[Federal Register Volume 76, Number 216 (Tuesday, November 8, 2011)]
[Proposed Rules]
[Pages 69188-69198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-28858]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-133223-08]
RIN 1545-BI19


Indian Tribal Governmental Plans

AGENCY: Internal Revenue Service (IRS), Department of the Treasury.

ACTION: Advance notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Treasury Department and IRS anticipate issuing regulations 
under section 414(d) of the Internal Revenue Code (Code) to define the 
term ``governmental plan.'' This document describes the rules the 
Treasury Department and IRS are considering proposing relating to the 
determination of whether a plan of an Indian tribal government is a 
governmental plan within the meaning of section 414(d) and contains an 
appendix that includes a draft notice of proposed rulemaking on which 
the Treasury Department and IRS invite comments from the public. This 
document applies to sponsors of, and participants and beneficiaries in, 
employee benefit plans of Indian tribal governments.

DATES: Written or electronic comments must be received by February 6, 
2012.

ADDRESSES: Send submissions relating to the section 414(d) draft ITG 
regulations to: CC:PA:LPD:PR (REG-133223-08), Room 5203, Internal 
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington DC 
20044. Submissions may be hand delivered Monday through Friday, between 
the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-133223-08), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC.
    Alternately, taxpayers may submit comments relating to the section 
414(d) draft ITG regulations located in the Appendix to this ANPRM 
electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-REG-133223-08).

FOR FURTHER INFORMATION CONTACT: Concerning the ANPRM, Pamela R. 
Kinard, at (202) 622-6060; concerning submission of comments, Richard 
Hurst, at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document describes rules that the Treasury Department and IRS 
are considering proposing and contains a draft notice of proposed 
rulemaking (in the Appendix to this ANPRM) under section 414(d) of the 
Internal Revenue Code (Code). Under the draft notice of proposed 
rulemaking (in the Appendix to this ANPRM), the rules would provide 
guidance relating to the determination of whether a plan of an Indian 
tribal government, a subdivision of an Indian tribal government, or an 
agency or instrumentality of either (ITG) is a governmental plan within 
the meaning of section 414(d) of the Code (section 414(d) draft ITG 
regulations).
    Section 414(d) of the Code provides that the term ``governmental 
plan'' generally means a plan established and maintained for its 
employees by the Government of the United States, by the government of 
any State or political subdivision thereof, or by any agency or 
instrumentality of any of the foregoing. See sections 3(32) and 
4021(b)(2) of the Employee Retirement Income Security Act of 1974 
(ERISA) for definitions of the term ``governmental plan,'' which govern 
respectively for purposes of title I and title IV of ERISA.\1\
---------------------------------------------------------------------------

    \1\ The three definitions of the term ``governmental plan'' are 
essentially the same. The only difference is that, in defining the 
term ``governmental plan,'' section 3(32) of ERISA uses the phrase 
``established or maintained,'' whereas section 414(d) of the Code 
and section 4021(b) of ERISA use the term ``established and 
maintained.''
---------------------------------------------------------------------------

    The term ``governmental plan'' also includes any plan to which the 
Railroad Retirement Act of 1935 or 1937 (49 Stat. 967, as amended by 50 
Stat. 307) applies and which is financed by contributions required 
under that Act and any plan of an international organization which is 
exempt from taxation by reason of the International Organizations 
Immunities Act (59 Stat. 669). See section 414(d)(2) of the Code.

[[Page 69189]]

    Section 414(d) was amended by the Pension Protection Act of 2006, 
Public Law 109-280 (120 Stat. 780) (PPA '06) to include certain plans 
of Indian tribal governments and related entities.\2\ Section 906(a)(1) 
of PPA '06 provides that the term ``governmental plan'' includes a plan 
which is established and maintained by an Indian tribal government (as 
defined in section 7701(a)(40)), a subdivision of an Indian tribal 
government (determined in accordance with section 7871(d)), or an 
agency or instrumentality of either (ITG), and all the participants of 
which are employees of such entity substantially all of whose services 
as such an employee are in the performance of essential governmental 
functions but not in the performance of commercial activities (whether 
or not an essential governmental function).
---------------------------------------------------------------------------

    \2\ Section 906(a) of PPA '06 made similar amendments to 
sections 3(32) and 4021(b)(2) of ERISA.
---------------------------------------------------------------------------

    Neither section 414(d) of the Code, section 3(32) of ERISA, nor 
section 4021(b)(2) of ERISA define key terms relating to governmental 
plans, including the terms ``established and maintained,'' ``political 
subdivision,'' ``agency,'' and ``instrumentality.'' Currently, there 
are no regulations interpreting section 414(d). Revenue Ruling 89-49 
(1989-1 CB 117), see Sec.  601.601(d)(2), sets forth a facts and 
circumstances analysis for determining whether a retirement plan is a 
governmental plan within the meaning of section 414(d).\3\ This 
analysis is used by the IRS in issuing letter rulings. In connection 
with this advanced notice of proposed rulemaking, an advance notice of 
proposed rulemaking is also being issued with respect to the general 
definition of a governmental plan (REG-157714-06 that is being 
published elsewhere in this issue of the Federal Register).
---------------------------------------------------------------------------

    \3\ See also Rev. Rul. 57-128 (1957-1 CB 311), see Sec.  
601.601(d)(2), which provides guidance on determining when an entity 
is a governmental instrumentality for purposes of the exemption from 
employment taxes under section 3121(b)(7) and 3306(c)(7).
---------------------------------------------------------------------------

    Governmental plans are subject to different rules than retirement 
plans of nongovernmental employers. Governmental plans are excluded 
from the provisions of titles I and IV of ERISA. In addition, 
governmental plans receive special treatment under the Code. These 
plans are exempt from certain qualification requirements and they are 
deemed to satisfy certain other qualification requirements under 
certain conditions. As a result, the principal qualification 
requirements for a tax-qualified governmental plan\4\ are that the 
plan--
---------------------------------------------------------------------------

    \4\ A special rule applies to contributory plans of certain 
governmental entities. Section 414(h)(2) provides that, for a 
qualified plan established by a State government or political 
subdivision thereof, or by any agency or instrumentality of the 
foregoing, where the contributions of the governmental employer are 
designated as employee contributions under section 414(h)(1) but the 
governmental employer picks up the contributions, the contributions 
picked up will be treated as employer contributions.
---------------------------------------------------------------------------

     Be established and maintained by the employer for the 
exclusive benefit of the employer's employees or their beneficiaries;
     Provide definitely determinable benefits;
     Be operated pursuant to its terms;
     Satisfy the direct rollover rules of section 401(a)(31);
     Satisfy the section 401(a)(17) limitation on compensation;
     Comply with the statutory minimum required distribution 
rules under section 401(a)(9);
     Satisfy the pre-ERISA vesting requirements under section 
411(e)(2); \5\
---------------------------------------------------------------------------

    \5\ Section 411(e)(2) states that a plan described in section 
411(e)(1) is treated as meeting the requirements of section 411 if 
the plan meets the vesting requirements resulting from the 
application of section 401(a)(4) and (a)(7) as in effect on 
September 1, 1974.
---------------------------------------------------------------------------

     Satisfy the section 415 limitations on benefits, as 
applicable to governmental plans; and
     Satisfy the prohibited transaction rules in section 503.

