Federal regulations dictate how tribal trust funds are to be held and distributed for and to Native American tribes. 

Under 25 U.S.C. § 117b(a) and 25 U.S.C. § 1407, per capita distributions made from funds the Secretary of the Interior holds in a Trust Account for the benefit of a tribe are generally excluded from the gross income of the members of the tribe receiving the per capita distributions. For example, if proceeds from timber sales, an agricultural lease, or a grazing permit are deposited into a tribe’s Trust Account and that tribe subsequently makes a per capita distribution using funds from the Trust Account, the per capita distributions are excluded from the tribal members’ gross income.

Exceptions to the excludable rule include distributions that (1) constitute compensation, (2) business profits and (3) gaming revenues. Further, distributions to tribal members from a tribal Trust Account are gross income to the members of the tribe receiving the distributions if a tribal Trust Account is used to mischaracterize what would otherwise be taxable income as nontaxable per capita distributions. For example, distributions from a tribal Trust Account constitute gross income if, based on the facts and circumstances, the distributions are mischaracterized compensation to tribal members for their services, mischaracterized distributions of business profits, or mischaracterized gaming revenues. (Notice 2015-67)

Under 25 U.S.C. §117b(a), per capita payments made from the proceeds of an agreement between the United States and an Indian tribe settling the tribe's claims that the United States mismanaged monetary assets and natural resources held in trust for the benefit of the tribe by the Secretary of the Interior are excluded from the gross income of the tribal members receiving the per capita payments. Per capita payments that exceed the amount of the Tribal Trust case settlement proceeds and that are made from an Indian tribe's private bank account in which the tribe has deposited the settlement proceeds are included in the gross income of the members of the tribe receiving the per capita payments. For example, if an Indian tribe receives proceeds under a settlement agreement, invests the proceeds in a private bank account that earns interest, and subsequently distributes the entire amount of the bank account as per capita payments, then a tribal member excludes from gross income their portion of the per capita payment attributable to the settlement proceeds and must include the remaining portion of the per capita payment in gross income. (Notice 2013-1) The IRS has updated the list of the Indian tribes participating in the settlement; see Notice 2019-23, which can be found on page 941 of IRB 2019-15 at: https://www.irs.gov/pub/irs-irbs/irb19-15.pdf.

Personal Income Tax Regulation 17071(p) provides that income derived from allotted and restricted Indian land held by the United States as Trustee under Section 5 of the General Allotment Act of 1887 is exempt from taxation. Such exempt income includes rentals, royalties, proceeds of sale of cattle raised on or of crops grown upon the land and income from the use of the land for grazing purposes. (California FTB Legal Ruling 399, 01/19/1977)