[Federal Register Volume 90, Number 239 (Tuesday, December 16, 2025)]
[Rules and Regulations]
[Pages 58151-58163]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-22874]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[TD 10039]
RIN 1545-BQ13
Entities Wholly Owned by Indian Tribal Governments
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
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SUMMARY: This document contains final regulations regarding the Federal
tax classification of entities wholly owned by Indian Tribal
governments (Tribes). The final regulations provide that entities that
are wholly owned by Tribes and organized or incorporated under the laws
of one or more of the Tribes that own them generally are not recognized
as separate entities for Federal tax purposes. The final regulations
also provide that such entities, as well as certain Tribal corporations
chartered by
[[Page 58152]]
the Department of the Interior (DOI), are recognized as separate
entities for Federal employment and certain Federal excise tax
purposes. In addition, the final regulations provide that, for purposes
of making elective payment elections (including determining eligibility
for and the consequences of such elections) for energy credits under
the Inflation Reduction Act of 2022, each of these types of Tribal
entities is treated as an instrumentality of one or more Indian Tribal
governments.
DATES:
Effective date: These regulations are effective on January 15,
2026.
Applicability dates: For dates of applicability, see Sec. Sec.
301.7701-1(f) and 1.6417-1(q).
FOR FURTHER INFORMATION CONTACT: Concerning the final regulations,
contact Iris Chung of the Office of Associate Chief Counsel
(Passthroughs, Trusts, and Estates) at (202) 317-5279 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains amendments to provisions of 26 CFR part 1
(Income Tax Regulations) under section 6417 of the Internal Revenue
Code (Code) and 26 CFR part 301 (Procedure and Administration
Regulations) under section 7701 of the Code that address the Federal
tax treatment of certain Tribal entities wholly owned by one or more
Indian Tribal governments \1\ (final regulations).
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\1\ The term ``Indian Tribal government,'' also referred to as a
``Tribe'' herein, is defined as a federally recognized Tribe
pursuant to the Federally Recognized Indian Tribe List Act of 1994,
Public Law 103-454, 108 Stat. 4791 (List Act). Pursuant to the List
Act, the Secretary of the Interior is required to publish annually a
list of all federally recognized Tribes. This definition is also
consistent with Revenue Procedure 2008-55 (2008-39 I.R.B. 768),
which provides that the Treasury Department and the IRS utilize
current or future lists of federally recognized Tribes published
annually under the List Act by the DOI Bureau of Indian Affairs, for
identification of Indian Tribal governments for purposes of section
7701(a)(40). See 89 FR 944 (January 8, 2024) for the most current
list published by the DOI, Bureau of Indian Affairs.
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Section 6417(h) provides an express delegation of authority to the
Secretary of the Treasury or the Secretary's delegate (Secretary)
relating to elective payment elections under section 6417 (section 6417
elections), stating, ``[t]he Secretary shall issue such regulations or
other guidance as may be necessary to carry out the purposes of this
section, including guidance to ensure that the amount of the payment or
deemed payment made under this section is commensurate with the amount
of the credit that would be otherwise allowable (determined without
regard to section 38(c)).''
Section 7701(a)(40) provides an express delegation of authority to
the Secretary related to identifying Indian Tribal governments for
Federal tax purposes, stating, ``[t]he term `Indian tribal government'
means the governing body of any tribe, band, community, village, or
group of Indians, or (if applicable) Alaska Natives, which is
determined by the Secretary, after consultation with the Secretary of
the Interior, to exercise governmental functions.''
Finally, section 7805(a) of the Code provides an express delegation
of authority to the Secretary to ``prescribe all needful rules and
regulations for the enforcement of [the Code], including all rules and
regulations as may be necessary by reason of any alteration of law in
relation to internal revenue.''
Background
I. Overview of Prior Guidance
The Federal government has long recognized the unique aspects of
Tribal sovereignty and Tribal sovereign immunity. Tribes themselves are
not subject to Federal income tax under the Code.\2\ IRS guidance on
the issue in the 1960s raised questions about the extent to which
Tribal corporations incorporated under section 17 of the Indian
Reorganization Act of 1934 (IRA), as amended, 25 U.S.C. 5124 (section
17 corporations) or under section 3 of the Oklahoma Indian Welfare Act,
as amended, 25 U.S.C. 5203 (section 3 corporations) should share the
Tribe's Federal income tax status. In response, the IRS published
further guidance and issued proposed regulations in 1996 on the
treatment of section 17 corporations and section 3 corporations for
Federal tax purposes. See the notice of proposed rulemaking,
Simplification of Entity Classification Rules (PS-43-95), published in
the Federal Register (61 FR 21989) on May 13, 1996 (explaining the
basis for the proposed rule later adopted in Sec. 301.7701-1(a)(3)).
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\2\ See Rev. Rul. 67-284, 1967-2 C.B. 55. However, Tribes
generally are subject to Federal employment taxes. Employment taxes
refers to Federal Insurance Contributions Act (FICA) (consisting of
both social security and Medicare taxes), Federal Unemployment Tax
Act (FUTA), and Income Tax Withholding. Section 3306(c)(7) of the
Code provides an exception from FUTA taxes under certain
circumstances. Further, subject to applicable law, including
statutes (such as section 7871 of the Code) and treaties or
agreements with the United States, Tribes are subject to Federal
excise taxes. See Rev. Rul. 94-81, 1994-2 C.B. 412.
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On December 18, 1996, the Department of the Treasury (Treasury
Department) and the IRS published final regulations (TD 8697) in the
Federal Register (61 FR 66584) under section 7701, known as the entity
classification regulations. These regulations (at Sec. 301.7701-
1(a)(3)) make clear that entities formed under local laws are not
always recognized as separate entities for Federal tax purposes. For
example, an organization wholly owned by a State is not recognized as a
separate entity for Federal tax purposes if it is an integral part of
the State. Similarly, these regulations (until their amendment by this
Treasury decision) provided that section 17 corporations and section 3
corporations are not recognized as separate entities for Federal tax
purposes. These regulations, however, did not specifically address
whether an entity organized or incorporated under Tribal law and wholly
owned by a Tribe (that is, a wholly owned Tribal entity) is recognized
as a separate entity for Federal tax purposes.
The preamble to TD 8697 stated that the IRS received a number of
comments asking for clarification of the tax treatment of wholly owned
Tribal entities. 61 FR 66584. The preamble also indicated that the
Treasury Department and the IRS continued to study the issue and would
issue additional guidance, if necessary. Id. at 66585-86.
II. Tribal Consultation
Over the past several decades, Tribes have sought clarity
concerning the Federal tax status of wholly owned Tribal entities, in
part to provide certainty for Tribal economic development and to
support the generation of revenue for Indian Tribal governments. To
obtain Tribal input on the issue before publishing the proposed
regulations, and in accordance with Executive Order 13175 (November 6,
2000), ``Consultation and Coordination with Indian Tribal
Governments,'' and the Treasury Department's Tribal Consultation Policy
(80 FR 57434, September 23, 2015), superseded by Treasury Order 112-04
(November 22, 2023), the Treasury Department and the IRS held Tribal
consultations on the issue on June 21 and June 22, 2023, October 8 and
10, 2019, and a listening session on December 3, 2019.
During Tribal consultations, Tribes have explained that they view
incorporating corporations under Tribal law as an exercise of their
inherent sovereign authority to generate governmental revenue, self-
govern the use of that revenue according to their own laws, and self-
determine the use of that revenue for their citizenry. Tribes
highlighted that incorporating corporations under Tribal law enables
[[Page 58153]]
Tribes to create entities that meet their emerging revenue
opportunities, establish guidelines for the operation of these entities
that are culturally appropriate and protect Tribal assets, and dissolve
them when they are no longer needed. Tribes also highlighted that
clarifying the status of corporations incorporated under Tribal law is
consistent with recent Federal policy to promote Tribal sovereignty,
self-governance, and self-determination in economic development
activities.
In contrast, Tribes highlighted that section 17 and section 3
corporations are not always sufficient to meet their needs. The
incorporation process for these entities is a lengthy multi-step
Federal process that subjects Tribal authority to Federal oversight and
approval and results in increased administrative costs to Tribes. In
addition, an act of Congress is required to dissolve the chartered
entity.
This issue has taken on increased salience in recent years with the
enactment of laws that extend greater access to capital and new
economic opportunities to certain governments (including Indian Tribal
governments), tax-exempt organizations, and other entities. Tribes have
reiterated their requests for guidance through meetings of the Treasury
Tribal Advisory Committee and other Tribal consultations.
III. Proposed Regulations
In light of the considerations of Tribal sovereignty and self-
determination described previously, on October 9, 2024, the Treasury
Department and the IRS published a notice of proposed rulemaking (REG-
113628-21) in the Federal Register (89 FR 81871), which provided
proposed guidance under sections 6417 and 7701 (proposed regulations).
See the preamble to the proposed regulations for additional information
regarding the developments leading to this rulemaking.
