IGRA trust distributions require income tax withholding

Plain-English summary

Chief Counsel considered distributions from trusts established under the Revenue Procedure 2011-56 safe harbor for tribal members who are minors or legally incompetent. The safe harbor defers beneficiaries' income inclusion until amounts are actually or constructively received from the trust. The advice concluded that section 3402(r) requires income tax withholding when those distributions become includible in gross income. It further stated that the withholding rule applies to all payments from the specified gaming revenues, regardless of whether the payor is a trust, an Indian tribe, or another person.

Ruling snapshot

• Question: Does section 3402(r) require withholding on payments from an IGRA trust that satisfies Revenue Procedure 2011-56?
• Outcome: advice given, withholding is required
• Key authorities: IRC § 3402(r); Rev. Proc. 2011-56; Indian Gaming Regulatory Act

Full text (IRS public release)

ID: CCA_2017013114002404
UILC: 3402.20-00

Number: 201710023
Release Date: 3/10/2017
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Sent: Tuesday, January 31, 2017 2:00:24 PM
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Subject: 3402(r) requires income tax withholding from IGRA trust payments

Hi --------,

Thanks for asking about the application of Internal Revenue Code (IRC) section 3402(r). Let me know if you have questions about the response below.

Question: Does the income tax withholding requirement of IRC section 3402(r) apply to payments from a trust that satisfies the safe harbor of Rev. Proc. 2011-56? Answer: Yes.

Rev. Proc. 2011‐56 provides a safe harbor for Indian tribes to establish trusts for tribal members who are minors or legally incompetent for the distribution of gaming revenues under the Indian Gaming Regulatory Act (IGRA). Under the safe harbor, beneficiaries of an IGRA trust are not required to include amounts in gross income under the economic benefit doctrine when transferred to, or earned by, the IGRA trust, but must include trust distributions in income when actually or constructively received.

Section 3402(r) provides: “Every person, including an Indian tribe, making a payment to a member of an Indian tribe from the net revenues of [certain] gaming activities conducted or licensed by such tribe shall deduct and withhold from such payment [income taxes].”

This income tax withholding requirement of section 3402(r) applies to amounts paid from a trust that satisfies the safe harbor of Rev. Proc. 2011-56 in the year in which it is included in gross income.

In fact, the income tax withholding requirement of section 3402(r) applies to all payments of revenue from the specified gaming activities, regardless of whether the payment is made from a trust, by an Indian tribe, or by any other payor.

Thanks,
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