My friend is a Canadian-born naturalized American citizen residing in the US. He is also a Native American and registered with an Indian band in Canada. The members of the band are about to receive a benefit payout from the Canadian government; each member will receive $30,000 (CDN), tax-free in Canada. Will my friend have to pay tax on that money in the US?

I guess it depends; As a US resident, he needs to report both US source and world wide income on his return; As a general rule, the pension/annuity articles of most tax treaties allow the country of residence (as determined by the residency article) to tax the pension or annuity under its domestic laws. This is true unless a treaty provision specifically amends that treatment. Some treaties, for example, provide that the country of residence may not tax amounts that would not have been taxable by the other country if you were a resident of that country. In some cases, government pensions/annuities or social security payments may be taxable by the government making the payments. There also may be special rules for lump-sum distributions. You need to look at each treaty carefully. You need to contact international tax representative at the IRS for more info in detail