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S. HRG. 111–399 

EXAMINING THE FEDERAL TAX TREATMENT OF 

HEALTH CARE BENEFITS PROVIDED BY TRIBAL 

GOVERNMENTS TO THEIR CITIZENS 

HEARING 

BEFORE THE

COMMITTEE ON INDIAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 18, 2009 

Printed for the use of the Committee on Indian Affairs 

( 

(II) 

COMMITTEE ON INDIAN AFFAIRS 

BYRON L. DORGAN, North Dakota, Chairman 

JOHN BARRASSO, Wyoming, Vice Chairman 

DANIEL K. INOUYE, Hawaii 

KENT CONRAD, North Dakota 

DANIEL K. AKAKA, Hawaii 

TIM JOHNSON, South Dakota 

MARIA CANTWELL, Washington 

JON TESTER, Montana 

TOM UDALL, New Mexico 

AL FRANKEN, Minnesota 

JOHN MCCAIN, Arizona 

LISA MURKOWSKI, Alaska 

TOM COBURN, M.D., Oklahoma 

MIKE CRAPO, Idaho 

MIKE JOHANNS, Nebraska 

ALLISON C. BINNEY, Majority Staff Director and Chief Counsel 

DAVID A. MULLON JR., Minority Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on September 18, 2009 ..................................................................... 1 

Statement of Senator Udall .................................................................................... 1 

WITNESSES

Ingram, Sarah H., Commissioner, Tax Exempt and Government Entities, 

Internal Revenue Service .................................................................................... 4 

Prepared statement .......................................................................................... 6 

Joseph, Jr., Hon. Andrew, Board Member, National Indian Health Board 

(NIHB) ................................................................................................................... 21 

Prepared statement .......................................................................................... 22 

Keel, Hon. Jefferson, Vice President, National Congress of American Indians 

(NCAI) ................................................................................................................... 16 

Prepared statement .......................................................................................... 17 

Macarro, Hon. Mark, Chairman, Pechanga Band of Luisen ̃ o Indians ................ 11 

Prepared statement .......................................................................................... 14 

Taylor, Scott A., Professor, University of St. Thomas School of Law .................. 25 

Prepared statement .......................................................................................... 26 

(1) 

EXAMINING THE FEDERAL TAX TREATMENT 

OF HEALTH CARE BENEFITS PROVIDED BY 

TRIBAL GOVERNMENTS TO THEIR CITIZENS 

FRIDAY, SEPTEMBER 18, 2009 

U.S. SENATE, 

COMMITTEE ON INDIAN AFFAIRS, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:00 a.m. in room 

628, Dirksen Senate Office Building, Hon. Tom Udall, U.S. Senator 

from New Mexico, presiding. 

OPENING STATEMENT OF HON. TOM UDALL, 

U.S. SENATOR FROM NEW MEXICO 

Senator UDALL. Good morning, everyone. It is good to have you 

all here. I would at this point ask the Committee to come to order. 

First, I would like to pass on Senator Dorgan’s apologies for the 

inconvenience in scheduling this hearing and want to thank our 

witnesses for their great flexibility in being here today. 

The Committee meets today to examine the Federal tax treatment of health care programs the tribal governments provide to 

their citizens. 

It is well documented that we as the Federal Government are 

failing in meeting our obligation to provide health care to Native 

Americans. Native Americans face health disparities at almost 

every level. American Indians and Alaska Natives face lower birth 

rates, shorter life spans, and significantly higher rates of disease 

such as diabetes, suicide, and substance abuse. The Indian Health 

Service attempts to address these disparities by delivering health 

services to tribal communities. However, many times the services 

offered by the IHS are outdated and chronically underfunded. 

We have a chart that is being raised that depicts some of that 

underfunding in the form of contract health services. As you can 

see, contract health is only funded at 50 percent of need. As a result, contract health funding is depleted half way through the fiscal 

year. It is common in Indian country to hear the phrase, don’t get 

sick after June, in reference to the fact that funding has run out. 

When contract health funds run out, the Indian Health Service is 

forced to ration services and limit treatment to those patients who 

face immediate loss of life or limb. 

2 

Because of the Federal Government’s failure to meet these obligations, a number of tribal governments are taking matters into 

their own hands. We will hear about some of those today. Some 

tribes are using their own revenue to reimburse individuals for 

services that do not meet the life and limb requirement. Other 

tribes are using revenue to supplement services offered by the IHS 

or to make improvement to the local IHS facility. Still other tribes 

provide private health coverage for their members to help offset the 

failures of the Indian Health system. Tribes are taking these steps 

because their communities are suffering an unnecessary loss of life 

due to the lack of access to adequate health care. 

We have another chart here that we are putting up. I have a 

story to share about a young man from Isleta Pueblo in New Mexico named Russell Antonio Lente. Russell was a talented young artist and a student at the Institute of American Indian Arts. He 

loved to paint and his artwork was featured on billboards, murals, 

and even skateboards. Despite the advancement in modern medicine, Russell lost his life to cancer at 23 years of age. Russell was 

diagnosed with cancer but it went untreated because contract 

health services funds were not available. He was told that his cancer didn’t meet the priority one life or limb requirement. Russell’s 

cancer had reached stage IV and was untreatable when he was finally eligible for contract health services and referred to an 

oncologist. Russell died a short time later. 


918a1.eps
3 

Russell wasn’t given a chance because of this broken system that 

doesn’t consider cancer treatment a priority. It is because of stories 

like Russell’s that tribes are trying to become a part of the solution 

by attempting to improve their health care programs. 

As the Committee will hear today, these tribal efforts are being 

met with some resistance by the Federal Government. Some tribal 

health programs are now under review to determine whether they 

should be treated as taxable income. 

It is my understanding that the Internal Revenue Service is attempting to follow the black letter of the tax code. However, as a 

Member of this Committee, I also understand the great obligation 

of this Government to Indian people. The United States has treaty 

and statutory obligations to not only maintain but to improve the 

health status of Native Americans. There must be room to consider 

these competing Government obligations when making these decisions about taxability. 

In my mind, we should be relieved that some tribal governments 

are able to fill the void where the Federal Government has failed. 

At the very least, we should not penalize tribal governments for 

meeting our obligation and for exercising the right to self-governance that Congress supports. 

I want to again thank our witnesses for their flexibility in being 

here. I look forward to hearing your testimony. I know that Mark 

Macarro, the Pechanga Chairman, has a plane to catch and so he 

is going to have to head to the airport after he gives his statement. 

We are going to start from the left. Mark, you will go second. We 

understand you have a commitment to make on that. 

Sarah Hall Ingram, please? 


918a2.eps
4 

STATEMENT OF SARAH H. INGRAM, COMMISSIONER, TAX 

EXEMPT AND GOVERNMENT ENTITIES, INTERNAL 

REVENUE SERVICE 

Ms. INGRAM. Thank you. Good morning, Mr. Chairman and my 

fellow witnesses. I appreciate the opportunity to be here this morning to explain the tax treatment of health care that tribal governments choose to provide to their members. 

Before delving into the tax rules, I want to acknowledge the 

unique government-to-government relationship between the Federal Government and Indian tribal governments as set forth in our 

United States Constitution, treaties, statutes, executive orders, and 

court decisions. The responsibility to provide health services to 

American Indians and Alaska Natives derives from this relationship as well as from specific statutes. However, in addition to the 

services provided through that avenue, many tribal governments in 

the exercise of their sovereignty have developed other innovative 

approaches to providing health care to their members. 

As I focus on the Federal tax treatment of health care benefits 

provided by tribal governments, I would like to note that these tax 

rules have existed for decades. They also apply to benefits provided 

by non-tribal governments including Federal, State, and local authorities. The provisions in Title 26 of the U.S. Code, which governs Federal taxation, apply equally to all types of citizens and employers. The administrative exclusion, the general welfare exclusion, applies equally to all governments, tribal and non-tribal. 

Now I would like to address the basic tax rules and how they 

apply under two key scenarios, where the tribal government is providing benefits to its own employees, and I will cover that briefly, 

and then where the tribal government is providing benefits to a 

broader group of its tribal members. For this discussion, we need 

to focus on two types of benefits, the up-front provision of health 

insurance coverage and the back-end provision of medical services. 

To begin, Section 61 of Title 26, a foundational rule in Federal 

tax law, provides that gross income includes all income from whatever source derived unless a specific exception applies to expressly 

exclude it from taxation. Although Title 26 contains many health 

care related sections, today I would like to focus on three provisions 

in Title 26 and on the application of what is known as the general 

welfare exception. 

So let me touch briefly on where the tribal government is the employer. If the tribal government is the employer of the individual, 

it is possible to exclude from the employee’s income both the value 

of the up-front health coverage under section 106(a) and the backend benefits under 105(b). This tax treatment can work in a number of formats including self insurance, the purchase of a group policy, or the payment of premiums. These statutory rules apply to all 

types of employers, governmental and private. 

I do want to note that some people have raised to us the situation in which the tribe pays for medical benefits to employees on 

an ad hoc basis. In the absence of a consistently applied tribal program that addresses who and what is covered, an ad hoc arrangement would not tend to constitute a health plan under section 105 

so the amounts paid for medical services under that kind of an arrangement would not be excludable. 

5 

Now I would like to turn to the situations in which the tribal 

government would like to provide health benefits to tribal members 

who are not employees of the tribal government. The first thing to 

note is that there is no statutory parallel to section 106 that would 

give tax favored treatment to the tribal member when the tribal 

government provides up-front health benefits to all of its tribal 

members without regard to the employee issue. Section 106(a) excludes the value of up-front health coverage from income only if it 

is employer-provided. With no parallel exclusion for non-employees, 

these tribal members would have no means under the statue to exclude the value of tribally-provided health care coverage, that upfront coverage. 

In contrast, there may be ways under Title 26 to exclude the payment of the back-end medical benefits. Section 104(a)(3) provides 

that as long as the arrangement is or has the effect of accident and 

health insurance, then it may be possible to exclude the value of 

the medical services from the tribal member’s income. In some 

sense, provision 104(a)(3) parallels the section 105(b) treatment on 

the employee side. 

Again, Title 26 itself provides that for non-employee tribal members, the value of the up-front health coverage would not be excluded but the value of the back-end medical services could be excluded as long as the arrangement meets the requirements of 

104(a)(3). 

The final component I want to touch on is the general welfare 

exclusion. This is a non-statutory administrative exclusion that has 

developed over more than 50 years in IRS revenue rulings and notices. It has been recognized by a number of courts. 

Although section 61 broadly defines the items that are included 

in gross income, the Service has consistently concluded that payments made to individuals by government units, tribal or non-tribal, under legislatively provided social benefit programs for the promotion of the general welfare are not includable in a recipient’s 

gross income. The decades of rulings have generally followed three 

basic principles in determining whether a program may qualify for 

the general welfare exclusion. The payments need to be made from 

a governmental fund; they need to be for the promotion of general 

welfare, generally based on a demonstrated needs criteria; and they 

need to not represent compensation for services. 

Whether this exclusion would apply to a tribal government providing health coverage or benefits to tribal members would depend 

on how the program is structured and administered. If the tribe 

provides such assistance only in cases of demonstrated need pursuant to consistently applied standards of financial need, the general 

welfare exclusion might well apply. The financial needs standard 

and the nature of the expenses being covered would tend to be 

among the factors that we would look at. 

We have seen many programs both in Indian country and with 

other governments that work within the principles of the general 

welfare exclusion and successfully provide needed benefits without 

generating income to recipients. However, the Service generally 

has not applied the general welfare exclusion to programs that benefit persons with significant income or assets. Any such extension 

would represent a departure from well established administrative 

6 

1The statutory rules are included in the Internal Revenue Code (the ‘‘Code’’), Title 26 of the 

United States Code. 

practice. Over the past decades, the IRS has declined to apply the 

general welfare exclusion to programs that fail to tie benefits to 

some needs-based criteria. There are a number of examples, for example in the State government area. 

Finally, Mr. Chairman, I would like to thank you again for this 

opportunity to come this morning. I am aware of this Administration’s commitment to strengthen and build on the government-togovernment relationship between the United States and tribal nations. I appreciate your interest in this matter. 

This concludes my testimony. I would be glad to answer any 

questions. 

[The prepared statement of Ms. Ingram follows:] 

PREPARED STATEMENT OF SARAH H. INGRAM, COMMISSIONER, TAX EXEMPT AND

GOVERNMENT ENTITIES, INTERNAL REVENUE SERVICE

Good afternoon, Mr. Chairman, and members of the Committee. 

I appreciate the opportunity to be here this afternoon to explain the tax treatment 

of health care that tribal governments choose to provide to their members. 

At the outset of my testimony before delving into the tax rules, I want to acknowledge that the United States has a unique legal relationship with Indian tribal governments as set forth in the Constitution of the United States, treaties, statutes, 

executive orders, and court decisions. Our responsibility to provide health services 

to American Indians and Alaska Natives derives from the government-to-government relationship between the Federal Government and tribal governments, as well 

as specific statutes, such as The Snyder Act and the Indian Health Care Improvement Act, that provide the authority for Congress to appropriate Federal funds to 

provide health care to our First Americans. 

The Indian Health Service, a federal agency within the Department of Health and 

Human Services, provides clinical and public health services to American Indians 

and Alaska Natives often in remote, economically depressed locations with limited 

access to health facilities. In the face of these challenges, many tribal governments 

have developed innovative approaches to providing health care to their members. 

I recognize that tribes and tribal members may have a variety of non-tribal health 

resources available to them. Depending upon location and other considerations, 

these may include employer provided insurance, Medicare, the Indian Health Service, and federal, state and local health programs, insurance arrangements, hospitals 

and clinics. 

Within this health care environment, tribes, in the exercise of their sovereignty, 

may wish to create new health care opportunities for their members, or to expand 

or augment the health care presently available to their members. This afternoon, 

I will address the tax aspects of a number of methods tribes may have used, or have 

considered using, to provide medical benefits or health insurance coverage to their 

members. 

