This article is not about learning a certain type of currently popular urban musical genre. Instead it concerns the proper expenditure of Tribal Gaming profits. In this context, a “RAP” means a “revenue allocation plan” designed to ensure that net revenues of Tribal Gaming operations are spent for the benefit of the tribe as a whole in accord with the specific requirements of the Indian Gaming Revenue Act (IGRA) and are duly approved by the Bureau of Indian Affairs (BIA).
The issue of RAPs came front and center recently with publicity about two high-profile audits conducted by the National Indian Gaming Commission (NIGC). Each instance involves allegations that gaming revenues were improperly channeled to the benefit of individuals for such things as luxury cars, home improvements and sporting event tickets, or were used for political contributions and other unauthorized non-tribal purposes.
When To RAP?
Under IGRA, Tribal Gaming profits (net revenues after payment of prizes, operating expenses and certain other costs, excluding management contract fees) can only be allocated to five distinct expense categories:
• Funding of tribal government operations and programs
• Providing for the general welfare of the tribe and its members
• Promotion of tribal economic development
• Donations to charity
• Funding of local government operations
IGRA and its implementing regulations only permit payments of gaming revenues to individual tribal members under a revenue allocation plan approved by the BIA.1 These “per capita” payments are defined as the distribution of money to an identified group of tribal members, such as tribal elders who are paid directly from the net revenues of any Tribal Gaming activity.2
The above distinction is important because net gaming revenues distributed to the tribe and its members for legitimate general welfare purposes are not federally taxable, while payments to individual tribal members are subject to federal income tax. IGRA expressly provides that per capita payments are subject to federal taxes and requires tribes to notify members of such tax liability when per capita payments are made.3 In addition, NIGC regulations state that a tribe’s revenue allocation plan require the withholding of taxes for all per capita recipients in accordance with IRS regulations.4
Unfortunately, distinguishing between “general welfare” uses and individual “per capita” distributions is not always easy. One tribe, for example, had a practice of sponsoring recreational program events, such as a memorial horseshoe tournament, where checks were issued directly to members without any proof that the event actually took place. In another instance, a tribe issued “On Reservation Lifestyle Betterment Grants” to members. Needless to say, the Internal Revenue Service takes a dim view of attempts to mischaracterize per capita payments as something else. The IRS publication Gaming Tax Law for Indian Tribal Governments specifies that “grants received under a social welfare program that did not require recipients to establish individual need have not qualified for tax-exempt status.” Thus, to take a tribal distribution to an individual member out of the per capita taxable category, the recipients are required to first establish need according to pertinent objective standards before the payment can be made.
As the recent highly publicized audits suggest, both the IRS and the NIGC are likely to take a closer look at creative classifications of purported tribal welfare programs as taxable per capita payments in disguise. The bottom line is that if a tribe desires to distribute game revenues to its members without a showing of need, the safest and only lawful course is to have an approved RAP in place authorizing such payments.
What to Put in a RAP?
The procedures for submission and approval of RAPs can be found in 25 C.F.R. Part 290. Once the bureaucratic jargon is parsed, five basic criteria emerge.
First, the plan must reserve an adequate portion of the net revenue for one or more of the five permissible IGRA expenditures (emphasis added). In other words, basic governmental operations and tribal welfare programs need to be funded first.
Second, the plan must contain detailed information so that the BIA, the approving agency, can evaluate compliance, particularly with regard to funding for government programs and economic development — two of the principal expressed legislative purposes of Indian Gaming under the IGRA.
Third, the plan must provide for preservation of the rights of minors and other incompetents. Primarily, this involves safeguarding the distribution of funds and ensuring that they are spent for health, education and welfare needs, and other benefits for eligible recipients who are too young or otherwise unable to safeguard and protect their own interests.
Fourth, the plan must have a mechanism for notifying recipients of their individual tax liabilities.
And, finally, the plan must contain specific — and reasonable — criteria for determining the eligibility of individual tribal members, with a fair and adequate dispute resolution system regarding payment eligibility.
When all of the allowable distribution portions are added up, the total must equal 100 percent. In other words, there can be no “slush” funds. However, there do not appear to be any particular guidelines for the percentage breakdowns, though the RAPs we have seen that authorize per capita payments generally provide between 15 percent and 25 percent for such distributions. The bulk of the remaining funds typically go to tribal government operations or programs and economic development.
Despite the criteria and processes that are in place, the BIA has received criticism for approval of plans without sufficient or accurate information. A recent inspector general’s report from the Department of the Interior, for example, found that “of the 73 approved plans, only 24 contained any information that might assist in evaluating a tribe’s economic health.” The report further stated that “of these 24, only five provided comparative information about gaming profits, tribal enrollment levels and tribal operations budgets — all of which are essential for a reasoned evaluation of a tribe’s economic health.” It is not clear, however, whether such criticisms will result in expanded requirements or more detailed scrutiny of proposed plans. The better alternative is that individual tribes be proactive and step up on their own — without federal pressure — and exercise their sovereignty in a sound and good-faith manner to ensure that their RAPs provide adequate funding from their gaming revenues for strong tribal government operations and programs, a healthy tribal economy, and members in special need before they authorize per capita distributions.