State and local governments, political subdivisions thereof, and 
agencies or instrumentalities thereof are generally not permitted to 
offer cash or deferred arrangements under section 401(k). However, an 
ITG is permitted to offer a cash or deferred arrangement under section 
401(k).
    Notice 2006-89 (2006-2 CB 772) and Notice 2007-67 (2007-35 IRB 
465), see Sec.  601.601(d)(2), summarize the changes made by section 
906(a)(1) of PPA '06 and provide transitional relief to ITGs under a 
reasonable and good faith standard to comply with such changes. The 
notices provide that until such guidance is issued, a plan established 
and maintained by an ITG for its employees is treated as satisfying the 
requirements of section 906(a)(1) of PPA '06 to be a governmental plan 
under section 414(d) of the Code if it complies with those requirements 
based on a reasonable and good faith interpretation of section 414(d). 
For further background, see the ``Background'' section of the preamble 
of the section 414(d) draft ITG regulations in the Appendix to this 
ANPRM under the headings, ``Notices Issued by the IRS Relating to ITG 
Retirement Plans under PPA '06.''
    The Treasury Department and the IRS participated in a series of 
telephone listening meetings with the ITG community following the 
passage of PPA '06. The attached draft notice of proposed rulemaking in 
the Appendix to this ANPRM takes into account comments provided through 
a number of informative and cooperative comments received in response 
to Notices 2006-89 and 2007-67 and open and direct consultations with 
the Indian tribal community. Those comments received from Notices 2006-
89 and 2007-67 and during the consultations were considered in drafting 
the proposed rulemaking.
    The Treasury Department and the IRS have determined to seek public 
comment and consult with ITGs on the draft proposed regulations in 
advance of issuing a notice of proposed rulemaking. In light of the 
interaction of the governmental plan definitions in the Code and ERISA, 
a copy of the comments will be forwarded to DOL and PBGC.

Explanation of Provisions

    Attached to the Appendix to this ANPRM is a draft notice of 
proposed rulemaking. These draft regulations include proposed rules, a 
preamble, and a request for comments. The Treasury Department and IRS 
invite the public to comment on the rules that the Treasury Department 
and IRS are considering proposing, which would set forth special rules 
relating to retirement plans of ITGs.

Section 414(d) Draft ITG Regulations

    A plan established and maintained by an ITG is a governmental plan 
under section 414(d), as amended by section 906 of PPA '06, only if all 
of its participants are employees substantially all of whose services 
are in the performance of essential governmental functions (but not in 
the performance of commercial activities whether or not an essential 
governmental function). Therefore, the rules under the section 414(d) 
draft general regulations (in the Appendix to the ANPRM that is being 
published elsewhere in this issue of the Federal Register) would apply 
to ITG governmental plans, as well as the special rules under the 
attached section 414(d) draft ITG regulations. The anticipated proposed 
regulations would use the broader concepts of governmental activity and 
commercial activity, instead of the terms essential governmental 
function and commercial activity. See the ``Explanation of Provisions'' 
section in the section 414(d)

[[Page 69190]]

draft ITG regulations in the Appendix to this ANPRM under the heading, 
``Determination of Governmental and Commercial Activities.''
    Under the section 414(d) draft ITG regulations (in the Appendix to 
this ANPRM), whether a plan of an ITG is a governmental plan or a 
nongovernmental plan within the meaning of section 414(d) would be 
based, in part, on: (1) A determination of which activities are 
commercial activities and (2) a determination of whether employees of 
the ITG covered by the plan are employees who perform substantial 
services in commercial activities of the ITG (and are thus commercial 
employees).
    The anticipated proposed regulations would provide that certain 
specific activities are deemed to be governmental or commercial for 
purposes of section 414(d). Under the anticipated proposed regulations, 
commercial activities would be operations involving a hotel, casino, 
service station, convenience store, or marina. These activities are 
examples that were identified as commercial activities in Notices 2006-
89 and 2007-67, as well as in the Joint Committee on Taxation Technical 
Explanation to section 906 of PPA '06. The section 414(d) draft ITG 
regulations in the Appendix to this ANPRM would provide that 
governmental activities include activities related to the building and 
maintenance of public roads, sidewalks, and buildings, activities 
related to public work projects (such as schools and government 
buildings), and activities that are subject to a treaty or special 
rules that pertain to trust land ownership and use. See Sec.  
601.601(d)(2).
    In addition to listing certain specified activities, the 
anticipated proposed regulations would provide a facts and 
circumstances test for determining whether an activity is a 
governmental or commercial activity. See the ``Explanation of 
Provisions'' section in the section 414(d) draft ITG regulations in the 
Appendix to this ANPRM under the heading, ``Governmental and Commercial 
Activities.'' The anticipated proposed regulations would also provide 
examples illustrating the application of the facts and circumstances 
tests to particular activities.
    The anticipated proposed regulations would also provide rules for 
determining whether employees covered by an ITG plan are employees who 
perform substantial services in activities that are governmental. For 
this purpose, the determination of whether an employee's services are 
for governmental or commercial activities would generally be based on 
the employee's assigned duties and responsibilities. See the 
``Explanation of Provisions'' section in the section 414(d) draft ITG 
regulations in the Appendix to this ANPRM under the headings, 
``Determination of Governmental ITG Employees'' and ``Determination of 
Commercial ITG Employees.''
    The anticipated proposed regulations do not address the broader 
issue of whether a retirement plan is a governmental plan within the 
meaning of section 414(d). That topic is addressed in the advance 
notice of proposed rulemaking relating generally to the definition of 
governmental plan that is being published elsewhere in this issue of 
the Federal Register.

Request for Comments

    Before a notice of proposed rulemaking is issued, consideration 
will be given to any written comments that are submitted timely 
(preferably a signed original and eight (8) copies) to the IRS. All 
comments will be available for public inspection and copying. Copies of 
the comments will be provided to the DOL and PBGC.
    Comments are also requested on whether, as an alternative to 
issuing proposed regulations, the Department of the Treasury and IRS 
should publish a notice that reflects some or all of the rules in the 
draft proposed regulations and that also modifies the rule in Notice 
2007-67 concerning when a mixed ITG is required to be amended to be two 
different plans, one for governmental employees and another for 
commercial employees. If so, the notice would include a significant 
transitional period for compliance similar to the transition period 
that would be expected to apply for regulations (such as not being 
effective until plan years that begin at least 18 months after 
publication of the notice). The Department of the Treasury and IRS 
invite comments on whether this method of guidance would be preferable 
to the issuance of regulations.
    The IRS and Department of the Treasury plan to schedule a public 
hearing on the ANPRM. That hearing will be scheduled and announced at a 
later date. In addition to a public hearing, the Treasury Department 
and IRS anticipate scheduling consultation listening meetings in order 
to obtain comments from tribal governments on the section 414(d) draft 
ITG regulations. It is expected that these meetings will take place in 
different locations across the country. Participants will be encouraged 
to pre-register for the meetings. Information relating to these 
meetings, including dates, times, locations, registration, and the 
procedures for submitting written and oral comments, will be available 
on the IRS Web site relating to governmental plans at http://www.irs.gov/retirement/article/0,,id=181779,00.html.

EO 13175, Consultation and Coordination With Indian Tribal Governments

    In the Appendix to this ANPRM is a draft notice of proposed 
rulemaking. These draft regulations include proposed rules, a preamble, 
and a request for comments. The Treasury Department and the IRS invite 
the public to comment on the rules under consideration, which would set 
forth special rules relating to retirement plans of ITGs. This 
solicitation of comments is in furtherance of the objective of 
Executive Order 13175 under which Treasury consults with tribal 
officials in the development of Federal policies that may have tribal 
implications. The IRS and Treasury Department will consult with Indian 
tribes through the normal comment process in the Federal Register, 
issuing this advance notice of public rulemaking, and reaching out to 
Indian tribes through a series of consultation listening meetings.

Drafting Information

    The principal author of this advance notice of proposed rulemaking 
is Pamela R. Kinard, Office of the Chief Counsel (Tax-exempt and 
Government Entities), however, other personnel from the IRS and 
Treasury Department participated in its development.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.

