Withholding on Per Capita Payments to Indian Tribe Members Who Are Nonresident Aliens

Per Capita payments of Indian casino profits are generally taxable to tribal members upon distribution. Internal Revenue Code (IRC) Section 3402(r) imposes withholding requirements on Indian tribes making per capita payments, and these withholding requirements apply to payments made to tribal members who are nonresident aliens (NRAs). This issue snapshot describes the withholding regime that applies to these payments

IRC Section and Treasury Regulation

IRC Section 3402(r) – requires withholding on per capita payments to members of an Indian tribe from the net revenues of the tribe's Class II or Class III gaming activity. It also provides that these payments are to be treated as wages paid by an employer to an employee for purposes of Chapter 24 of the IRC, including Section 3402. The amount of such withholding is generally determined using the applicable table provided by the commissioner.

IRC Section 1441 – generally requires withholding agents to withhold 30 percent of any payment of U.S. sourced fixed or determinable annual or periodical (FDAP) gains, profits, and income made to a NRA

Treasury Reg. 1.1441-4(b) – provides that withholding is not required under IRC Section 1441 for wages subject to withholding under IRC Section 3402.

 

Analysis

Under the Indian Gaming Regulatory Act, Indian tribes with a revenue allocation plan may make per capita payments to tribal members from casino profits.

Section 1441 provides that any person making a payment of FDAP gain constituting gross income from sources within the United States to a NRA individual is required to deduct and withhold from the payment a tax equal to 30 percent thereof.

Section 3402(r) requires an Indian tribe making a payment to a member of an Indian tribe from the net revenues of any Class II or Class III gaming activity conducted or licensed by such tribe to deduct and withhold tax from such payment. The amount of such withholding is generally determined using the applicable table provided by the commissioner, which is published annually in Publication 15-A.

Indian tribes' per capita payments to NRA tribal members of casino profits would appear to be subject to withholding under both statutes absent Treas. Reg. Section 1.1441-4(b)(1)(I), which provides that wages are exempt from Section 1441 withholding if they are subject to withholding under Section 3402. Under Section 3402(r)(7), payments subject to Section 3402(r) are treated as if they were wages. Thus, an Indian tribe making a payment to a member of an Indian tribe (including a member of such tribe that is a NRA) from the net revenues of any Class II or Class III gaming activity conducted or licensed by such tribe should deduct and withhold tax from such payment as required under Section 3402 (and not under Section 1441).

 

Issue Indicators or Audit Tips

Review disbursements to identify possible per capita payments.

Identify those that constitute payments from net revenues from Class II or Class III gaming.

Verify the appropriate withholding tables in Publication 15-A, Employer's Supplemental Tax Guide, were used to calculate withholding.

Check the addresses of the recipients to verify proper withholding on NRA members.