Allow me, Mr. Chairman, to note that the tax rules that apply to health care provided by tribal governments are the same rules that have existed for decades and 

that apply to such care and benefits provided by non-tribal governments, including 

federal, state, and local authorities. 1 There are no special tax rules that apply 

uniquely to tribal government health care programs. 

I would also like to note that the Internal Revenue Service does not have a special 

program to examine tribal health programs. Nor are we emphasizing this area at 

the moment. That said, the issue of the taxability of medical benefits and health 

insurance coverage can arise from time to time in the normal course of an audit 

as we look at whether a tribe, or any other type of government or employer, is following appropriate information reporting and withholding practices as it administers its various programs. Moreover, the issue can arise when a government or 

employer comes to the IRS seeking a legal ruling about the tax treatment of a proposed plan or arrangement. 

7 

The Principal Questions at Issue 

In considering the tax treatment of health care that a tribe might provide for its 

members, we need to focus principally on two types of benefits and two categories 

of tribal members. 

The first type of benefit is health insurance coverage that the tribe provides to 

the tribal member. The tribe may pay the insurance carrier directly, or self-insure. 

I will refer to this benefit as health insurance coverage, or ‘‘up-front coverage.’’ The 

second type of benefit is funds paid out for medical services provided to the tribal 

members and their family members, either from a third party insurance company 

or directly from the tribe itself. These amounts may be paid directly to the tribal 

member as reimbursement, or to the health care provider who performed the medical service. In this testimony, I will refer to these medical services benefits as 

‘‘back-end benefits.’’ 

The two categories of tribal members we need to consider are tribal members who 

are also tribal employees, and tribal members who are not employees. The significance of this distinction will become apparent rapidly. 

In this context, when a tribe provides or pays health insurance coverage or medical services for its members, two principal income tax questions arise: 

• Is the value of the health insurance coverage—up-front coverage—paid for or 

provided by the tribe includable in the tribal member’s income? 

• Is the value of any medical services—back-end benefits—paid for or provided by 

the tribe, directly or by tribe-purchased insurance, includable in the tribal member’s income? 

To answer these questions, Mr. Chairman, I think it would be helpful if I began 

with a brief summary of key tax provisions that apply to health care in general. 

I will then address in more detail three provisions of the Internal Revenue Code 

and an administrative exclusion that have particular relevance here. 

As I do so, I’d like to emphasize that the Code provisions apply equally to all citizens and all employers, and that the administrative exclusion—the general welfare 

exclusion—applies equally to payments of all governments, tribal and non-tribal. 

Following that summary, I will discuss, in several contexts, the tax treatment of 

health benefits that tribes provide to tribal members who are employees, and the 

taxation of benefits to members who are not employees. 

Summary of the Code’s Treatment of Health Care 

Section 61 of the Code is the starting point for our discussion. Under section 61, 

gross income includes all income, from whatever source derived, unless a specific exception applies. This seminal provision establishes the important principle that income will be taxed unless it is expressly excluded from taxation. 

Of course, the Code does exclude many forms of health-care-related income. 

An employer’s contribution to a plan providing health coverage, and direct or indirect payments to reimburse the employee for expenses incurred for medical care for 

the employee and his or her spouse and dependents, are excludable from the employee’s income for both income and payroll tax purposes (secs. 105, 106 and 3121). 

Self-employed individuals may deduct the cost of health insurance for themselves 

and their spouses and dependents (sec.162(I)). 

All individuals may claim an itemized deduction for unreimbursed medical expenses, to the extent that such expenses exceed 7.5 percent of adjusted gross income 

(sec. 213). 

Individuals who are covered by a high-deductible health plan are able to contribute tax-free to a health savings account (sec. 223). 

The Controlling Law 

To answer the question about the inclusion or exclusion of health insurance coverage provided by a tribe and the value of medical services under that coverage or 

direct payment of medical services, however, we need to look more closely at three 

provisions of the Internal Revenue Code and at the application of what is known 

as the general welfare exclusion. 

Let me begin with the three Code provisions: sections 106(a), 105(b), and 

104(a)(3). 

Sections 106(a) and 105(b) allow tribes to provide health coverage and medical 

benefits—up-front coverage and back-end benefits—to their employees on a tax-free 

basis. 

Section 106(a). Section 106(a) provides, generally, that gross income of an employee does not include employer expenditures for coverage provided to an employee 

through an accident or health plan. 

8 

This section excludes from an employee’s income the value of health coverage paid 

by an employer. It applies to tribal members who are tribal employees, but not to 

tribal members who are not employees of the tribe. 

Section 105(b). Section 105(b) states that except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to 

medical expenses) for any prior taxable year, gross income does not include amounts 

paid, directly or indirectly, by an employer to the taxpayer to reimburse the taxpayer for expenses incurred by the taxpayer for the medical care (as defined in section 213(d)) of the taxpayer or the taxpayer’s spouse or dependents (as defined in 

section 152). 

This section provides an exclusion from income for payments for medical services 

provided through an employer-provided plan. Like section 106(a), it applies to tribal 

members who are tribal employees, but does not extend to tribal members who are 

not employees of the tribe. 

Section 104(a)(3). The third key provision is Code section 104(a)(3). This section 

comes into play only when there is no employer in the picture. 

It provides, generally, that gross income does not include ‘‘amounts received 

through accident or health insurance (or through an arrangement having the effect 

of accident or health insurance) for personal injuries or sickness (other than 

amounts received by an employee, to the extent such amounts (A) are attributable 

to contributions by the employer which were not includable in the gross income of 

the employee, or (B) are paid by the employer).’’ 

Neither the Code nor the regulations defines ‘‘insurance.’’ The accepted definition, 

for purposes of federal income taxation, dates back to Helvering v. Le Gierse, 312 

U.S. 531 (1941), in which the Supreme Court stated that ‘‘[h]istorically and commonly insurance involves risk-shifting and risk-distributing.’’ Insurance must shift 

the risk of economic loss from the insured and the insured’s family to the insurance 

program and must distribute the risk of this economic loss among the participants 

in the program. Risk shifting will occur when an insurer agrees to protect the insured (or a third-party beneficiary) against a direct or indirect economic loss arising 

from a defined contingency involving an accident or health risk. See, Allied Fidelity 

Corp. v. Commissioner, 572 F.2d 1190, 1193 (7th cir. 1978); Haynes v. U.S., 353 U.S. 

81, 83 (1957) (Broadly speaking, health insurance is an undertaking by one person 

for reasons satisfactory to him to indemnify another for losses caused by illness.). 

The parenthetical language, ‘‘(or through an arrangement having the effect of accident and health insurance)’’ in section 104(a)(3) was added to the Code by section 

31 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), 

1996–43 I.R.B. 7, effective for taxable years beginning after December 31, 1996. 

The House Conference Report noted that ‘‘payments for personal injury or sickness through an arrangement having the effect of accident or health insurance (and 

that are not merely reimbursement arrangements) are excludable from income. In 

order for the exclusion to apply, the arrangement must be insurance (e.g., there 

must be adequate risk shifting). This provision equalizes the treatment of payments 

under commercial insurance and arrangements other than commercial insurance 

that have the effect of insurance.’’ H.R. Rept. No. 104–736, 104th Cong., 2d Sess. 

293. 

In short, this section provides an exclusion from income for payments for medical 

services received from an insurance plan, or a similar arrangement, that is not provided by an employer. It thus provides an exclusion for payments from an insurance 

plan or similar arrangement purchased or created by the tribe for those tribal members who are not employees. In some sense, this provision parallels section 105(b) 

for non-employees. 

Let me point out that there is no Code provision that parallels section 106(a) for 

non-employees. Where there is no employer involved, the Code contains no provision 

that would allow a tribal member who is not a tribal employee to exclude the value 

of tribally-provided health care coverage, the up-front coverage. 

The General Welfare Exclusion. The final component of the prevailing law in this 

area is the general welfare exclusion. This is an administrative exclusion that has 

developed over more than 40 years in revenue rulings and notices and has been recognized by the courts. See, e.g., Rev. Rul. 63–136, 1963–2 C.B. 19; Graff v. Commissioner, 673 F.2d 784 (5th Cir. 1982), affg. per curiam 74 T.C. 743 (1980); Bailey v. 

Commissioner, 88 T.C. 1293 (1987). The exclusion applies to payments made by governmental units—tribal or non-tribal. Although Code section 61 defines broadly the 

items that are included in gross income, the Service has consistently concluded that 

payments made to individuals by governmental units, under legislatively provided 

social benefit programs, for the promotion of the general welfare, are not includable 

in a recipient’s gross income (‘‘general welfare exclusion’’). See, e.g., Rev. Rul. 74– 

205, 1974–1 C.B. 20; Rev. Rul. 98–19, 1998–1 C.B. 840. 

9 

To qualify under the general welfare exclusion, payments must: (1) be made from 

a governmental fund, (2) be for the promotion of general welfare (i.e., be based generally on individual or family needs), and (3) not represent compensation for services. The Service generally has not applied the general welfare exclusion to persons 

with significant income or assets, and any such extension would represent a departure from well-established administrative practice dating back decades and respected by courts. 

Whether this exclusion would apply to a tribal government providing coverage or 

benefits to tribal members would depend on how the program is structured and administered. 

How Tribes are Providing Health Care to Members 

I would like to illustrate how these rules apply in a number of situations. This 

is not an exhaustive list, but reflects some of the questions we have received. 

The Tribe is the Employer of the Tribal Member 

If the tribal government is the employer of the individual, it is possible to exclude 

both the value of the health coverage under Code section 106(a)—the up front coverage—and the amounts actually paid out to cover medical expenses under Code 

section 105(b)—the back end benefits. 

Self-Insurance. One option might be for the tribe to self-insure. By this I mean 

that the tribal government promises to pay for the health care costs of their employees out of the tribe’s resources. All tribal employees are covered, and all receive coverage with uniform terms and conditions. The coverage may be very extensive, and 

may even cover expenses that commercial health insurance typically does not cover. 

The tribe may provide health insurance coverage, medical benefits, or both. 

Looking first at the up-front provision of coverage, Code section 106(a) provides 

that gross income of an employee does not include employer-provided coverage 

under an accident and health plan. So, assuming the tribal members are employees, 

they may exclude the value of their tribally-provided health coverage from gross income. Looking at the provision of the actual medical benefits, Code section 105(b) provides an exclusion for amounts paid, under employer-provided coverage, to reimburse the employee for medical services. Therefore, tribal government employees 

may exclude the value of the medical benefits paid for by the tribe. 

Insurance policies. Next, what happens if the tribal government pays premiums 

on insurance policies, or purchases a commercial group health insurance policy to 

cover its employees? Again, Code sections 106(a) and 105(b) may operate to exclude 

both the up-front value of coverage and the later payments for medical benefits. 

The tribe pays for health care costs on an ad hoc basis. Some tribal governments 

have raised the situation in which the tribe pays for medical benefits on an ad hoc 

basis. In the absence of consistently applied tribal policies that address who and 

what is covered, an ad hoc arrangement would not constitute a ‘‘health plan.’’ Treas. 

Reg. § 1.105–5(a). Thus, amounts paid for medical services under such an arrangement to any tribal employee would not be excludable from income under a specific 

Code provision. Under an ad hoc approach, the issue of health care coverage does 

not arise since the tribe typically pays directly for medical benefits and does not provide health care coverage. 

Tribal Members Who are not Employees of the Tribal Government 

Now, I’d like to turn to the situations in which the tribal government would like 

to provide health benefits to tribal members who are not employees of the tribal 

government. While assistance can be provided, the options for excluding it from the 

tribal members’ income are more limited. 

The significance of the distinction between employees and non-employees is not 

unique to health care benefits provided by tribes to their members. The same employee—non-employee distinction applies across the country, to all citizens, all employers, all units of government. 

Value of up-front coverage. There is no parallel to Code section 106(a) that would 

allow the tribal government to provide up front health coverage on a tax-preferred 

basis to all of its tribal members, without regard to whether they are employees. 

Code section 106(a) excludes the value of the up-front health coverage from income 

if it is employer-provided, regardless of whether the employer is providing premiums 

for third party insurance or is covering employees in a self-insured plan. With no 

parallel exclusion for non-employees, these tribal members would have no means 

under the statute to exclude that value from income. 

Value of back-end benefits. There may be ways to exclude the payment of medical 

benefits even for tribal members who are not employees of the tribal government. 

Code section 104(a)(3) provides that as long as the arrangement is insurance, or has 

10 

the effect of accident and health insurance, then a variety of formats may operate 

to exclude the payments for medical services from the tribal member’s income. For 

example, the tribal government could self-insure and pay the benefits itself. Or, it 

could purchase a group policy or pay individual premiums and the medical benefits 

flowing from that policy would not be included in the tribal member’s gross income. 

Again, the value of the up front health coverage or health insurance premiums 

would not be excluded, but the value of the medical services would be excluded as 

long as the arrangement meets the requirements of Code section 104(a)(3). 

The General Welfare Exclusion 

Some people have suggested that the general welfare exclusion could be applied 

to exclude these amounts from income of tribal members. If the tribe provides such 

assistance only in cases of demonstrated need, pursuant to a consistently applied 

standard of financial need, the general welfare exclusion arguably could apply. The 

financial need standard and the nature of the expenses being covered would be 

among the factors that we would look at to determine whether the general welfare 

exclusion applied to a particular program. 

As I mentioned earlier, this administrative exclusion generally has not been applied to persons with significant income or assets. Whether this exclusion would 

apply to a particular tribe and its members would depend on the factual circumstances. But any extension of the general welfare exclusion to tribal members 

with significant income or assets would represent a departure from well-established 

practice. 

If the general welfare exclusion does not apply, the value of the health insurance 

plan coverage for non-employees must be included in gross income. We recognize 

that it may be difficult to determine how such coverage should be valued under a 

self-insured plan. Alternatively, if the general welfare exclusion does not apply and 

there is no health insurance plan that satisfies the requirement of section 104(a)(3), 

but instead benefits are paid on an ad hoc basis, then the provision of back-end benefits would be included in tribal members’ income. 

Conclusion 

Mr. Chairman, I would like to summarize my testimony and conclude. 