Appendix

    The following is draft language for a notice of proposed rulemaking 
that would set forth rules relating to the determination of whether a 
plan of an Indian tribal government is a governmental plan within the 
meaning of section 414(d). The IRS and Treasury release this draft 
language in order to solicit comments from the governmental plans 
community:

Background

    This document contains proposed regulations under section 414(d) of 
the Internal Revenue Code (Code). These regulations, when finalized, 
would provide guidance relating to the determination of whether a plan 
of an Indian tribal government or other entities related to an Indian 
tribal government is a governmental plan within the meaning of section 
414(d). The definition of a governmental plan

[[Page 69191]]

under section 414(d) applies for purposes of Part I of Subchapter D of 
Chapter 1 of Subtitle A (Income Taxes) of the Code (sections 401 
through 420) and certain other Code provisions that refer to section 
414(d) (such as sections 72(t)(10), 501(c)(25)(C), 4975(g)(2), 
4980B(d)(2), 9831(a)(1), and 9832(d)(1) of the Code).

Statutory Definition of Governmental Plan

    Both the Code and the Employee Retirement Income Security Act of 
1974 (ERISA) define the term ``governmental plan.'' Prior to the 
Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780) (PPA 
'06), section 414(d) of the Code provides that the term ``governmental 
plan'' means a plan established and maintained for its employees by the 
Government of the United States, by the government of any State or 
political subdivision thereof, or by any agency or instrumentality of 
any of the foregoing. Sections 3(32) and 4021(b)(2) of ERISA have 
parallel definitions of the term ``governmental plan.'' The term 
``governmental plan'' also includes any plan to which the Railroad 
Retirement Act of 1935 or 1937 (49 Stat. 967, as amended by 50 Stat. 
307) applies and which is financed by contributions required under that 
Act and any plan of an international organization which is exempt from 
taxation by reason of the International Organizations Immunities Act 
Public Law 79-291 (59 Stat. 669).

Section 906 of PPA '06

    Section 906(a) of PPA '06 amended section 414(d) of the Code (and 
the parallel provisions in sections 3(32) and 4021(b)(2) of ERISA) to 
include in the definition of ``governmental plan'' certain plans of an 
Indian tribal government, a subdivision of an Indian tribal government, 
or an agency or instrumentality thereof. Specifically, under section 
906(a)(1) of PPA '06, the term ``governmental plan'' includes a plan 
which is established and maintained for its employees by an Indian 
tribal government (as defined in section 7701(a)(40)), a subdivision of 
an Indian tribal government (determined in accordance with section 
7871(d)), or an agency or instrumentality of either (ITG), and all of 
the participants of which are employees of such entity substantially 
all of whose services as such an employee are in the performance of 
essential governmental functions but not in the performance of 
commercial activities (whether or not an essential governmental 
function). Section 906(c) of PPA '06 provides that the amendments made 
by section 906 of PPA '06 apply to any year beginning on or after the 
date of enactment, which is August 17, 2006.
    In its Technical Explanation \6\ to section 906 of PPA '06, the 
Joint Committee on Taxation refers to an employee substantially all of 
whose services for an ITG are in the performance of essential 
governmental services and not in the performance of commercial 
activities (whether or not such activities are an essential 
governmental function) as a qualified employee who is eligible to 
participate in a governmental plan as described in section 414(d). The 
Technical Explanation states, for example, that a governmental plan 
includes a plan of an ITG, all of the participants of which are 
teachers in tribal schools. However, the Technical Explanation also 
states that a governmental plan does not include a plan covering tribal 
employees who are employed by a hotel, casino, service station, 
convenience store, or marina operated by a tribal government.
---------------------------------------------------------------------------

    \6\ Joint Committee on Taxation, Technical Explanation of H.R. 
4, the ``Pension Protection Act of 2006'' as passed by the House on 
July 28, 2006, and considered by the Senate on August 3, 2006 (JCX-
38-06), August 3, 2006, 109th Cong., 2nd Sess. 244 (2006).
---------------------------------------------------------------------------

Exemption of Governmental ITG Plans From Certain Qualified Plan Rules

    Governmental plans under Code section 414(d), including 
governmental ITG plans, receive special treatment with respect to 
certain qualification rules. Such plans are exempt from certain 
qualification requirements and are deemed to satisfy certain other 
qualification requirements under certain conditions. For example, the 
nondiscrimination and minimum participation rules do not apply to 
governmental plans.\7\ In addition, the Code provides other exemptions 
for section 414(d) governmental plans:
---------------------------------------------------------------------------

    \7\ Section 861 of PPA '06 amended sections 401(a)(5)(G) and 
401(a)(26)(G) of the Code to provide that the minimum participation 
standards and nondiscrimination requirements of section 410 and the 
additional participation requirements under section 401(a)(26) do 
not apply to governmental plans within the meaning of section 414(d) 
of the Code. Section 861 of PPA '06 also exempts governmental plans 
from the nondiscrimination and participation requirements applicable 
to qualified cash or deferred arrangements under section 401(k)(3) 
of the Code.
---------------------------------------------------------------------------

     Section 401(a)(10)(B)(iii), which provides that the top-
heavy requirements of section 416 do not apply to a governmental plan.
     Section 410(c)(1)(A), which provides that the minimum 
participation provisions of section 410 do not apply to a governmental 
plan.
     Section 411(e), which provides that a governmental plan is 
treated as satisfying the requirements of section 411 if the plan meets 
the pre-ERISA vesting requirements.
     Section 412(e)(2)(C), which provides that the minimum 
funding standards of section 412 do not apply to a governmental plan.
     Section 417, which provides rules relating to qualified 
joint and survivor annuities and qualified preretirement survivor 
annuities.
    Section 415 also provides a number of special rules for 
governmental plans. The special rules include section 415(b)(11) (under 
which governmental pensions are not limited to 100% of a participant's 
average high 3 compensation), section 415(b)(2)(I) (the reduced 
limitation to the annual benefit payable beginning before age 62 and 
the reduction in the dollar limitation to the annual benefit payable 
for participation or services of less than 10 years do not apply to 
disability or survivor benefits received from a governmental plan), 
section 415(m) (benefits provided under a qualified governmental excess 
benefit arrangement are not taken into account in determining the 
section 415 benefit limitations under a section 414(d) governmental 
plan), and section 415(n) (permissive service credit).
    As a result, the principal qualification requirements for a tax-
qualified governmental plan \8\ are that the plan--
---------------------------------------------------------------------------

    \8\ A special rule applies to contributory plans of certain 
governmental entities. Section 414(h)(2) provides that, for a 
qualified plan established by a State government or political 
subdivision thereof, or by any agency or instrumentality of the 
foregoing, where the contributions of the governmental employer are 
designated as employee contributions under section 414(h)(1) but the 
governmental employer picks up the contributions, the contributions 
picked up will be treated as employer contributions.
---------------------------------------------------------------------------

     Be established and maintained by the employer for the 
exclusive benefit of the employer's employees or their beneficiaries;
     Provide definitely determinable benefits;
     Be operated pursuant to its terms;
     Satisfy the direct rollover rules of sections 401(a)(31) 
and 402(f);
     Satisfy the section 401(a)(17) limitation on compensation;
     Comply with the statutory minimum required distribution 
rules under section 401(a)(9);
     Satisfy the pre-ERISA vesting requirements under section 
411(e)(2); \9\
---------------------------------------------------------------------------

    \9\ Section 411(e)(2) states that a plan described in section 
411(e)(1) is treated as meeting the requirements of section 411 if 
the plan meets the vesting requirements resulting from the 
application of section 401(a)(4) and (a)(7) as in effect on 
September 1, 1974.
---------------------------------------------------------------------------

     Satisfy the section 415 limitations on benefits, as 
applicable to governmental plans; and

[[Page 69192]]