The proposed regulations proposed to amend the existing section
7701 regulations to make clear that entities wholly owned by Tribes and
organized, incorporated, or authorized under the laws of the Tribes
that own them generally are not recognized as separate entities for
Federal tax purposes. As has been the case with Tribes and section 17
corporations or section 3 corporations, the proposed regulations
proposed that an entity wholly owned by one or more Indian Tribal
governments, within the meaning of section 7701(a)(40), that is
organized or incorporated under the laws of the Tribe or Tribes that
own the entity, or organized or incorporated under the laws of one or
more of the owning Tribes and authorized by all of the other owning
Tribes (wholly owned Tribal entity), would not be recognized as a
separate entity for Federal tax purposes (and thus not subject to
Federal income tax). The use of the term ``organized'' includes the
creation of Tribal entities other than corporations. For instance, a
single member limited liability company (LLC) organized under the laws
of the Tribe that owns the LLC would be a wholly owned Tribal entity
covered by the proposed regulations. Accordingly, such wholly owned
entities generally would be viewed as one and the same as the Tribes
that own them for Federal income tax purposes and therefore are not
subject to Federal income tax.
In addition, the proposed regulations proposed to amend the
existing section 6417 regulations to provide that wholly owned Tribal
entities, section 17 corporations, and section 3 corporations are
treated, for purposes of making section 6417 elections (including
determining eligibility for and the consequences of such elections), as
instrumentalities of the Indian Tribal government(s) that wholly own
them. As a result, the wholly owned Tribal entity itself, rather than
the Indian Tribal government(s) owning the entity, would be required to
make a section 6417 election for an applicable credit determined with
respect to any applicable credit property held directly by the wholly
owned Tribal entity.
A. Wholly Owned Tribal Entity Requirements Under Proposed Regulations
1. Tribal Law
The proposed regulations recognized that Tribal law is established
by each individual Tribe. The notice of proposed rulemaking stated
that, where multiple Tribes work together to establish an entity that
is owned by more than one Tribe, each Tribe would need to provide for
the entity under its own laws.
2. Wholly Owned
The notice of proposed rulemaking noted that, as is the case for
determining the ownership of all corporations (including a corporation
wholly owned by a State or other government), the determination of
whether an outside investor (a person other than a Tribe) holds equity
in a Tribal entity, such that it would fail to be wholly owned by one
or more Indian Tribal governments for Federal tax purposes, would take
into account principles of Federal tax law, such as the substance over
form doctrine, debt versus equity analyses, and the economic substance
doctrine.
Under the proposed regulations, an entity could satisfy the wholly
owned requirement through a multi-Tribe ownership structure, so long as
the entity is organized or incorporated under each Tribe's laws.
Proposed Sec. 301.7701-1(a)(4)(iii)(D) (Example 4) illustrates an
example of the organizational structure of such an entity.
The proposed regulations did not address an entity formed under
Tribal law that was not also wholly owned by one or more Indian Tribal
governments for Federal tax purposes.
IV. Elective Payment Elections
Under 26 CFR 1.6417-1(f) as of April 1, 2025, section 17
corporations and section 3 corporations were treated as ``disregarded
entities'' for purposes of section 6417, and the applicable entity
owner of a disregarded entity that directly holds applicable credit
property was required to make a section 6417 election for applicable
credits determined with respect to such property pursuant to Sec.
1.6417-2(a)(1)(ii). Under the proposed regulations, for purposes of
making a section 6417 election (including determining eligibility for
and the consequences of such election), entities described in proposed
Sec. 301.7701-1(a)(4)(i) (that is, section 17 corporations, section 3
corporations, and wholly owned Tribal entities), would be treated as
instrumentalities of Indian Tribal governments. This change would mean
that an entity described in proposed Sec. 301.7701-1(a)(4)(i) that
directly owns applicable credit property, rather than the entity's
owner or owners, would make the section 6417 election. Such an entity
generally would do so by filing a Form 990-T, Exempt Organization
Business Income Tax Return, as described in Sec. 1.6417-1(b)(2), using
its own name and employer identification number.
Given that proposed Sec. 301.7701-1(a)(4)(i) generally provided
that an entity owned by multiple Tribes is not recognized as a separate
entity from those Tribes for Federal income tax purposes, treating the
entity as a ``disregarded entity'' for section 6417 purposes would have
required each of the entity's owners to make a section 6417 election
with respect to an applicable credit determined with respect to an
applicable credit property owned directly by the entity. That approach
would have been administratively burdensome and complex for the Tribes
that own the entity as well as for the IRS. Given the
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need for coordination among these Tribes in making consistent tax
filings, that approach could also have resulted in cases in which the
amount of the total payments or deemed payments claimed under section
6417 might not be commensurate with the amount of the underlying
credit. In addition, even for an entity owned by a single Tribe, the
entity directly owning the applicable credit property may be better
positioned to fulfill the pre-filing registration and other
requirements to make the section 6417 election. Accordingly, the
proposed regulations were intended to simplify the filing obligations
for Tribes and their wholly owned entities and ensure that the amount
of any payment or deemed payment made under section 6417 will be
commensurate with the amount of the credit that would be otherwise
allowable.
In general, the determination of whether an entity is an agency or
instrumentality is analyzed on a facts and circumstances basis. In
determining whether an entity is an agency or instrumentality for
Federal tax purposes, Federal courts have applied the six-factor test
in Rev. Rul. 57-128, 1957-1 C.B. 311, which generally provides guidance
on whether an entity is an instrumentality for purposes of the
exemptions from employment taxes under sections 3121(b)(7) and
3306(c)(7) of the Code. See, e.g., Rose v. Long Island Railroad Pension
Plan, 828 F.2d 910, 918 (2d Cir. 1987), cert. denied, 485 U.S. 936
(1988); Berini v. Federal Reserve Bank of St. Louis, Eighth District,
37 Employee Benefits Cas. 1072, 420 F. Supp. 2d 1021 (E.D. Mo. 2005).
The special rule in proposed Sec. 1.6417-1(c)(7) is informed in
part by administrative considerations and would be issued under the
express delegation of authority in section 6417(h) to promulgate rules
that carry out the purposes of section 6417 and ensure that the amount
of the payment or deemed payment made thereunder is commensurate with
the amount of the underlying credit. No inferences should be drawn from
the instrumentality treatment in proposed Sec. 1.6417-1(c)(7) as to
whether any particular entity is or is not an instrumentality for any
other Federal tax purpose.
Summary of Comments and Explanation of Revisions
The Treasury Department and the IRS conducted Tribal consultations
on December 16-18, 2024, to obtain additional input on questions
involving the proposed regulations. The content of these consultations
is published in a Tribal consultation summary available at: https://home.treasury.gov/system/files/136/Tax-Status-of-Tribally-Chartered-Corporations-Consultation-Summary.pdf. In addition, the Treasury
Department and the IRS received written comments in response to the
proposed regulations. A public hearing on the proposed regulations was
held on January 17, 2025. Copies of written comments and the list of
speakers at the public hearing are available at https://www.regulations.gov or upon request.
After full consideration of all comments received on the proposed
regulations, including through the Tribal consultations, and the
testimony presented at the public hearing, this Treasury decision
adopts the proposed regulations as final regulations with clarifying
changes and modifications as described in this Summary of Comments and
Explanation of Revisions. Overall, commenters largely supported the
proposed regulations' recognition of a Tribe's inherent authority to
create businesses under Tribal law and that wholly owned Tribal
entities should have parity with federally chartered Tribal
corporations.
Section I of this Summary of Comments and Explanation of Revisions
addresses the comments and revisions applicable to Sec. 301.7701-1.
Section II of this Summary of Comments and Explanation of Revisions
addresses the comments and revisions applicable to Sec. 1.6417-1.
Unless otherwise indicated in this Summary of Comments and
Explanation of Revisions, provisions of the proposed regulations for
which no comments were received are adopted without substantive change.
Comments that merely summarize the proposed regulations, recommend
statutory revisions to section 7701, section 6417, or other statutes,
address issues that are outside the scope of this rulemaking (such as
proposed changes to other guidance), or recommend changes to IRS forms
are beyond the scope of these regulations and are not adopted. In
addition, comments that are related to executive orders and prior
guidance described in the preamble to the proposed regulations are
beyond the scope of these regulations and are not adopted. The final
regulations include non-substantive modifications, including
modifications that promote consistency across rules and examples,
rearrange provisions, and improve the overall clarity of the guidance.
Such non-substantive modifications are not addressed in this Summary of
Comments and Explanation of Revisions.
I. Wholly Owned Tribal Entities Under the Final Regulations
The final regulations under section 7701 provide that a wholly
owned Tribal entity (including a single member LLC organized under the
laws of the Tribe that owns it) is not recognized as a separate entity
for Federal income tax purposes, but is recognized as separate and
treated as a corporation for Federal employment tax purposes and
certain Federal excise tax purposes. The final regulations also provide
that section 17 corporations and section 3 corporations are recognized
as entities separate from the Tribe(s) that own these entities for
Federal employment and certain Federal excise tax purposes.
