- A corporation wholly owned by an Indian tribe is not exempt from federal income tax as an integral part of the tribal government.
- It could not file consolidated tax returns with another corporation that is wholly owned by the same tribe.
- The corporation must reduce its wage and employee expense deductions by the amount of the Indian employments credits to which it was entitled.
Uniband, Inc., v. Commissioner, 140 T.C. No. 13 (May 22, 2013)
Although Indian tribes do not have an inherent sovereign immunity from federal taxes (as states do), and while no treaty exempts the tribe from federal income tax, the IRS has long considered Indian tribes are not subject to tax because they are neither individuals nor corporations under the Internal Revenue Code.
The corporation (Uniband) claimed that it was not subject to tax because it is an integral part of the tribe.
The Tax Court, however, found that Uniband was a state-chartered corporation that was separate and distinct from the Indian tribe. The court concluded that Uniband is not an integral part of the tribe, citing Michigan v. United States, 40 F.3d 817 (6th Cir. 1994) (education trust created by Michigan legislature is not subject to tax as an integral part of the state) and applying the criteria in Rev. Rul. 57-128 (cited by Sixth Circuit in Michigan).
The Tax Court found no evidence of a financial relationship between the tribe and Uniband—such as a contribution of capital by the tribe to Uniband, loan guaranties by the tribe, or assumption by the tribe of liability for Uniband’s debts.
Apart from the facts that (1) the tribe was its sole shareholder, (2) Uniband conducted its business on the tribe’s reservation, and (3) a portion of Uniband’s workforce are tribal members, the Tax Court found no evidence of any special relationship between the tribe and Uniband.
The Tax Court also determined that Uniband is not entitled to file consolidated returns with another corporation wholly owned by the tribe because the tribe was not eligible to join in the filing of a consolidated return, and the two corporations alone do not constitute an affiliated group.
Concerning an Indian employment credit issue, the Tax Court held that the Indian employment credits under section 45A were not elective, and as a result, Uniband’s employee expense deductions must be reduced by the amount of the credits as determined under section 45A.
As noted above, the Tax Court applied the analysis used by the Sixth Circuit in Michigan v. United States, which in turn applied the criteria in Rev. Rul. 57-128.
Observers have noted that Rev. Rul. 57-128 provides criteria for determining whether an entity is a wholly owned “instrumentality” of a state or political subdivision for purposes of the exception from federal employment taxes (FICA and FUTA) for employees of such an instrumentality.
Also, in a 2001 letter ruling [PDF 13 KB], the IRS ruled that the Sixth Circuit’s reliance on the factors in Rev. Rul. 57-128, to reach its conclusion, “is misplaced” because Rev. Rul. 57-128 applies to entities that are separate from the state, and “[t]he factors in the revenue ruling do not determine whether an enterprise is considered to be a separate entity or an integral part of the state.” PLR 200136011 (released September 7, 2001).
For more information, contact:
Rick Speizman, Partner-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group
+1 (202) 533-3084