[Federal Register Volume 89, Number 196 (Wednesday, October 9, 2024)]
[Proposed Rules]
[Pages 81871-81878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-23142]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-113628-21]
RIN 1545-BQ13


Entities Wholly Owned by Indian Tribal Governments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations regarding the 
Federal tax classification of entities wholly owned by Indian Tribal 
governments (Tribes). The proposed regulations would provide that 
entities that are wholly owned by Tribes and organized or incorporated 
exclusively under the laws of the Tribes that own them generally are 
not recognized as separate entities for Federal tax purposes. The 
proposed regulations would also provide that, for purposes of making 
certain elective payment elections (including determining eligibility 
for and the consequences of such elections) for certain energy credits 
under the Inflation Reduction Act of 2022, these entities and certain 
Tribal corporations chartered by the Department of the Interior (DOI) 
are treated as an instrumentality of one or more Indian Tribal 
governments or subdivisions thereof. This document also requests 
comments and provides notice of a public hearing on the proposed 
regulations that will be in addition to Tribal consultation on the 
proposed regulations.

DATES: 
    Comments: Electronic or written comments on this proposed rule from 
the public must be received by January 7, 2025.
    Public Hearing: The public hearing on these proposed regulations is 
scheduled to be held on January 17, 2025, at 10

[[Page 81872]]

a.m. EST. Requests to speak and outlines of topics to be discussed at 
the public hearing must be received by January 7, 2025. If no outlines 
are received by January 7, 2025, the public hearing will be cancelled.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-113628-21) by following the 
online instructions for submitting comments. Once submitted to the 
Federal eRulemaking Portal, comments cannot be edited or withdrawn. The 
Department of the Treasury (Treasury Department) and the IRS will 
publish for public availability any comments submitted to the IRS's 
public docket. Send paper submissions to: CC:PA:01:PR (REG-113628-21), 
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin 
Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
contact Amanda R. Markarian of the Office of Associate Chief Counsel 
(Passthroughs and Special Industries) at (202) 317-6850 (not a toll-
free number); and concerning submissions of comments, the hearing, or 
any questions to attend the hearing by teleconferencing, contact 
Publications and Regulations Section at (202) 317-6901 (not a toll-free 
number) or preferably by email to <a href="/cdn-cgi/l/email-protection#c4b4b1a6a8ada7aca1a5b6adaaa3b784adb6b7eaa3abb2"><span class="__cf_email__" data-cfemail="fc8c899e90959f94999d8e95929b8fbc958e8fd29b938a">[email protected]</span></a>. If emailing, 
please include the following information in the subject line: Attend, 
Testify, or Question and REG-113628-21.

SUPPLEMENTARY INFORMATION:

Authority

    This notice of proposed rulemaking contains proposed amendments to 
provisions of 26 CFR part 1 (Income Tax Regulations) under section 6417 
of the Internal Revenue Code (Code) and 26 CFR part 301 (Procedure and 
Administration Regulations) under section 7701 of the Code that would 
address the Federal tax treatment of certain Tribal entities wholly 
owned by one or more Indian Tribal governments (proposed regulations).
    Section 6417(h) provides an express delegation of authority to the 
Secretary of the Treasury or her delegate (Secretary) relating to 
elective payment elections under section 6417 (section 6417 elections), 
stating, ``[t]he Secretary shall issue such regulations or other 
guidance as may be necessary to carry out the purposes of this section, 
including guidance to ensure that the amount of the payment or deemed 
payment made under this section is commensurate with the amount of the 
credit that would be otherwise allowable (determined without regard to 
section 38(c)).''
    Section 7701(a)(40) provides an express delegation of authority to 
the Secretary related to identifying Indian Tribal governments for 
Federal tax purposes, stating, ``[t]he term `Indian tribal government' 
means the governing body of any tribe, band, community, village, or 
group of Indians, or (if applicable) Alaska Natives, which is 
determined by the Secretary, after consultation with the Secretary of 
the Interior, to exercise governmental functions.'' \1\
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    \1\ Under the Federally Recognized Indian Tribe List Act of 
1994, Public Law 103-454, 108 Stat. 4791 (List Act), the Secretary 
of the Interior is required to publish annually a list of all 
Federally-recognized Tribes. In Revenue Procedure 2008-55 (2008-39 
I.R.B. 768), after consultation with the Department of Interior 
(DOI), the Treasury Department and the IRS determined that the 
Indian tribal entities that appear on the current or future lists of 
Federally-recognized Tribes published annually under the List Act by 
the DOI, Bureau of Indian Affairs, are designated as Indian tribal 
governments for purposes of section 7701(a)(40). See 89 FR 944 
(January 8, 2024) for the most current list published by the DOI, 
Bureau of Indian Affairs.
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    Finally, section 7805(a) of the Code authorizes the Secretary to 
``prescribe all needful rules and regulations for the enforcement of 
[the Code], including all rules and regulations as may be necessary by 
reason of any alteration of law in relation to internal revenue.''