A. Multi-Tribe Ownership
The majority of commenters expressed support for the recognition
that Tribes may organize or incorporate an inter-Tribal entity serving
multiple Tribes. However, some commenters stated that it is impractical
and unworkable to require that an inter-Tribal entity wholly owned by
more than one Indian Tribal government (within the meaning of section
7701(a)(40) of the Code) be organized or incorporated under the laws of
each of the Indian Tribal governments with an ownership stake in the
entity. Commenters stated that the rules should provide that an inter-
Tribal entity with a single charter authorized by each Tribe's
governing body, or other body or official acting pursuant to authority
delegated by the Tribe's governing body, shares the tax status of the
Tribe(s) that own it. These commenters recommended that, although
authorized under each Tribe's legislative or administrative process,
the inter-Tribal entity charter should allow for a choice of law or
forum clause that subjects the inter-Tribal entity to the corporate or
limited liability company laws of just a single Tribe. To clarify the
proposed regulations, the same commenters requested amendments to the
language of the regulations to require that the inter-Tribal entity be
authorized under each owner Tribe's law and to allow Tribes to adopt
their choice of law and forum. Additionally, a commenter requested the
regulations be amended to allow Tribes to enter into co-ownership
arrangements with respect to existing entities previously organized and
incorporated under the laws of one or more Tribes.
Other commenters suggested that entities owned solely by multiple
Tribal governments should be disregarded where (a) the entity is formed
under the laws of one of the member Tribes, (b)
[[Page 58155]]
the Tribe's laws permit ownership by the other Tribes, and (c) each
owner Tribe agrees to such outcome by resolution or other suitable
document.
Based on these comments, the final regulations provide that an
inter-Tribal entity is not recognized as a separate entity when
organized or incorporated exclusively under the laws of one or more of
the Indian Tribal governments that own it. The final regulations also
add a sentence that clarifies that whether an entity is organized or
incorporated under the laws of one or more Indian Tribal government(s)
is determined without regard to any specified choice of law or forum.
These changes are intended to minimize the administrative burden on
Tribes seeking to form or acquire interests in inter-Tribal entities
that would generally not be recognized as separate entities under these
final regulations.
The word ``exclusively,'' as used in these regulations, means that
the entity must be formed under the laws of one or more of the Indian
Tribal governments that own it and not the laws of an Indian Tribal
government that does not have an interest in the entity or the laws of
a state or foreign government. Therefore, an entity formed solely under
the laws of one owning Indian Tribal government that is also owned by
several other Indian Tribal governments would be considered as
organized or incorporated exclusively under the laws of one or more of
the Indian Tribal governments that own it and would generally not be
recognized as a separate entity for Federal tax purposes.
B. State-Recognized Tribes
One commenter expressed concern that entities organized or
incorporated under the laws of a Tribe that is not federally recognized
but recognized by a State (State-recognized Tribe) would not be covered
under these proposed regulations and requested clarity as to how the
result might change, if at all, in proposed Sec. 301.7701-
1(a)(4)(iii)(D) (Example 4) if one or more of the four participating
Tribes were State-recognized Tribes.
The United States has a government-to-government relationship with
and recognizes the sovereignty of federally recognized Tribes. Revenue
Procedure 2008-55 (2008-39 I.R.B. 768) treats all federally recognized
Tribes as Indian Tribal governments under section 7701(a)(40).
Federally recognized Tribes are not subject to Federal income taxes.
Section 301.7701-1(a)(3) has long provided that section 17 corporations
and section 3 corporations chartered under Federal law and wholly owned
by federally recognized Tribes are not recognized as separate entities
for Federal tax purposes. These final regulations extend the same
treatment to entities organized or incorporated under Tribal law and
wholly owned by Tribes. Because section 17 corporations, section 3
corporations, and wholly owned Tribal entities are not recognized as
separate entities, they, like the Tribes that own them, are not subject
to Federal income tax.
Corporations wholly owned by State-recognized Tribes were not
covered by the proposed regulations and are not covered by these final
regulations. If one or more of the four participating Tribes in Sec.
301.7701-1(a)(4)(iii)(D) (Example 4) were a State-recognized Tribe or
an entity created by a State-recognized Tribe, then the jointly owned
corporation would not satisfy the requirements of Sec. 301.7701-
1(a)(4) and would be respected as a separate legal entity that could be
subject to Federal income taxation.
C. State-Chartered Tribally Owned Entities
Some commenters suggested that not only entities wholly owned by
Indian Tribal governments and organized or incorporated under the laws
of their Indian Tribal government owner, section 3, or section 17, but
also Tribally owned entities organized under State law should be
treated as not separate from the Tribe for Federal tax purposes. The
Treasury Department and the IRS have previously ruled that a
corporation organized by an Indian Tribe under State law is subject to
Federal income tax on the income earned in the conduct of a commercial
business on and off the Tribe's reservation. See Rev. Rul. 94-16,
situation 3, 1994-1 C.B. 19 (1994). The commenters proposed that the
relevant consideration for Federal income tax purposes is not which
government created the corporate entity but, rather, the tax status of
the owner. Commenters explained the advantages of State-chartered
entities to include that their structure is more familiar to outside
investors and offers a broader spectrum of opportunities, particularly
for business ventures outside of the Tribe's reservation. These
regulations only address the Federal tax treatment of entities
chartered by DOI or under Tribal law. Accordingly, the Federal tax
treatment of State-chartered entities is outside the scope of these
regulations, and, therefore, the final regulations do not adopt this
comment.
D. Majority-Owned Entities
Many commenters recommended extending Federal income tax exemption
to entities with 51 percent or greater ownership by Tribes so that they
are on parity with State and local governments to receive the same tax
advantages afforded to State and local government entities in public-
private partnerships. Commenters also requested clarifying guidance on
the tax treatment of partially owned entities, including distinctions
between wholly owned, partially owned, and majority owned entities.
As these matters are outside the scope of the guidance contained in
the proposed regulations that these regulations finalize, the final
regulations do not adopt these comments. The Treasury Department and
the IRS continue to consider possible guidance on the Federal tax
treatment of corporations incorporated under Tribal law that are owned
in part by persons other than Tribes. The Treasury Department and the
IRS would conduct Tribal consultation prior to issuing any guidance in
that area.
E. Wholly Owned Tribal Entities as Separate From the Tribe(s)
Some commenters suggested that wholly owned corporations
incorporated under Tribal law should be considered exempt from Federal
income tax without the fiction that such corporations are not separate
from the parent Tribe. These commenters explained that Revenue Ruling
94-16, 1994-1 C.B. 19, does not rely on this concept. The commenters
indicated that section 17 corporations share the same tax status as the
Tribe without relying on a fiction that the section 17 corporation is
not separate from the Tribe. As support, the commenters indicated that
Federal law permits a Tribe to organize both section 16 corporations
and section 17 corporations, separate classes of entities with
differing powers, purpose, and function. Commenters further explained
that if a corporation incorporated under Tribal law is not distinct
from the Tribal government, this could prohibit Tribes from qualifying
a wholly owned Tribal entity for section 501(c)(3) status and, thus,
would require Tribes to charter non-profit corporations under State
law, contrary to Federal policy.
Under the existing framework of the section 7701 regulations, an
entity recognized as separate from the Tribe does not share the same
tax status as the Tribe. Thus, in order to be an entity not subject to
Federal income tax under those regulations, section 17 corporations and
section 3 corporations cannot be recognized as separate and distinct
from the Tribe for Federal income tax purposes. These final
[[Page 58156]]
regulations treat wholly owned Tribal corporations similarly to section
17 corporations and section 3 corporations. The commenter is correct
that a wholly owned corporation incorporated under Tribal law that is
not separate and distinct from the Tribal government cannot qualify for
section 501(c)(3) status. However, there is nothing in these
regulations to prevent Tribes from creating non-stock Tribal law
entities that are described in section 501(c)(3), nor would doing so be
contrary to Federal policy.
F. Limited Liability Companies
Commenters requested the addition of clarifying language to confirm
that LLCs that qualify as wholly owned Tribal entities are not
recognized as separate entities for Federal income tax purposes and,
therefore, would not be subject to Federal income tax. The commenters
indicated that confusion arises because an entity can be classified as
one type of entity for local law purposes such as an LLC or
partnership, and then make an entity classification election by filing
Form 8832, Entity Classification Election, with the IRS to be taxed
differently for Federal tax purposes. A majority of commenters
supported the addition to the final regulations of a separate
illustrative example of an LLC that qualifies as a wholly owned Tribal
entity that is not regarded as a separate entity and, therefore, not
subject to Federal income tax. Other commenters suggested that it is
unnecessary for the proposed regulations to apply to entities other
than corporations that qualify as wholly owned Tribal entities. Those
commenters explained that since the section 7701 regulations treat a
domestic eligible entity with a single owner as disregarded unless the
owner otherwise elects, many Tribes have created LLCs that qualify as
wholly owned Tribal entities with the understanding that the rules
under the existing regulations apply. Commenters expressed concern that
adopting a rule that automatically disregards the separateness of all
wholly owned Tribal entities for Federal tax purposes disrupts that
understanding.
