SERVICE EXPLAINS REFUND PROCESS FOR TAXES WITHHELD OR REMITTED ON TAX- EXEMPT TRIBAL FISHING RIGHTS INCOME.

Notice 89-34

The purpose of this notice is to inform affected taxpayers that section 7873 of the Internal Revenue Code added by section 3041 of the Technical and Miscellaneous Revenue Act of 1988 (the Act). Pub. L. No. 100-647, 102 Stat. 3342, exempts from federal income and employment taxes certain income derived by Indians from the exercise of their recognized tribal fishing rights. Under section 3042 of the Act, such income is also exempt from state and local taxation.

Section 7873 of the Code generally exempts from federal taxes income derived by an individual member of an Indian tribe, or by a "qualified Indian entity" of a tribe, from a "fishing rights-related activity" of the tribe, as these terms are defined below.

In general, a business entity is a qualified Indian entity of a tribe if it is (1) engaged in a fishing rights-related activity of the tribe, (2) 100% owned by one or more qualified Indian tribes, their members, or the spouses of members, and (3) managed by members of such tribes. If an entity is engaged in substantial processing or transporting of fish, it generally is not considered a qualified Indian entity unless 90 percent or more of its annual gross receipts are derived from fishing rights-related activities of one or more qualified Indian tribes each of which owns at least 10 percent of the equity interests in the entity. (For this purpose, ownership by members of a tribe and their spouses is treated as ownership by that tribe.)

An Indian tribe is a qualified Indian tribe with respect to an entity if the entity is engaged in a fishing rights-related activity of the tribe.

A fishing rights-related activity of an Indian tribe is any activity directly related to harvesting, processing, or transporting fish harvested in the exercise of a recognized fishing right of such tribe, or to selling such fish, if substantially all the harvesting was performed by members of such tribe.

Recognized fishing rights of an Indian tribe are fishing rights secured as of March 17, 1988, by a treaty, an executive order, or an Act of Congress.

In the case of a member of an Indian tribe having recognized fishing rights, income earned by that individual from a fishing rights-related activity of the tribe, either directly or through a qualified Indian entity, is exempt from both federal income tax and federal self-employment (SECA) tax. Any distribution with respect to an equity interest in a qualified Indian entity of an Indian tribe to a member of the tribe is treated as derived by the member from a fishing rights-related activity of the tribe, and thus is exempt from these taxes, to the extent the distribution is attributable to income derived by the entity from a fishing rights-related activity of the tribe. Income earned by a corporation, partnership, or other business entity from a fishing rights-related activity of a tribe also is exempt from federal income tax if the entity constitutes a qualified Indian entity of the tribe.

Wages paid to a member of a tribe employed by another member of the same tribe, or by a qualified India entity, for services performed in a fishing rights-related activity of the employee's tribe are exempt not only from federal income tax, but also from both the employer's and employee's share of social security (FICA) tax, and from unemployment compensation (FUTA) tax. Wages are not exempt from such taxes if paid by an employer who is not either a member of the same tribe or a qualified Indian entity, or if paid to an employee who is not a member of the tribe whose fishing rights are exercised.

The provisions of new section 7873 of the Code apply to all taxable periods beginning before, on, or after the date of enactment. Thus, all taxes with respect to which the period of limitations has not expired may be subject to claims for refund. In addition, the Internal Revenue Service will not collect any tax, penalty, or addition to tax, regardless of whether the period of limitations for assessing the underlying deficiency has expired, if the underlying deficiency is attributable to income that is exempt from tax under section 7873.

To recover income taxes or SECA taxes paid on fishing income that is now exempt, individual taxpayers should file Form 1040X, Amended U.S. Individual Income Tax Return. To recover income tax overpayments, corporations should file Form 1120X, Amended U.S. Corporation Income Tax Return. To obtain a refund of the employee and the employer portions of FICA taxes paid or withheld on remuneration to employees from fishing rights-related activities, the employer should obtain the employees' written consent to pursue such a refund and file Form 941c, Statement to Correct Information Previously Reported on the Employer's Federal Tax Return, and Form 843, Claim. Instead of filing for a refund, the employer may take an adjustment in the current quarter for the amount of overpaid FICA taxes by filing Form 941, Employer's Quarterly Federal Tax Return, and Form 941c. Regardless of whether the employer is taking an adjustment or pursuing a refund, the employer should file Form W-2c, Statement of Corrected Income and Tax Amounts, and Form W-3c, Transmittal of Corrected Income and Tax Statements, to correct wage information that was previously reported. If the employees does not consent to his or her employer's pursuit of a refund of FICA taxes on his or her behalf, such employee should individually file a refund claim using Form 843, and the employer's claim for refund or adjustment should cover only the employer's portion of the FICA tax.

To obtain a refund of the overpaid FUTA taxes, the employer should file Form 843. If the overpayment is in the current year, when filing Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, for such year, the employer may apply the overpayment to the next year's return or request a refund.

This document serves as a "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

DRAFTING INFORMATION

The principal author of this notice is Sheldon Iskow of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Mr. Iskow on (202) 566-3492 (not a toll-free call).