     Satisfy the prohibited transaction rules in section 503.
    State and local governments, political subdivisions thereof, and 
agencies or instrumentalities thereof are generally not permitted to 
offer cash or deferred arrangements under section 401(k).\10\ However, 
Indian tribal governments and their related entities are permitted to 
offer cash or deferred arrangements as part of a plan maintained by an 
ITG.\11\
---------------------------------------------------------------------------

    \10\ Section 401(k)(4)(B)(ii) provide that a cash or deferred 
arrangement shall not be treated as a qualified cash or deferred 
arrangement if it is part of a plan maintained by a State or local 
government or political subdivision thereof, or any or agency or 
instrumentality thereof.
    \11\ See section 401(k)(4)(B)(iii). For a general overview of 
the special rules relating to plans of ITGs, see the Joint Committee 
on Taxation, Overview of Federal Tax Provisions Relating to Native 
American Tribes and Their Members (JCX 61-08), July 18, 2008.
---------------------------------------------------------------------------

Rules Treating Indian Tribal Governments as States for Purposes of 
Issuing Tax-Exempt Bonds

    Section 7871 provides special rules for Indian tribal governments. 
Section 7871(a)(4) provides that an Indian tribal government is to be 
treated as a State for purposes of section 103, relating to tax-exempt 
bonds.\12\ Section 7871(c)(1) generally provides that section 103(a) 
applies to an obligation issued by an Indian tribal government only if 
such obligation is part of an issue substantially all of the proceeds 
of which are to be used in the exercise of any essential governmental 
function.
---------------------------------------------------------------------------

    \12\ An Indian tribal government is treated in the same manner 
as a State for certain specified purposes under the Code, but not 
for purposes of section 414(d) (or any provision in sections 401 
through 424, other than sections 403(b)(1)(A)(ii)).
---------------------------------------------------------------------------

    On August 9, 2006, an advance notice of proposed rulemaking under 
section 7871 was published in the Federal Register (71 FR 45474). The 
ANPRM describes the rules that the Treasury Department and the IRS 
anticipate proposing on the definition of essential governmental 
function under section 7871(e). The rules would provide that an 
activity is considered an essential governmental function that is 
customarily performed by State and local governments if: (1) There are 
numerous State and local governments with general taxing powers that 
have been conducting the activity and financing it with tax-exempt 
governmental bonds; (2) State and local governments with general taxing 
powers have been conducting the activity and financing it with tax-
exempt governmental bonds for many years; and (3) the activity is not a 
commercial or industrial activity. The ANPRM provides examples of 
activities customarily performed by State and local governments, 
including public works projects such as roads, schools, and government 
buildings.

Notices Issued by the IRS Relating to ITG Retirement Plans Under PPA 
`06

    Notice 2006-89 (2006-2 CB 772) and Notice 2007-67 (2007-35 IRB 
467), see Sec.  601.601(d)(2), summarize the changes made by section 
906(a)(1) of PPA '06 and provide transitional relief to ITGs under a 
reasonable and good faith standard to comply with such changes. The 
notices provide that, until such guidance is issued, a plan established 
and maintained by an ITG for its employees is treated as satisfying the 
requirements of section 906(a)(1) of PPA '06 to be a governmental plan 
under section 414(d) of the Code if it complies with those requirements 
based on a reasonable and good faith interpretation of section 414(d). 
The notices further provide that it is not a reasonable and good faith 
interpretation of section 414(d) for an ITG plan to claim to be a 
governmental plan within the meaning of section 414(d) if employees 
participating in the plan perform services for a hotel, casino, service 
station, convenience store, or marina operated by an ITG.
    In Notices 2006-89 and 2007-67, the Treasury Department and IRS 
announced that regulations would be proposed to provide guidance on 
section 414(d), including changes made to section 414(d) by section 906 
of PPA '06, and to provide transitional relief pending the issuance of 
these regulations. Comments were requested on issues relating to 
section 906 of PPA '06, including transitional issues not addressed in 
the notice.
    The transitional relief provided to plans of ITGs under Notices 
2006-89 and 2007-67 continues up to the date that is six months after 
the date that guidance is issued under section 414(d) of the Code, as 
amended by section 906 of PPA '06 (extended date). For ITG plans that 
provide benefits both to employees substantially all of whose work is 
in essential governmental functions that are not commercial activities 
(governmental ITG employees) and to employees who perform services 
substantially in the performance of commercial activities (commercial 
ITG employees), the Notices provide that the ITG plan will be treated 
as satisfying the reasonable, good faith standard if certain steps are 
taken, which include adopting a separate plan covering commercial ITG 
employees effective as of the beginning of the first plan year 
beginning on or after August 17, 2006, the enactment of PPA '06. The 
commercial ITG plan, beginning on the same effective date, must comply 
with the qualification requirements for plans that are not governmental 
plans.
    These proposed regulations would provide guidance relating to ITG 
plans under section 414(d). The transitional relief provided under 
Notices 2006-89 and 2007-67 would end six months after the effective 
date of the final regulations published in the Federal Register.
    The transitional relief in Notices 2006-89 and 2007-67 is 
conditioned on the ITG plans involved not being amended, for periods 
before the extended date, to reduce benefits unless the reduction does 
not distinguish between reductions for commercial ITG employees and 
governmental ITG employees or the reduction for commercial ITG 
employees is the minimum amount necessary to satisfy any requirement 
under the Code. If any reduction occurs that does not satisfy these 
conditions, the transitional relief provided under Notices 2006-89 and 
2007-67 ends on the date that the reduction goes into effect.

Executive Order 13175

    Executive Order 13175 requires that Federal departments and 
agencies engage in consultation procedures in certain circumstances 
where regulations are issued which have substantial direct effects with 
respect to the Federal government and Indian tribes. While these 
regulations when issued as final regulations would not have such 
substantial direct effects, the IRS and Treasury Department have 
followed similar procedures. Further, the Treasury Department and the 
IRS participated in a series of telephone listening meetings with the 
ITG community following the passage of PPA '06 and these proposed 
regulations also take into account the comments that were provided in 
response to Notices 2006-89 and 2007-67, including the related open and 
direct consultations with the Indian tribal community.

Judicial Determinations

    The few court cases that discuss section 906 of PPA '06 primarily 
relate to welfare benefit plans. One reason for the legislative change 
to section 414(d) of the Code and section 3(32) of ERISA is ``to 
clarify the legal ambiguity regarding the status of employee benefit 
plans established and maintained by tribal governments.'' \13\ In 
Bolssen v.

[[Page 69193]]

Unum Life Insurance Company of America, 629 F.Supp. 2d 878 (E.D. Wis. 
2009), Mr. Bolssen sued the Unum Life Insurance Company for failing to 
provide disability insurance benefits. He argued that the case should 
be remanded to state court because the insurance plan sponsored by his 
employer, an Indian tribal casino, was a governmental plan within the 
meaning of section 3(32) of ERISA. In analyzing whether the welfare 
benefit plan was a governmental plan, the Bolssen court looked to 
another case involving an Indian tribal casino, San Manuel Indian Bingo 
& Casino v. NLRB, 475 F.3d 1306 (DC Cir. 2007). In San Manuel Indian 
Bingo & Casino, the court held that the National Labor Relations Act 
applied to an Indian tribal casino because the operation of the casino 
was a commercial function. The court reasoned that ``it can be argued 
any activity of a tribal government is by definition `governmental,' 
and even more so an activity aimed at raising revenue that will fund 
governmental functions. Here, though, we use the term `governmental' in 
a restrictive sense to distinguish between the traditional acts 
governments perform and collateral acts that, though perhaps in some 
way related to the foregoing, lie outside their scope.'' \14\
---------------------------------------------------------------------------

    \13\ See Dobbs v. Anthem Blue Cross & Blue Shield, 475 F.3d 
1176, 1178 (10th Cir. 2007) (citing 150 Cong. Rec. S9526, 9533), 
rev'd in part 600 F.3d 1275 (2010). See also Bolssen v. Unum Life 
Insurance Company of America, 629 F.Supp. 2d 878, 881 (E.D. Wis. 
2009).
    \14\ San Manuel Indian Bingo & Casino, 475 F.3d at 1313.
---------------------------------------------------------------------------