The treatment of limited liability companies for Federal tax
purposes is determined under the general classification rules of Sec.
301.7701-3(a). However, the term ``organized'' used in Sec. 301.7701-
1(a)(4)(i) is meant to apply to LLCs organized under Tribal law that
are wholly owned by one or more Tribe(s) (Tribally organized LLC),
which is consistent with both the preamble to the proposed regulations
and proposed Sec. 301.7701-1(a)(4)(iii)(C).
Comments indicate that taxpayers understand that the proposed
regulations would treat a Tribally organized LLC with a single member
as not separate from the Tribe for Federal tax purposes, and therefore
not subject to Federal income tax under these final regulations.
Therefore, the final regulations do not adopt these comments.
However, the Treasury Department and the IRS understand the need
for certainty in this area. Therefore, the final regulations adopt the
general comments that the examples provided in the regulation should
explicitly state that the rules apply equally to Tribally organized
LLCs.
G. Multi-Tier Entity Structures
Many commenters requested clarification in the final regulations
that the treatment of wholly owned Tribal entities as not separate
entities from their Tribal owners applies equally to subsidiary
entities. Similarly, many commenters also suggested revising proposed
Sec. 301.7701-1(a)(4)(iii)(B) (Example 2) to indicate that it involves
a holding company and a subsidiary. A few commenters also suggested
adding an example of a multi-tier partnership entity similar to
proposed Sec. 301.7701-1(a)(4)(iii)(B) (Example 2).
Proposed Sec. 301.7701-1(a)(4) did not expressly state that
entities that are owned through a chain of entities that themselves are
not recognized for Federal tax purposes are not recognized as separate
entities for Federal tax purposes. In order to ensure clarity on this
point, the final regulations add language in Sec. 301.7701-1(a)(4) to
clarify that the wholly owned requirement can be met through ownership
by other entities not recognized as separate under Sec. 301.7701-
1(a)(4).
The final regulations, in Sec. 301.7701-1(a)(4)(iii)(B) (Example
2), illustrate that in a tiered structure where Corporation Z is wholly
owned by Corporation X and Corporation X is wholly owned by Tribe B,
where both Corporation Z and Corporation X are organized or
incorporated exclusively under the laws of Tribe B, both entities are
not recognized as separate from Tribe B for Federal tax purposes and
are not subject to Federal income tax. This example was intended to be
a general illustration of the proposed rule that subsidiaries in a
tiered entity structure of wholly owned Tribal entities are not
recognized as separate entities for Federal tax purposes and are,
therefore, exempt from Federal income tax. Revising the example as
suggested by the commenters to specify that proposed Sec. 301.7701-
1(a)(4)(iii)(B) (Example 2) involves a holding company and a subsidiary
would unnecessarily narrow the scope and relevancy of this example,
which was intended to be a general illustration. Therefore, the final
regulations do not adopt this comment.
H. Partnerships With Non-Tribally Owned Entities
One commenter requested adding an example to confirm that a
Tribally organized LLC would retain its status as not regarded when it
enters into a partnership with a third-party for-profit corporation
formed under State law. Though the final regulations do not add such an
example, the Treasury Department and the IRS confirm that the Federal
tax status of a Tribally organized LLC would not be affected by holding
an interest in a partnership regardless of who the other partners in
the partnership were.
I. Section 17 Corporation
A commenter recommended clarifying that a section 17 corporation is
a federally chartered corporation created through a lengthy
incorporation process for a corporation with the DOI and the eventual
approval of such corporation's charter.
These final regulations do not adopt the recommendation in this
comment concerning detailing the processes by which a section 17
corporation is created because the regulations do not modify or
otherwise affect the incorporation process of section 17 corporations
and section 3 corporations. They do provide certainty that wholly owned
Tribal entities are accorded the same tax treatment as section 17
corporations and section 3 corporations. The final regulations do,
however, adopt the recommendation to change the description of section
17 corporations and section 3 corporations to reflect that they are
federally chartered corporations.
J. Tribal Entity Formation
Several commenters also requested clarification that entities
formed under resolutions or interim measures, rather than formal
ordinances, are also afforded Federal income tax exemption if
established under Tribal law. The proposed regulations did not address
the specific mechanisms or administrative processes by which Tribes
organize or incorporate a wholly owned entity under their sovereign
laws. While the final regulations do not specifically adopt these
comments by providing the requested clarification, the Treasury
Department and the IRS confirm that any acts to organize or incorporate
a wholly owned Tribal
[[Page 58157]]
entity under the laws of the Tribes would satisfy the requirements of
being ``organized under Tribal law'' for such entity to not be
recognized as a separate entity from the Tribe under Sec. 301.7701-
1(a)(4)(i).
K. Not Subject to Federal Income Tax
A commenter recommended expressly stating in the text of proposed
Sec. 301.7701-1(a)(4)(i) that section 17 corporations, section 3
corporations, and wholly owned Tribal entities are not subject to
Federal income tax on income earned by them in the conduct of
commercial business, investment, and/or other activities on or off the
organizing Tribe's reservation or Tribes' reservations (as applicable).
The commenter suggested that, although proposed Sec. 301.7701-
1(a)(4)(iii)(A) through (C) (Examples 1 through 3) illustrated that
entities wholly owned by one or more Tribes and organized or
incorporated exclusively under the laws of such Tribe or Tribes are
both not recognized as separate entities for Federal tax purposes and
not subject to Federal income tax, additional language explicitly
stating that such entities are not subject to Federal income tax is
necessary in proposed Sec. 301.7701-1(a)(4)(i) for consistency and to
avoid any ambiguity on this issue.
This commenter also indicated that the use of the phrase ``in the
conduct of commercial business'' in connection with the statement of
exemption from Federal income tax in the preamble to the proposed
regulations creates uncertainty as to the scope of the exemption from
Federal income tax of section 17 corporations and section 3
corporations, creating the possibility of disputes regarding whether
income from investments or other activities or sources is excluded from
the exemption from Federal income tax. Thus, the commenter requests
clarification in the final regulations on the scope of the exemption
from Federal income tax for section 17 corporations and section 3
corporations.
The Treasury Department and the IRS adopt the recommendation and
added language to Sec. 301.7701-1(a)(4)(i) to clarify that such
entities are not subject to Federal income tax. As such, the source of
their income is not relevant because their Federal tax status is not
based on the source or type of income earned. Accordingly, the final
regulations do not comment on the nature or source of income excluded
from Federal income tax derived by section 17 corporations, section 3
corporations, or wholly owned Tribal entities.
L. Federal Income Tax Refunds
Some commenters requested that the IRS defer to Tribes' sole
discretion to determine whether wholly owned Tribal entities that have
been in existence for decades have consistently applied Sec. 301.7701-
1(a)(4) and relied on that provision for tax years prior to the final
regulations' publication date. By providing such deference, these
commenters suggest, the IRS would respect Tribal sovereignty and self-
governance, and reduce administrative burdens. To that effect, some
commenters suggested developing a specific streamlined refund process
for wholly owned Tribal entities that may have paid Federal income
taxes for a period before the final regulations' publication date.
While the final regulations do not adopt the foregoing comments,
the Treasury Department and the IRS confirm that Federal income tax
refund requests may be processed under the general principles of tax
administration. In particular, wholly owned Tribal entities that choose
to apply the final regulations retroactively may seek income tax
refunds by filing Form 1120-X, Amended U.S. Corporation Income Tax
Return, for tax years for which the applicable period of limitations is
open and obtain the assistance of the Indian Tribal Governments office
of the Tax Exempt and Government Entities Division of the IRS to
process their refund requests.
M. Federal Excise Tax
1. Entity Classification
The majority of commenters recommended that the final regulations
treat section 17 corporations, section 3 corporations, and wholly owned
Tribal entities as entities that are separate from the Tribe(s) that
own these entities for Federal excise tax purposes because Tribes
create these entities to limit the risk of liability to the Tribes
themselves. The commenters' suggestion would be consistent with the
treatment of disregarded entities as separate from their owners for
purposes of certain Federal excise taxes under the special rule in
Sec. 301.7701-2(c)(2)(v). Additionally, the Background section of the
preamble to the proposed regulations notes at footnote 2 that while
Tribes are not subject to Federal income tax, they generally are
subject to Federal excise taxes absent a rule (such as section 7871 of
the Code) providing otherwise. Other commenters requested that the
final regulations allow Tribes to elect to treat a wholly owned entity
as either regarded or disregarded for Federal excise tax purposes.
These commenters asserted that Tribes have a sovereign right to elect
specific Federal tax treatment.
