Federal Taxation

BRIEF HISTORY OF TAXATION

• Income Tax

Section 1 of the Internal Revenue Code imposes a tax on the taxable income of individuals, trusts, and estates. Section 11 imposes a tax on the taxable income of corporations. Section 61 provides that gross income means all income from whatever source derived unless otherwise provided by law.

No constitutional or statutory provision expressly exempts Indian tribes from federal income taxation. Generally, the political entity of an Indian tribe has been recognized and no federal tax liability has been assessed against a tribe with respect to tribal income from business activities conducted within the reservation. See Mescalero Apache Tribe v. Jones, 411 US 145 (1973).

The assets of an Indian Tribe are owned by the tribe as a community and not by the members as individuals or tenants in common. The right to participate in this community depends on a continuing membership in the tribe. See Gritts v. Fisher, 224 US 640 (1912).

Prior to the enactment of the Indian Reorganization Act of 1934 (IRA), the both the governmental and business functions of a tribe were conducted by a single tribal entity. The IRA allowed for a division of the functions in which the governmental functions are conducted under a tribal constitution and bylaws (Act Section 16) and the business function is conducted under a tribal business corporation (Act Section 17). Rev. Rul. 81-295, 1981-2 CB 15, states that an Indian tribal corporation organized under IRA Section 17 has the same tax status as the Indian tribe and is not taxable on income from activities carried on within the reservation. Any income earned by an unincorporated tribe, regardless of location of the business activities, is not subject to federal income tax as an Indian tribal corporation organized under Act Section 17 has the same tax status as the tribe. However, a tribal corporation organized under state law does not have the same tax status as the tribe for Federal tax purposes and is subject to Federal income tax on any income earned regardless of the location of the business activities.

Rev. Rul 67-284, 1967-2 CB 55, states that Indian tribes are not taxable entities. The ruling also states that tribal income not otherwise exempt from Federal income tax is includible in the gross income of the Indian tribal member when distributed to, or constructively received by, the individual tribal member.

• Employment Taxes

Employers, including tribes, are obligated to withhold FICA and federal income taxes from employee wages. The wages paid to elected tribal government officers are not subject to FICA or federal income tax withholding under Rev. Rul. 59-354, 1959-2 CB 24. However, since the wages would be included in the gross income of the officer, voluntary withholding of federal income taxes may be requested.

• Excise Taxes

The Indian Tribal Government Tax Status Act of 1983 (Pub. L. No. 97-473) assigned state status to Indian tribes for exemption from certain federal excise taxes. The exemption applies only to tribal activities conducted as "essential governmental function" as stated in Code Section 7871(b).

• Wagering Taxes

A federal wagering tax of one-quarter of one percent is imposed on the amount of all wagers placed on betting pools or lotteries conducted under state law under Code Sections 4401(a) and 4421. The Internal Revenue Service has applied this tax to Indian tribes that sell pulltabs or conduct lotteries. See Rev. Rul. 94-81, 1994-2 CB 412; PLR 9229005 (July 17, 1992), and PLR 9229006 (July 17, 1992).