Entities Wholly Owned by Indian Tribal Governments

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Parts 1 and 301</CFR> <DEPDOC>[TD 10039]</DEPDOC> <RIN>RIN 1545-BQ13</RIN> <SUBJECT>Entities Wholly Owned by Indian Tribal Governments</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations regarding the Federal tax classification of entities wholly owned by Indian Tribal governments (Tribes). The final regulations provide that entities that are wholly owned by Tribes and organized or incorporated under the laws of one or more of the Tribes that own them generally are not recognized as separate entities for Federal tax purposes. The final regulations also provide that such entities, as well as certain Tribal corporations chartered by the Department of the Interior (DOI), are recognized as separate entities for Federal employment and certain Federal excise tax purposes. In addition, the final regulations provide that, for purposes of making elective payment elections (including determining eligibility for and the consequences of such elections) for energy credits under the Inflation Reduction Act of 2022, each of these types of Tribal entities is treated as an instrumentality of one or more Indian Tribal governments. </SUM> <DATES> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on January 15, 2026. <E T="03">Applicability dates:</E> For dates of applicability, <E T="03">see</E> §§ 301.7701-1(f) and 1.6417-1(q). </DATES> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the final regulations, contact Iris Chung of the Office of Associate Chief Counsel (Passthroughs, Trusts, and Estates) at (202) 317-5279 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains amendments to provisions of 26 CFR part 1 (Income Tax Regulations) under section 6417 of the Internal Revenue Code (Code) and 26 CFR part 301 (Procedure and Administration Regulations) under section 7701 of the Code that address the Federal tax treatment of certain Tribal entities wholly owned by one or more Indian Tribal governments  <SU>1</SU> <FTREF/> (final regulations). <FTNT> <SU>1</SU>  The term “Indian Tribal government,” also referred to as a “Tribe” herein, is defined as a federally recognized Tribe pursuant to the Federally Recognized Indian Tribe List Act of 1994, Public Law 103-454, 108 Stat. 4791 (List Act). Pursuant to the List Act, the Secretary of the Interior is required to publish annually a list of all federally recognized Tribes. This definition is also consistent with Revenue Procedure 2008-55 (2008-39 I.R.B. 768), which provides that the Treasury Department and the IRS utilize current or future lists of federally recognized Tribes published annually under the List Act by the DOI Bureau of Indian Affairs, for identification of Indian Tribal governments for purposes of section 7701(a)(40). <E T="03">See</E> 89 FR 944 (January 8, 2024) for the most current list published by the DOI, Bureau of Indian Affairs. </FTNT> Section 6417(h) provides an express delegation of authority to the Secretary of the Treasury or the Secretary's delegate (Secretary) relating to elective payment elections under section 6417 (section 6417 elections), stating, “[t]he Secretary shall issue such regulations or other guidance as may be necessary to carry out the purposes of this section, including guidance to ensure that the amount of the payment or deemed payment made under this section is commensurate with the amount of the credit that would be otherwise allowable (determined without regard to section 38(c)).” Section 7701(a)(40) provides an express delegation of authority to the Secretary related to identifying Indian Tribal governments for Federal tax purposes, stating, “[t]he term `Indian tribal government' means the governing body of any tribe, band, community, village, or group of Indians, or (if applicable) Alaska Natives, which is determined by the Secretary, after consultation with the Secretary of the Interior, to exercise governmental functions.” Finally, section 7805(a) of the Code provides an express delegation of authority to the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD2">I. Overview of Prior Guidance</HD> The Federal government has long recognized the unique aspects of Tribal sovereignty and Tribal sovereign immunity. Tribes themselves are not subject to Federal income tax under the Code. <SU>2</SU> <FTREF/> IRS guidance on the issue in the 1960s raised questions about the extent to which Tribal corporations incorporated under section 17 of the Indian Reorganization Act of 1934 (IRA), as amended, 25 U.S.C. 5124 (section 17 corporations) or under section 3 of the Oklahoma Indian Welfare Act, as amended, 25 U.S.C. 5203 (section 3 corporations) should