In addition, several commenters expressed concern that the rules
applying to ``business entities'' in Sec. 301.7701-2(c)(2)(i) and (v)
may not include section 17 corporations, section 3 corporations, or
wholly owned Tribal entities. Section 301.7701-2(a) defines a
``business entity'' as an entity recognized for Federal tax purposes,
and Sec. 301.7701-1(a)(3), as of April 1, 2025, provided that section
17 corporations and section 3 corporations were not ``recognized'' for
Federal tax purposes. Similarly, proposed Sec. 301.7701-1(a)(4)(i)
generally would not have recognized section 17 corporations, section 3
corporations, or wholly owned Tribal entities as separate entities for
Federal tax purposes. These commenters requested that the final
regulations explicitly treat these three types of Tribal entities as
separate entities for Federal excise tax purposes. Specifically,
commenters suggested modifying Sec. 301.7701-2(c)(2)(v) to apply both
to business entities described in Sec. 301.7701-2(c)(2)(i) and to
Tribal entities described in proposed Sec. 301.7701-1(a)(4)(i). In
conjunction with this change, commenters also suggested modifying
proposed Sec. 301.7701-1(a)(4)(i) to provide an exception for cases
where the (newly modified) special rule relating to Federal excise
taxes at Sec. 301.7701-2(c)(2)(v) applies to Tribal entities.
The Treasury Department and the IRS agree with the recommendation
of the majority of commenters to treat section 17 corporations, section
3 corporations, and wholly owned Tribal entities as entities separate
from the Tribe(s) that own them for Federal excise tax purposes. The
final regulations do not adopt these commenters' specific
recommendation to amend Sec. 301.7701-2(c)(2)(v) because the rules of
Sec. 301.7701-2 apply solely to ``business entities.'' Instead, the
final regulations provide for this separate entity treatment in Sec.
301.7701-1. Specifically, while the final regulations in Sec.
301.7701-1(a)(4)(i) provide the general rule that section 17
corporations, section 3 corporations, and wholly owned Tribal entities
are not recognized as separate entities for Federal tax purposes, the
final regulations in Sec. 301.7701-1(a)(4)(iii) provide an exception
under which such entities are treated as separate entities for certain
Federal excise tax purposes under rules identical to those of Sec.
301.7701-2(c)(2)(v). This aligns the rules applicable to section 17
corporations, section 3 corporations, and wholly
[[Page 58158]]
owned Tribal entities with the existing rules under Sec. 301.7701-
2(c)(2)(v) that treat disregarded entities as separate from their
owners for certain Federal excise tax purposes.
The Treasury Department and the IRS decline to adopt the suggestion
of some commenters that Tribes be allowed to elect the treatment of
wholly owned Tribal entities for Federal excise tax purposes. Instead,
as explained in the previous paragraph, the final regulations provide
that wholly owned Tribal entities (as well as section 17 corporations
and section 3 corporations) will, in all cases, be regarded as separate
entities for the Federal excise tax purposes identified in Sec.
301.7701-2(c)(2)(v). This approach is consistent with most commenters'
requests and aligns with the existing Federal excise tax regime under
Sec. 301.7701-2(c)(2)(v).
This approach also avoids a number of administrative difficulties
that taxpayers and the IRS have experienced with respect to disregarded
entities generally, due to the interaction of the disregarded entity
rules and certain Federal excise tax provisions. Many Federal excise
tax provisions rely on State law, rather than Federal law, to determine
when tax attaches or whether to allow an excise tax credit or refund.
Federal excise taxes are generally transaction-based, and State law
often governs one or more aspects of a transaction, such as when title
to an article passes. As such, difficulties arose prior to the 2007
regulations, TD 9356 (72 FR 45891, August 16, 2007), when an entity
that was regarded under State law, but disregarded under Federal tax
law, engaged in transactions subject to a Federal excise tax. To
address these problems, in 2007, the Treasury Department and the IRS
promulgated Sec. 301.7701-2(c)(2)(v) to treat wholly owned business
entities otherwise disregarded for Federal tax purposes as separate
from their owners for certain Federal excise tax purposes. See TD 9356
(72 FR 45891, August 16, 2007) (adopting final regulations and stating
no comments were received regarding the excise tax provisions of the
proposed regulations); REG-114371-05 (70 FR 60475-60476, October 18,
2005) (preamble to proposed Sec. 301.7701-2(c)(2)(v), explaining
reasons for the change).
To prevent similar problems with respect to Tribal entities, the
final regulations adopt separate Federal excise tax treatment,
identical to that of Sec. 301.7701-2(c)(2)(v), for section 17
corporations, section 3 corporations, and wholly owned Tribal entities.
Having all wholly owned Tribal entities on a uniform system for Federal
excise tax purposes that conforms with the existing Sec. 301.7701-
2(c)(2)(v) rules avoids inconsistency and promotes sound tax
administration.
Finally, other commenters requested that wholly owned Tribal
entities be not recognized as separate entities for excise tax
exemption purposes but recognized as separate entities for excise tax
liability purposes. These commenters requested that the final
regulations allow Tribes to extend their sovereign privileges, such as
a tax exemption, to their wholly owned entities while also permitting
Tribes to shield their assets from potential liabilities by forming
business entities. The Treasury Department and the IRS decline to adopt
this suggestion because excise tax exemptions, such as those provided
in section 7871, are outside the scope of this rulemaking.
2. Section 7871
In expressing their views on the classification of Tribal entities
as separate from the Tribe for Federal excise tax purposes, some
commenters expressed concern about the potential impact of such
treatment on the section 7871 exemption from certain Federal excise
taxes. Those commenters stated that section 17 corporations, section 3
corporations, and wholly owned Tribal entities should be explicitly
permitted to claim Federal excise tax exemptions to the same extent as
Tribes under section 7871. Some of those commenters suggested that
language be added to proposed Sec. 301.7701-1(a)(4) to provide that
section 17 corporations, section 3 corporations, and wholly owned
Tribal entities are treated as an ``Indian Tribal government'' for
purposes of section 7871 and obsolete Sec. 305.7871-1. Other
commenters requested that such entities be deemed a ``subdivision'' for
purposes of section 7871.
The final regulations do not adopt these commenters' suggestions,
as section 7871 and any regulations thereunder are outside the scope of
this rulemaking. The proposed regulations did not address section 7871
or obsolete Sec. 305.7871-1. Accordingly, the final regulations do not
address the existing law under section 7871 or the availability of the
section 7871(a)(2) exemption from certain Federal excise taxes for
Tribes, section 17 corporations, section 3 corporations, or wholly
owned Tribal entities.
N. Employment Tax
Prior to the publication of this Treasury decision, Sec. 301.7701-
1(a)(3) provided that section 17 corporations and section 3
corporations are not recognized as separate entities for Federal tax
purposes. However, the regulations did not specifically address whether
a wholly owned Tribal entity is recognized as a separate entity for
Federal employment tax purposes.
In general, employment tax responsibilities rest with an employer.
Employers are required to deduct and withhold Federal income taxes and
Federal Insurance Contributions Act (FICA) taxes from their employees'
wages under sections 3402(a) and 3102(a) of the Code, and are
separately liable for their share of FICA taxes as well as for Federal
Unemployment Tax Act (FUTA) taxes under sections 3111 and 3301 of the
Code. These Federal income tax withholding, FICA, and FUTA taxes are
collectively referred to herein as ``Federal employment taxes.''
Sections 3403, 3102(b), 3111, and 3301 provide that the employer is the
person liable for the withholding and payment of Federal employment
taxes. In addition, the employer is required to make timely tax
deposits, file Federal employment tax returns, and issue wage
statements (Forms W-2) to employees, which are collectively referred to
herein as ``other Federal employment tax obligations.''
An employer is generally defined as the person for whom an
individual performs services as an employee. See sections 3401(d),
3121(d), and 3306(a) of the Code. If an entity were not recognized as
separate from its owner for Federal employment tax purposes, the owner
of the entity would be treated as the employer for purposes of Federal
employment tax liabilities and all other Federal employment tax
obligations related to wages paid to employees performing services for
the disregarded entity. In the context of wholly owned Tribal entities,
the IRS has not previously issued guidance regarding their employment
tax treatment.
Outside the context of wholly owned Tribal entities, Sec.
301.7701-2(c)(2)(iv)(A) and (B) treat business entities that are
disregarded for Federal tax purposes as separate corporations for
purposes of Federal employment taxes and related reporting
requirements. Specifically, certain other single-owner eligible
entities (under Sec. Sec. 301.7701-1 through 301.7701-3) that are
disregarded as entities separate from their owners for other Federal
tax purposes are treated as entities separate from their owners for
Federal employment tax purposes. See Sec. 301.7701-2(c)(2)(iv)(A) and
(B).
Several commenters requested a provision treating wholly owned
Tribal entities separately for employment tax purposes to ensure that
such entities can assume direct responsibility without burdening the
Tribes that own
[[Page 58159]]
them. The final regulations adopt these comments and treat wholly owned
tribal entities as separate from their Tribal owners for Federal
employment tax purposes. As discussed above, this approach is
consistent with the treatment of disregarded entities in Sec.