Out of Tune RAPs
The NIGC has the authority to enforce civil penalties against tribes for failure to adhere to the per capita requirements of the IGRA, including possible fines and closure of gaming facilities.5 The IRS also has a role in enforcement to ensure that taxable payments are properly deducted and reported.
As noted, some tribes unlawfully make per capita payments without an approved RAP. In other cases, certain tribes have created mechanisms to improperly classify what are in fact per capita payments as general welfare programs, often through erroneous, liberal and unsupportable interpretations of what constitutes a need-based program. Either of these approaches can result in a discordant note that may attract costly federal regulatory attention.
The inspector general has reported that “neither the BIA nor the NIGC is monitoring Indian tribes to determine whether tribes comply with approved revenue allocation plans.” That was once true, but no longer. There has been a significant shift in focus with the addition of NIGC resources, in particular, that greatly increases the likelihood that more and more tribes will be facing a thorough review of their RAP compliance and expenditures of gaming revenues. Rather than wait for the NIGC or IRS to knock on the door, however, tribes are better advised to proactively exercise their own sovereignty to self-police their compliance with IGRA and thoughtfully develop their own well-designed RAP that both effectively meets the unique needs of their tribe and is consistent with the goals and requirements of IGRA.
Not Everyone Wants to RAP
There is an old adage that says “just because you can, doesn’t mean you should.” Approximately 73 of the more than 200 tribes that operate casinos currently have RAPs that provide for per capita distributions. In general, tribes are highly protective of the actual amount of per capita payments that is distributed to members under these plans. Reports suggest that some monthly payments can be very large, ranging from $12,000 to $30,000 or more.
Not every tribe believes that making per capita payments is necessarily a good idea. The chairperson of one Oklahoma tribe expressed his concern that the per capita program would eat up more than one-third of the money the tribe expected to make from its casinos and result in the delay or abandonment of expansion and tribal economic development plans. At a major gaming conference, National Indian Gaming Association Chair Ernie Stevens Jr. put it more bluntly: “I’m telling you that the per capita destroys your economy and your budget.” Another prominent tribal leader compared per capita distribution to spending every dollar of your paycheck without saving for a rainy day. Under the express goals of IGRA, per capita distribution is appropriate only after adequate provision is first ensured for strong tribal government operations and programs, critical community infrastructure, diverse tribal economic development, and the general welfare and basic needs of the tribe and its members.
Per capita distribution can also lead to disappointed expectations. Due to financial strains, a Wisconsin tribe was forced to cut back its payments by 30 percent, much to the dismay of some tribal members. A California tribe, also facing budget woes, reduced its $14,000 monthly payment to its 32 members.
Payments can also lead to enrollment disputes, where simple greed can result in the efforts of some to increase the size of the revenue pie by shrinking the numbers entitled to a slice. In California, where tribes with casinos brought in $5.3 billion according to the Indian Gaming Industry Report, hundreds of people were unilaterally cut from the rolls of wealthy tribes at an obvious cost to tribal unity, culture and credibility, with much rancor and resentment. Ousted members of one tribe have sued, claiming unfair disenrollment and seeking at least $38 million in withheld payments. In South Dakota, members of another tribe who were excluded from a per capita plan have sued to halt the use of all gaming revenues.
RAP for the Long Term
Indian Gaming is part of the current federal Indian policy that replaced the failed strategy of termination with promoting recognition of tribal sovereignty and self-sufficiency. To that end, IGRA’s stated goal is to create a statutory framework for the successful operation and regulation of Indian Gaming by Indian tribes in order to generate vital revenues that promote individual tribal sovereignty and cultural identity by funding strong tribal government operations and programs, lasting self-sufficient tribal communities with healthy diverse economies; and the education, health and general welfare of tribes and their members.
In considering the provisions for their RAP, tribes should keep IGRA’s stated policy goals in mind and not let the understandable allure of individual per capita distributions distract or divert the tribe, its leadership and its individual members from the long-term needs and goals as a lasting sovereign tribal community. Continued tribal dedication to meeting those needs and goals in wisely using net Tribal Gaming revenues will not only protect and promote continued federal support for Indian Gaming, but will also maximize the benefits of Indian Gaming to the tribe and its individual members, including — where justified — reasonable per capita distributions.
Footnotes
1 25 U.S.C. §§ 2710(b)(2)(B) and 2710(d)(1)(A)(ii); 25 C.F.R. Part 290.
2 25 C.F.R. § 290.2.
3 25 U.S.C. § 2710(b)(3)(D).
4 25 C.F.R. § 290.12(b)(4).
5 25 U.S.C. § 2713.
Pat Leen, co-owner of Gaming Regulatory Consultants, was a founding member of the Michigan Gaming Control Board. He can be reached at (517) 256-8619 or pleen@grcgaming.com.
Tom Nelson, co-owner of Gaming Regulatory Consultants, was the first Director of Licensing and Enforcement for the MGCB and served for 22 years as Michigan’s Assistant Attorney General. He can be reached at (719) 440-6611 or tnelson@grcgaming.com.
Nelson Westrin is a Partner for Honigman Miller Schwartz and Cohn LLP in Lansing, Mich., where he specializes in federal Indian law and gaming regulatory matters.
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