Background

I. Overview

    The proposed regulations under section 7701 would provide that an 
entity wholly owned by one or more Indian Tribal governments, within 
the meaning of section 7701(a)(40), that is organized or incorporated 
under the laws of the Tribe or Tribes that own it (wholly owned Tribal 
entity) is not recognized as a separate entity for Federal tax 
purposes. A single member limited liability company organized under the 
laws of the Tribe that owns it would be a wholly owned Tribal entity. 
Additionally, the proposed regulations would provide that wholly owned 
Tribal entities, as well as Tribes incorporated under section 17 of the 
Indian Reorganization Act of 1934, as amended, 25 U.S.C. 5124 (section 
17 corporations), or under section 3 of the Oklahoma Indian Welfare 
Act, as amended, 25 U.S.C. 5203 (section 3 corporations), are treated, 
for purposes of making section 6417 elections (including determining 
eligibility for and the consequences of such elections), as 
instrumentalities of the Indian Tribal government(s) that wholly own 
them.
    The Treasury Department and the IRS consulted with DOI on these 
proposed rules because of DOI's role in working with Federally-
recognized Indian Tribes and administering a broad array of Federal 
laws that affect Federally-recognized Indian Tribes. These proposed 
rules would address only the application of Federal tax law and would 
not affect the rights of Tribes and Tribal entities under other Federal 
laws.
    The Treasury Department and the IRS continue to consider the 
Federal tax treatment of Tribally chartered corporations that are owned 
in part by persons other than Tribes. The Treasury Department and the 
IRS would conduct Tribal consultation prior to issuing any additional 
guidance in that area.

II. Executive Order 14112

    In December 2023, the President issued an executive order titled 
``Reforming Federal Funding and Support for Tribal Nations to Better 
Embrace Our Trust Responsibilities and Promote the Next Era of Tribal 
Self-Determination.'' Executive Order 14112 (Dec. 6, 2023). Executive 
Order 14112 reaffirms the Executive Branch's support for Tribal self-
determination as the most effective policy for the economic growth of 
Tribal Nations and the economic well-being of Tribal citizens. 
Executive Order 14112 requires agency heads to take certain actions, 
consistent with applicable law and to the extent practicable, to 
increase access to ``Federal funding and support programs for Tribal 
Nations''; provide Tribal Nations with the flexibility to improve 
economic growth and address the specific needs of their communities; 
and reduce administrative burdens. Section 2(b) of the Executive Order 
defines ``Federal funding and support programs for Tribal Nations'' as 
including ``funding, programs, technical assistance, loans, grants, or 
other financial support or direct services that the Federal Government 
provides to Tribal Nations or Indians because of their status as 
Indians.'' The Treasury Tribal Advisory Committee has advised that 
Tribes consider ``financial support'' in Executive Order 14112 to 
include tax matters that range from tax credits to Federal tax rules 
that regulate Tribal revenue.
    Consistent with Executive Order 14112, the Treasury Department and 
the IRS recognize the importance of protecting and supporting Tribal 
sovereignty and self-determination. As the Executive Order explains, 
``As we continue to support Tribal Nations, we must respect their 
sovereignty by better

[[Page 81873]]

ensuring that they are able to make their own decisions about where and 
how to meet the needs of their communities. No less than for any other 
sovereign, Tribal self-governance is about the fundamental right of a 
people to determine their own destiny and to prosper and flourish on 
their own terms.'' These commitments build on a recognition of 
principles of sovereignty, sovereign immunity, and self-governance that 
have been repeatedly reaffirmed by the Supreme Court. See, e.g., Three 
Affiliated Tribes of the Fort Berthold Reservation v. Wold Engineering, 
P.C., et al., 476 U.S. 877, 890-91 (1986); Oklahoma Tax Comm'n v. 
Citizen Band Potawatomi Indian Tribe of Oklahoma, 498 U.S. 505, 510 
(1991).