301.7701-2(c)(2)(iv)(A) and (B), which generally are disregarded as
separate from their owners for Federal tax purposes, but regarded as
separate for Federal employment tax purposes. Further, this approach
would generally not subject Tribes to liability for Federal employment
taxes owed with respect to employees performing services for their
wholly owned Tribal entities, a result that many commenters support.
This approach also minimizes administrative burdens, particularly for
inter-Tribal entities.
Other commenters expressly requested that FICA and FUTA tax
benefits applicable to Tribes be applied to wholly owned Tribal
entities. Another commenter suggested that the final regulations should
confirm that wholly owned Tribal entities share their owner's Federal
tax exemption benefits from certain Federal employment taxes and
provide a wide range of hypothetical examples.
There are some Federal employment tax provisions that specifically
apply to services performed in the employ of a Tribe. For example, an
exception from FUTA taxes exists for service performed in the employ of
a Tribe, or any instrumentality that is wholly owned by a Tribe. See
section 3306(c)(7). Section 3306(u) provides that, for FUTA purposes,
the term ``Indian tribe'' has the meaning given to such term by section
4(e) of the Indian Self-Determination and Education Assistance Act
(codified at 25 U.S.C. 5304(e)), and includes any subdivision,
subsidiary, or business enterprise wholly owned by such an Indian
tribe. 25 U.S.C. 5304(e) provides that ``Indian Tribe'' means, inter
alia, any Indian tribe, band, nation, or other organized group or
community which is recognized as eligible for the special programs and
services provided by the United States to Indians because of their
status as Indians.
Accordingly, even though wholly owned Tribal entities are treated
as separate from the Tribes for employment tax purposes, they remain
eligible for the FUTA tax exception in section 3306(c)(7) because
section 3306(u) makes it clear that for purposes of FUTA tax, the term
``Indian Tribe'' has the meaning given to such term by 25 U.S.C.
5304(e) and includes ``any subdivision, subsidiary, or business
enterprise wholly owned by such an Indian tribe.''
As an example, if a Tribe establishes a wholly owned Tribal entity,
under the final regulations, it will generally be treated as a separate
corporation for Federal employment tax purposes, but it will be treated
as an Indian Tribe for purposes of the FUTA tax exception provided by
section 3306(c)(7) because it is a subdivision, subsidiary, or business
enterprise wholly owned by the Tribe as defined in section 3306(u).
II. Elective Payment Elections
The final regulations provide that wholly owned Tribal entities,
section 17 corporations, and section 3 corporations are treated, for
purposes of making section 6417 elections (including determining
eligibility for and the consequences of such elections), as
instrumentalities of the Indian Tribal government(s) that wholly own
them. This is the same rule contained in proposed Sec. 1.6417-1, which
stated that an entity described in Sec. 301.7701-1(a)(4)(i) is treated
as an instrumentality of the Indian Tribal government(s) or
subdivision(s) thereof that own(s) it.
Commenters generally supported the proposed rule treating wholly
owned Tribal entities as instrumentalities of the Tribes that own them
for purposes of the section 6417 elective payment election. Some
commenters requested clarification on the application of the elective
payment election rules when an applicable credit is generated by a
wholly owned Tribal entity jointly owned by multiple Tribes. As a
clarification, a wholly owned Tribal entity that is jointly owned by
multiple Tribes would be treated as an instrumentality for purposes of
section 6417. The wholly owned Tribal entity will determine any
applicable credit generated by the Tribal entity's activities and make
the elective payment election for any applicable credit so determined.
This avoids each Tribe having to separately determine a credit and
separately make an elective payment election. By following the
procedural rules in the section 6417 final regulations, TD 9988 (89 FR
17584, March 11, 2024), the wholly owned Tribal entity generally will
make the elective payment election by completing pre-filing
registration and then filing a return including a completed Form 990-T,
Exempt Organization Business Income Tax Return, as described in Sec.
1.6417-1(b)(2), using its own name and employer identification number,
any relevant source credit form(s), Form 3800, General Business Credit
(or its successor), and any additional information, including
supporting calculations, required in instructions to the relevant
forms. Any refund resulting from the elective payment election would be
paid to the wholly owned Tribal entity. This treatment should reduce
overall complexity for Tribes and the IRS as it reduces the number of
necessary credit calculations and elective payment elections and also
helps ensure any elective payment amount is commensurate with the
amount of the otherwise allowable credit.
Another commenter suggested that the proposed regulations be
revised to allow Tribes the choice of having the Tribe or the wholly
owned Tribal entity make the elective payment election because in some
cases it may be impractical for the wholly owned Tribal entity to do
so. The final regulations do not adopt this suggestion, consistent with
the view of most commenters who supported the rule providing that the
wholly owned Tribal entity that is treated as an instrumentality must
make the election. There also are additional administrative benefits
gained for both Tribes and the IRS by having certainty on how to file
elective payment elections. For example, it will be clear that the
wholly owned Tribal entity makes the elective payment election when an
entity is wholly owned by multiple tribes. Thus, the final regulations
provide that a wholly owned Tribal entity is treated as an
instrumentality of an Indian Tribal government and such instrumentality
(and not the Indian Tribal government) would make the elective payment
election.
A commenter suggested that, rather than being treated as a payment
of tax, the elective payment amount should be treated as a grant and
paid prior to the time a project is placed in service. The statutory
text of section 6417(a) expressly requires the entity making an
elective payment election with respect to an applicable credit to be
treated as making a payment of tax equal to the amount of such credit.
Furthermore, the statutory text of section 6417(d)(4) controls the
timing of an elective payment and provides that the payment is treated
as being made by the applicable entity on the later of the due date for
the return or the date the return is actually filed. As this comment
could only be adopted if statutory revisions were made, these final
regulations do not adopt the commenter's suggestions.
Several commenters recommended that Tribes be given the option to
monetize credits through transferability under section 6418 of the
Code, rather than only being able to make elective payment elections
under section 6417.
[[Page 58160]]
The commenters also suggested additional changes to the section 6418
rules if Tribes were allowed to make transfers. Tribal governments (and
their instrumentalities, pursuant to Sec. 1.6417-1(c)(7)) are listed
as applicable entities under section 6417(d)(1)(A)(iv) and section
6418(f)(2) expressly provides that an eligible taxpayer for section
6418 is any taxpayer not listed in section 6417(d)(1)(A). Thus, Tribal
governments (and their instrumentalities) are only allowed to make
elective payment elections under section 6417. As the comment
requesting the option to use section 6418 and the other comments
suggesting additional section 6418 changes would require statutory
revisions, these final regulations do not adopt the commenters'
suggestions.
Applicability Dates
The final regulations apply to taxable periods, or taxable years
for purposes of section 6417, beginning on or after January 1, 2026.
The final regulations provide that section 17 corporations, section 3
corporations, and wholly owned Tribal entities are treated as
instrumentalities for purposes of making a section 6417 election, and
as entities separate from their owners for the Federal employment and
excise tax purposes identified in Sec. 301.7701-2(c)(2)(iv) and (v).
Accordingly, each such entity must have its own employer identification
number (EIN) for these purposes. Each such entity must separately
calculate, report, and pay all employment tax obligations identified in
Sec. 301.7701-2(c)(2)(iv) with respect to its employees under its own
name and EIN for wages paid on or after January 1, 2026. With respect
to taxable periods beginning on or after January 1, 2026, each such
entity must separately report, calculate, and pay taxes for any purpose
identified in Sec. 301.7701-2(c)(2)(v) under its own name and EIN. To
ensure that taxpayers have sufficient time to make any necessary
changes to their systems in response to these final regulations, the
final regulations apply only to taxable periods beginning on or after
January 1, 2026.
For Federal income tax purposes only, an entity may choose to apply
Sec. 301.7701-1(a)(4) to taxable periods beginning before January 1,
2026, for which the applicable period of limitations is open.
For section 6417 purposes, an entity described in Sec. 301.7701-
1(a)(4)(i) may choose to apply Sec. 1.6417-1(c)(7) and (f) to taxable
years beginning before January 1, 2026, but only if the Indian Tribal
government(s) that own the entity also apply Sec. 1.6417-1(c)(7) and
(f) consistently with such entity for all such taxable years.
Special Analyses
I. Executive Order 13175: Consultation and Coordination With Indian
Tribal Governments
Executive Order 13175 (Consultation and Coordination With Indian
Tribal Governments) prohibits an agency from publishing any rule that
has Tribal implications if the rule either imposes substantial, direct
compliance costs on Indian Tribal governments and is not required by
statute, or preempts Tribal law, unless the agency meets the
consultation and funding requirements of section 5 of the Executive
order. This final rule would neither impose substantial, direct
compliance costs on Indian Tribal governments nor preempt Tribal law
within the meaning of the Executive order.
