INCOME EARNED BY CORPORATION FORMED BY INDIAN TRIBE UNDER STATE LAW IS TAXABLE, IRS RULES.

Rev. Rul. 94-16

ISSUE

Is income earned by an Indian tribe or tribal corporation from the conduct of a commercial business subject to federal income tax?

FACTS

Situation 1. Tribe T, a federally recognized Indian tribe, conducts an unincorporated commercial business both on and off T's reservation.

Situation 2. Tribe U incorporates itself as Corporation X under section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. section 477 (1993) (IRA). X conducts a commercial business both on and off U's reservation.

Situation 3. Tribe V organizes Corporation Y under the law of State S. V is the sole shareholder of Y, which conducts a commercial business both on and off V's reservation.

LAW AND ANALYSIS

Section 1 of the Internal Revenue Code imposes a tax on the taxable income of individuals, trusts and estates. Section 11 imposes a tax on the taxable income of corporations.

Section 61 of the Code provides that gross income means all income from whatever source derived, unless otherwise provided by law. Section 63 defines taxable income as gross income minus deductions.

Revenue Ruling 67-284, 1967-2 C.B. 55, 58, modified on another issue by Rev. Rul. 74-13, 1974-1 C.B. 14, holds that Indian tribes are not taxable entities. The revenue ruling further holds that tribal income not otherwise exempt from federal income tax is includible in the gross income of the Indian tribal member when distributed to, or constructively received by, the tribal member.

Revenue Ruling 81-295, 1981-2 C.B. 15, relying on Mescalero Apache Tribe v. Jones, 411 U.S. 145, 157, n.13 (1973), holds that an Indian tribal corporation organized under section 17 of the IRA shares the same tax status as the Indian tribe and is not taxable on income from activities carried on within the boundaries of the reservation.

However, a corporation organized by an Indian tribe under state law is not the same as an Indian tribal corporation organized under section 17 of the IRA and does not share the same tax status as the Indian tribe for federal income tax purposes. Generally, the choice of corporate form will not be ignored. See Moline Properties v. Commissioner, 319 U.S. 436 (1943).

Because an Indian tribe is not a taxable entity, any income earned by an unincorporated tribe, regardless of the location of the business activities that produced the income, is not subject to federal income tax. An Indian tribal corporation organized under section 17 of the IRA shares the same tax status as the tribe. Therefore, any income earned by such a corporation, regardless of the location of the business activities that produced the income, is not subject to federal income tax. However, a corporation organized by an Indian tribe under state law does not share the same tax status as the tribe for federal income tax purposes and is subject to federal income tax on any income earned, regardless of the location of the business activities that produced the income.

Accordingly, Tribe T in Situation 1 and Corporation X in Situation 2 are not taxable entities and are not subject to federal income tax on any income earned from their business activities. Corporation Y in Situation 3 is a taxable entity and is subject to federal income tax on all income earned from its business activities.

HOLDING

An unincorporated Indian tribe or an Indian tribal corporation organized under section 17 of the IRA is not subject to federal income tax on the income earned in the conduct of commercial business on or off the tribe's reservation. However, a corporation organized by an Indian tribe under state law is subject to federal income tax on the income earned in the conduct of commercial business on and off the tribe's reservation.

This revenue ruling deals only with federal income taxes. It does not affect the application of other federal taxes, such as employment taxes and excise taxes (including excise taxes on wagering), to Indian tribes or tribal corporations.

PROSPECTIVE APPLICATION

Pursuant to section 7805(b) of the Code, the portion of the holding of this revenue ruling that applies to a corporation organized by an Indian tribe under state law will not be applied to income earned before October 1, 1994, from activities conducted within the boundaries of the reservation (including gain or loss properly allocable to such activities from the sale or exchange of assets).

EFFECT ON OTHER RULINGS

Rev. Rul. 81-295 is clarified. Rev. Rul. 67-284 is amplified.

DRAFTING INFORMATION

The principal author of this revenue ruling is Johnnel St. Germain of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. St. Germain on (202) 622-4930 (not a toll-free call).