As my prior discussion demonstrates, in the case of a tribe providing coverage and 

health benefits to its employees, the Code—sections 105 and 106—provides exclusions from gross income for both the value of the up-front coverage (e.g., coverage 

under a commercially purchased insurance policy or self-insurance) and the benefits 

provided under the coverage. 

In the case of a tribe providing coverage and health benefits to tribal members 

who are not employees, the Code—section 104—provides an exclusion from gross income of the value of the health benefits if provided under an insurance arrangement. However, the Code does not provide any exclusion from gross income of the 

value of the up-front health coverage outside the employer-provided context. 

In certain cases, the administratively-based general welfare exclusion may provide 

an exclusion from gross income for these amounts, but only if the program meets 

the need standards. 

I am aware of this Administration’s commitment to strengthen and build on the 

government-to-government relationship between the United States and tribal nations and I appreciate your interest in this matter. Thank you for your patience as 

I worked through the technical aspects of current law. I look forward to working 

with Congress to examine this issue further. 

This concludes my testimony this afternoon I would be happy to try to answer 

any questions you might have. 

Senator UDALL. Thank you very much for your testimony. 

I would just remind each of our witnesses to please keep their 

testimony to five minutes. Your full written testimony will become 

part of the permanent record. We will take all the testimony first. 

Chairman Macarro? 

11 

STATEMENT OF HON. MARK MACARRO, CHAIRMAN, 

PECHANGA BAND OF LUISEN ̃ O INDIANS 

Mr. MACARRO. Senator Udall, good morning. [Phrase in native 

tongue.] It is good to be here with you this morning. 

The homeland of the Pechanga people is the Pechanga Indian 

Reservation located near Temecula, 60 miles north of San Diego. 

Our people have called the Temecula Valley home for over 10,000 

years. We think this is your homeland, too, for we believe that the 

world was created in the Temecula Valley, known as Exva 

Temeeku. 

In 1847, 18 treaties were negotiated in sequence with tribes 

throughout the State of California. We Luisen ̃ o Indians were party 

to the 17th of these treaties. It is called the Treaty of Temecula. 

In good faith, huge land cessions were made involving most of 

southern California in exchange for a permanent inviolable homeland and the provision of goods and services to improve the health, 

education, and welfare of my great grandfathers. 

Shortly after ceding these huge tracts of land and within one 

month of arriving back in Washington, D.C. with the 18 treaties, 

gold was found for the first time in California near the town of Julian, about 40 miles away from my reservation. The timing was unfortunate for us because the Senate, upon hearing of the gold, elected not to ratify these 18 treaties. Nonetheless, our land was still 

taken from us. Most of the goods and services that were promised 

in our treaty never materialized. 

But there is more. Twenty-six years later in 1873, sheep farmers 

laid claim to the land our village was on. They obtained a Federal 

court decree of ejectment and on a summer day in 1875, a posse 

led by the San Diego County sheriff evicted my ancestors from 

their village at gunpoint. In one fell swoop, 300 elders, women, and 

children were loaded onto wagons with only a few personal effects 

and just dumped in a dry wash two miles away. Their former tule 

brush homes were burned and their livestock herds were seized to 

pay for court costs and the cost of the eviction itself. 

On June 27, 1882, President Chester Arthur signed an executive 

order that established the Pechanga Indian Reservation finally as 

a homeland for my people. Today, approximately 66 percent of our 

tribal citizens currently live on or near the reservation. 

Over the years, we have lost much land and resources because 

of now-repudiated Federal policies. We have paid dearly for the 

Federal Government’s trust obligation to provide health care to our 

citizens. 

Many of our Pechanga citizens face the same health problems associated with other American Indian communities: diabetes, obesity, tuberculosis, accidents, and mental health crises. The only Indian hospital to have operated in southern California was on the 

Soboba Indian Reservation and it closed permanently in 1949. Between 1949 and 1970, no official Indian health care existed in our 

region for my tribe. So between 1970 and 2002, our people relied 

primarily on the IHS for health care with a few members eligible 

to receive VHA care or covered by private insurance. 

Beginning in 1970, tribes in the region began pooling their paltry 

IHS dollars to establish a consortium for funding health care benefits for Indians on reservations. Pechanga joined this tribal health 

12 

care consortium, called the Riverside San Bernardino County Indian Health Consortium, Incorporated. Today there are 12 tribes in 

the consortium, including ours. The consortium is headquartered 

on the Morongo Reservation. It operates a small clinic on the 

Pechanga Reservation for our tribal citizens and is open five days 

a week. The clinic staff is comprised of a general practitioner, floating nurse practitioners, floating podiatrists, and other medical 

technicians. Special visits and hospitalizations are referred out to 

a local health care provider. 

In 2002 and before, the IHS was not able to provide many medical procedures which Pechanga citizens desperately needed due to 

the limited contract health funds that ran out early in the fiscal 

year. I appreciate and honor the work that these professionals provide to our Pechanga people and Indians from other tribes but, like 

other IHS facilities, it is underfunded, understaffed, and its hands 

are tied when it comes to more modern medicine, thus allowing for 

the provision of only substandard care at the Pechanga clinic. 

In addition to the specific health care portrait at Pechanga, the 

provision of Indian health care in the State of California is unique. 

For example, in spite of having one of the highest American Indian 

populations in the Country, there are no IHS direct service clinics 

or hospitals in California. All IHS services are provided through 

tribal health consortiums and urban Indian health clinics. The 

nearest IHS funded hospital is in Phoenix, 350 miles away. 

IHS funding for the members of our consortium is inadequate in 

all areas including the areas of contract health services, specialty 

services, diagnostics, or in-patient services. Chronic underfunding 

in the area of contract health services had negatively impacted the 

delivery of comprehensive health care services to our tribal citizens. Specifically, tribal citizens that needed care outside of the 

limited direct services offered in the Pechanga clinic were forced to 

access treatment through the already overburdened public health 

care system and were offered no continuum of care. This forced our 

tribal citizens to often ignore symptoms for preventable diseases 

until the symptoms became chronic. 

In 2002, this insufficient health care structure spurred my tribe 

to purchase a group health policy for all tribal members. This decision was made following a two year study of the tribe’s need for 

health care coverage by a seven member tribal committee that explored a number of options including where to build our own brick 

and mortar medical facility, which in the end proved too costly for 

us to pursue. The committee’s initial concern was to provide coverage for tribal citizens 55 years of age and older. However, it 

found that no health insurance companies were willing to cover a 

group of elders, so it was determined that the solution could best 

be resolved through mandatory group coverage for all tribal members. 

The health insurance initially approved by the tribe was purchased from Blue Shield. It covered all medically necessary health 

care except dental and optical care. The health insurance plan’s effective date was January 1, 2003. The health insurance contract required all tribal citizens to sign up for the plan. Only citizens able 

to prove that they had other insurance were allowed to opt out of 

this mandatory coverage. 

13 

This approach to Pechanga’s health care has led to measurable 

improvement in the physical health of our tribe. Pechanga’s commitment to improving health can be measured by the commitment 

of millions of dollars annually to pay for these health plan premiums. For example, in the coming fiscal year 2010 we expect we 

will pay $10 million in premiums for coverage. These sizable annual expenditures should be regarded as proof of my tribe’s commitment to improving the health and wellness of our citizens and 

our willingness to take internal responsibility for ourselves and our 

community. 

In November 2006, we first heard from the IRS that it was concerned about the tribe’s purchase of health care policies for our 

people. In an ongoing audit, we are being pressed to demonstrate 

how the law exempts this coverage from being taxable income to 

tribal citizens. 

The IRS has indicated to us that we need to demonstrate that 

our tribal governmental programs are needs-based and not provided to all citizens regardless of need. It appears to us that the 

IRS is interpreting need as meaning only financial need. Did the 

IRS become the arbitrator of what the health needs of my people 

are? 

When you measure what the IRS is trying to do against the history of Pechanga’s relationship with the United States, the Senate’s 

failure to ratify our treaties, the ensuing dispossession and theft of 

our homeland, and the failure to follow through on the health, education, and social welfare promises said treaty purported but failed 

to make good on, the IRS’s recent actions add insult to historical 

injury. 

From our perspective, this makes absolutely no sense. The 

Pechanga government has stepped in where the Federal Government has fallen short for our people. Federal statues have been enacted stating that a major goal of the United States is to provide 

the quantity and quality of health services which will permit the 

health status of Indians to be raised to the highest level possible. 

Further, HHS found that the funds appropriated for IHS programs have been consistently inadequate to meet even the basic 

health care needs. To remedy this problem, tribes have been encouraged by Congress to use their governmental gaming revenues 

to provide for the health care needs of their members, including 

through universal coverage programs. 

Our Indian people deserve the best health care and Pechanga 

has decided not to wait on the Federal Government to fulfill its 

trust obligations to our people. Waiting for the Federal Government 

has not been a winning strategy. The health of our people is at 

stake. 

Mr. Udall, the rest of my testimony is written and has been submitted. 

But the situation cries out for a Congressional fix. There is a bill 

that has been introduced on the House side. We would like your 

consideration so that both houses can work on a solution for this 

for the benefit of all Indian people throughout Indian country. 

Thank you very much. 

[Mr. Macarro’s prepared statement follows:] 

14 

PREPARED STATEMENT OF HON. MARK MACARRO, CHAIRMAN, PECHANGA BAND OF

LUISEN ̃ O INDIANS

Chairman Dorgan, Vice Chairman Barrasso, other Members of the Committee, it 

is an honor to be here to testify concerning this issue. This hearing is the latest 

demonstration that this Committee is willing to fight for the advancement of health 

care for American Indians and Alaska Natives. With the health care reform debate 

raging on, this Committee’s willingness to address the unique problems Indian country faces does not go unnoticed by tribal leaders. Thank you. 

The homeland of the Pechanga people is the Pechanga Indian Reservation located 

near Temecula, California. Our people have called the Temecula Valley home for 

more than 10,000 years. Approximately 66 percent of our tribal citizens currently 

live on or near the Reservation. Over the years, we have lost much land and resources because of now-repudiated federal policies. We have paid dearly for the Federal Government’s trust obligation to provide health care to our members. 

Today, many of our Pechanga citizens face the same health problems associated 

with other Native American communities: diabetes, obesity, tuberculosis, accidents 

and mental health issues. Until 2002, our people relied primarily upon the Indian 

Health Service for health care, with a few members eligible to receive care from the 

Veterans Health Administration or covered by private health insurance. Pechanga 

is a member of a tribal health consortium funded by the IHS. The consortium operates a clinic on the Pechanga Reservation for tribal citizens that was and continues 

to be open five days a week. The clinic staff is comprised of a general practitioner, 

floating nurse practitioners, floating podiatrist and other medical technicians. Specialist visits and hospitalizations are referred out to a local (Temecula) health-care 

provider. In 2002 and before, the IHS was not able to provide many medical procedures that Pechanga citizens desperately needed due to the limited contract health 

funds than ran out early into the fiscal year. I appreciate and honor the work that 

these professionals provide to our Pechanga people and Indians from other tribes, 

but, like other IHS facilities, it is underfunded, understaffed, and its hands are tied 

when it comes to more modern medicine—thus allowing for the provision of only 

substandard care at the Pechanga Clinic. 

In addition to the specific healthcare portrait at Pechanga, the provision of Indian 

health care in the state of California is unique. For example, in spite of having one 

of the highest Native American populations in the country, there are no IHS direct 

service clinics or hospitals in CA. All IHS services are provided through tribal 

health consortiums and urban Indian health clinics. The nearest IHS funded hospital is the Phoenix Indian Medical Center (PIMC) in Phoenix, AZ, 350 miles away. 

The Pechanga Clinic is operated by the Riverside San Bernardino County Indian 

Health Consortium Inc. (RSBCIHC), a health consortium of 12 tribes. IHS funding 

for the members of this consortium is underfunded in all areas, including the area 

of contract health services, the purchase of specialty services, diagnostics or inpatient services. Chronic underfunding in the area of contract health services has negatively impacted the delivery of comprehensive health care services to our tribal citizens specifically. Should we have a tribal citizen that needs care outside of the limited direct services offered in the Pechanga Clinic, they become forced to access 

treatment through the already overburdened public health care system and are offered no continuum of care. This forces our tribal citizens to often ignore symptoms 

for preventable diseases until the symptoms became chronic. 

In 2002, this insufficient health care structure spurred the Tribe to purchase a 

group health policy for all tribal members. This decision was made following a twoyear study of the Tribe’s need for health care coverage by a seven-member committee that explored a number of options. The Committee’s initial concern was to 

provide coverage for members 55 years or older. However, it found that no health 

insurance companies were willing to cover a group of elders, so it was determined 

that the solution could best be resolved through mandatory group coverage for all 

tribal members. 

The health insurance initially approved by the Tribe was purchased from Blue 

Shield. It covered all medically necessary health care, except dental and optical 

care. The health insurance plan’s effective date was January 1, 2003. The health 

insurance contract required all members to sign up for the plan. Only members able 

to prove that they had other insurance were allowed to ‘‘opt out’’ of this mandatory 

coverage. 

This has led to measurable improvement in the physical health of our Tribe. Earlier this year, we opened a new exercise facility that both contributes to and facilitates the health and wellness of our tribal citizens. 

In November, 2006, we first heard from the IRS that it was concerned about the 

Tribe’s purchase of health care policies for our people. In an ongoing audit, we are 

15 

1 25 U.S.C. § 1601(b). 