II. Regulatory Planning and Review
The Office of Management and Budget's Office of Information and
Regulatory Analysis has determined that this regulation is not
significant and is not subject to review under section 6(b) of
Executive Order 12866. Therefore, a regulatory impact assessment is not
required.
The Executive Order 14192 designation for this final rule is
anticipated to be deregulatory.
III. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the
Office of Management and Budget (OMB) before collecting information
from the public, whether such collection of information is mandatory,
voluntary, or required to obtain or retain a benefit. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays
a valid control number.
The collection of information in these regulations contain
reporting and recordkeeping requirements. The recordkeeping
requirements mentioned within these final regulations are considered
general tax records under Sec. 1.6001-1(e). These records are required
for the IRS to validate that taxpayers have met the regulatory
requirements and are entitled to make an elective payment election and
to verify the Federal tax classification of entities described in these
final regulations. For PRA purposes, general tax records are already
approved by OMB under 1545-0047 for tax-exempt organizations and
government entities.
These regulations also mention reporting requirements related to
making elections under section 6417. These elections will be made by
taxpayers on Forms 990-T, and credit calculations will be made on Form
3800 and supporting forms. These forms are approved under 1545-0047 for
tax-exempt organizations and government entities.
IV. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6),
the Secretary of the Treasury hereby certifies that the final
regulations will not have a significant economic impact on a
substantial number of small entities pursuant to the Regulatory
Flexibility Act. These final regulations would affect entities that are
wholly owned by Tribes. Additionally, no added burden is created
through these final regulations; rather, these final regulations would
expand the definition of an eligible entity for section 6417 of the
Code but does not expand the requirements for entities to make the
elective payment election. Although data is not readily available about
the number of small entities that are potentially affected by this
rule, it is possible that a substantial number of small entities may be
affected.
To the extent the entities described in these regulations make
elections under section 6417, the Treasury Department and the IRS
certify the final regulatory flexibility analysis undertaken in TD 9988
(89 FR 17584, March 11, 2024).
For the reasons stated, a regulatory flexibility analysis under the
Regulatory Flexibility Act is not required.
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding this Treasury decision was submitted to the Chief
Counsel for the Office of Advocacy of the Small Business Administration
for comment on its impact on small business, and no comments were
received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandate Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Indian Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). These final
regulations do not include any Federal mandate that may result in
expenditures by State, local, or Indian Tribal governments or by the
private sector in excess of that threshold.
[[Page 58161]]
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These final regulations do not have
federalism implications and do not impose substantial, direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
VII. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule, as defined by 5 U.S.C. 804(2).
Statement of Availability of IRS Documents
The Revenue Rulings and Revenue Procedure cited in this preamble
are published in the Internal Revenue Bulletin and are available from
the Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.
Drafting Information
The principal author of these final regulations is the Office of
Associate Chief Counsel (Passthroughs, Trusts, and Estates). However,
other personnel from the Treasury Department and the IRS participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
0
Par. 2. Section 1.6417-1 is amended by:
0
1. Revising paragraph (c) introductory text;
0
2. Removing the semicolons from the end of paragraphs (c)(1)(ii) and
(c)(2) through (5) and adding periods in their places;
0
3. Removing the language ``; and'' from the end of paragraph (c)(6) and
adding a period in its place; and
0
4. Revising paragraphs (c)(7), (f), and (q).
The revisions read as follows:
Sec. 1.6417-1 Elective payment election of applicable credits.
* * * * *
(c) Applicable entity. The term applicable entity means any entity
described in paragraphs (c)(1) through (7) of this section.
* * * * *
(7) An agency or instrumentality of any applicable entity described
in paragraph (c)(1)(ii) or (c)(2) or (3) of this section. For purposes
of making an elective payment election under section 6417 (including
determining eligibility for and the consequences of such election), an
entity described in Sec. 301.7701-1(a)(4)(i) of this chapter is
treated as an instrumentality of the Indian Tribal government(s) or
subdivision(s) thereof that own(s) it.
* * * * *
(f) Disregarded entity. The term disregarded entity means an entity
that is disregarded as, or not recognized as, an entity separate from
its owner for Federal income tax purposes under Sec. 301.7701-1(a)(3)
or Sec. Sec. 301.7701-2 and 301.7701-3 of this chapter. See paragraph
(c)(7) of this section regarding entities described in Sec. 301.7701-
1(a)(4)(i) of this chapter.
* * * * *
(q) Applicability dates--(1) In general. Except as provided in
paragraph (q)(2) of this section, this section applies to taxable years
ending on or after March 11, 2024. For taxable years ending before
March 11, 2024, taxpayers may choose to apply the rules of this section
and Sec. Sec. 1.6417-2 through 1.6417-4 and 1.6417-6, provided the
taxpayers apply the rules in their entirety and in a consistent manner.
(2) Paragraphs (c)(7) and (f) of this section. Paragraphs (c)(7)
and (f) of this section apply to taxable years beginning on or after
January 1, 2026. For taxable years beginning before January 1, 2026, an
entity described in Sec. 301.7701-1(a)(4)(i) of this chapter may
choose to apply paragraphs (c)(7) and (f) of this section, but only if
the Indian Tribal government(s) that own the entity also apply
paragraphs (c)(7) and (f) of this section consistently with such entity
for all such taxable years. For the rules that apply to entities that
do not choose to apply paragraphs (c)(7) and (f) of this section in
accordance with the preceding sentence for taxable years beginning
before January 1, 2026, see Sec. 1.6417-1 as contained in 26 CFR part
1, revised April 1, 2025.
PART 301--PROCEDURE AND ADMINISTRATION
0
Par. 3. The authority citation for part 301 is amended by adding an
entry for Sec. 301.7701-1(a)(4) in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805.
* * * * *
Section 301.7701-1(a)(4) also issued under 26 U.S.C.
7701(a)(40).
* * * * *
0
Par. 4. Section 301.7701-1 is amended by:
0
1. Revising paragraph (a)(3);
0
2. Redesignating paragraph (a)(4) as paragraph (a)(5);
0
3. Adding a new paragraph (a)(4); and
0
4. Revising paragraph (f).
The revisions and addition read as follows:
Sec. 301.7701-1 Classification of organizations for federal tax
purposes.
(a) * * *
(3) Certain State and local law entities not recognized. An entity
formed under State or local law is not always recognized as a separate
entity for Federal tax purposes. For example, an organization wholly
owned by a State is not recognized as a separate entity for Federal tax
purposes if it is an integral part of the State.
(4) Certain Tribal entities--(i) In general--(A) Rule. Except as
provided in paragraphs (a)(4)(ii) and (iii) of this section, section 17
corporations, section 3 corporations, and wholly owned Tribal entities
(as defined, respectively, in paragraphs (a)(4)(i)(B) through (D) of
this section) are not recognized as separate entities for Federal tax
purposes and, therefore, are not subject to Federal income tax.
(B) Definition of section 17 corporation. The term section 17
corporation means a federally chartered corporation incorporated under
section 17 of the Indian Reorganization Act of 1934, as amended (25
U.S.C. 5124), by the Bureau of Indian Affairs, as the authorized
delegate of the Secretary of the Interior.
(C) Definition of section 3 corporation. The term section 3
corporation means a federally chartered corporation incorporated under
section 3 of the Oklahoma Indian Welfare Act, as
[[Page 58162]]
amended (25 U.S.C. 5203), by the Bureau of Indian Affairs, as the
authorized delegate of the Secretary of the Interior.
(D) Definition of wholly owned Tribal entity. The term wholly owned
Tribal entity means an entity wholly owned by one or more Indian Tribal
governments (within the meaning of section 7701(a)(40) of the Code),
directly or through other entities that are not recognized as separate
entities for Federal income tax purposes, that is organized or
incorporated exclusively under the laws of one or more of the owning
Indian Tribal governments. Whether an entity is organized or
incorporated under the laws of one or more Indian Tribal government(s)
is determined without regard to any specified choice of law or forum.
(ii) Elections under section 6417. See Sec. 1.6417-1(c)(7) of this
chapter for the treatment of section 17 corporations, section 3
corporations, and wholly owned Tribal entities described in paragraph
(a)(4)(i) of this section for the purposes of making an elective
payment election under section 6417 of the Code (section 6417
election), including determining eligibility for and the consequences
of such election.
(iii) Federal employment taxes and excise taxes. Section 17
corporations, section 3 corporations, and wholly owned Tribal entities
are treated as separate entities for Federal employment and certain
Federal excise tax purposes in a manner identical to the treatment
described in Sec. 301.7701-2(c)(2)(iv) and (v).
(iv) Examples. The following examples illustrate the application of
paragraphs (a)(4)(i) through (iii) of this section. For purposes of
these examples, all references to a Tribe are references to an Indian
Tribal government within the meaning of section 7701(a)(40).
(A) Example 1. Tribe B incorporates Corporation X pursuant to Tribe
B's Corporations Ordinance, which governs the purpose, formation, and
operation of commercial entities. Tribe B owns all the shares of
Corporation X. Corporation X is therefore wholly owned by Tribe B and
organized or incorporated under the laws of Tribe B. As a result,
Corporation X is not recognized as a separate entity from Tribe B for
Federal tax purposes, except for the purposes described in Sec.