III. Prior Guidance

    The Federal government has long recognized the unique aspects of 
Tribal sovereignty and Tribal sovereign immunity. Tribes themselves are 
not subject to Federal income tax under the Code.\2\ IRS guidance on 
the issue in the 1960s raised questions about the extent to which 
section 17 corporations and section 3 corporations should share the 
Tribe's Federal income tax status. In response, the IRS published 
further guidance and issued proposed regulations in 1996 on the 
treatment of section 17 corporations and section 3 corporations for 
Federal tax purposes. See the notice of proposed rulemaking, 
Simplification of Entity Classification Rules, (PS-43-95) published in 
the Federal Register (61 FR 21989) on May 13, 1996 (explaining the 
basis for the proposed rule later adopted as Sec.  301.7701-1(a)(3)).
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    \2\ See Rev. Rul. 67-284, 1967-2 C.B. 55. However, Tribes 
generally are subject to Federal employment taxes. Employment taxes 
refers to Federal Insurance Contributions Act (FICA) (consisting of 
both social security and Medicare taxes), Federal Unemployment Tax 
Act (FUTA), and Income Tax Withholding. Section 3306(c)(7) of the 
Code provides an exception from FUTA taxes under certain 
circumstances. Further, subject to applicable law, including 
statutes (such as section 7871 of the Code) and treaties or 
agreements with the United States, Tribes are subject to Federal 
excise taxes. See Rev. Rul. 94-81, 1994-2 C.B. 412.
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    On December 18, 1996, the Treasury Department and the IRS published 
final regulations (TD 8697) in the Federal Register (61 FR 66584) under 
section 7701, known as the entity classification regulations. Those 
still-existing regulations at Sec.  301.7701-1(a)(3) make clear that 
entities formed under local laws are not always recognized as separate 
entities for Federal tax purposes. For example, an organization wholly 
owned by a State is not recognized as a separate entity for Federal tax 
purposes if it is an integral part of the State. Similarly, those 
regulations provide that section 17 corporations and section 3 
corporations are not recognized as separate entities for Federal tax 
purposes. The entity classification regulations, however, do not 
specifically address whether an organization formed under Tribal law 
and wholly owned by a Tribe (that is, a wholly owned Tribal entity) is 
recognized as a separate entity for Federal tax purposes.
    The preamble to TD 8697 states that the IRS received a number of 
comments asking for clarification of the tax treatment of wholly owned 
Tribal entities. 61 FR 66584. The preamble also indicated that the 
Treasury Department and the IRS continued to study the issue and would 
issue additional guidance, if necessary. Id. at 66585-86.

