FAQs for Indian Tribal Governments regarding Employee Plans and Exempt Organization Issues


These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Indian law and Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided.

1. Are Federally Recognized Tribes (FRTs) tax-exempt?

They are not "exempt" from tax such as a charitable organization is under IRC 501(c)(3). However, FRTs are governmental entities and, like state governments, they are immune from state and federal income tax. They are also eligible to receive deductible charitable contributions. FRTs are subject to employment taxes and excise taxes.

2. Are federally recognized tribes considered organizations to which charitable contributions are tax-deductible?

Congress authorized federally recognized Indian tribes and their political subdivisions to be treated like states for certain specified purposes because tribal governments, like state governments, serve the public within their jurisdictional boundaries, and accordingly, should be permitted to devote their limited resources to that end. A listing of federally recognized tribes and their political subdivisions can be found in Revenue Procedure 2008-55. Updates to this list are published annually by the Bureau of Indian Affairs in the Federal Register.

Section 7871 of the Internal Revenue Code provides that Indian tribal governments are treated as states for purposes of determining whether and in what amount any contribution or transfer to or for the use of such government is deductible under IRC section 170 (relating to income tax deduction for charitable, etc., contributions and gifts).

Section 170(c)(1) defines a charitable contribution as being a contribution or gift for the use of a State, a possession of the United States, or any political subdivision of any State or possession of the United States, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes.

As a result of being an Indian tribe described in IRC Section 7871 a federally recognized tribe and/or its political subdivision is determined by the IRS to be an organization to which contributions may be tax deductible, as provided in IRC Section 170.

3. Can a federally recognized tribe qualify as a charitable organization exempt from taxation under IRC section 501(c)(3)?

A federally recognized tribe that exercises sovereign powers generally will not qualify for exemption as a charitable organization under IRC section 501(c)(3) because the exercise of sovereign powers is not a charitable purpose as defined by IRC section 501(c)(3).

IRC section 501(c)(3) describes a charitable organization as one that is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or the for prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

A tribe may choose to create, through separate organizing documents, an entity separate from the tribe that does not have sovereign powers and that is organized exclusively for purposes as described under IRC section 501(c)(3). This type of entity will generally qualify for exemption from taxation on its earnings from charitable activities. Application for IRS determination of IRC section 501(c)(3) exemption is made on Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code , or Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (for eligible organizations) Code. An exempt organization created in this manner will be subject to the same reporting requirements as any other taxpayer exempt under IRC section 501(c)(3). Though its income from those activities for which it obtained its IRC section 501(c)(3) exemption is exempt from Federal income tax, income from unrelated business activities (activities not directly related to its exempt purpose) is not exempt and is subject to income tax. More information about qualifying for exemption under section 501(c)(3) as an exempt organization can be found in Publication 557, Tax-Exempt Status For Your OrganizationPDF. Information regarding unrelated business income can be found in Publication 598, Tax on Unrelated Business Income of Exempt OrganizationsPDF.

Additional assistance in completing Form 1023 can be obtained by visiting the Charities and Non-Profits website.

4. If an Indian tribal governments sets up a 501(c)(3) entity for the purpose of providing care to the ill, needy, or infants, can they then accept food donations from a food bank that qualifies for the enhanced deduction by the donor? 

Yes. Tribes may set up an organization under IRC 501(c)(3) and accept food donations from a food bank that qualifies for the enhanced deduction by the donor under IRC 170(e).

5. Are Tribal Council members eligible to participate in a 401(k) Plan sponsored by the tribe? 

In order to participate in a 401(k) Plan, the members of the Plan must be employees. Section 1.401(k)-6 of the Income Tax Regulations defines the term employee with the same meaning as section 1.410(b)-9. That section defines employee, in part, as a common law employee. Therefore, it is possible that Tribal Council members could participate in a 401(k) Plan if the facts in the particular case indicate that they are common law employees.

Tribal Council members are generally elected officials, but may be appointed. Under Revenue Ruling 59-354PDF, the pay they receive for services performed as Council members does not constitute wages for purposes of FICA, FUTA, or federal income tax withholding, but it is considered income.

Generally, amounts received for services performed as Council members should be reported on Form W-2PDF. The issuance of Form W-2 strongly suggests that there is an employee/employer relationship between the Tribe and the Tribal Council members, and that as a result of that employee/employer relationship, the Tribal Council members could participate in a 401(k) Plan sponsored by the Tribe. However, the ability of a Tribal Council member to participate in a tribally-sponsored 401(k) Plan is highly dependent on the facts and circumstances of the specific situation.

6. Can tribal members contribute to an Individual Retirement Account (IRA) if their only income is derived from fishing rights-related activities under section 7873 of the Code? 

In Hall v. CIR, T.C. Memo. 1998-336, the United States Tax Court considered the taxation of fishing rights-related related income contributed to an IRA. The court held that a deposit of fishing rights-related income into an IRA does not change the character of the funds. Amounts contributed cannot be deducted at the time of contribution and are not taxable upon withdrawal. The amounts earned on the contributions, however, are subject to taxation upon withdrawal.

7. Can an Indian tribal government set up a 401(k) plan with contributions based on section 7873 income?

Yes. The IRS released proposed regulations clarifying that amounts paid to Indian tribal members as compensation for services performed in a fishing rights-related activity may be treated as compensation and contributed to a 401(k) plan.