1.6417-1(c)(7) of this chapter and paragraph (a)(4)(iii) of this
section. Accordingly, Corporation X is not subject to Federal income
tax. Under Sec. 1.6417-1(c)(7) of this chapter, Corporation X is
treated as an instrumentality of Tribe B for purposes of making a
section 6417 election (including determining eligibility for and the
consequences of such election). Thus, Corporation X, rather than Tribe
B, would be the applicable entity for purposes of making a section 6417
election for any applicable credit (as defined in section 6417(b))
relating to property held or activities conducted by Corporation X.
Corporation X is treated as a corporation separate from its owner for
Federal employment tax purposes governed under subtitle C of the
Internal Revenue Code, and as separate from its owner for the Federal
excise tax purposes identified in Sec. 301.7701-2(c)(2)(v)(A). The
analysis would be the same if Tribe B had organized its business as a
single member limited liability company (LLC) pursuant to the Tribe's
business code instead of incorporating Corporation X.
(B) Example 2. The facts are the same as in paragraph (a)(4)(iv)(A)
of this section (Example 1), except that the board of Corporation X,
pursuant to Tribe B's Corporations Ordinance, organizes a subsidiary,
Corporation Z, to pursue a limited line of new business. Corporation X
owns all the shares of Corporation Z. Corporation Z is therefore wholly
owned by Tribe B and organized or incorporated under the laws of Tribe
B. As a result, neither Corporation X nor Corporation Z is recognized
as an entity separate from Tribe B for Federal tax purposes, except for
the purposes described in Sec. 1.6417-1(c)(7) of this chapter and
paragraph (a)(4)(iii) of this section. Accordingly, Corporation Z is
not subject to Federal income tax. Under Sec. 1.6417-1(c)(7) of this
chapter, Corporation X and Corporation Z are each treated as an
instrumentality of Tribe B for the purposes of making a section 6417
election (including determining eligibility for and the consequences of
such election). Thus, Corporation Z, rather than Corporation X or Tribe
B, is the applicable entity for purposes of making a section 6417
election for any applicable credit relating to property held or
activities conducted by Corporation Z. As in paragraph (a)(4)(iv)(A) of
this section (Example 1), Corporation X would continue to be the
applicable entity for purposes of making a section 6417 election for
any applicable credit relating to property held or activities conducted
by Corporation X. Both Corporation X and Corporation Z are treated as
corporations separate from their owner for Federal employment tax
purposes governed under subtitle C of the Internal Revenue Code, and as
separate from their owner for the Federal excise tax purposes
identified in Sec. 301.7701-2(c)(2)(v)(A). The analysis would be the
same if Tribe B had organized its businesses as single member LLCs
pursuant to the Tribe's business code instead of incorporating
Corporations X and Z.
(C) Example 3. Tribe B incorporates a section 17 corporation. The
section 17 corporation subsequently incorporates Corporation J pursuant
to Tribe B's Corporations Ordinance, which governs the purpose,
formation, and operation of commercial entities. The section 17
corporation owns all the shares of Corporation J. Corporation J is
therefore treated as wholly owned by Tribe B and organized or
incorporated under the laws of Tribe B. As a result, Corporation J is
not recognized as a separate entity from Tribe B for Federal tax
purposes, except for the purposes described in Sec. 1.6417-1(c)(7) of
this chapter and paragraph (a)(4)(iii) of this section. Accordingly,
neither the section 17 corporation nor Corporation J is subject to
Federal income tax. Under Sec. 1.6417-1(c)(7) of this chapter, the
section 17 corporation and Corporation J are each treated as an
instrumentality of Tribe B for the purposes of making a section 6417
election (including determining eligibility for and the consequences of
such election). Thus, the section 17 corporation, rather than Tribe B,
would be the applicable entity for purposes of making a section 6417
election for any applicable credit relating to property held or
activities conducted by the section 17 corporation. In addition,
Corporation J, rather than Tribe B or the section 17 corporation, would
be the applicable entity for purposes of making a section 6417 election
for any applicable credit relating to property held or activities
conducted by Corporation J. Both the section 17 corporation and
Corporation J are treated as corporations separate from their owner for
Federal employment tax purposes governed under subtitle C of the
Internal Revenue Code, and as separate from their owner for the Federal
excise tax purposes identified in Sec. 301.7701-2(c)(2)(v)(A). The
analysis would be the same if the section 17 corporation had organized
its business as a single member LLC pursuant to the Tribe's business
code instead of incorporating Corporation J.
(D) Example 4. Tribe A, Tribe B, Tribe C, and Tribe D through
resolutions approved by their respective Indian Tribal governments
incorporate Corporation K which is chartered under the Corporations
Ordinance of Tribe A. Each Tribe owns 25% of the shares of Corporation
K. Corporation K is incorporated under the laws of one of its owners,
Tribe A. As a result, Corporation K is a wholly owned Tribal
[[Page 58163]]
entity and is not recognized as a separate entity from the Tribes for
Federal tax purposes, except for the purposes described in Sec.
1.6417-1(c)(7) of this chapter and paragraph (a)(4)(iii) of this
section. Accordingly, Corporation K is not subject to Federal income
tax. Under Sec. 1.6417-1(c)(7) of this chapter, Corporation K is
treated as an instrumentality of Tribe A, Tribe B, Tribe C, and Tribe D
for the purposes of making a section 6417 election (including
determining eligibility for and the consequences of such election).
Thus, Corporation K, rather than Tribe A, Tribe B, Tribe C, or Tribe D,
would be the applicable entity for purposes of making a section 6417
election for any applicable credit relating to property held or
activities conducted by Corporation K. Corporation K is treated as a
corporation separate from its owners for Federal employment tax
purposes governed under subtitle C of the Internal Revenue Code, and as
separate from its owners for the Federal excise tax purposes identified
in Sec. 301.7701-2(c)(2)(v)(A). The analysis would be the same if
Tribe A, Tribe B, Tribe C, and Tribe D had organized their business as
an LLC pursuant to Tribe A's business code instead of incorporating
Corporation K.
(E) Example 5. Tribe A incorporates Corporation L pursuant to Tribe
A's Corporations Ordinance, which governs the purpose, formation, and
operation of commercial entities. Corporation L subsequently
incorporates Corporation M pursuant to Tribe A's Corporations
Ordinance. Tribe A owns all the shares of Corporation L, and
Corporation L owns all the shares of Corporation M. Corporations L and
M are therefore wholly owned by Tribe A and organized or incorporated
under the laws of Tribe A. In a later year, Tribe B, in agreement with
Tribe A, acquires some, but not all, shares of Corporation M.
Corporations L and M continue to be considered as wholly owned by
Indian Tribal governments and were incorporated under the laws of an
Indian Tribal government that owns them. As a result, neither
Corporation L nor Corporation M is recognized as a separate entity from
the Tribes that own them for Federal tax purposes, except for the
purposes described in Sec. 1.6417-1(c)(7) of this chapter and
paragraph (a)(4)(iii) of this section. Accordingly, Corporations L and
M are not subject to Federal income tax. Under Sec. 1.6417-1(c)(7) of
this chapter, Corporation L is treated as an instrumentality of Tribe
A, and Corporation M is treated as an instrumentality of Tribe A and
Tribe B, for the purposes of making a section 6417 election (including
determining eligibility for and the consequences of such election).
Thus, Corporations L and M, rather than Tribe A or Tribe B, would be
the applicable entities for purposes of making a section 6417 election
for any applicable credit relating to property held or activities
conducted by Corporations L and M, respectively. Both Corporation L and
Corporation M are treated as corporations separate from their owners
for Federal employment tax purposes governed under subtitle C of the
Internal Revenue Code, and as separate from their owners for the
Federal excise tax purposes identified in Sec. 301.7701-2(c)(2)(v)(A).
The analysis would be the same if Tribe A had organized its businesses
as LLCs pursuant to Tribe A's business code instead of incorporating
Corporations L and M, and had Tribe B acquired a membership interest
instead of stock.
* * * * *
(f) Applicability dates--(1) In general. Except as provided in
paragraph (f)(2) of this section, the rules of this section are
applicable as of January 1, 1997.
(2) Exceptions--(i) Paragraph (a)(4) of this section. The rules of
paragraph (a)(4) of this section apply to taxable periods beginning on
or after January 1, 2026. An entity may choose to apply paragraph
(a)(4) of this section to taxable periods beginning before January 1,
2026, for which the applicable period of limitations is open.
(ii) Paragraph (c) of this section. The rules of paragraph (c) of
this section are applicable on January 5, 2009.
Frank J. Bisignano,
Chief Executive Officer.
Approved: November 12, 2025.
Kenneth J. Kies,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-22874 Filed 12-15-25; 8:45 am]
BILLING CODE 4831-GV-P