Indian Tribes are treated as States for certain purposes of the Internal Revenue Code (IRC), as specified in IRC Section 7871.
IRC Section and Treas. Regulation
- IRC Section 7871 – Indian tribal governments are treated as States for certain purposes.
26 CFR Section 305.7871-1 – The Internal Revenue Code provisions are listed and explained for which Indian tribal governments shall be treated as States, and subdivisions of Indian tribal governments shall be treated as political subdivisions of States
Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)
- Public Law 97-473, Title II, Section 202(a) – created IRC Section 7871
- H.R. 3760 (97th Congress) – Indian Tribal Governmental Act of 1981
- Rev. Rul. 94-81 – discusses how various excise taxes apply to Indian tribal governments
- Montana v. Blackfoot Tribe of Indians (471 U.S. 759) – Indian statutes are read in favor of Indians with ambiguous provisions interpreted to their benefit
- Squire v. Capoeman (351 U.S. 1) – to be valid, tax law exemptions must be clearly expressed
- United States Trust Co. v. Helvering (307 U.S. 57) – tax exemptions don’t rest upon implication
- Chickasaw Nation v. United States (534 U.S. 84) – when Congress enacts a tax exemption, it does so explicitly
- San Manuel Indian Bingo and Casino v. N.L.R.B. (475 F. 3d 1306) – [the Court] must allow an agency to limit a statutory phrase to its ordinary and plain meaning. In short, the Board could conclude that Congress didn’t include an express exception for Indian tribes in the NLRA because no such exception was intended or exists.
The IRC includes certain exceptions applicable to States and their political subdivisions. Often, the language doesn’t include Indian tribal governments and their political subdivisions.
Congress added IRC Section 7871 in 1982 and made it permanent in 1984. As modified, it allows an Indian tribe to be treated as a State for:
- The income, estate, and gift tax deductions for charitable contributions;
- The deduction for income taxes paid to State and local governments;
- The tax on unrelated business income of certain colleges and universities;
- The exclusion for certain accident and health plan payments
- Eligibility for certain tax-deferred annuities; and
- The taxes imposed on excess lobbying expenditures and prohibited transactions by public charities and private foundations;
Two additional purposes are included**:
- The exclusion from tax exempt bond interest income; and
- The exception for miscellaneous excise tax (chapters 31, 32, 33, and 36).
**These two purposes include additional restrictions that don’t apply to States.
In general, Courts interpret ambiguous provisions in Indian statutes in favor of Indians. (Montana v. Blackfoot Tribe of Indians, 471 U.S. 759).
However, Courts are hesitant to interpret federal statutes as offering tax exemptions unless they are clearly expressed. See, for example, Squire v. Capoeman, United States Trust Co. v. Helvering, and Chickasaw Nation v. United States.
The Courts rely, primarily, on the plain language of the statute, unless legislative intent is clearly expressed to the contrary. If the terms aren’t defined in the statute, the Court uses the ordinary meaning of the words used.
In the case, San Manuel Indian Bingo and Casino v. N.L.R.B., the Court ruled the N.L.R.B. correctly concluded that Congress didn’t include an express exception for Indian tribes in the National Labor Relations Act because no such exception was intended or exists.
Likewise, the IRS ruled in Revenue Procedure 94-81 that Indian tribal governments were subject to the wagering excise tax and occupational tax assessed under Chapter 35 of the Code. The IRS stated that Section 4401(a)(1) and Section 4411(a) (parts of Chapter 35) weren’t included among the purposes for which an Indian tribal government is considered a state. Therefore, the exceptions to those taxes provided to States under Section 4402(3) didn’t apply to Indian tribes.
Besides the wagering excise taxes under Chapter 35 of the Code, Indian tribes generally aren’t treated as States for other purposes not mentioned in Section 7871. Examples include, but are not limited to: employment taxes under Sections 3101 through 3512, and deferred compensation plans under Section 457.
Issue Indicators or Audit Tips
Indian tribes and their wholly owned entities aren’t subject to income tax. An exception exists for businesses incorporated under State law.
This exclusion is limited to income tax. It doesn’t apply to employment taxes and excise taxes.
- Inspect employment tax returns.
- Verify FICA calculations for government employees
- Inspect excise tax returns
- Determine whether any wagers subject to the wagering excise and occupational taxes were received
- Confirm any exemptions claimed were correctly calculated