in their "sole discretion" can distribute a portion of trust income back to the tribe or its adult members.

However, no beneficiary can have an interest in the trust or a right to receive or demand its distributions, nor can they base various actions on prior knowledge or anticipation of the fund's distributions. With these conditions fulfilled, income from the trust could benefit tribal members without being taxable to tribal members. The tribe, as owner of the trust, will not be taxed on the income it generates.

Tribal per capita payments to individuals could possibly be tax-deferred by depositing them in an account structured as a "rabbi trust," so-called from the emergence of this old age and disability-maintenance model in the Jewish community. The tribe would have to establish a "rabbi trust" plan, which would allow tribal members to deposit a portion of per capita payments into a tax-deferred account. The amount in this account would not be counted as taxable income until the year the payments became available to participants.

Other tribal government benefits that could possibly be provided tax-free to tribal members are educational benefits (including child development and scholarships), health benefits (including disease management and mental health care), and general welfare (including elder assistance, educational assistance with living expenses, housing assistance with mortgage, maintenance and utility payments, and economic development programs). Among these options, only general welfare benefits would have to be based on need in order to remain tax-free.

All of these benefits and more, tribal governments may be able to provide tribal members without increasing their taxable income. To move toward implementation will take the counsel of a tax attorney. But at long last the fences around this ripened field have come down, and many beneficial tax structures are now in place for sovereign tribal governments to harvest on behalf of tribal members if they so desire.

Rebecca Adamson is president of First Nations Development Institute and a columnist for Indian Country Today.