IV. Tribal Consultation

    Over the past several decades, Tribes have sought clarity 
concerning the Federal tax status of Tribally chartered corporations 
that are wholly owned by Tribes, in part to provide certainty for 
Tribal economic development and to support the generation of revenue 
for Indian Tribal governments. In order to obtain Tribal input on the 
issue, and in accordance with Executive Order 13175 (November 6, 2000), 
``Consultation and Coordination with Indian Tribal Governments,'' and 
the Treasury Department's Tribal Consultation Policy (80 FR 57434, 
September 23, 2015), superseded by Treasury Order 112-04 (November 22, 
2023), the Treasury Department and the IRS most recently held Tribal 
consultations on the issue on June 21 and June 22, 2023, October 8 and 
October 10, 2019, and a listening session on December 3, 2019.
    During Tribal consultations, Tribes have explained that they view 
Tribally chartered corporations as an exercise of their inherent 
sovereign authority to generate governmental revenue, self-govern the 
use of that revenue according to their own laws, and self-determine the 
use of that revenue for their citizenry. Tribes highlighted that 
Tribally chartered corporations enable Tribes to create entities that 
meet their emerging revenue opportunities, establish guidelines for the 
operation of these entities that are culturally appropriate and protect 
Tribal assets, and dissolve them when they are unneeded. Tribes also 
highlighted that Tribally chartered corporations are consistent with 
recent Federal policy that promotes Tribal sovereignty, self-
governance, and self-determination in economic development activities.
    In contrast, Tribes highlighted that section 17 and section 3 
corporations are not sufficient to meet their needs. The incorporation 
process for these entities is a lengthy multi-step Federal process that 
subjects Tribal authority to Federal oversight and approval, results in 
increased administrative costs to Tribes, and requires an act of 
Congress to dissolve the chartered entity.
    This issue has taken on increased salience in recent years, 
particularly with the enactment of laws, such as Public Law 117-169, 
136 Stat. 1818 (August 16, 2022), commonly known as the Inflation 
Reduction Act of 2022, that extend greater access to capital and new 
economic opportunities to certain governments (including Indian Tribal 
governments), tax-exempt organizations, and other entities. Tribes have 
reiterated their requests for guidance through meetings of the Treasury 
Tribal Advisory Committee and other Tribal consultations.
    In light of the considerations of Tribal sovereignty and self-
determination described previously, the Treasury Department and the IRS 
propose to amend the existing section 7701 regulations to make clear 
that entities wholly owned by Tribes and organized or incorporated 
under the laws of the Tribes that own them generally are not recognized 
as separate entities for Federal tax purposes. Accordingly, such 
entities generally would be viewed as one and the same as the Tribes 
that own them for Federal tax purposes and would therefore not be 
subject to Federal income tax. In addition, the Treasury Department and 
the IRS are proposing to amend the existing regulations under section 
6417 to provide that such entities and section 17 and section 3 
corporations are treated as instrumentalities of the Indian Tribal 
governments that own them for purposes of making an elective payment 
election under section 6417 (including determining eligibility for and 
the consequences of the election). This would mean that the wholly 
owned Tribal entity itself, rather than the Indian Tribal government(s) 
owning the entity, would make a section 6417 election for an applicable 
credit determined with respect to any applicable credit property held 
directly by the wholly owned Tribal entity.
    The Treasury Department and the IRS will conduct Tribal 
consultation before finalizing these regulations to obtain additional 
input on questions involving these proposed regulations. The content of 
these consultations will be published in a Tribal consultation summary.

[[Page 81874]]

Explanation of Provisions

I. In General

    These proposed regulations would address the Federal tax treatment 
of wholly owned Tribal entities (that is, entities wholly owned by 
Tribes and organized or incorporated exclusively under the laws of the 
Tribes that own them). Specifically, these proposed regulations would 
provide that such entities are not recognized as separate entities for 
Federal tax purposes (other than for purposes related to section 6417 
elections described in part III of this Explanation of Provisions). The 
proposed regulations recognize that these entities share core 
characteristics with section 17 corporations and section 3 
corporations, including that they are wholly owned by Tribes and 
benefit the Tribes by facilitating economic growth and Tribal 
rebuilding. Accordingly, just as section 17 corporations and section 3 
corporations are not recognized as separate entities for Federal tax 
purposes and are thus not subject to Federal income tax on income 
earned in the conduct of commercial business on or off the organizing 
Tribe's reservation, the proposed regulations would confirm that wholly 
owned Tribal entities would not be recognized as separate entities for 
Federal tax purposes and would not be subject to Federal income tax on 
income earned in the conduct of commercial business on or off the 
organizing Tribe's reservation.

II. Requirements

A. Tribal Law
    The proposed regulations would recognize that Tribal law is 
established by each individual Tribe. Where multiple Tribes work 
together to establish an entity that is owned by more than one Tribe, 
each Tribe would need to provide for the entity under its own laws.
B. Wholly Owned
    As is the case for determining the ownership of all corporations 
(including a corporation wholly owned by a State or other government), 
the determination of whether an outside investor (a person other than a 
Tribe) holds stock in a Tribal entity, such that it would fail to be 
wholly owned by one or more Indian Tribal governments for Federal tax 
purposes, would take into account principles of Federal tax law, such 
as the substance over form doctrine, debt versus equity analyses, and 
the economic substance doctrine.
    Under these proposed regulations, an entity could satisfy the 
wholly owned requirement through a multi-Tribe ownership structure, so 
long as the entity is organized or incorporated under each Tribe's 
laws. Proposed Sec.  301.7701-1(a)(4)(iii)(D) (Example 4) illustrates 
an example of the organizational structure of such an entity.