    The court, in San Manuel Indian Bingo & Casino, held that the 
operating a casino is not a traditional act of government, but is 
commercial in nature.\15\ The court in Bolssen applied the same 
reasoning to conclude that disability plan of the casino was not a 
governmental plan within the meaning of section 3(32) of ERISA.
---------------------------------------------------------------------------

    \15\ Id. at 1315.
---------------------------------------------------------------------------

Explanation of Provisions

    These proposed regulations would provide special rules for purposes 
of the definition of a ``governmental plan'' under section 414(d) of 
the Code, as it relates to plans of ITGs. The Treasury Department and 
IRS also expect to issue separate proposed regulations under section 
414(d) to define a governmental plan for purposes other than the 
special rules applicable to ITGs. However, these proposed regulations 
relating to ITGs would provide Indian tribal governments with guidance 
in determining whether an ITG plan is a governmental ITG plan or a 
commercial ITG plan. As discussed in the background of this preamble, 
under the heading ``Exemption of Governmental ITG Plans from Certain 
Qualified Plan Rules,'' governmental plans receive special treatment 
with respect to certain qualification rules. Thus, the determination of 
whether an ITG plan is a governmental ITG plan is essential in ensuring 
compliance with the qualified plan rules because an ITG must be able to 
ascertain which of its plans are governmental plans under section 
414(d) and which of its plans must comply with the requirements for a 
plan that is not a governmental plan. These proposed regulations take 
into account comments received in response to Notices 2006-89 and 2007-
67 and a number of open and direct consultations with the Indian tribal 
community. Those comments received from Notices 2006-89 and 2007-67 and 
during the consultations were considered in drafting these proposed 
regulations.

Determination of Governmental and Commercial Activities

    As discussed earlier in the background section of this preamble, a 
governmental plan, as it relates to ITGs, may include a plan 
established and maintained by an ITG, but such a plan is a governmental 
plan under section 414(d) only if all of its participants are employees 
substantially all of whose services are in the performance of essential 
governmental functions (but not in the performance of commercial 
activities whether or not an essential governmental function). Key to 
determining whether a plan of an ITG is a governmental plan within the 
meaning of section 414(d) is the determination of the terms ``essential 
governmental function'' and ``commercial activity.''
    These proposed regulations would use the concepts of ``governmental 
activity'' and ``commercial activity,'' instead of the terms 
``essential governmental function'' and ``commercial activity.'' The 
terms ``governmental activity'' and ``commercial activity'' would apply 
only for purposes of the governmental plan rules under section 414(d) 
and not for any other purpose under the Code, including section 7871. 
The use of these terms is meant to provide guidance on the requirements 
of section 414(d) with respect to ITG plans, while maintaining 
flexibility and without directly impacting future guidance on section 
7871.
    These proposed regulations would define a governmental ITG plan as 
any plan that is established and maintained by an Indian tribal 
government, a subdivision of an Indian tribal government, or an agency 
or instrumentality of either, and all of its participants are employees 
substantially all of whose services are in the performance of 
governmental activities. The regulations would define a commercial ITG 
plan as a plan covering any ITG employees who perform substantial 
services in a commercial activity, such as a hotel, casino, service 
station, convenience store, or marina, which are examples of commercial 
activities that are listed in the Joint Committee on Taxation Technical 
Explanation to section 906 of PPA `06.\16\ A plan would also be a 
commercial plan if it covers any individual who is not an employee of 
an ITG.
---------------------------------------------------------------------------

    \16\ Joint Committee on Taxation, Technical Explanation of H.R. 
4, the ``Pension Protection Act of 2006'' as passed by the House on 
July 28, 2006, and considered by the Senate on August 3, 2006 (JCX-
38-06), August 3, 2006, 109th Cong., 2nd Sess. 244 (2006).
---------------------------------------------------------------------------

Governmental and Commercial Activities

    Under the proposed regulations, whether a plan of an ITG is a 
commercial plan or a governmental plan within the meaning of section 
414(d) is based in part on (1) a determination of which activities are 
commercial activities and (2) a determination of whether employees of 
the Indian tribal government covered by the plan are employees who 
perform substantial services in commercial activities (and are thus 
commercial employees).
    Under the first step, the proposed regulations would provide 
guidance for determining whether an activity operated by an ITG is a 
governmental activity or a commercial activity for purposes of section 
414(d). This is achieved by listing certain specific activities that 
are deemed to be governmental or commercial for purposes of section 
414(d). Specific governmental activities would include the following: 
(1) Activities that are related to public infrastructure, such as the 
building and maintaining of public roads and buildings; (2) activities 
that involve providing criminal protection services to the public (such 
as police and fire departments) or providing civil or public 
administrative service (such as providing public housing and operating 
public schools and hospitals, as well as managing the ITG's civil 
service system); and (3) activities subject to a treaty or special 
rules that pertain to trust land ownership and use. Under the 
regulations, operations involving a hotel, casino, service station, 
convenience store, and marina would be commercial activities. As 
discussed above, these activities are examples that are identified as 
commercial activities in Notices 2006-89 and 2007-67, as well as in the 
Joint Committee on

[[Page 69194]]

Taxation Technical Explanation to section 906 of PPA '06.
    In addition to listing certain specified activities, the proposed 
regulations would provide a facts and circumstances test for 
determining whether an activity is a governmental or commercial 
activity. The proposed regulations provide that, in making a 
determination of whether an activity is a governmental activity, the 
factors to be considered include whether--
     The activity provides a public benefit to members of the 
Indian tribal government (not treating the generation of profits from 
commercial acts as providing a public benefit); and
     The absence of one or more of the relevant factors listed 
for a commercial activity as provided in these proposed regulations.
    The proposed regulations also provide that, in making a 
determination of whether an activity is a commercial activity, the 
factors to be considered include whether--
     The activity is a type of activity that is operated to 
earn a profit;
     The activity is a type of activity that is typically 
performed by private businesses; and
     The activity is a type of activity where the customers are 
substantially from outside of the Indian tribal community, including 
whether the activity is located or conducted outside of Indian tribal 
land.
    These proposed regulations also provide examples illustrating the 
application of the facts and circumstances tests to particular 
activities. Some examples of activities of an Indian tribal government 
that are commercial might include: (1) Operating a bank for a profit, 
serving tribal and non-tribal customers; (2) operating a trucking 
business for a profit; and (3) operating a factory producing goods for 
sale primarily to non-tribal customers. Conversely, examples of 
activities of an Indian tribal government that are governmental could 
include: (1) A community swimming pool on tribal land used primarily by 
tribal members; and (2) the operation of a cultural center and a museum 
on tribal land.
    The proposed regulations would also delegate to the Commissioner of 
Internal Revenue the authority to publish guidance under section 414(d) 
that the Commissioner determines to be necessary or appropriate with 
respect to determining whether a plan of an Indian tribal government is 
a commercial ITG plan because the tribe's employees are performing 
services in an activity that the Commissioner determines to be a 
commercial activity. Any such guidance would be published in the form 
of revenue rulings, notices, or other guidance published in the 
Internal Revenue Bulletin (see Sec.  601.601(d)(2)).