2See Overview of Federal Tax Provisions Relating to Native American Tribes and Their Members (JCX–61–08) (stating that ‘‘the average funding of an IHS site was found to be 40 percent 

less than an equivalent average health insurance plan’’). 3See NIGC Bulletin No. 05–1 (Subject: Use of Net Gaming Revenue) (January 18, 2005) 

(available at http://www.nigc.gov under the ‘‘Reading Room’’ tab and ‘‘Bulletins’’ sub-tab). 4See, e.g., Rev. Rul. 57–102, 1957–1 C.B. 26 (payments to the blind); Private Letter Ruling 

200845025 (November 7, 2008) (ruling that payments made by an Indian tribe to elderly tribal 

members who were displaced by a flood were general welfare payments); Bailey v. Commissioner, 88 T.C. 1293 (1987) (considering whether grants to restore a building facade were excludable from income as general welfare payments). 5 Revenue Ruling 70–341, 1971–2 C.B. 31. 

being pressed to demonstrate how the law exempts this coverage from being taxable 

income to tribal citizens. The IRS has indicated to us that we need to demonstrate 

that our tribal governmental programs are needs-based and not provided to all citizens regardless of need. It appears to us that the IRS is interpreting ‘‘need’’ as 

meaning only ‘‘financial’’ need. 

From our perspective, this makes absolutely no sense. The Pechanga government 

has stepped in where the Federal Government has fallen short for our people. Federal statutes have been enacted stating that a major ‘‘goal of the United States is 

to provide the quantity and quality of health services which will permit the health 

status of Indians to be raised to the highest possible level’’ 1 Further, the U.S. Department of Health and Human Services found that funds appropriated for IHS programs have been consistently inadequate to meet even basic health care needs. 2 To 

remedy this problem, Tribes have been encouraged to use gaming revenues to provide for the health care needs of their members, including through universal coverage programs. 3

Our tribal citizens deserve the best health care, and Pechanga has decided not 

to wait on the Federal Government to fulfill its trust obligations to our people. Waiting for the Federal Government has not been a winning strategy and the health of 

our people is at stake. 

The fact that my Tribe provides health insurance for our members has a direct 

benefit not only to them but also to the United States. When a Pechanga tribal 

member visits the IHS clinic on our reservation or any other reservation, that clinic 

can actually bill our insurance for the service provided. This alleviates the U.S. Government’s financial burden of providing health care to Pechanga tribal members, 

even though we are entitled to it. In addition, IHS, which, as previously mentioned, 

is perpetually underfunded, is able to use its allocated funds on Indians from other 

tribes that may not have the means to provide supplemental coverage. 

We also understand that federal law is not as clear as it should be about this 

issue. 

The Internal Revenue Code and Treasury regulations say that gross income includes all income from whatever source derived, unless specifically exempted. The 

IRS and federal courts have consistently ruled that payments made under legislatively-provided social benefit programs for the promotion of general welfare, including health care, are not includable in the recipient’s gross income. 4 Consistent with 

this position, the IRS has ruled that government-provided health care benefits for 

the elderly, commonly known as Medicare benefits, were nontaxable to recipients. 5

Although the general welfare doctrine provides a ‘‘common law’’ exclusion for government social welfare programs, the test is based on facts and circumstances and 

is difficult to apply. A statutory exclusion is needed to clarify that medical care provided by tribal governments to their members is not subject to income taxation. 

This situation cries out for a Congressional fix. 

On the House side, Congressman Xavier Becerra and Congressman Devin Nunes 

are expected to introduce a bipartisan bill this week, the ‘‘Tribal Health Benefits 

Clarification Act of 2009,’’ that we hope and expect will be a part of the House 

health care reform legislation. This bill would make clear that medical care tribes 

and tribal organizations provide for tribal citizens is excluded from gross income. 

Importantly, it also states that enactment of the bill cannot be construed to create 

an inference against health benefits provided by tribes prior to the passage of the 

bill, or benefits provided by tribes, such as education assistance, that is not within 

the scope of this legislation. 

I specifically ask that this Committee’s Members strongly consider introducing 

and supporting a companion bill so that both chambers could be actively involved 

in clarifying this situation. 

Thank you. 

16 

Senator UDALL. Thank you very much. We understand you have 

to catch a plane. Certainly stay as long as you can but we will excuse you when you choose to leave. 

Mr. MACARRO. Thank you, Senator. 

Senator UDALL. Thank you very much. 

Vice President Keel, it is good to have you here. Please proceed. 

STATEMENT OF HON. JEFFERSON KEEL, VICE PRESIDENT, 

NATIONAL CONGRESS OF AMERICAN INDIANS (NCAI) 

Mr. KEEL. Thank you, Mr. Chairman. Senator, on behalf of the 

National Congress of American Indians, I want to thank you for 

the opportunity to provide views on issues critical to our people. 

The Internal Revenue Service is now engaged in a broad and unprecedented effort to tax the basic human services that Indian tribal governments provide to their members. This is a relatively new 

issue that has honestly baffled tribal leaders across the Country. 

We cannot understand why a Federal agency would create a disincentive for tribal governments to provide services for our members. It is also a direct affront to tribal sovereignty, a violation of 

the Federal trust responsibility, and at best a terrible Federal policy. 

Our chief concern is that the IRS is targeting health care benefits and services provided by tribal governments. The Federal Government has treaty and trust responsibilities to provide health care 

to American Indians and Alaska Natives. As you noted, the Indian 

Health Service is terribly underfunded and, in many places, the 

IHS services are outdated or simply unavailable. In response, tribal 

governments throughout the Country have implemented a variety 

of supplemental health care programs. Now the IRS is attempting 

to require the tribes to issue 1099 forms and withhold tax for 

health care we provide to tribal members. Our people ask, why 

should we pay Federal taxes on health benefits that should have 

been provided by the Federal Government in the first place? 

The IRS is not targeting only health care services. The IRS also 

proposes that tribes withhold taxes on basic educational services, 

meals for elders, housing assistance, the provision of safe drinking 

water, and waste disposal services. All of these are services that 

are commonly provided by other governments. We also have heard 

from our members that IRS personnel have instructed a pueblo to 

issue 1099 forms for the meals provided at a traditional feast day. 

These absurdities raise very serious questions for tribal leaders. 

We urge Congress to engage in a two track effort to address these 

problems. 

First, Congress should immediately pass legislation that will specifically amend the tax code to clarify that health care benefits provided by tribal governments are excludable from gross income. This 

legislative clarification should be included in the national health 

care reform bill. 

We are particularly grateful to Chairman Baucus of the Senate 

Finance Committee and Chairman Rangel of the Ways and Means 

Committee, along with Representatives Becerra, Nunes, and many 

others for their support and encouragement of this proposal. Although NCAI would prefer to exempt all tribally provided social 

welfare benefits, our supporters in Congress are indicating that it 

17 

will be difficult to include all general welfare issues as part of a 

health care bill. 

Second, Congress needs to exercise oversight over the Treasury 

Department and the IRS to ensure that adequate policy guidance 

is provided. Indian tribal governments have a unique status in our 

Federal system under the U.S. Constitution and numerous Federal 

laws, treaties, and Federal court decisions. Tribes have the power 

and responsibility to provide a broad range of governmental services to our citizens. The IRS has never attempted to tax the thousands of Federal, State, and local government services that are provided to all citizens regardless of income. 

It is common for Federal, State, and local governments to provide 

health care, education, transportation, trash and recycling collection, snow removal, public libraries, nutrition programs, museums, 

and public parks. The list goes on. In practice, the general welfare 

doctrine has exempted a huge range of public benefits. We can 

think of no legitimate reason why the IRS would choose to discriminate against tribal government services. 

It appears the IRS is confused because of the source of tribal revenues. Although tribal governments collect taxes, most tribes lack 

an adequate tax base on the reservations. Instead, tribes rely on 

revenue from natural resources, Federal appropriations, and tribal 

business enterprises to fund our programs. 

NCAI urges Congress to immediately pass legislation that would 

exclude tribal health benefits from income for Federal tax purposes. Even with this legislative fix, we anticipate that Indian 

tribes will be subject to IRS audits on other social welfare programs that will create uncertainty and delay tribal progress for 

years to come. Oversight and engagement is needed to ensure that 

proper policy guidance is provided and that Indian tribal governments are treated equitably. 

We thank you for your diligent efforts on behalf of Indian country on these and many other issues. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Keel follows:] 

PREPARED STATEMENT OF HON. JEFFERSON KEEL, VICE PRESIDENT, NATIONAL

CONGRESS OF AMERICAN INDIANS (NCAI) 

On behalf of the National Congress of American Indians, thank you for the opportunity to provide our views on an issue of critical importance to tribal governments 

and tribal citizens throughout the United States. It is often said that there are no 

new issues in Indian country—that the same old issues re-circulate again and again. 

However, thanks to enterprising auditors at the Internal Revenue Service, this has 

been proven untrue. The IRS is now engaged in a broad and unprecedented effort 

to tax the basic human services that Indian tribal governments provide to their 

members. This is a direct affront to tribal sovereignty, a violation of the federal 

trust responsibility, and at best is utterly bad federal policy. We cannot understand 

why the Federal Government would choose to create a disincentive for Indian tribal 

governments to provide basic human services to their members. 

One of our major concerns is that there has been little or no policy guidance from 

the Treasury Department, and instead IRS auditors are creating policy through the 

rote application of a tax code that was never intended to reflect the fundamental 

federal-tribal relationship embodied in the U.S. Constitution. Moreover, we are concerned that the IRS actions are highly discriminatory in impact if not in intent. The 

IRS is subjecting tribal governments to audits on issues that have never been raised 

when substantially similar benefits have been provided by other government entities. The IRS has initiated 139 examinations during the past two years that focused 

18 

1 IRS Letter to The Honorable Senator Charles Grassley, Ranking Member of the Finance 

Committee, June 28, 2009. 

specifically on the use of tribal government revenues used to provide governmental 

services to tribal citizens. 1

This Committee has noted that the IRS is targeting health care benefits and services provided by tribal governments. This is our chief concern. The Federal Government has treaty and trust responsibilities to provide health care to American Indians and Alaska Natives. The Indian Health Service is the federal agency responsible 

for providing this care, yet the IHS is funded at only 60 percent of need. Most tribal 

communities cannot readily access health care services and, even when services are 

available, they are often subject to decades-old, outdated practices and services. As 

detailed in the statement submitted by the National Indian Health Board, across 

every indicator, American Indian and Alaska Natives face massive disparities in 

health. 

In response to the need for adequate health care, Indian tribal governments 

throughout the United States have implemented a wide variety of supplemental 

measures, including the following: 

• Direct health care in the form of tribally-funded health care clinics; 

• Tribal subsidies for programs that the tribe operates under a contract or compact with the Indian Health Service (IHS); 

• Tribal health care reimbursement programs or plans that pay for the cost of 

care not covered by IHS (because of funding shortfalls) or other sources; and 

• Self-insured tribal health care plans and group health insurance policies that 

cover tribal members and their dependents. 

Yet, it is our understanding that in the scenarios described above (all of which 

involve dedication of tribal government revenues to supplement the inadequate IHS 

system), the IRS is attempting to require the tribe to issue 1099 forms to each tribal 

member. This makes no sense from a policy perspective as it reduces the net 

amount of health care expenditures that tribal governments will be able to fund. 

It also compounds the violations of federal trust and treaty responsibilities, as tribal 

members would be required pay federal taxes on health benefits that should have 

been provided by the Federal Government in the first place. 

Moreover, we understand that the IRS is not targeting only health care services. 

The IRS is also proposing that tribe withhold or report on basic educational services, 

job training, meals for elders, housing assistance, the provision of safe drinking 

water, and waste disposal services. All of these are government services that are 

commonly provided by other governments. We have also heard from our members 

that IRS personnel have instructed a pueblo to issue 1099 forms for the meals provided at a traditional feast day. All of these raise issues raise very serious concerns 

for tribal leaders. 

We would urge Congress to engage in a two-track effort to address these problems. First, Congress should consider legislation that would specifically amend the 

IRS to exempt health care services provided by Indian tribes. Second, Congress 

needs to exercise oversight over the Treasury Department and the IRS to ensure 

that adequate policy guidance is provided. 

Legislation Needed 

NCAI and many tribes have proposed a legislative fix that would clarify that 

health care benefits provided by tribal governments are excludable from gross income. This legislative clarification should be included in the national ‘‘Health Care 

Reform’’ bill. (NCAI is proposing several other health care amendments to protect 

IHS and tribal health care systems.) We are particularly grateful to Chairman Baucus of the Senate Finance Committee, Chairman Rangel of the Ways and Means 

Committee, along with Representatives Becerra and Nunes and many others, for 

their support and encouragement of this proposal. 

Although NCAI would prefer to exempt all tribally provided social welfare benefits, our supporters in Congress are indicating that it will be difficult to include all 

general welfare issues as part of a health care bill. Instead, they are asking that 

we consider excluding only tribal health care benefits as a part of this legislation, 

and we use that to build momentum for a broader exclusion of all tribally provided 

social welfare benefits. NCAI will continue to push for a broad exclusion, but at this 

point NCAI is supporting a narrower exclusion of tribal health care benefits as a 

first step. 

There is a concern that if we address health care in the legislation, the IRS will 

be even more likely to challenge other welfare programs provided by tribal governVerDate Nov 24 2008 11:01 May 06, 2010 Jkt 056083 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 S:\DOCS\56083.TXT JACK PsN: JACKF
19 

2See, e.g., Rev. Rul. 57–102, 1957–1 C.B. 26 (payments to the blind); Private Letter Ruling 

200845025 (November 7, 2008) (ruling that payments made by an Indian tribe to elderly tribal 

members who were displaced by a flood were general welfare payments); Bailey v. Commissioner, 88 T.C. 1293 (1987) (considering whether grants to restore a building facade were excludable from income as general welfare payments). 3See I.T. 3194, C.B. 1938–1 114, which concluded that lump sum payments made to individuals as Social Security benefits not subject to federal income tax in the hands of the recipients. 4 25 U.S.C. § 1601(b) and 25 U.S.C. § 13. 

ments. To guard against this we are urging Congress to include ‘‘no-inference’’ language in both the statute and committee reports, to make sure that the legislative 

history is clear that there are many tribal government programs that are not subject to tax, and to continue oversight with Treasury and IRS officials at the highest 

levels to curb the overly aggressive approach to tribal government social welfare 

benefits. 

Oversight Needed on Application of ‘‘General Welfare’’ Doctrine 

Indian tribal governments have a unique status in our federal system under the 

U.S. Constitution and numerous federal laws, treaties and federal court decisions. 