III. Elective Pay

    The proposed regulations would revise the elective pay regulations 
to provide that, for purposes of making a section 6417 election 
(including determining eligibility for and the consequences of such 
election), entities described in proposed Sec.  301.7701-1(a)(4)(i) 
(that is, section 17 corporations, section 3 corporations, and wholly 
owned Tribal entities), would be treated as instrumentalities of Indian 
Tribal governments. Under existing Sec.  1.6417-1(f), section 17 
corporations and section 3 corporations are treated as ``disregarded 
entities'' for purposes of section 6417, and the applicable-entity 
owner of a disregarded entity that directly holds applicable credit 
property must make a section 6417 election for applicable credits 
determined with respect to such property pursuant to Sec.  1.6417-
2(a)(1)(ii). Treatment as instrumentalities under these proposed 
regulations would mean that an entity described in proposed Sec.  
301.7701-1(a)(4)(i) that directly owns applicable credit property would 
make the section 6417 election itself, rather than its owner or owners. 
Such an entity generally would do so by filing a Form 990-T, Exempt 
Organization Business Income Tax Return, as described in Sec.  1.6417-
1(b)(2), using its own name and employer identification number.
    The Treasury Department and the IRS are proposing this rule 
pursuant to the Secretary's authority under section 6417(h) to issue 
such regulations or other guidance as may be necessary to carry out the 
purposes of section 6417, including guidance to ensure that the amount 
of the payment or deemed payment made under section 6417 is 
commensurate with the amount of the credit that would be otherwise 
allowable (determined without regard to section 38(c) of the Code). 
Given that proposed Sec.  301.7701-1(a)(4)(i) would generally provide 
that an entity owned by multiple Tribes is not recognized as a separate 
entity from those Tribes for Federal tax purposes, treating the entity 
as a ``disregarded entity'' for section 6417 purposes would have 
required each of the entity's owners to make a section 6417 election 
with respect to an applicable credit determined with respect to an 
applicable credit property owned directly by the entity. That approach 
would have been administratively burdensome and complex for the Tribes 
that own the entity as well as for the IRS. Given the need for 
coordination among these Tribes in making consistent tax filings, it 
could also have resulted in cases in which the amount of the total 
payments or deemed payments claimed under section 6417 may not be 
commensurate with the amount of the underlying credit. In addition, 
even for an entity owned by a single Tribe, the entity directly owning 
the applicable credit property may be better positioned to fulfill the 
pre-filing registration and other requirements to make the section 6417 
election. Accordingly, the proposed regulations are intended to 
simplify the filing obligations for Tribes and their wholly owned 
entities and ensure that the amount of any payment or deemed payment 
made under section 6417 will be commensurate with the amount of the 
credit that would be otherwise allowable.
    In general, the determination of whether an entity is an agency or 
instrumentality is analyzed on a facts and circumstances basis. In 
determining whether an entity is an agency or instrumentality for 
Federal tax purposes, Federal courts have applied a test similar to the 
six-factor test in Rev. Rul. 57-128, 1957-1 C.B. 311, which generally 
provides guidance on whether an entity is an instrumentality for 
purposes of the exemptions from employment taxes under sections 
3121(b)(7) and 3306(c)(7). See, e.g., Berini v. Federal Reserve Bank of 
St. Louis, Eighth District, 420 F. Supp. 2d 1021 (E.D. Mo. 2005) and 
Rose v. Long Island Railroad Pension Plan, 828 F.2d 910, 918 (2d Cir. 
1987), cert. denied, 485 U.S. 936 (1988).
    No inferences should be drawn from the instrumentality treatment in 
proposed Sec.  1.6417-1(c)(7) as to whether any particular entity is or 
is not an instrumentality in other contexts. The special rule in 
proposed Sec.  1.6417-1(c)(7) is informed in part by administrative 
considerations and would be issued under the express delegation of 
authority in section 6417(h) to promulgate rules that carry out the 
purposes of section 6417 and ensure that the amount of the payment or 
deemed payment made thereunder is commensurate with the amount of the 
underlying credit.