Determination of Governmental ITG Employees

    These proposed regulations would also provide rules for the second 
step, namely determining whether employees covered by an ITG plan are 
employees who perform substantially all of their services in activities 
that are governmental. For this purpose, the determination of whether 
an employee's services are for governmental or commercial activities 
would generally be based on the employee's assigned duties and 
responsibilities. In making this determination, the rules in these 
regulations would not require that a plan keep track of the individual 
hours worked by any employee or that the compensation of any particular 
employee be traced through the hours worked by that employee. The 
proposed regulations would provide that an employee whose assigned 
duties and responsibilities are in the performance of a governmental 
activity is treated as performing substantially all of his or her 
services in a governmental activity, and not treated as performing 
services for a commercial activity, even though the performance of 
those services for the governmental activity may temporarily involve 
significant time working in the commercial activity. For example, the 
chief financial officer (CFO) for an ITG may be expected to spend a 
substantial amount of time working on the financing for any casino, 
marina, or hotel to be built on the ITG's tribal lands, but, despite 
temporarily working in a commercial activity, the proposed regulations 
would provide that the CFO is a governmental employee of the ITG all of 
whose services are in that capacity.

Determination of Commercial ITG Employees

    The proposed regulations set forth rules for determining an 
employee's assigned duties and responsibilities, and thus when his or 
her services are substantially in the performance of a governmental or 
commercial activity. The analysis would start with the location of the 
employee's services in relation to the activity. The regulations 
provide that if a commercial activity has a specific location that is 
identifiable and is not associated with a governmental activity, any 
employee performing services at the location of activity is a 
commercial employee. One example is a security guard whose work is 
providing security services at a location which is an Indian tribal 
casino. In the case of an employee who works at a location other than a 
location where a commercial activity is being performed, the result 
would depend on the employee's assigned duties and responsibilities.
    Another key part of the analysis is who pays the employee. If an 
employee is on the payroll of an ITG entity that is engaged in a 
commercial activity, the employee's assigned duties and 
responsibilities are treated as being for a commercial activity and, 
thus, the employee is a commercial ITG employee. For example, if a 
cashier is on the payroll of a convenience store (which is a commercial 
activity) owned by an ITG, the cashier is a commercial ITG employee. 
However, in the case of an employee who is not on a payroll of an ITG 
that engages in a commercial activity, the result would depend on the 
employee's assigned duties and responsibilities.
    Where an employee neither works at a location where a commercial 
activity is being performed nor is on the payroll of a commercial 
entity, the result would depend on the employee's assigned duties and 
responsibilities, taking into account the facts and circumstances. 
Thus, for example, a bookkeeper located in a governmental building and 
paid through the general payroll of the ITG would nevertheless be a 
commercial employee if the facts and circumstances indicate that his or 
her assigned duties and responsibilities are to maintain the books and 
records for a hotel owned and operated by an ITG.
    The statutory language in section 414(d) makes it clear that a plan 
is not a governmental ITG plan if it covers any employee who is a 
commercial ITG employee. There is no de minimis exception relating to 
this rule under section 414(d). In light of these circumstances, an ITG 
may choose to use caution when covering employees in a governmental 
plan. If, after applying the rules, an ITG plan sponsor is not certain 
whether an employee is a governmental ITG or commercial ITG employee, 
the ITG may choose to provide coverage for the employee in its 
commercial ITG plan in order to ensure the preservation of the status 
of the governmental ITG plan. Coverage of a governmental employee in a 
commercial plan would not adversely affect the qualified status of the 
commercial plan.

Reasonable, Good Faith Interpretation

    The proposed regulations provide that, in general, an ITG plan will 
not be treated as failing to satisfy the assignment of employee rules 
if the plan complies with those rules under a

[[Page 69195]]

standard that constitutes a reasonable, good faith interpretation of 
the statute, taking into account the final regulations and any other 
published guidance that relates to the application of section 414(d) to 
ITGs. The reasonable, good faith interpretation standard for the 
assignment of employees to governmental and commercial plans would only 
apply if the benefit levels between the separate governmental and 
commercial plans are uniform. Thus, this reasonable, good faith 
interpretation standard would not apply if the benefit level for 
employees under a plan purporting to be a governmental plan is higher 
than that of the benefit level under a separate plan covering employees 
who include commercial employees.

Assignment of Shared Employees

    Under these rules, there may be cases in which an employee is 
transferred from one ITG employer to another. An employee may also 
perform substantially all of his or her services in the performance of 
a governmental activity and later the employee's assigned duties and 
responsibilities may change, so that the employee is subsequently 
performing substantially all of his or her duties in the performance of 
a commercial activity. In addition, an employee may work two separate 
and distinct jobs, one in a commercial activity of an ITG and another 
in a governmental activity of an ITG (for example, an ITG employee who 
works as a full-time police officer and also works at the front desk in 
the lobby of a hotel over the weekends). For all of these scenarios, 
assuming the ITG maintains separate plans for its governmental and 
commercial employees, the ITG should assign the employee to either plan 
based on prorating service credits and allocating compensation between 
the governmental and commercial activities.

Application of the Controlled Group Rules to ITG Plans

    These proposed regulations do not address the rules under which, 
for purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, 
all employees of all corporations that are members of a controlled 
group of corporations are treated as employed by a single employer for 
purposes of these controlled group rules. Note that, under current 
guidance, a reasonable, good faith interpretation standard applies with 
respect to governments. See Notice 89-23 (1989-1 CB 654) and Notice 96-
64 (1996-2 CB 229), see Sec.  601.601(d)(2) of this chapter.

Proposed Effective Date

    The proposed regulations would apply to plan years beginning 6 
months after publication of these regulations as final regulations. For 
plan years after the statutory effective date of the PPA '06 amendment 
of section 414(d) and prior to the effective date of these regulations 
as final regulations, a plan of an ITG would be treated as a 
governmental plan for purposes of section 414(d), providing that a 
reasonable, good faith effort is made to ensure that the plan satisfy 
the conditions for being a governmental plan under section 414(d), 
taking into account relevant guidance, including Notices 2006-89 and 
2007-67. To the extent that a plan of an Indian tribal government 
complies with the requirements under either the notices or the proposed 
regulations, the plan will be treated as making a reasonable, good 
faith effort to satisfy the requirements of section 414(d).

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. In addition, 
because no collection of information is imposed on small entities, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply, and therefore, a Regulatory Flexibility Analysis is not 
required. Pursuant to section 7805(f) of the Code, this notice of 
proposed rulemaking will be submitted to the Small Business 
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The Treasury Department and the IRS specifically request 
comments on the clarity of the proposed rules and how they can be made 
easier to understand. Comments are specifically requested on whether a 
correction mechanism under the Employee Plans Compliance Resolution 
System (EPCRS), as set forth in Rev. Proc. 2008-50 (2008-35 IRB 464), 
see Sec.  601.601(d)(2), might be helpful for cases in which an 
employee substantially all of whose services are not in the performance 
of a governmental activity has nevertheless inadvertently become a 
participant in a plan purporting to be a governmental plan. For 
example, assuming the various conditions for self correction have been 
satisfied (see section 4.09 of Rev. Proc. 2008-50, which provides that 
the failure must be an operational failure which occurred by mistake or 
oversight, even though the plan had established practices and procedure 
to ensure qualification, and which is promptly corrected), the plan's 
assets and liabilities with respect to the employee might be 
transferred to a similar plan covering commercial employees under which 
the employee would accrue benefits up to the level that would have 
applied if he or she had participated in that commercial plan during 
the period when he or she was a commercial employee. All comments will 
be available for public inspection and copying.
    A public hearing has been scheduled for (date to be provided when 
proposed regulations are published), beginning at 10 a.m. in the 
Auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., 
Washington, DC. Due to building security procedures, visitors must 
enter at the main entrance, located at 1111 Constitution Avenue NW. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit written or electronic 
comments and an outline of the topics to be discussed and time to be 
devoted to each topic (signed original and eight (8) copies) by (date 
to be provided when proposed regulations are published). A period of 10 
minutes will be allotted to each person for making comments. An agenda 
showing the scheduling of the speakers will be prepared after the 
deadline for receiving comments has passed. Copies of the agenda will 
be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Pamela R. 
Kinard, Office of Division Counsel/Associate Chief Counsel (Tax Exempt 
and Government Entities), Internal Revenue Service. However, personnel 
from other offices of the IRS and

[[Page 69196]]

Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part:

    Authority:  26 U.S.C. 7805 * * *

    Par. 2. Section 1.414(d)-1 is amended by adding paragraph (g) to 
read as follows:


Sec.  1.414(d)-1  Definition of governmental plan.