They have a governmental structure, and have the power and responsibility to enact 

civil and criminal laws regulating the conduct and affairs of their members and reservations. They operate and fund courts of law, police forces, and fire departments. 

They provide a broad range of governmental services to their citizens, including education, transportation, public utilities, health, economic assistance, and domestic 

and social programs. Like states and local governments, tribal revenues and property are not treated as taxable income—but as the governmental revenues of a distinct sovereign. Tribes are generally treated in the same manner as states under 

the IRS Code, 26 USC Sec. 7871, the Indian Tribal Governmental Tax Status Act 

of 1982. In contrast, individual tribal members, whether they live on or off-reservation, are generally subject to federal taxes. 

Internal Revenue Code Section 61 provides that, gross income includes all income 

from whatever source derived unless excluded by law. The IRS and the federal 

courts have consistently held that payments made under legislatively provided social benefit programs for the promotion of general welfare are not includable in the 

recipient’s gross income. 2 Revenue Ruling 76–131, 1976–1 C.B. 16 explicitly lists 

health as a need that promotes the general welfare. The problem is that the IRS 

seems to have narrowed its interpretation of the general welfare doctrine in the context of tribal governments to require that the recipient demonstrate financial need, 

and not simply that the benefit contribute to the welfare of the community. 

This is where we sharply disagree with the discriminatory application of the general welfare doctrine by the IRS. First, the general welfare doctrine originated in 

a 1938 decision by the IRS to exempt the Social Security system, which is not a 

means tested program. 3 Second, in Revenue Ruling 70–341, 1971–2 C.B. 31, the 

IRS ruled that government provided health care benefits for the elderly, commonly 

known as Medicare benefits, are nontaxable to all recipients, not only to those in 

financial need. Third, federal and state governments commonly provide vaccinations 

and basic health tests to all citizens free off charge. Fourth, the Federal government 

has a longstanding policy of providing tax-free medical care to Indians. To effect this 

policy, federal statutes have been enacted stating that a major ‘‘goal of the United 

States is to provide the quantity and quality of health services which will permit 

the health status of Indians to be raised to the highest possible level’’ and providing 

specific authorization for the Indian Health Service, a federal agency that administers funds provided by Congress for the promotion of Indian health care services. 4

In addition, the IRS has never attempted to subject to income tax the value of 

myriad non-medical federal, state and local government services that are provided 

to all citizens regardless of income. It is common for state and local governments 

to provide refuse and trash collection, recycling collection, snow removal, and hazardous waste disposal to all citizens. For example, the City of San Diego has provided free trash collection for the last 96 years without a challenge by the IRS. Cities and local governments also provide free access to benefits with clear value to 

individuals, such as public libraries, public education, pest eradication programs, 

museums and public parks, and public concerts and events. Free government services range from National Public Radio and Television, to the local pancake breakfast 

provided by a Parent Teacher Association. 

As indicated by past IRS rulings and administrative practice, the general welfare 

doctrine is clearly much broader than simply those programs provided to low-income 

individuals. In practice, the general welfare doctrine has exempted all legislatively 

provided public benefits that do not inure simply to the individual, but improve the 

entire community. 

20 

5See NIGC Bulletin No. 05–1 (Subject: Use of Net Gaming Revenue) (January 18, 2005) 

(available at http://www.nigc.gov under the ‘‘Reading Room’’ tab and ‘‘Bulletins’’ sub-tab). 

Health care is a classic example of a government service that does not benefit only 

an individual. In the treatment and prevention of infectious diseases it is essential 

that all members of a community receive treatment in order to protect the entire 

community. Beyond this, a healthy workforce is necessary for the economy, and 

healthy children are a prerequisite for successful education. Moreover, medical researchers are proving that more and more medical conditions are in effect ‘‘contagious’’—obesity, smoking, diabetes, drugs and alcohol—all of these are examples 

where an individual’s social interactions with the rest of the community have a significant effect on the entire community’s health. An Indian tribe, just like any government, has an enormous interest in ensuring that its citizens share in the benefits 

of excellent community health. 

We can think of no legitimate reason why the IRS would choose to discriminate 

against tribal government services, but it appears to be that the IRS is confused 

because of the source of tribal revenues. Although Indian tribal governments are tax 

collecting entities and tribes often collect sales and excise taxes, unlike States, 

tribes typically lack an adequate tax base on the reservations, and have traditionally relied on revenue from their own natural resources, federal appropriations, and 

tribal business enterprises to fund their governments and government programs. 

Indian gaming has grown to be the most significant source of revenue for tribal 

governments, in much the same way that state lotteries and other forms of state 

gaming have grown significantly in recent years. The source of tribal revenues provides no rationale for discriminating against tribal general welfare programs. 

Congress’s intent that general welfare benefits for tribal members should not be 

treated as income is made clear in the Indian Gaming Regulatory Act, where Congress distinguished between revenues used to provide for the general welfare and 

per capita payments. 

25 USC 2710 provides that: 

(B) net revenues from any tribal gaming are not to be used for purposes 

other than— 

(i) to fund tribal government operations or programs; 

(ii) to provide for the general welfare of the Indian tribe and its members; 

(iii) to promote tribal economic development; 

(iv) to donate to charitable organizations; or 

(v) to help fund operations of local government agencies; 

(3) Net revenues from any class II gaming activities conducted or licensed by 

any Indian tribe may be used to make per capita payments to members of the 

Indian tribe only if . . . 

(D) the per capita payments are subject to Federal taxation and tribes notify 

members of such tax liability when payments are made. 

In fact, the in the only clear guidance provided to Indian tribes on the appropriate 

uses of gaming revenue under the Act, tribal governments have been encouraged to 

use gaming revenue to provide for the health care needs of their members, including 

through universal coverage programs. 5

Conclusion 

NCAI urges Congress to immediately pass legislation that would specifically exclude tribal health benefits from income for federal tax purposes. Even with this legislative fix, we anticipate that Indian tribes will be subject to vexatious IRS audits 

on other social welfare programs that will create uncertainty and delay tribal 

progress for years to come. Oversight and engagement with the Treasury Department is needed to ensure that proper policy guidance is provided to the IRS to ensure that Indian tribal governments are treated equitably. We thank you for your 

diligent efforts on behalf of Indian country on these and many other issues. 

Senator UDALL. Thank you for your testimony. 

Chairman Joseph, go ahead. 

21 

STATEMENT OF HON. ANDREW JOSEPH, JR., BOARD MEMBER, 

NATIONAL INDIAN HEALTH BOARD (NIHB) 

Mr. JOSEPH. Senator Udall and distinguished Members of the 

Senate Committee of Indian Affairs, [greeting in native tongue]. 

Badger is my name in my language. I am Andrew Joseph, Jr. I appear today as a Portland Area Representative to the National Indian Health Board, NIHB. I am also accompanied by our NIHB 

Chairman, Reno Franklin, from the California Area. Thank you for 

inviting NIHB here today to help the Committee in its efforts to 

examine the Federal tax treatment of health care benefits provided 

by tribal governments to their citizens. 

Indian health care is provided for in the Federal law and the 

Constitution of the United States through a complex web of law 

and regulations. This is described in detail in my written testimony. 

First, the provision of health care to tribes is funded on a formalized trust responsibility with our people. The receipt of health care 

services or benefits has been consistently held in Federal policy in 

case law to not be included as income to individual beneficiaries. 

Likewise, funding from the Indian Health Service, IHS, has never 

been classified as income for individual beneficiaries. 

The IHS has been the primary provider of health care to our people since 1955 and has been grossly underfunded since its birth. 

The IHS is currently funded at approximately 54 percent of identified need. Until the IHS is fully funded, many tribes will continue 

to find it necessary to supplement Federal funding to provide needed health care services to their people. 

All of the 564 tribes of the United States provide health care 

services under some level of self-determination contracting. This is 

needed to provide health services and assume a portion of the 

health care delivery obligations of the Federal Government. Due to 

the chronic underfunding of the Indian self-determination line item 

of IHS appropriations, these contracts are grossly underfunded 

from day one. 

Recent concerns have been raised regarding the Federal Government’s efforts to tax the value of health care services provided to 

individual American Indians and Alaska Native people, particularly in the area of contract health services. Health benefits are defined under the Internal Revenue Code as general welfare assistance programs and are not subject to taxation. As such, health benefits payments like these derived through IHS contract health service programs are not subject to Federal income tax. Tribal financial 

assistance provided to meet IHS shortfalls should be treated the 

same. 

The benefits should not be subject to the gross income calculation 

for the purposes of Federal income tax. Taxation of health benefits 

steps beyond the authorities and requirements of the Indian Health 

Care Improvement Act and frustrates the Congressional intent of 

law to elevate the health status of American Indians through expansion of participation, entitlement programs, and programs offered by the IHS tribal health providers. 

IHS is defined clearly in the Indian Health Care Improvement 

Act and no limitations are placed on the source or amount of benVerDate Nov 24 2008 11:01 May 06, 2010 Jkt 056083 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 S:\DOCS\56083.TXT JACK PsN: JACKF
22 

efit payments under the Act. Tribal supplemental funds to support 

CHS program payments are one type of cost incurred by tribes. 

Transportation costs tribes assume to assure that their members 

can receive health care services are a significant financial burden. 

Two significant reasons for these tribal investments include the extreme poverty and unemployment in tribal communities and the remote locations where tribes and Alaska Natives occur. These costs 

are required of nearly every tribe in the United States. Many tribes 

transport members out of town at least once a week to receive necessary medical care not available in tribal communities. 

It is a given that IHS is grossly underfunded. This makes supplemental funding to IHS care delivery systems drastically needed regardless of whether the supplemental funding comes from additional Federal appropriations, tribal generated revenue sources, or 

other sources. All such funding is utilized to meet the Federal Government’s trust responsibility to provide health care to American 

Indian and Alaska Native people. It should never be taxed. 

The taxation of funds to provide health care services to individual American Indians and Alaska Natives has never occurred 

nor should it. All attempts to tax the value of health care services 

provided to tribal citizens should be abandoned. Rather, the sacred 

trust between the Federal Government and tribes should stand. 

The tribes purchased this trust through forfeiture of land, resources, American Indian lives, and our way of life. This has already been negotiated. Appropriate funding commitment from the 

Federal Government to honor its responsibility to provide health 

care to tribes would end this discussion quite effectively. 

Thank you for this opportunity to provide these comments. I am 

pleased to answer your questions. [Phrase in native tongue.] 

[The prepared statement of Mr. Joseph follows:] 

PREPARED STATEMENT OF HON. ANDREW JOSEPH, JR., BOARD MEMBER, NATIONAL

INDIAN HEALTH BOARD (NIHB) 

Chairman Dorgan, Vice-Chairman Barrasso and distinguished members of the 

Senate Committee on Indian Affairs, I am Andrew Joseph Jr. and I appear today 

as the Portland Area Representative to the National Indian Health Board (NIHB). 

I am also the Chairman of the Northwest Portland Area Indian Health Board. In 

addition, my fellow NIHB board member, Reno Franklin, NIHB Chairman and California Area Representative, is here with me to assist with answering any questions. 

I thank you for inviting NIHB here today to help with the Committee’s efforts to 

examine the federal tax treatment of health care benefits provided by tribal governments to their citizens. 

Since its establishment in 1972, the National Indian Health Board serves federally recognized American Indian/Alaska Native tribal governments by advocating for 

the improvement of health care delivery to American Indian/Alaska Natives (AI/ 

AN). It is the belief of the NIHB that the Federal government must uphold its trust 

responsibility to AI/AN populations in the provision and facilitation of quality health 

care to our people. The end results that we all wish to achieve are the enhancement 

of the level and quality of health care, the adequacy of funding for health services 

that are operated by Tribal Governments, the Indian Health Service and other programs. Our Board Members represent each of the twelve Areas of the Indian Health 

Services (IHS) and are elected to serve on our Board by the respective Tribal Governmental Officials within their Area. The NIHB is the only national organization 

solely devoted to the improvement of Indian health care on behalf of all Tribes. As 

health care is the top priority of Tribes across the nation, and delivery of health 

care is unique and individual to each Tribal nation in the United States, it is fitting 

that the National Indian Health Board provides comments regarding the federal tax 

treatment of health care benefits provided by Tribal Governments to their citizens. 

Thank you for inviting us to do so. 

23 

First and foremost, the provision of health care to AI/AN tribes is founded on a 

sovereign government-to-government relationship between the United States and 

Tribes. This provision of health care is formalized as a federal trust responsibility 

to AI/AN people that has been guaranteed through numerous treaties and federal 

law. Health care for AI/AN people was permanently authorized in the Snyder Act 

of 1921 (25 U.S.C. § 13). 

The Indian Self-Determination and Education Assistance Act reiterate the trust 

obligations of the United States to provide for the health and welfare of AI/AN people. Likewise, Tribal Governments establish in their constitutions similar commitments to provide for and protect the health and welfare of the citizens they govern. 

The Indian Health Care Improvement Act (IHCIA), (P.L. 94–437, as amended), is 

another cornerstone to the health care delivery system for AI/AN people. The IHCIA 

has provided numerous benefits to the AI/AN health care delivery system by authorizing Tribes to participate in federal entitlement programs, among other things. 

Under the authorities of Title IV of the IHCIA, Tribes have been allowed to participate in the U.S. Medicare, Medicaid and State Children’s Health Insurance Program 

entitlements through the enrollment of AI/AN people and billing for reimbursement 

of covered services. S. 1200, introduced in the 110th Congress sought to expand participation of AI/AN individuals in the federal entitlement programs; Medicare, Medicaid and SCHIP. This language was inserted in an effort to improve the ‘‘quantity 

and quality’’ of health services, to ‘‘permit the health status of Indians to be raised 

to the highest level possible.’’ This legislation further defines Contract Health Services (CHS) ‘‘as services provided at the expense of the Service (IHS) or a Tribal 

Health Program by public or private medical providers other than the service unit 

or Tribal health program at whose expense the services are provided.’’ No limitations were placed in the legislation relative to the level or source of funds to pay 

for those services; essentially the funds may be derived from multiple sources. The 

receipt of such benefits (i.e., health care services) has been consistently held in federal policy and case law to not be included as income to the individual beneficiary. 

