## Facts

- The IRS addressed federal income tax treatment of commercial income earned by three tribal business structures operating both on and off reservation land.
- In Situation 1, a federally recognized Indian tribe operated an unincorporated commercial business.
- In Situation 2, a federally recognized Indian tribe formed a corporation under § 17 of the Indian Reorganization Act (a federally chartered tribal corporation) that operated a commercial business.
- In Situation 3, a federally recognized Indian tribe was the sole shareholder of a corporation organized under state law that operated a commercial business.
- The ruling concerned only federal income taxation, not other federal taxes (e.g., employment or excise taxes).
- The IRS provided a transition rule limiting application to certain pre-October 1, 1994 income of state-law tribal corporations from on-reservation activities.

## Issues

1. Whether income earned by an unincorporated federally recognized Indian tribe from commercial activities is subject to federal income tax, including when earned off reservation.
2. Whether income earned by a federally chartered tribal corporation formed under § 17 of the Indian Reorganization Act is subject to federal income tax, including when earned off reservation.
3. Whether income earned by a corporation organized under state law and wholly owned by a tribe is subject to federal income tax, including when earned on reservation.
4. Whether and to what extent the IRS would apply its position prospectively under its effective-date authority.

## Decision

- The IRS concluded that an unincorporated Indian tribe is not subject to federal income tax on commercial income, regardless of where the income-producing activity occurs.
- The IRS concluded that a tribal corporation organized under § 17 of the Indian Reorganization Act shares the tribe’s federal income tax status and is not subject to federal income tax on its income, regardless of where the income-producing activity occurs.
- The IRS concluded that a corporation organized under state law, even if wholly owned by a tribe, is a separate taxable entity subject to federal corporate income tax on its income from commercial activities conducted on or off the reservation.
- The IRS adopted a transition rule under its effective-date authority: the ruling did not apply to specified pre-October 1, 1994 income of state-law tribal corporations from on-reservation activities (including properly allocable gain or loss from asset dispositions).

## Legal Principles

- Federally recognized Indian tribes are not taxable entities for federal income tax purposes; as a result, their income is not subject to federal income tax at the tribal level.
- A corporation formed under § 17 of the Indian Reorganization Act shares the tribe’s federal income tax status for federal income tax purposes, without an on-/off-reservation limitation.
- A corporation formed under state law is generally respected as a separate taxable entity for federal income tax purposes; tribal ownership alone does not confer the tribe’s non-taxable status on the corporation.
- The IRS may limit retroactive application of its published positions and set effective dates under its general administrative authority.

## Conclusion

The IRS treated tribes and § 17 federally chartered tribal corporations as non-taxable for federal income tax on commercial income regardless of where earned, but treated state-law corporations owned by tribes as separate taxable corporations, subject to federal income tax, with limited prospective application for certain earlier on-reservation income.


Rev. Rul. 94-16, 1994-1 C.B. 19 (1994)