* * * * *
    (g) Special rules for plans of Indian tribal governments--(1) 
Definition of governmental plan as it relates to Indian tribal 
governments. For purposes of applying paragraph (a)(3) of this section, 
a governmental plan as it relates to an Indian tribal government is a 
plan that is established and maintained for its employees by an Indian 
tribal government, a subdivision of an Indian tribal government, or an 
agency or instrumentality of either (ITG), provided that the employees 
covered under the plan provide substantially all of their services in 
the performance of governmental activities as determined in paragraph 
(g)(6) of this section.
    (2) Definition of commercial ITG plans. For purposes of paragraph 
(g) of this section, the term commercial ITG plan means a plan of an 
ITG that covers any ITG employee who is not a governmental ITG employee 
under paragraph (g)(8) of this section or that covers any individual 
who is not an employee of an ITG.
    (3) Definition of an Indian tribal government. For purposes of this 
paragraph (g), the term Indian tribal government has the meaning set 
forth in section 7701(a)(40).
    (4) Definition of subdivision of an Indian tribal government. For 
purposes of this paragraph (g), the term subdivision of an Indian 
tribal government has the meaning set forth in section 7871(d).
    (5) Definition of agency or instrumentality of an Indian tribal 
government or subdivision of an Indian tribal government. For purposes 
of this paragraph (g), the term agency or instrumentality of an Indian 
tribal government or subdivision of an Indian tribal government means 
an entity that would be treated as an ``agency or instrumentality of a 
State or political subdivision of a State'' under paragraph (f) of this 
section if the related Indian tribal government or subdivision of an 
Indian tribal government were treated as a State or political 
subdivision of a State, respectively.
    (6) Definition of governmental activities--(i) In general. The 
following activities are governmental activities for purposes of 
paragraph (g)(1) of this section:
    (A) Activities that are related to the building and maintaining of 
public roads; public sidewalks, public buildings, and related areas, 
such as parking lots.
    (B) Activities that are related to public sewer and drainage 
facilities, and related facilities such as a waste-water treatment 
plant.
    (C) Activities relating to public works projects, such as schools 
and government buildings.
    (D) Activities relating to public utilities, such as electricity 
and other power sources, including the development of newer and 
emerging technologies.
    (E) Activities related to providing criminal protection services, 
such as police and fire departments, providing civil and public 
administrative services, such as operating and managing public housing, 
libraries, judiciary buildings, and administrative buildings, teaching 
in and managing public schools, managing and providing services at 
public hospitals and health clinics, operating the government's civil 
service system, and other related public services.
    (F) Activities subject to a treaty or special rules that pertain to 
trust land ownership and use.
    (ii) Facts and circumstances test. Whether any other activity is a 
governmental activity for purposes of section 414(d) is based on facts 
and circumstances. In making this determination, the facts to be 
considered include the following:
    (A) Whether the activity provides a public benefit to members of 
the Indian tribal government; and
    (B) Whether there is the absence of one or more of the relevant 
factors listed for a commercial activity as provided in paragraph 
(g)(7) of this section.
    (iii) Examples. The following examples illustrate the application 
of this paragraph (g)(6):

    Example 1. (i) Facts. Indian tribal government C owns and 
operates a community swimming pool on tribal land. Indian tribal 
members of Indian tribal government C may use the pool for free. 
Other local community members pay a fee to use the pool. Due to its 
location, this pool is used primarily by tribal members of Indian 
tribal government C.
    (ii) Conclusion. Based on the facts and circumstances and the 
factors in paragraph (g)(6)(ii) of this section, the operation of 
the community swimming pool is a governmental activity of Indian 
tribal government C because it is a type of activity that is 
operated on a nonprofit basis and is similar to an activity that 
other non-tribal local governments operate for their communities. In 
addition, the pool is located inside tribal land and provides 
recreational benefits to tribal members.
    Example 2. (i) Facts. Indian tribal government D owns and 
operates a cultural center and a museum on tribal land. The purpose 
of the cultural center and museum is to preserve and showcase items 
related to the culture of Indian tribal government D, including 
crafts and artistry. The center contains an exhibit area, a lobby 
and reception area, a small gift shop, a theater and various 
activity rooms. A variety of civic functions are held in the 
activity rooms. The other areas display and sell local handicraft 
items produced locally by members of Indian tribal government D.
    (ii) Conclusion. Based on the facts and circumstances and the 
factors in paragraph (g)(6)(ii) of this section, the operation of 
the cultural center and museum is a governmental activity of Indian 
tribal government D even though the majority of its visitors are 
individuals who are not members of the tribe. Its purpose is to 
promote and display the culture of Indian tribal government D, which 
is a type of activity that is generally operated on a nonprofit 
basis (similar to municipal museums operated by public authorities) 
and not by private businesses. In addition, the center and museum 
are located inside tribal land and provide a public benefit by 
educating the public and preserving and highlighting the culture of 
the tribe.

    (7) Definition of commercial activities--(i) In general. The 
following activities are commercial activities for purposes of 
paragraph (g)(2) of this section:
    (A) Activities relating to the operation of a hotel.
    (B) Activities relating to the operation of a casino.
    (C) Activities relating to the operation of a service station.
    (D) Activities relating to the operation of a convenience store.
    (E) Activities relating to the operation of a marina.
    (ii) Facts and circumstances test. Whether any other activity is a 
commercial activity for purposes of section 414(d) is based on facts 
and circumstances. In making this determination, the facts to be 
considered include the following:
    (A) Whether the activity is a type of activity that is operated to 
earn a profit.
    (B) Whether the activity is a type of activity that is typically 
performed by private businesses.

[[Page 69197]]

    (C) Whether the activity is a type of activity where the customers 
are substantially from outside of the Indian tribal community, 
including whether the activity is located or conducted outside of 
Indian tribal land.
    (iii) Delegation of authority to the Commissioner. Any activity 
that the Commissioner of the Internal Revenue Service determines is a 
commercial activity under section 414(d), in revenue rulings, notices, 
or other guidance published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2) of this chapter).
    (iv) Examples. The following examples illustrate the application of 
this paragraph (g)(7)(ii):