Likewise, funding appropriated to the Indian Health Service (IHS) has never been 

classified as income for individual AI/AN beneficiaries. 

The IHS has been the primary provider of health care to AI/AN people since 1955, 

and the overall value of health care services provided to individual AI/AN people 

is immeasurable. Much has been accomplished since 1955 in terms of improvements 

in public health and health care delivery, but much more improvement is still needed. The AI/AN population still suffers vast disparities in overall health status, and 

the funding appropriated to the IHS is abysmal relative to the per capita health 

care amounts provided to other federally-funded population groups (e.g., federal employees, Medicaid beneficiaries and even federal prisoners). Moreover, the IHS has 

been characterized as a ‘‘broken’’ system. The truth is that the IHS system is not 

so much broken, as it is ‘‘starved.’’ The IHS has been grossly under-funded for the 

past several decades, and as such, cannot be expected to perform optimally. The IHS 

is currently funded at approximately 54 percent of the identified need. Until the 

IHS is fully-funded (i.e., 100 percent of documented need), many tribes will continue 

to find it necessary to supplement federal trust funding to provide needed health 

care services to their people. 

All of the 564 Tribes in the United States operate under self-determination contract to provide some level of services, assuming a portion of the health care delivery obligation of the Federal Government. This assumption of services is underfunded from the first day of the contract agreement. This is due to the lack of funding in the Indian Self-Determination (ISD) line item of the IHS appropriations, 

which is consistently under-requested in the President’s budget. 

The shortfall demonstrated in IHS funding is over $1 billion and in excess of 

$121.8 million per 2008 contract support cost data annually. Clearly, the care delivered to Native Americans and Alaska Natives through the Indian Health Service 

system is provided on chronically deficient funding, and this requires Tribes to supplement funds to provide the care they provide through external revenue resources 

such as Tribal revenue support, third party collections and grants. By virtue of the 

limits on annual appropriations, 1.9 million American Indians are affected by the 

Tribe’s efforts to supplement IHS services when they take on some degree of their 

own service delivery. 

Recent Concerns Regarding Taxation of Health Benefits 

Recent concerns have been raised regarding the Federal Government’s efforts 

through the United States Internal Revenue Service seeking to tax the value of 

health care services provided to individual AI/AN people, particularly in the area 

of contract health services. 

24 

Section 7701(a)(40) of the IRS Code defines Tribal governments as the governing 

bodies of an Indian Tribe, band, community, village or group of Indians, and recognizes that these bodies exercise government functions. In general, where Tribal governments act in a capacity to provide general welfare type services, similar to those 

traditionally provided by federal, state or local governmental bodies, federal tax 

treatment of those benefits is equivalent and those payments are not subject to taxation under the Code. 

Health benefits are by their nature, general welfare assistance programs; they 

provide for the continued improved health status of the individual to enhance the 

quality of life of the person, and ultimately, the wellbeing of the community. It is 

within the ability of Tribal governments to assess the needs of the community and 

create programmatic opportunities to address those priorities. In the instance of 

health benefit programs, Tribal governments must pass and accept either funding 

for, or implementation of, programs by Tribal authorizing resolution or ordinance. 

Health benefit payments, like those derived through the Indian Health Service 

Contract Health Service program, are not subject to federal income tax. Health benefit payments are a benefit established by the Federal Government by law and 

through the exercise of Tribal sovereignty by the acceptance of the program funds. 

Similar programs established by Tribal statute designed to assist with meeting the 

shortfalls of this program and other health care programs should be treated the 

same. The benefits should not be subject to the gross income calculation for the purposes of federal income tax. Tribes redirect their revenue to support the shortfall 

gap in federal trust funding in an attempt to provide basic health care delivery to 

their citizens. The goal of the funding is to prevent further erosion of services provided for Indian health programs. These challenges are multiplied in the face of recent dramatic increases in operating cost of health care while IHS funding fails to 

keep pace with medical inflation. 

Tribes that provide CHS payments in an effort to reach beyond the life and limb 

definition of CHS Priority I services into basic primary care, are dependent on Tribal supplemental funding. They seek supplemental insurance to reduce the burden 

of cost to existing CHS programs, and in turn generate revenue that supports direct 

service operations, or creates programs to provide insurance premium co-payments 

Tribal members purchase or are mandated to purchase. These types of benefits are 

provided in the interest of the general welfare of the citizens Tribes serve based on 

the needs of individuals and the priorities of the Tribal government. To add the burden of factoring these benefit structures into the gross income of the individual falls 

outside of current IRS structures and place an unfair burden on an economically 

disadvantaged population. The contract health services funding is an extension of 

health care services funds provided directly within IHS or tribal facilities, and cannot justifiably be presumed as the personal income of individual tribal citizens any 

more than can the funding allocated to provide Medicare health care services to the 

elderly. CHS is one facet of costs associated with providing medical care to AI/AN 

people that Tribes assume and supplement under Tribal Self-Determination at less 

than whole costs. That is not the only cost. 

Transportation costs Tribes assume to ensure that their members can receive 

health care services are a significant financial burden. It is necessary for these costs 

to be covered by the Tribes due to the lack of federal funding for these purposes. 

Two significant reasons for these Tribal investments include extreme poverty and 

unemployment in Tribal communities and the remote locations where Tribes and 

Alaska Native Villages occur. These costs are required of nearly every Tribe in the 

United States but many Tribes transport members out of town at least once a week 

to receive necessary medical care not available in the Tribal community. 

An additional demonstration of the cost burden to the Tribes is found in health 

information technology. It is estimated that the per capita expenditure for health 

information technology in Indian Country is $28 per IHS user, as reported by the 

IHS Data Quality Workgroup in 2008. After meeting the cost to implement government mandated records management and security, $14.00 remains to support patient care information. A tribe with an annual budget of $15,000,000 spends an average of 5 percent of the total budget on health information technology implementation (electronic health records); $750,000 or $82.00 per user. The IHS spends approximately $28.00 per user; 2 percent of the total IHS budget. Based on this example, the Tribe spends $54.00 per user to support information technologies. This is 

another example of the types of costs Tribes incur. This is not a direct payment to 

the Tribal citizen; however, it is part of the cost of doing business to support the 

individual Tribal patient. 

As stated, the IHS is grossly under funded. Therefore, supplemental funding to 

the IHS health care delivery system is drastically needed, and regardless of whether 

such supplemental funding comes from additional federal appropriations, TriballyVerDate Nov 24 2008 11:01 May 06, 2010 Jkt 056083 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 S:\DOCS\56083.TXT JACK PsN: JACKF
25 

generated revenue sources or other sources, all such funding is utilized to meet the 

Federal Government’s trust responsibility to provide health care to AI/AN people. 

The taxation of these funds, whether appropriated or Tribally contributed, to provide health care services to individual American Indian and Alaska Natives has 

never occurred, nor should it. Taxation frustrates the intent of Congress as stated 

in the Indian Health Care Improvement Act to ‘‘permit the health status of Indians 

to be raised to the highest level possible.’’ This action creates a slippery slope; increasing the burden of costs to the individual and eroding the intent of honoring 

the federal trust responsibility to American Indians. All attempts to tax the value 

of health care services provided to tribal citizens should be abandoned; rather the 

sacred trust between the Federal Government and Tribes should stand. The Tribes 

purchased this trust through forfeiture of lands, resources, American Indian lives 

and our way of life. This has already been negotiated. Appropriate funding commitments from the Federal Government to honor its responsibility to provide health 

care to the Tribes would end this discussion quite effectively. 

I wish to thank the Committee for the opportunity to provide these comments and 

will be pleased to answer any questions the Committee may have. 

Senator UDALL. Thank you, Chairman Joseph. 

Our final witness today, Professor Taylor, it is good to have you 

here. I am sorry that we at the University of New Mexico lost you 

as a law professor in past years and you moved on to Minnesota. 

But it is great to have you in front of the Committee today. Please 

proceed. 

STATEMENT OF SCOTT A. TAYLOR, PROFESSOR, UNIVERSITY 

OF ST. THOMAS SCHOOL OF LAW 

Mr. TAYLOR. Thank you very much, Senator Udall. I don’t know 

if you recall but when you were in law school there was a law student who was one year behind you. That was me. 

[Laughter.] 

Mr. TAYLOR. I thank you for how you enriched my educational 

experience when we were law students together at the University 

of New Mexico School of Law. 

Senator UDALL. Yes, I do remember. Thank you. 

Mr. TAYLOR. You have my statement. Instead of me reading it, 

I think I will just leave it for the record and provide you with some 

responses to the testimony that I have heard thus far. 

In terms of the testimony of Commissioner Ingram, she stated 

that the general welfare exclusion generally has not been applied 

to persons with significant income or assets. I just wanted to state 

that I think that is not true. 

If you look at Revenue Ruling 79–172, the IRS by its ruling provided an exclusion for Medicare benefits. But Medicare benefits are 

not means-tested. They are based on age. That is an incredible 

area of health care. It is one of the biggest sources of the Federal 

budget. So if what she says is correct, perhaps that revenue ruling 

should be revoked. If it were, we know that there would be dire 

consequences for the Internal Revenue Service. 

In addition, it is the practice of the Internal Revenue Service to 

exclude medical benefits provided by the VA. So that is another 

area where, by practice not by ruling, there is an exclusion. 

By practice, there is an exclusion for medical care provided under 

the Indian Health Service. The Indian Health Service provides 

medical care based on status, not based on need. So if someone who 

is a Native American happens to be a wealthy individual, if that 

person does go to the Indian Health Service and receives care, the 

26 

value of the care or the value of the coverage is not included in 

gross income. 

So those are examples that are really quite pervasive. 

I think it is not correct to say that the need is based on income. 

I want to refer to a private letter ruling. It is in my testimony. It 

is Private Letter Ruling 200632005. It says, ‘‘The general welfare 

exclusion applies only to governmental payments out of a welfare 

fund based upon the recipient’s identified need, which need not 

necessarily be financial.’’ In other words, it doesn’t need to be financial. It can be based on health. It can be based on education. 

It can be based on employment status. These are different articulations of need. 

It is my position in my testimony that someone who needs health 

care has a need. They need to be treated for their sickness, for 

their illness. If someone has a predisposition for a particular condition, they need to be screened for that to see if the condition has 

arisen. To me, it seems that whenever an insurance plan provides 

for health care, it is only given if someone has the articulated need. 

If someone does not have a health condition, they are not going to 

receive treatment for it. Therefore it is self-defining as a personal 

need. 

So if I were in Commissioner Ingram’s position, what I would do, 

knowing the ruling history of the IRS, to provide clarity and guidance to tribes, I would issue a revenue ruling just like the Medicare 

ruling which says that tribally provided health care through insurance or reimbursement plans is excluded from gross income. I 

think that the rulings history of the Internal Revenue Service is 

clear enough to provide a basis for such a ruling. 

Now, in the absence of the Service’s willingness to provide such 

a ruling, it seems to me that the legislative fix that Vice President 

Keel has recommended and suggested is actually a good idea. In 

addition, I think that Chairman Joseph’s testimony showed that 

health care is a pervasive need for Native Americans. Therefore, to 

tie up or impede the provision of tribally provided health care, 

health insurance, or reimbursement plans through audits by the 

IRS is not really good policy. It actually impedes that. 

As I said, a revenue ruling could easily clarify this. In the absence of a revenue ruling, I guess it is up to the legislative branch 

of our Government to fix the problem which could be fixed through 

administrative practice. It has been fixed in almost all the other 

areas, as I said, with the VA, IHS, and Medicare. 

I will take any questions. Thank you. 

[The prepared statement of Mr. Taylor follows:] 

PREPARED STATEMENT OF SCOTT A. TAYLOR, PROFESSOR, UNIVERSITY OF ST. THOMAS

SCHOOL OF LAW

Application of the General Welfare Exclusion to Health Care Provided by 

Federally Recognized Indian Tribes to Their Members 

Mr. Chairman and members of the Committee allow me to thank you for the invitation to present testimony on the question of whether the value of tribally provided 

health care is included in the gross income of tribal members for purposes of the 

federal income tax. I have concluded that the general welfare exclusion, an administrative practice that the Internal Revenue Service (IRS) has developed through rulings, operates to exclude the value of tribally provided health care from the gross 

income of members. In addition, I have concluded that exclusion of these benefits 

is justified as a matter of federal Indian law because the United States has underVerDate Nov 24 2008 11:01 May 06, 2010 Jkt 056083 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 S:\DOCS\56083.TXT JACK PsN: JACKF
27 

taken the obligation to provide health care to Native Americans as a general treaty 

obligation through the Indian Health Service (IHS). If tribes determine that, compared to IHS, they can provide better health care through private health insurance 

or direct reimbursements for health care, then tribal health care should receive the 

same federal income tax treatment as medical care provided through IHS. IRS has 

provided no explanation of why it excludes the value of IHS care coverage from the 

gross income of Native Americans receiving such care. 

Some Federal Income Tax Background 

In terms of understanding the federal income tax questions involved, we need to 

focus on the benefits that IRS may treat as gross income. The underlying transaction involves a federally recognized Indian tribe that purchases health insurance 

for its members. Under this health insurance arrangement, an individual tribal 

member may receive health care that the health insurance pays for directly or 

through reimbursement. Under section 104(a)(3) of the Internal Revenue Code, 

amounts received through health insurance to cover medical care are excluded from 

the gross income of the person receiving the health care. Section 104(a)(3) does not 

apply to employer provided health care. The rules for employer provided health are 

contained in section 105 and, generally speaking, provide rules of exclusion similar 

to those in section 104(a)(3). As a result, section 104(a)(3) operates to exclude the 

value of the health care that a tribal member actually receives under the health insurance arrangement. 

