Proposed Tribal Business Tax Rules Provide Incomplete Certainty

The Treasury Department this month issued proposed regulations that expand the entity types owned by Indian tribal governments that aren’t recognized as separate entities for federal tax purposes.

These regulations provide a safe harbor for tribal business enterprises seeking certainty on a federal income tax exemption and reduce barriers tribes face in benefiting from parts of the Inflation Reduction Act. But the proposed rules fall short of removing all such obstacles, as they don’t account for various ways tribes may structure tribal enterprises.

Tribal governments aren’t subject to federal income tax. They often use business entities to engage in economic development activities on their behalf. Existing regulations extend that exemption to two types of wholly owned tribal enterprises that are federally chartered—Section 17 corporations (referring to that section of the Indian Reorganization Act of 1934) and Section 3 corporations (referring to that section of the Oklahoma Indian Welfare Act.

The existing regulations state that Section 3 and Section 17 corporations aren’t separate entities for tax purposes. The entity classification is key to the elective pay regulations under Section 6417 of the tax code, which allows tribes and other nonprofit and governmental entities to monetize tax credits created by the massive tax-and-climate law for investments in clean energy development.

Classifying Section 3 and Section 17 corporations as disregarded entities for federal income tax purposes allows them to be considered an arm of the tribe for purposes of the Section 6417 election.

The proposed regulations extend the federal income tax exemption to entities that are organized under tribal law and wholly owned by a tribe or tribes. This change reflects comments made by tribes and the Treasury Tribal Advisory Committee seeking clarification of the tax treatment of wholly owned tribal entities.

The new regulations contemplate multiple tribes co-owning an entity and provide an example of how to preserve tax exemption under a multi-tribal ownership structure. They also amend current regulations on tribally owned entities for claiming the direct payment of clean energy tax credits under Section 6417.

The proposed rules reflect federal policies of tribal sovereignty, self-governance, and self-determination. Tribes may prefer tribally chartered organizations to Section 17 or Section 3 corporation status due to flexibility and ease of organizing under tribal law.

Section 17 corporations require congressional approval in creation and dissolution. Section 3 corporations are chartered by the Department of Interior. Tribally chartered entities can be organized with principles that are culturally appropriate and protect tribal resources. The proposed regulations provide certainty on the federal income tax consequences, so tribes have more options in using tribally chartered entities to structure their investment and economic development activities.

But the proposed regulations don’t go far enough. There remain additional barriers for tribes in fully realizing the tax-and-climate law’s incentives.

The proposed regulations don’t include other ways tribes might structure entities to engage in economic development. For example, a wholly owned tribal enterprise could be organized under state or local law rather than federally chartered (like a Section 17 corporation) or tribally chartered. The IRS has said such entities aren’t the same as federally chartered ones and aren’t exempt from federal income taxes.

Regardless of where the entity is organized, the focus should be on ownership of an entity. Tribes and the Treasury Tribal Advisory Counsel likely will comment on the proposed regulations and request consideration of state-chartered tribally owned organizations, too.

The entity’s requirement to be wholly owned by a tribe to retain the tax exemption is another barrier. A tribe may prefer to structure a business enterprise with a non-tribal co-owner or partner. Co-ownership or joint ventures with non-tribal partners can assist a tribe with developing expertise, contributing capital, or managing an enterprise.

That choosing to co-own could lead to loss of federal income tax-exempt status forces tribes into a zero-sum decision. Congress designed the tax-and-climate law in part to stimulate development in clean energy investments, especially in marginalized or underserved parts of the country. The Treasury has effectively limited a tribal government’s ability to access credits under the law to scenarios where a tribe makes investments through wholly owned, tribally or federally chartered business entities.

To fully achieve the law’s goal and ensure tribes can access the incentives, the Treasury must understand different ways that tribes may structure tribal enterprises, including state-chartered tribally owned businesses and as businesses that are co-owned by tribes.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Pippa Browde is a professor at the University of Montana School of Law, where she researches and writes about all things tax in Indian country.

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