    Example 1.  (i) Facts. Indian tribal government A owns and 
operates a recreational RV park and campground facility, serving 
transient non-tribal customers, primarily tourists. Other RV parks 
and campgrounds in the area operated by non-tribal private entities 
also attract the same type of customers. Very few, if any, tribal 
members of Indian tribal government A use this RV park and 
campground facility. Indian tribal government A charges a fee to 
customers to use the RV park and campground.
    (ii) Conclusion. Based on the facts and circumstances and the 
factors in paragraph (g)(7)(ii) of this section, the operation of 
the recreational RV park and campground facility is a commercial 
activity of Indian tribal government A because it is the type of 
activity that is operated to earn a profit and is the type of 
activity that is performed by other private businesses. In addition, 
the facility includes customers who are substantially from outside 
of the Indian tribal community.
    Example 2. (i) Facts. Indian tribal government B owns and 
operates a bank. This bank serves both tribal and non-tribal 
customers primarily living in the local area (either on or off the 
tribal land). No distinction is made between the services and fees 
provided to any customer based on whether or not he or she is a 
tribal member of Indian tribal government B.
    (ii) Conclusion. Based on the facts and circumstances and the 
factors in paragraph (g)(7)(ii) of this section, the operation of a 
bank is a commercial activity of Indian tribal government B because 
it is the type of activity that is operated to earn a profit and is 
the type of activity that is performed by other private businesses.
    Example 3. (i) Facts. Indian tribal government E entered into a 
lease with Company X, which is in the trucking business. The lease 
provides that Indian tribal government E will purchase tractors, 
trailers and other equipment and lease such equipment to Company X 
on a long-term basis.
    (ii) Conclusion. Based on the facts and circumstances and the 
factors in paragraph (g)(7)(ii) of this section, the leasing 
transactions relate to a commercial activity of Indian tribal 
government E because it is the type of activity that is operated to 
earn a profit and is the type of activity that is performed by other 
private businesses.
    Example 4.  (i) Facts. Indian tribal government G operates a 
factory on tribal land that produces goods for sale primarily to 
non-tribal customers, intended to earn a profit.
    (ii) Conclusion. Based on the facts and circumstances and the 
factors in paragraph (g)(7)(ii) of this section, this is a 
commercial activity of Indian tribal government G because the 
activity is operated to earn a profit and is the type of activity 
that is performed by private businesses. In addition, the customers 
are substantially from outside of the Indian tribal community. The 
result could be different if the factory produced goods to promote 
and display the culture of Indian tribal government G, even if non-
tribal customers primarily purchase the goods. This could be a 
governmental activity, depending on the factors.

    (8) Determination of ITG employees--(i) Governmental and commercial 
ITG employees. This paragraph (g)(8) applies to determine whether an 
employee is an employee substantially all of whose services are in the 
performance of a governmental activity of an ITG (a governmental ITG 
employee), or is instead an employee who renders a significant portion 
of his or her services in the performance of a commercial activity of 
an ITG (a commercial ITG employee), for purposes of this paragraph (g). 
As provided in paragraph (g)(8)(iv) of this section, this determination 
is based on the employee's assigned duties and responsibilities.
    (ii) Location of the activity. If a commercial activity (within the 
meaning of paragraph (g)(7) of this section) of an ITG has a specific 
location that is readily identifiable and is not associated with a 
governmental activity, an employee performing substantial services at 
such a location is treated as having assigned duties and 
responsibilities for that commercial activity and, thus, the employee 
is a commercial ITG employee within the meaning of paragraph (g)(8) of 
this section. For example, a guard who is assigned to provide security 
services for an Indian tribal government at an Indian tribal casino 
(which is a commercial activity under paragraph (g)(7)(i)(B) of this 
section) is a commercial ITG employee within the meaning of paragraph 
(g)(8) of this section. However, where an employee is not on a payroll 
of an ITG that engages in a commercial activity, the result would 
depend on the other rules in this paragraph (g)(8).
    (iii) Payroll records. If an employee is on the payroll of an ITG 
entity that is engaged in a commercial activity (within the meaning of 
paragraph (g)(7) of this section), the employee's assigned duties and 
responsibilities are being treated as for the commercial activity and, 
thus, the employee is a commercial ITG employee. For example, if a 
cashier is on the payroll of a convenience store (which is a commercial 
activity under paragraph (g)(7)(i)(D) of this section) owned by an ITG, 
the cashier is a commercial ITG employee within the meaning of 
paragraph (g)(8) of this section.
    (iv) Duties and responsibilities. Subject to the specific rules in 
paragraph (g)(8)(ii) or (iii) of this section, whether an employee is a 
governmental or commercial ITG employee within the meaning of this 
paragraph (g)(8) is based on the employee's assigned duties and 
responsibilities, taking into account facts and circumstances. Thus, 
whether an employee is a governmental or commercial ITG employee 
depends on whether the facts and circumstances indicate that the 
employee's assigned duties and responsibilities are substantially in 
the performance of a governmental or commercial activity. Thus, for 
example, a bookkeeper located in a governmental building and on the 
payroll of the general ITG government would nevertheless be a 
commercial employee if the facts and circumstances indicate that his or 
her assigned duties and responsibilities are to maintain the books and 
records for the hotel owned and operated by an ITG. However, an 
employee whose assigned duties and responsibilities are in the 
performance of a governmental activity, based on all the facts and 
circumstances, in accordance with the standards set forth in this 
paragraph (g)(8), is not treated as performing services for a 
commercial activity, even if the performance of services for the 
governmental activity may temporarily involve significant time working 
in a commercial activity in furtherance of the employee's duties and 
responsibilities for the governmental activity. For example, although, 
over a six-month period, the chief financial officer (CFO) for an ITG 
may spend a substantial amount of time working on the financing for a 
casino to be built on the ITG's tribal lands, the CFO would not be a 
commercial employee within the meaning of this paragraph (g)(8) because 
the CFO's duties and responsibilities are for a governmental activity.
    (v) Reasonable, good faith interpretation. Except as provided in 
paragraph (g)(8)(ii) and (iii) of this section, an ITG plan will not be 
treated as failing to satisfy the rules in this paragraph (g)(8) if it 
complies with those rules under a standard that

[[Page 69198]]

constitutes a reasonable, good faith interpretation of the statute, 
taking into account the rules in this paragraph (g) and any other 
published guidance that relates to the application of section 414(d) to 
ITGs. However, this paragraph (g)(8)(v) applies with respect to the 
assignment of employees to governmental and commercial plans only if 
the benefit levels provided by the separate governmental and commercial 
plans are uniform. Thus, this paragraph (g)(8)(v) would not apply if 
the benefit level for employees under a plan purported to be a 
governmental plan is higher than that provided under a separate plan 
which covers commercial ITG employees.
    (vi) Examples. The following examples further illustrate the 
application of this paragraph (g)(8):

    Example 1.  (i) Facts. Employee A, who is an attorney, works at 
the Attorney General's office of Indian tribal government B. 
Employee A's job location is in a government office building on 
tribal lands. The assigned duties and responsibilities of Employee A 
are principally to review the operations of marina boat operators to 
ensure that they comply with tribal rules and regulations as 
applicable to marina boat operators. Employee A provides some 
services for the marina, such as speaking at conferences or meetings 
with marina boat operators. Employee A's area of expertise is 
contract law.
    (ii) Conclusion. Based on the facts and circumstances and the 
factors in paragraph (g)(8)(ii) through (iv) of this section, 
Employee A is a governmental ITG employee within the meaning of this 
paragraph (g)(8). Employee A primarily performs services for Indian 
tribal government B at a government building which is a governmental 
location and Employee A is on the payroll of Indian tribal 
government B. In addition, Employee A's assigned duties and 
responsibilities are primarily to provide government oversight 
services for Indian tribal government B.
    Example 2. (i) Facts. Employee C is a police officer providing 
services for Indian tribal government D. Employee C's job location 
is the tribal police station located in a government building on 
tribal lands. The assigned duties and responsibilities of Employee C 
indicate that Employee C is expected to maintain public order, 
detect crime, and apprehend offenders on tribal lands of Indian 
tribal government D. Occasionally, while on patrol, Employee C must 
go to the casino operated by Indian tribal government D to restore 
order relating to a disturbance. Employee C's area of expertise is 
in general law enforcement.
    (ii) Conclusion. Based on the facts and circumstances and the 
factors in paragraph (g)(8)(ii) through (iv) of this section, 
Employee C is a governmental ITG employee within the meaning of this 
paragraph (g)(8). Employee C primarily performs services for Indian 
tribal government D at either a government building or while on 
patrol, even though Employee C's patrol duties include providing law 
enforcement services at the casino, which is a commercial activity 
under paragraph (g)(7)(i)(B) of this section. In addition, the 
assigned duties and responsibilities of Employee C, as well as 
Employee C's area of expertise, relate to general law enforcement 
and do not substantially relate to a commercial activity.

[FR Doc. 2011-28858 Filed 11-7-11; 8:45 am]
BILLING CODE 4830-01-P