An Argument in Support of Tax-Free Per-Cap Distribution Payments Derived from Native American Nations Gaming Sources

Gaming activities play important social, cultural, and economic roles for many Native American tribes. During the 1970s and 1980s, gaming activities spread throughout the country, and became more accessible to nonnative individuals. This growth in gaming activities drew the attention of state and local officials who sought to limit and regulate Native American gaming. In California v. Cabazon Band of Mission Indians, the State of California, arguing before the Supreme Court, asserted that it could exercise jurisdiction over Native American gaming activities. In a stunning defeat, the Supreme Court ruled against the State of California when it announced its decision in 1987. The Cabazon decision effectively removed all state and local regulatory oversight from Native American gaming activities, thereby leaving states powerless to regulate this area. In response to Cabazon, Congress enacted the Indian Gaming Regulatory Act (“IGRA”) in 1988. The purpose of IGRA is to regulate Indian gaming activities conducted by Native American tribes. A key feature of IGRA allows tribes to make discretionary per capita distributions to members of its tribe from the net revenues of its gaming operations. However, one of IGRA’s distribution conditions requires that per-capita payments be “subject to Federal taxation.” That means per-capita payments are counted toward one’s income. Section 61 of the Income Tax Code defines gross income for income tax purposes. In broad and sweeping language, § 61 provides that “gross income includes all income from whatever source derived.” This language is structured to capture all forms of income. The IRS has stated in a private letter ruling that per-capita distributions constitute gross income under § 61 of the Income Tax Code. Notwithstanding § 61’s broad language, a taxpayer may exclude an item from income only by proving that such item qualifies under one of the exclusionary tax provisions of the Income Tax Code. This Article argues that per-capita distributions qualify for exclusion from gross income as a gift. This Article first discusses the evolution and regulation of the gaming industry within the Native American community. Next, this Article examines the controversial history of defining “gross income” since the enactment of the federal income tax in 1913. Finally, this Article presents several arguments supporting the proposition that per-capita distribution payments constitute gifts under the Income Tax Code—and are therefore non-taxable to the recipient