However, no federal income tax provision deals with the cost of health care that 

a tribe purchases on behalf of individual members. For example, if a tribe pays a 

health insurance provider $7,000 per year for comprehensive health insurance for 

each tribal member requesting such coverage, then IRS may assert that the tribe 

is conferring a benefit on the member in the amount of $7,000 each year. This 

$7,000 is gross income, IRS would argue, because the benefit goes to the tribal 

member and because Congress has provided no statutory rule of exclusion. The result is different if a tribal member receives health insurance coverage as an employee of the tribe. In the case of a tribal employee, section 105 excludes the cost 

of the health insurance from the member’s gross income. Likewise, if a tribal member is self-employed, then section 162(l) allows the individual to deduct the cost of 

the health insurance as an above-the-line business expense effectively giving the 

same treatment as the exclusion provided in section 105. See IRC § 62(a)(1) (allowing the health insurance cost of self-employed individuals as an above-the-line deduction; see IRS Form 1040 for 2008, line 29). 

Without a specific statutory exclusion to protect a tribal member from an aggressive IRS auditor, the amount a tribe pays for health insurance on behalf of a tribal 

member may be treated as the gross income of that member. IRS, however, has discovered that many types of governmental payments not covered by a specific statutory rule of exclusion should be excluded. The most often used theory of exclusion 

is the ‘‘general welfare exclusion’’ (sometimes also described as the ‘‘general welfare 

exemption’’). 

The General Welfare Exclusion 

Most law professors teach their students that gross income includes all income 

from whatever source derived. As a general concept, income is any realized benefit 

or accession to wealth over which the taxpayer has dominion and control. This concept comes from the Supreme Court case of Commissioner v. Glenshaw Glass, 348 

U.S. 426 (1955), and applies to all potential income unless the taxpayer can find 

a specific statute that provides a rule of exclusion. See Vincent v. Commissioner, 

T.C. Memo 2005–95 (construing rules of statutory exclusion narrowly). This sweeping characterization of the federal income tax is so over inclusive that IRS has been 

forced to develop some explicit and some implicit rules of exclusion, without which 

our federal income tax would collapse. 

The broadest explicit administrative rule of exclusion that IRS uses is the ‘‘general welfare exclusion’’ (GWE). IRS, back when it was called the Bureau of Revenue, 

developed this doctrine in 1938 to provide for the exclusion of lump sum payments 

made under the Social Security Act. See I.T. 3194, 1938–1 C.B. 114. By 1971 IRS 

referred to GWE as a long-standing doctrine. See GCM 34506 (May 26, 1971) (providing exclusion of federal mortgage assistance payments). The United States Tax 

Court seems to acknowledge that GWE may provide a basis of exclusion in appropriate cases. See Bannon v. Commissioner, 99 T.C. 59 (1992) (refusing to apply GWE 

in a case where a relative was paid to care for a disabled relative but acknowledging 

its possible application under appropriate facts). 

In applying the general welfare exclusion, the IRS generally requires that the 

payments (1) come from a governmental general welfare fund, (2) be spent to proVerDate Nov 24 2008 11:01 May 06, 2010 Jkt 056083 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 S:\DOCS\56083.TXT JACK PsN: JACKF
28 

mote general welfare, and (3) not be based on payment for service rendered. See 

Rev. Rul. 98–19, 1998–1 C.B. 840 (excluding relocation payments made by local governments to those whose homes were damaged by floods). The second requirement 

(promotion of general welfare) must be based on the need of the recipient; however, 

the need can be based on a variety of considerations including ‘‘financial status, 

health, educational background, or employment status.’’ IRS CCA 200021036 (May 

25, 2000) (excluding state adoption assistance payments made to those individuals 

adopting special needs children even though not based on any financial means test 

applied to the adoptive parents). IRS has applied GWE to tribal payment and has 

acknowledged that tribes are governments within our legal system and capable of 

setting aside and making payments out of a ‘‘governmental welfare fund.’’ See PLR 

200632005 (April 13, 2006) (excluding tribal funds expended for housing assistance 

allocated based on multiple factors of need); compare Tec. Adv. Memo. 9717007 

(Jan. 13, 1997) (including as gross income those per capita payments made by a 

tribe to its members when the amount of the payments were made without regard 

to the health, education, or employment status of individual members) . 

The question here is whether tribes can provide health care, through health insurance or through a reimbursement plan, to all members without regard to the financial needs of their members. IRS, in some of their audits, is asserting that tribal 

health plans provided to all members may produce gross income to recipients because the benefits are not based on financial need. If IRS is making such an assertion, then such an assertion is wrong. Health care is provided to prevent and treat 

disease. Those receiving medical treatment receive such treatment because they 

have a need for it. Those at risk of contracting breast cancer, for example, should 

receive regular screening. Those not at risk do not require such screening. Those 

who have a chronic disease, such as diabetes, require and need medical treatment 

to mitigate the effects of such a disease. It is entirely appropriate for IRS to treat 

all health care as need based because it treats or prevents illness. Providing this 

health care through health insurance is a prudent way for a tribe to manage costs. 

Such an arrangement benefits from risk pooling and should lower the overall costs 

of health care. 

IRS currently treats the value of health care received through Medicare, the Veterans Administration, and the Indian Health Service as excluded from gross income. 

Except in the case of Medicare, IRS has not provided any rulings and Congress has 

not enacted any statutes providing a specific exclusion for these benefits. See Rev. 

Rul. 79–172, 1979–1 C.B. 86 (applying the general welfare exclusion to Medicare 

benefits). Health care under these federal plans is not provided based on financial 

need. Medicare is based solely on age. Coverage through the Veterans Administration is based on past military service, although some medical services are based on 

financial need. Care though IHS depends on an individual’s status as an Indian 

without regard to wealth or income. See 42 C.F.R. § 136.12 (describing eligibility 

based on status as a Native American and not based on financial need). 

Senator John McCain, a member of your Committee, qualifies for health insurance through his service as a United States Senator, through the VA based on his 

military service, and through Medicare based on his years on this earth. None of 

these programs is means tested. Nonetheless, the value of these benefits, if equated 

to health insurance, is not included in his gross income. To single out Native Americans as the only group of Americans who should treat as gross income the value 

of governmentally provided health care would be unfair. The health care needs of 

Native Americans are just as real and substantial as those over 65, those who have 

served in the military, and those Native Americans who are members of tribes that 

cannot afford health care for their members and who must seek care through the 

Indian Health Service. 

Treaty Exemption 

IRS takes the position that tribal members are subject to the federal income tax 

unless specifically exempted by treaty or statute. See Rev. Rul. 67–284, 1967–2 C.B. 

55. Congress has provided no statutory rule of exclusion for the benefit a member 

receives when the tribe pays for the member’s health insurance. See IRC § § 105 & 

106 (applying rules of exclusion to employer provided health care but not to tribes 

or other health care provided through government programs, such as Medicare). 

The Indian Health Service exists primarily because many treaties obligated the 

United States to provide health care to the members of tribes. The Indian Health 

Service explains that treaties ‘‘between the United States Government and Indian 

Tribes frequently call for the provision of medical services, the services of physicians, or the provision of hospitals for the care of Indian people.’’ See IHS Facts 

Sheets, available at http://info.ihs.gov/BasisHlthSvcs.asp. If health care is a federal treaty obligation and if tribes are willing to provide their members with better 

29 

health care through the purchase of private health insurance, then it makes sense 

to honor the treaty obligation and to treat tribally provided health care benefits as 

excluded from gross income for purposes of the federal income tax. It would be 

strange to allow tribal members to exclude the value of IHS medical care but to tax 

the value of tribally provided care, especially when it lessens the federal obligation 

owed. 

Conclusion 

The general welfare exclusion is a sufficient and adequate legal theory to exclude 

the benefits of health care provided by tribes to their members. The difficulty comes 

from IRS auditors and revenue agents who view all tribal benefits as gross income 

unless provided based on financial need. The criteria of need used by IRS acknowledge that an allocation of benefits based on health, education, or employment status 

is just as appropriate as one based on financial status. In this case, the health of 

a tribal member is the need, and tribal health insurance meets the health needs 

of tribal members. Therefore, the general welfare exclusion clearly applies. To clarify this situation and to instruct IRS agents in the field, IRS should issue a revenue 

ruling. This ruling should hold that the cost of health insurance provided by tribes 

to their members is excluded from gross income under the general welfare exclusion. 

In addition, the federal treaty obligation to provide health care to Native Americans is an independent legal basis for excluding the cost of health care provided by 

tribes. Tribes that choose to purchase health insurance for their members should 

be allowed to step into the shoes of the Federal Government and provide medical 

services to members. Treating tribal health benefits the same as those that the Indian Health Services provides is just and fair. This treatment would validate tribal 

sovereignty and enhance the government-to-government relationship that the 

United States has with Native American governments. 

Senator UDALL. Thank you very much, Professor Taylor. 

We will proceed now with questions. I will allow all of you to 

comment as we move along here. 

Ms. Ingram, thank you for your testimony. I understand you are 

constrained to informing us about the black letter of tax law and 

how the IRS is implementing that law. With that in mind, I will 

ask some questions about the activity of your Division. I understand that the IRS Chief Counsel in June of 2007 stated that the 

IRS had initiated 139 examinations of tribal government programs. 

Is that correct? 

Ms. INGRAM. I am sorry, Senator. I am not familiar with that 

statement. If I look at our level of activity in terms of cases that 

have been completed with tribal entities, that number seems high. 

But I would have to check and get back to you for an answer on 

the record. 

Senator UDALL. We would like to have that pinned down for the 

record, both on the 2007 date and the statement of the Chief Counsel but also on what you have going today. So you can’t tell us specifically how many tribal governments are under audit today? 

Ms. INGRAM. I do not have the exact number of how many are 

underway at the moment. I will say that if I look at how many we 

have completed per year, I would have said it was below 100. But 

I would rather be more precise in getting back to you. 

Senator UDALL. One of the things I am wondering is, you have 

State and local governments and then you have tribal governments. What would be the comparison of the two in terms of audits 

for general welfare programs? Do you have a rough sense on those? 

You thought the number was a little lower. Do you have a rough 

sense on how much the IRS is proceeding with State and local governments? 

Ms. INGRAM. If you will allow us a two part answer, Senator? 

Senator UDALL. Yes. 

30 

Ms. INGRAM. The numbers that we put in our annual data book 

for the Internal Revenue Service and the numbers that appear in 

our annual work plan that go on our website every year for both 

Federal, State, and local government audits and then also for Indian tribal audits are numbers that come from the number of returns that have been pulled and closed. So for any one examination 

with an entity, there may be quite a few returns because of employment taxes, quarters, and things like that. 

So backing out of those numbers into the number of entities, my 

information indicates that the rate at which we reach out to members of each of those populations is quite comparable, one to the 

other. 

Senator UDALL. Is it the practice of the IRS to audit a State or 

local government without first providing some guidance or bulletin 

on the subject of the audit? 

Ms. INGRAM. Well, we audit many State and local governments 

and Federal agencies. We try to have a continuous flow of information about what the laws are or what issues we think might be of 

concern in the conversation for examinations. So I am at a loss as 

to what specific bulletin you would have in mind, Senator. 

Senator UDALL. Well, any kind of guidance or bulletin, any guidance before you carry out an audit. 

Ms. INGRAM. We have quite a lot of educational activity that goes 

on across the board. In fact, when we established our Indian Tribal 

Governments Office almost 10 years ago, we spent a great deal of 

time in the first part of the last decade doing almost exclusively 

outreach and educational activities, trying to figure out how to 

make sure that the laws that applied equally to everybody could 

be explained or educational materials could be prepared and put 

into the context of Indian country. We do the same thing for State 

and local and Federal agency governments. 

As time passed, we tried to see what the impact of that educational process and outreach process was on the voluntary compliance of our constituents. Over time, we have gone in and looked at 

actual compliance with some of our 2,700 entities that we are responsible for to see how that is playing out on the ground. So the 

current rate of audit coverage is something that has evolved. 

We are always in the business of trying to figure out what the 

right balance is in terms of how we spend our time and how we 

interact with the community, whichever community it is. That continuous evaluation of do we need to spend more time on the education versus on the checking on filing compliance is an ongoing 

conversation. 

Senator UDALL. You mentioned in your answer this Indian Tribal 

Governments Office that I think was established in 1999. Can you 

explain the role that that Office has today, 10 years later? How 

does it look into the trust responsibility and the responsibilities 

under the treaties and statutes that are out there with regard to 

Native Americans? 

Ms. INGRAM. Yes, Senator. The role of the Indian Tribal Governments Office is only as wide as the responsibility of the Internal 

Revenue Service with the specialization of trying to understand, 

dialogue, and listen to the interests of Indian country in particular. 

But its responsibilities start and end with the issues of the taxVerDate Nov 24 2008 11:01 May 06, 2010 Jkt 056083 PO 00000 Frm 00034 Fmt 6633 Sfmt 6601 S:\DOCS\56083.TXT JACK PsN: JACKF
31 

ation, particularly of the 2,700 entities that come within that umbrella. 

It is a continuous process of trying to make sure that as we administer the tax laws that we are given and as we understand how 

to consistently apply the general welfare exclusion to all kinds of 

governments that we try to understand the context in which we are 

doing that. It is a rich and complicated historical context in this 

context. We are continuously trying to understand that and administer it appropriately. 

But the jurisdiction is only as to taxes. 

Senator UDALL. So are you saying that this Tribal Office doesn’t 

look into matters except for taxes? Is it excluded from looking into 

these other things where you have a much different relationship 

with tribes than with the Federal Government? 

Many of the tribes would argue, and I think they have a pretty 

strong argument in Indian law, that the trust responsibility applies 

to all of the Federal Government. So your agency and the Treasury 

Department has an obligation to understand the treaties and the 

context of these treaties. You have an obligation to understand the 

statutes and then to try to reflect in your policy what you see from 

those. But you say this Tribal Office isn’t even looking at those 

kinds of issues? 

Ms. INGRAM. The Tribal Office never walks away from trying to 

understand these things more deeply. The difficulty that faces the 

tax administrator is understanding where and when, as a tax administrator without more specific guidance as to the Internal Revenue Code, we have adequate maneuvering room, shall I say, to go 

beyond that black letter. 

