Tribal gaming payments to children are unearned income

Plain-English summary

A tribe distributed gaming revenue to minor members under an approved per capita revenue-allocation plan. A return preparer argued that the payments were earned income for purposes of the tax rules for children's unearned income. Chief Counsel explained that IRC § 911(d)(2) limits earned income to compensation for personal services and certain trade-or-business earnings attributable to services. The children received the payments solely because they were tribal members, without regard to services performed. The payments were therefore unearned income under IRC § 1(g)(4).

Ruling snapshot

• Question: Are tribal gaming per capita payments made to or for minor tribal members unearned income under IRC § 1(g)?
• Outcome: advice given, the payments are unearned income
• Key authorities: IRC §§ 1(g)(4) and 911(d)(2); 25 U.S.C. § 2710(b)(3); 25 C.F.R. § 290.2

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201729001
       Release Date: 7/21/2017
       CC:ITA:B04: SRSinno
       GL-104710-17

UILC: 1.10-00, 911.00-00

date: June 20, 2017

 to:   Kimberly A. Daigle
       Senior Attorney
       Office of Chief Counsel
       Small Business/Self-Employed

from: Michael J. Montemurro
Branch Chief
Office of Associate Chief Counsel
(Income Tax and Accounting)

subject: Gaming Revenues to Minors

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       LEGEND


       Tribe = ------------------------------------------------
       x     = ----------

       ISSUE

       Are tribal gaming revenues that Tribe distributes as per capita payment pursuant to its
       revenue allocation plan to (or on behalf of) a child (as defined in § 1(g)(2) of the Internal
       Revenue Code) who is a member of Tribe “unearned income” under § 1(g)(4)?

       CONCLUSION

       Tribal gaming revenues that Tribe distributes as per capita payment pursuant to its
       revenue allocation plan to (or on behalf of) a child (as defined in § 1(g)(2)) who is a
       member of Tribe are “unearned income” under § 1(g)(4).

GL-104710-17 2

FACTS

Tribe distributes gaming revenues to its members pursuant to its revenue allocation
plan, which under the Indian Gaming Regulatory Act1 are per capita payments and
subject to federal income tax. See 25 U.S.C. § 2710(b)(3) which provides that 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, among
other requirements, the Indian tribe has prepared a plan to allocate revenues to certain
uses and the per capita payments are subject to federal taxation and tribes notify
members of such tax liability when payments are made. Tribe regularly makes per
capita payments of gaming revenue to members of Tribe who are minors of $x a year.

A tax preparer who has prepared Tribe members’ federal income tax returns asserts
that these per capita payments of gaming revenues paid to or on behalf of a member of
Tribe who is a child are “earned income” for purposes of § 1(g).

LAW AND ANALYSIS

Section 1(g)(1) provides that in the case of a child to whom § 1(g) applies, the tax
imposed by § 1 is equal to the greater of the (A) the tax imposed by § 1 without regard
to § 1(g) or (B) the sum of (i) the tax that would be imposed by § 1(g) if the taxable
income of the child for the taxable year were reduced by the child’s net unearned
income plus (ii) the child’s share of the allocable parental tax.

Section 1(g)(3)(A) defines the term “allocable parental tax” to mean the excess of (i) the
tax that would be imposed by § 1 on the parent’s taxable income if that income included
the net unearned income of all children of the parent to whom § 1(g) applies over (ii) the
tax imposed by § 1 on the parent without regard to § 1(g).

Section 1(g)(3)(B) provides that a child’s share of any allocable parental tax of a parent
equals an amount that bears the same ratio to the total allocable parental tax as the
child’s net unearned income bears to the aggregate net unearned income of all children
the parent to whom § 1(g) applies.

Section 1(g)(4) defines net unearned income as the excess of the portion of the
adjusted gross income for the taxable year that is not attributable to earned income as
defined in § 911(d)(2) over the sum of the amounts described in § 1(g)(4)(ii)(I) and (II).

Section 911(d)(2)(A) states that the term “earned income” means wages, salaries, or
professional fees, and other amounts received as compensation for personal services
actually rendered, but does not include that part of the compensation derived by the
taxpayer for personal services rendered by him to a corporation which represents a

1
Pub. L. No. 100-497, 102 Stat. 2467 (IGRA).
GL-104710-17 3

distribution of earnings or profits rather than a reasonable allowance as compensation
for personal services actually rendered.

Section 911(d)(2)(B) states that in the case of a taxpayer actually engaged in a trade or
business in which both personal services and capital are material income-producing
factors, under regulations prescribed by the Secretary, a reasonable allowance as
compensation for personal services actually rendered by the taxpayer, not in excess of
30 percent of his share of the net profits of such trade or business, shall be considered
as earned income.

Section 1.1(i)-1T, Q&A 6 of the temporary Income Tax Regulations provides that net
unearned income is the excess of the portion of the gross income for the taxable year
that is not “earned income” as defined in § 911(d)(2) (income that is not attributable to
wages, salaries, or other amounts received as compensation for personal services) over
the sum of the standard deduction provided for under § 63(c)(5)(A), plus the greater of
(A) $500 (adjusted for inflation after 1988) or (B) the amount of allowable itemized
deductions that are directly connected with the production of unearned income.2

Under 25 C.F.R. § 290.2, the term “per capita payment” means the distribution of
money or other thing of value to all members of the tribe, or to identified groups of
members, which is paid directly from the net revenues of any tribal gaming activity.

A member of Tribe who is a child (as defined is § 1(g)(2)) does not receive the per
capita payments of gaming revenues of $x per year under Tribe’s revenue allocation
plan as compensation for personal services rendered or actually rendered under
§ 911(d)(2)(A) or (B). Rather, a member of Tribe who is a child receives the per capita
payment of $x per year due to his or her status as a member of Tribe, without regard to
whether he or she renders personal services. See 25 C.F.R. § 290.2, above, defining
the term per capita payments.

Therefore, Tribe’s per capita payments of Tribe’s gaming revenues made pursuant to its
revenue allocation plan paid to or on behalf of a child (as defined in § 1(g)(2)) who is a
member of Tribe are not earned income of that child under § 911(d)(2)(A) or (B).
Consequently, these per capita payments are income that is not attributable to earned
income under § 1(g)(4)(A). Section 1(g), § 911, and the temporary and final regulations
under those sections do not provide any support for the position that these per capita
payments to a member of Tribe who is a child are earned income for purposes of § 1(g).

Please call Suzanne R. Sinno or me at (202) 317-4718 if you have any further
questions.

2
These temporary regulations were issued prior to the time that §1(i) was redesignated as current § 1(g)
by § 11101(d)(2) of the Omnibus Budget Reconciliation Act of 1990. Pub. L. No. 101-508, 104 Stat. 1388.