Proposed Regulation Clarifies Federal Tax Status of Entities Wholly Owned by Tribes

The Internal Revenue Service (IRS) has issued a Notice of Proposed Rulemaking to amend Regulation 1.6417-1 to clarify the status of entities wholly owned by Indian Tribal governments (“Tribes”). The proposed regulations would provide that entities wholly owned by Tribes and organized or incorporated exclusively under the laws of the Tribes that own them generally would not be recognized as separate entities for federal tax purposes. In addition, the proposed regulations would provide that wholly owned Tribal entities, Section 17 corporations under the Indian Reorganization Act of 1934, and Section 3 corporations under the Oklahoma Indian Welfare Act, would be treated as instrumentalities of the Tribes that wholly own them for purposes of making Section 6417 elections.

The Notice indicates that principles of existing federal tax law, such as the substance over form doctrine, debt versus equity analyses, and the economic substance doctrine, would apply to determine ownership in cases where a non-Tribe investor holds stock in a Tribal entity. Furthermore, when multiple Tribes hold an ownership interest in an entity, the entity could satisfy the “wholly owned” requirement as long as the entity is organized or incorporated under each Tribe’s laws.

The proposal includes four new examples to show when wholly owned Tribal entities would not be considered separate from the Tribe for tax purposes and how Section 6417 elections would apply.

The IRS and Treasury Department consulted with Tribes on the proposed rule and claim that this resolves decades-long ambiguities about the federal tax status of entities wholly owned by Tribes. It also provides more flexible entity formation options other than Section 17 and Section 3 corporations, which were already accounted for in existing Regulation 1.6417-1. The proposal should also simplify the administration of Section 6417 elections by identifying a single entity able to make such elections rather than having the election made by the Tribes owning such entities, which could prove burdensome for entities with multiple Tribes as owners or subsidiaries of Tribal entities.

Scott Stogsdill, Director of Energy Incentives, points out, “In the past, the main complaint from Tribal authorities is that the incorporation process for new tribal entities is a lengthy multistep federal process that subjects a Tribe to Federal oversight and approval. It takes a proverbial act of Congress to create or dissolve an agency or subdivision of the Tribe.” Therefore, this clarity was a long time coming. Under the new rules, there should be a more streamlined approach to creating and dissolving Tribal-owned entities. Further, the Tribal-owned entity itself (not the Tribal government owning the entity) would make the Section 6417 direct-pay election.

Ian Boccaccio, Principal and Income Tax Practice Leader, states, “The Tribal communities are an under-penetrated segment of the industry. We are here to help.” The Energy Incentives team at Ryan is already working with several Tribal-owned casinos to achieve their green energy goals and obtain the direct-pay election.

Comments on the proposal may be submitted via the Federal eRulemaking Portal. A public hearing is scheduled for January 17, 2025. Until final regulations are published in the Federal Register, Tribes and related entities may generally rely on the proposed regulations.

For additional information, please contact our Ryan tax professionals.

TECHNICAL INFORMATION CONTACTS:

Ian Boccaccio
Principal
Ryan
469.399.4545
ian.boccaccio@ryan.com

Scott Stogsdill
Director
Ryan
469.399.4496
scott.stogsdill@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.