The general welfare exclusion is a place where the Service has 

tried vis-a`-vis governments in general to find ways to go beyond 

the black letter law. The variety of rulings and, may I say, the variety of statutes underlying the actual words of the rulings show 

how challenging it is as we go beyond those parameters and how 

much clearer it can be for both the administrator and the constituents to navigate these things when we do have bright lines and 

black letter rules. That is a continuing conversation. 

There are many conversations going on in terms of tribal governments or entities coming to us to ask for rulings who come and talk 

to us about our views about the general welfare exclusion. They are 

able to craft what they would like to do within that and often then 

don’t bother going through with that private letter ruling process 

so there is no public document at the end. 

It is a more challenging conversation the farther we get away 

from the traditional 50 years of rulings. But it is a very fact driven 

process when it is not actually in Title 26. 

Senator UDALL. I want to focus a little bit more on this Tribal 

Office because I would think that is the one focal point for tribes 

to be able to have a voice in terms of the general welfare exclusion, 

exemption. 

Look at the history that the tribes have with the United States 

and that relationship, the treaty relationship, the statutes that 

have been put in place, specifically with regard to health care, trying to provide the very best health care. We know they aren’t doing 

that. The Indian Health Service, because of the resources and the 

32 

various circumstances, is not able to do that. Now you have tribes 

stepping forward and doing that in cases where they have the ability to do so. 

I would hope that that Tribal Office would see its mandate as reviewing all of these things and educating the Treasury Department, the IRS, and everybody within the Department. Maybe at 

some point we should talk with them about it. 

But Professor Taylor raises something which I think I would like 

you to explain if it is true that we have this Medicare exemption 

and a Veterans exemption. Senator McCain sits on this Committee. 

His medical care through the Veterans Administration is not taxed. 

You have applied the exemption in this one area. Yet tribal health 

care, which I think stands alone because of the trust responsibility—you haven’t initiated an effort to go forward on that. The 

burden is now on the tribes and many of them don’t have the resources to hire the lawyers, and to go through the process. 

Could you speak to what he pointed out, that you do have the 

ability? You could issue a ruling with regard to these tribal health 

policies. Why aren’t they like Medicare and like Veterans? 

Ms. INGRAM. Well, if I could mention a couple of things without 

the Professor and I doing dueling revenue rulings and private letter rulings, I have a couple of thoughts and then a comment and 

an offer. 

Since I assumed this job recently, I have tried to understand 

what is behind the printed word of what is available on the public 

record when you read these rulings. What is of interest to me is 

that so often the results depend on the underlying statute. The ruling might not have a needs filter in it but if you go to the statute, 

it is in the statute. So I think it is very hard for all of us to look 

at those rulings and understand everything we need to know about 

why they came out the particular ways they did. 

That said, I will say there is a very strong sense amongst the 

people who work on these rulings, this doesn’t go to the next topic, 

but there is a strong sense that we need to be very careful to make 

sure that we are treating all governments equivalently because the 

general welfare exclusion is not for one kind of government versus 

another. 

To the extent people feel like that has not been what we are 

doing, we would like to pursue that thought because we are totally 

committed to applying it equitably across all kinds of governments. 

That does not respond to the point about whether there is this special trust relationship that ought to provide an additional policy 

backdrop either to the general welfare exclusion or to any legislative efforts. 

The last thought I would share is that I am very flattered but 

I don’t personally control the issuance of revenue rulings. That is 

a collaborative process. It includes a great many policy people in 

the process. 

I certainly can sit here today and say that it is in the best interests of both the administrators and the communities to have as 

much clarity as possible. To the extent that that should be embodied in more rulings, which is a very messy road to try to do that 

with, or whether that should be in legislation or in a revenue ruling that draws a bright line of some kind in this community would 

33 

require more discussion with people beyond myself for sure. I will 

pursue that discussion. 

Senator UDALL. We are hoping to educate people through you. 

Ms. INGRAM. Thank you, Senator. 

Senator UDALL. But you didn’t comment on the Medicare or Veterans. Tell us the difference. Applying the black letter of the law, 

what is the difference here? You have a tribe, as Chairman 

Macarro talked about, that wasn’t getting health care so they went 

out and got health care for all their tribal members. What is the 

difference there with Medicare and the health care provided by the 

Veterans Administration? What would you argue would be the difference based on the law? 

Ms. INGRAM. Well, there are some things that are not different. 

There are some things that are. I think it is an important comparison to continue discussion on after today. 

If you go back through the history of the rulings on Medicaid and 

Medicare, they are grounded back in the 1940s in a comparison to 

Social Security. Now, all those programs have evolved in those 

many years. But the rationale in the long line of rulings appears 

to be those portions that are particularly focused on the needs safety net and those portions for which citizens use post-tax dollars for 

premiums to get extra coverage. Whether those theories actually 

answer the question for every piece of those programs, I am not 

going to claim expertise today to respond to. 

But if you look at the portion, for example, where I could provide 

an extra premium through payroll withholding at the moment 

since I am employed, those are post-tax dollars. I have paid on that 

up-front piece as I described and so the back-end would not be includable in income. 

But the underlying statutes are terribly important for trying to 

figure out how to apply these things. I certainly am committed to 

and take away from today the commitment to look at how those 

line up across the board. I would just say that it is hard to do that 

by looking at just the revenue rulings. 

Senator UDALL. Thank you, thank you. 

Professor Taylor, do you have any thoughts on what you have 

just heard? 

Mr. TAYLOR. Yes, I have of a couple of thoughts. One, in terms 

of the pre-tax/post-tax dollars at least in the employment context, 

it is true that there were no statutes covering the situation where 

people would have out of pocket expenses or buy supplemental insurance. Those were post-tax dollars that had to go through medical expense rules and things like that. But the IRS has allowed 

employers to set up flexible spending accounts where deductibles 

and things like that can be paid for with pre-tax dollars. That has 

been done administratively as a convenience to employers. That is 

an example. 

Then, in terms of a revenue ruling, I do agree with her that a 

revenue ruling is a consultative process. But when I served as Professor in Residence in the Chief Counsel’s Office of the Internal 

Revenue Service, one of my projects was a speed regulation. Someone wanted a regulation that relieved crime stoppers from the obligation of issuing 1099s for the rewards they were paying. That regulation was drafted, approved, and adopted within one week. I 

34 

don’t know that that was an incredible national emergency but it 

was done quickly. So where there is a will there is a way. 

Maybe that is a record that can never be beaten. Maybe it needs 

to go into the Guinness Book of World Records for the fastest regulation ever promulgated in the history of the United States. But my 

point is that a revenue ruling could be opened as a project. 

When I was Professor in Residence there also was a revenue ruling that I was reviewing, recommending that it be published and 

issued. It was initially proposed in 1955 and I reviewed it in 1988. 

I was the fifth person to recommend publication and it is still not 

published. I guess that may be the world’s record for the longest 

revenue ruling project that never saw the light of day. No, there 

are older ones than that? Okay. 

Senator UDALL. You made the argument in your testimony that 

Medicare and Veterans were very similar to what the tribes are 

doing. Based on the testimony that you heard here, do you still feel 

pretty strongly that the tribes’ facts fit into that scenario? 

Mr. TAYLOR. Yes, absolutely. The benefits that are involved with 

Medicare are not based on financial need, they are age-based. In 

the case of Veterans, it is service based. Again, it is not based on 

financial need. If you look at the medical benefits that are available 

to veterans, there are very few that are based on financial need. 

Most of them are status-based. That is, you are veteran and therefore you are entitled to those. You may seek your health care elsewhere. 

The one we haven’t talked about is the Indian Health Service. I 

cited the regulation and Commissioner Ingram is free to look at 

that regulation. It is absolutely, fundamentally clear that Indian 

Health Service rights to service are based on status, not based on 

financial need. I don’t see any effort on the part of the Internal 

Revenue Service to determine the value of the coverage or the 

value of the benefits that are received. 

I think that the value of the health care benefits should be excluded under 104(a)(3). She and I probably agree on that. But the 

value of the coverage is something that is just like the tribal coverage where the tribe purchases insurance. I really don’t see any 

difference at all. I don’t see the Internal Revenue Service wanting 

to take on the task of trying to value the coverage of the Indian 

Health Service and then including that in the gross income of all 

the recipients of Indian Health Service coverage. 

Then to go out and audit the million and a half people, I don’t 

know how many are covered by the Indian Health Service but 

someone probably knows, that would be an awful lot of audits to 

go back and correct just because it is not needs-based financially. 

It is based on medical need. 

Senator UDALL. Vice President Keel, your testimony indicates 

that the IRS may be looking into other tribal government programs 

such as education, housing, or even benefits provided to help participation in religious and cultural activities. 

Of particular interest to me, you mentioned the fact that the IRS 

is requiring some New Mexico pueblos to provide 1099 forms to 

their tribal members if the tribal government helps offset the cost 

of the pueblo’s religious feast day. Now, I have been to a few pueblo 

35 

feast days and I can tell you that it is quite a production. Each 

family in the pueblo feeds well over 100 visitors. 

Can you please share any additional information about some of 

these additional programs that you believe the IRS is looking into? 

Mr. KEEL. Thank you, Senator. You are absolutely correct. The 

pueblo feast days are part of their religious activities. For instance, 

the families who provide those meals that feed sometimes in excess 

of 100 people, they go and purchase food and other goods to accomplish that and to accommodate those folks who come in. They are 

simply reimbursed so there is no gain on those services. We would 

say that to be reimbursed for the food that they purchase and provide for other tribal members and other folks, there is no gain 

there and so there is no need to provide or to require 1099s for that 

or to tax that type of service. 

In terms of the trash and recycling collection and other types of 

services, the City of San Diego has been doing that for 100 years. 

They have never been audited and they have never been required 

to issue 1099s to folks who live within the city for trash collection 

and other types of services. So that would be the equivalent. 

For the IRS to come to some of our member tribal programs, for 

instance, educational benefits, and attempt to tax those, again, we 

are simply providing services. In fact, in many ways the scholarships and funds that we provide for many of our students are reimbursement-type programs. So again, there is no gain for that. 

Senator UDALL. Thank you. Ms. Ingram, do you have any 

thoughts on that particular part of this in terms of other governmental services or programs? 

Ms. INGRAM. No, I don’t think I am prepared today to talk about 

the array of other governmental services. 

But I have been taking many notes, Mr. Keel. I would be curious 

as to exactly how the arrangements, both in the tribal setting and 

in the government setting, the State government or the city government in your example, are actually structured and administered. I 

would like to make sure we are doing it correctly. 

Senator UDALL. Great, thank you. 

Chairman Joseph, do you have any thoughts on what you have 

heard at this point? I want to give you a chance here as we get 

ready to conclude. 

Mr. JOSEPH. Yes, sir. Earlier we had some charts that were 

brought up. They are very good charts. They show that our people 

are funded at very low levels. What they didn’t show is a comparison of the different programs like the VA or Medicaid, or like the 

Federal prisoners who receive almost twice the amount of funding 

in health care as what is needed for our people. I don’t see the IRS 

going there and giving those people the 1099s. 

Our people are unique. We are mentioned in the Constitution of 

the United States. There are treaties and executive orders. The 

ones that our Chief signed, there is no language about any out of 

pocket expenses. There is no language about being taxed. As a tribal leader, I don’t think any of our tribes have agreed to pay any 

of this. 

We are struggling with the economy, with the way it is going, 

and having to supplement and help our people from the high rates 

of disparities in health and the average age of Native American 

36 

men. I am going to be 50 next week and according to the data, I 

have 13 more years. That is what an average Native American 

male lives to be. These are hard words. We have got children, K– 

8, on my reservation that were at a pre-diabetic stage. We are just 

trying to do our part to try to prevent our people from dying at 

these young ages. 

Like I said in my testimony, if IHS was fully funded to its need 

then we wouldn’t even have to worry about this. It should be fully 

funded. I would much rather have our tribe spending money on 

other things like our housing shortfalls. On my reservation there 

are about 1,400 families needing homes, young people that got an 

education and are starting their families. But instead we are having to take care of what our priorities are. Living is one of our priorities. Thank you. 

Senator UDALL. Chairman Joseph, thank you very much. I think 

you make a very good point. Compare the resources that the Indian 

Health Service has with other medical care. Federal prisoners are 

one comparison. I think actually it is even worse than you said. I 

think it is about three to one. The last time I saw the numbers, 

it was about $1,300 per patient for the Indian Health Service and 

for a Federal prisoner it was $3,900. If you go to the society in general and look at Medicare, those numbers are much, much higher. 

So we need to put the resources behind the Indian Health Service. 

There is no doubt about that. 

Now, because we moved the hearing to today I think you were 

all told we were going to try to keep this to an hour. So I want 

to thank all of you for your time and for your flexibility. 

The United States Tax Code is complicated. When we consider 

Federal Indian law, we are looking at two unique areas of the law. 

On one hand we have the black letter of the tax code and on the 

other we have this flexible doctrine of the general welfare exclusion. We must include the Indian Health Care Improvement Act in 

this debate as well as the hundreds of treaties and laws that make 

promises to Indian tribes. 

It seems to me that Indian tribes need much clearer guidance on 

this issue before IRS audits continue. Ms. Ingram, I hope you can 

pass that message back to the Treasury. I know that you have been 

listening here. It was great to have you as a part of this panel. 

In addition, I think the Treasury Department should have a discussion with the Interior Department, which has a better understanding of the United States’ obligations to Indian tribes. I hope 

that that specific unit within the IRS also keeps that same kind 

of focus. Through those communications, I hope we can then meet 

with tribal leaders themselves and develop guidance that respects 

the tax code and respects the promises made to the tribes. 

At the same time, I think Congress will also consider proposals 

to address this issue, which is timely given the current national debate on health reform. Several of the witnesses have mentioned 

bills in the House, Xavier Becerra, and other colleagues. We are 

certainly going to be taking a look at those. 

Again, thank you for your flexibility and willingness to be here. 

With that, the hearing is adjourned. 

37 

[Whereupon, at 11:15 a.m., the Committee was adjourned.] 

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