share the Tribe's Federal income tax status. In response, the IRS published further guidance and issued proposed regulations in 1996 on the treatment of section 17 corporations and section 3 corporations for Federal tax purposes. <E T="03">See</E> the notice of proposed rulemaking, <E T="03">Simplification of Entity Classification Rules</E> (PS-43-95), published in the <E T="04">Federal Register</E> (61 FR 21989) on May 13, 1996 (explaining the basis for the proposed rule later adopted in § 301.7701-1(a)(3)). <FTNT> <SU>2</SU>   <E T="03">See</E> Rev. Rul. 67-284, 1967-2 C.B. 55. However, Tribes generally are subject to Federal employment taxes. Employment taxes refers to Federal Insurance Contributions Act (FICA) (consisting of both social security and Medicare taxes), Federal Unemployment Tax Act (FUTA), and Income Tax Withholding. Section 3306(c)(7) of the Code provides an exception from FUTA taxes under certain circumstances. Further, subject to applicable law, including statutes (such as section 7871 of the Code) and treaties or agreements with the United States, Tribes are subject to Federal excise taxes. <E T="03">See</E> Rev. Rul. 94-81, 1994-2 C.B. 412. </FTNT> On December 18, 1996, the Department of the Treasury (Treasury Department) and the IRS published final regulations (TD 8697) in the <E T="04">Federal Register</E> (61 FR 66584) under section 7701, known as the entity classification regulations. These regulations (at § 301.7701-1(a)(3)) make clear that entities formed under local laws are not always recognized as separate entities for Federal tax purposes. For example, an organization wholly owned by a State is not recognized as a separate entity for Federal tax purposes if it is an integral part of the State. Similarly, these regulations (until their amendment by this Treasury decision) provided that section 17 corporations and section 3 corporations are not recognized as separate entities for Federal tax purposes. These regulations, however, did not specifically address whether an entity organized or incorporated under Tribal law and wholly owned by a Tribe (that is, a wholly owned Tribal entity) is recognized as a separate entity for Federal tax purposes. The preamble to TD 8697 stated that the IRS received a number of comments asking for clarification of the tax treatment of wholly owned Tribal entities. 61 FR 66584. The preamble also indicated that the Treasury Department and the IRS continued to study the issue and would issue additional guidance, if necessary. <E T="03">Id.</E> at 66585-86. <HD SOURCE="HD2">II. Tribal Consultation</HD> Over the past several decades, Tribes have sought clarity concerning the Federal tax status of wholly owned Tribal entities, in part to provide certainty for Tribal economic development and to support the generation of revenue for Indian Tribal governments. To obtain Tribal input on the issue before publishing the proposed regulations, and in accordance with Executive Order 13175 (November 6, 2000), “Consultation and Coordination with Indian Tribal Governments,” and the Treasury Department's Tribal Consultation Policy (80 FR 57434, September 23, 2015), <E T="03">superseded by</E> Treasury Order 112-04 (November 22, 2023), the Treasury Department and the IRS held Tribal consultations on the issue on June 21 and June 22, 2023, October 8 and 10, 2019, and a listening session on December 3, 2019. During Tribal consultations, Tribes have explained that they view incorporating corporations under Tribal law as an exercise of their inherent sovereign authority to generate governmental revenue, self-govern the use of that revenue according to their own laws, and self-determine the use of that revenue for their citizenry. Tribes highlighted that incorporating corporations under Tribal law enables Tribes to create entities that meet their emerging revenue opportunities, establish guidelines for the operation of these entities that are culturally appropriate and protect Tribal assets, and dissolve them when they are no longer needed. Tribes also highlighted that clarifying the status of corporations incorporated under Tribal law is consistent with recent Federal policy to promote Tribal sovereignty, self-governance, and self-determination in economic development activities. In contrast, Tribes highlighted that section 17 and section 3 corporations are not always sufficient to meet their needs. The incorporation process for these entities is a lengthy multi-step Federal process that subjects Tribal authority to Federal oversight and approval and results in increased administrative costs to Tribes. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 89k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━