TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, January 13, 2005

Tax Analysts: Raby & Raby on Tribal Taxation

Tax_analysts_16 Burgess J.W. Raby & William L. Raby have published Treaties, Tribes, and Income Tax (also available on the Tax Analysts web site as Doc 2005-766, 2005 TNT 9-30). Here is the Conclusion:

Tribes are not, as such, subject to federal (or state) income taxes. Nor are the unincorporated entities they use or the corporations they form under federal law. However, corporations formed under state law, although wholly owned by a tribe, are subject to federal income tax. S corporations cannot be used to sidestep that consequence according to Rev. Rul. 2004-50 because a tribe, says the ruling, is an ineligible shareholder. It is unclear whether corporations formed under tribal law would be exempt or not, although the logic of the situation would indicate that they should be. Unincorporated passthrough entities would seem to be acceptable vehicles for tribal activities that would remain free of income tax.

The members of tribes, however, are generally going to be subject to federal income tax on their income unless they can find some specific statutory or treaty provision, such as section 7873, that exempts the particular income, or the income is from restricted land, as described in Rev. Rul. 67-284. Beyond that, general income tax concepts apply, as with the rabbi trust safe harbor set out in Rev. Proc. 2003-14. Tax practitioners dealing with American Indians need to do their own analysis of the tax consequences of transactions both on and off the reservation and not accept the client's interpretation of the applicable tax law without verifying it for themselves. It is true that some income of a Native American may be exempt from tax, but it is far from as broad an exemption as the sovereign nation mythology of Native American taxation would have one believe.

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