Proposed Applicability Dates

    These proposed regulations would, upon finalization, apply to 
taxable years ending after October 9, 2024. The proposed regulations 
would also, upon finalization, generally allow an entity the option to 
apply proposed

[[Page 81875]]

Sec.  301.7701-1(a)(4), including the option to apply proposed Sec.  
1.6417-1(c)(7) and (f), to taxable years ending on or before October 9, 
2024, provided that the Indian Tribal government(s) that own the entity 
also apply Sec.  301.7701-1(a)(4), and Sec.  1.6417-1(c)(7) and (f) as 
applicable, consistently with such entity for all such taxable years. 
However, this option would not be available for any taxable period for 
a Federal excise tax or employment tax with respect to which the entity 
was, as of October 9, 2024, a party to any administrative or judicial 
proceeding.
    Until the date final regulations are published in the Federal 
Register, an entity described in proposed Sec.  301.7701-1(a)(4)(i) 
generally may rely on the proposed regulations for taxable years ending 
on or before that date, provided that the Indian Tribal government(s) 
that own the entity do so consistently with such entity for all such 
taxable years. However, an entity described in proposed Sec.  301.7701-
1(a)(4)(i) may not rely on the proposed regulations for any taxable 
period for a Federal excise tax or employment tax with respect to which 
the entity was, as of October 9, 2024, a party to any administrative or 
judicial proceeding.
    Reliance and the proposed option to apply the regulations 
retroactively are not provided for any taxable period for a Federal 
excise or employment tax subject to pending administrative or judicial 
proceedings as of October 9, 2024, because reliance and retroactive 
application of these regulations in that context could create certain 
unintended and technical procedural questions. This exception to 
reliance on the proposed regulations and the proposed option to 
retroactively apply these regulations is limited to the Federal excise 
and employment tax context because these questions would not arise in 
the context of a Federal income tax administrative or judicial 
proceeding.

Special Analyses

I. Executive Order 13175: Consultation and Coordination With Indian 
Tribal Governments

    Executive Order 13175 (Consultation and Coordination With Indian 
Tribal Governments) prohibits an agency from publishing any rule that 
has Tribal implications if the rule either imposes substantial, direct 
compliance costs on Indian Tribal governments and is not required by 
statute, or preempts Tribal law, unless the agency meets the 
consultation and funding requirements of section 5 of the Executive 
order. This proposed rule would neither impose substantial, direct 
compliance costs on Indian Tribal governments nor preempt Tribal law 
within the meaning of the Executive order.

II. Executive Order 14112: Reforming Federal Funding and Support for 
Tribal Nations To Better Embrace Our Trust Responsibilities and Promote 
the Next Era of Tribal Self-Determination

    Consistent with Executive Order 14112 (described previously in the 
Background section), these proposed regulations would further Tribal 
self-determination and self-governance and reduce administrative 
burdens by providing entities wholly owned by Tribes and organized or 
incorporated under the laws of the Tribes that own them with the same 
Federal tax treatment that applies to section 17 corporations and 
section 3 corporations.

III. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

IV. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
generally requires that a Federal agency obtain the approval of the 
Office of Management and Budget (OMB) before collecting information 
from the public, whether such collection of information is mandatory, 
voluntary, or required to obtain or retain a benefit. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection of information displays 
a valid control number.
    The collection of information in these regulations contain 
reporting and recordkeeping requirements. The recordkeeping 
requirements mentioned within these final regulations are considered 
general tax records under Sec.  1.6001-1(e). These records are required 
for the IRS to validate that taxpayers have met the regulatory 
requirements and are entitled to make an elective payment election and 
to verify the Federal tax classification of entities described in these 
proposed regulations. For PRA purposes, general tax records are already 
approved by OMB under 1545-0047 for tax-exempt organizations and 
government entities.
    These regulations also mention reporting requirements related to 
making elections under section 6417. These elections will be made by 
taxpayers on Forms 990-T, and credit calculations will be made on Form 
3800 and supporting forms. These forms are approved under 1545-0047 for 
tax-exempt organizations and governmental entities.

V. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
the Secretary of the Treasury hereby certifies that the proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities pursuant to the Regulatory 
Flexibility Act (5 U.S.C. chapter 6). These proposed regulations would 
affect entities that are wholly owned by Tribes. Additionally, no added 
burden is created through these proposed regulations; rather, these 
proposed regulations would expand the definition of an eligible entity 
for section 6417 of the Code but does not expand the requirements for 
entities to make the elective pay election. Although data is not 
readily available about the number of small entities that are 
potentially affected by this rule, it is possible that a substantial 
number of small entities may be affected.
    To the extent the entities described in these regulations make 
elections under section 6417, the Treasury Department and the IRS 
certify the final regulatory flexibility analysis undertaken in TD 
9988.
    For the reasons stated, a regulatory flexibility analysis under the 
Regulatory Flexibility Act is not required. The Treasury Department and 
the IRS invite comments on the impact of the proposed regulations on 
small entities.
    Pursuant to section 7805(f), this notice of proposed rulemaking has 
been submitted to the Chief Counsel for the Office of Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

VI. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandate Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Indian Tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). These 
proposed regulations do not include any Federal mandate that may result 
in expenditures by State, local, or Indian Tribal governments or by the 
private sector in excess of that threshold.

[[Page 81876]]

VII. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has Federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the executive order. These proposed regulations do not 
have Federalism implications and do not impose substantial, direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the executive order.

Comments and Public Hearing

    Consideration will be given to comments received in Tribal 
consultation and comments regarding the notice of proposed rulemaking 
that are submitted timely to the IRS as prescribed in the preamble 
under the ADDRESSES section. The Treasury Department and the IRS 
request comments on all aspects of the proposed regulations, including 
the application of the proposed regulations in the context of federal 
employment and excise taxes. All commenters are strongly encouraged to 
submit comments electronically. All comments will be made available at 
https://www.regulations.gov. Once submitted to the Federal eRulemaking 
Portal, comments cannot be edited or withdrawn.
    A public hearing will be held on January 17, 2025, beginning at 10 
a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 
Constitution Avenue NW, Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. Pursuant to Announcement 2023-16, 2023-20 I.R.B. 854 
(May 15, 2023), the public hearing is scheduled to be conducted in 
person, but the IRS will provide a telephonic option for individuals 
who wish to attend or testify at the hearing by telephone.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit an outline of 
the topics to be discussed as well as the time to be devoted to each 
topic January 7, 2025. A period of ten minutes will be allocated to 
each person for making comments. After the deadline for receiving 
outlines has passed, the IRS will prepare an agenda containing the 
schedule of speakers. Copies of the agenda will be made available free 
of charge at the hearing. If no outlines of the topics to be discussed 
at the hearing are received by January 7, 2025, the public hearing will 
be cancelled. If the public hearing is cancelled, a notice of 
cancellation of the public hearing will be published in the Federal 
Register.
    Individuals who want to testify in person at the public hearing 
must send an email to <a href="/cdn-cgi/l/email-protection#265653444a4f454e4347544f484155664f545508414950"><span class="__cf_email__" data-cfemail="e9999c8b85808a818c889b80878e9aa9809b9ac78e869f">[email protected]</span></a> to have your name added to 
the building access list. The subject line of the email must contain 
the regulation number REG-113628-21 and the language TESTIFY In Person. 
For example, the subject line may say: ``Request to TESTIFY In Person 
at Hearing for REG-113628-21.''
    Individuals who want to testify by telephone at the public hearing 
must send an email to <a href="/cdn-cgi/l/email-protection#fe8e8b9c92979d969b9f8c9790998dbe978c8dd0999188"><span class="__cf_email__" data-cfemail="b2c2c7d0dedbd1dad7d3c0dbdcd5c1f2dbc0c19cd5ddc4">[email protected]</span></a> to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-113628-21 and the language 
TESTIFY Telephonically. For example, the subject line may say: 
``Request to TESTIFY Telephonically at Hearing for REG-113628-21.''
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to <a href="/cdn-cgi/l/email-protection#48383d2a24212b202d293a21262f3b08213a3b662f273e"><span class="__cf_email__" data-cfemail="5b2b2e39373238333e3a2932353c281b322928753c342d">[email protected]</span></a> to have 
your name added to the building access list. The subject line of the 
email must contain the regulation number (REG-113628-21) and the 
language ATTEND In Person. For example, the subject line may say: 
``Request to ATTEND Hearing In Person for REG-113628-21.'' Requests to 
attend the public hearing must be received by 5 p.m. ET on January 15, 
2025.
    Individuals who want to attend the public hearing telephonically 
without testifying must send an email to <a href="/cdn-cgi/l/email-protection#2c5c594e40454f44494d5e45424b5f6c455e5f024b435a"><span class="__cf_email__" data-cfemail="2d5d584f41444e45484c5f44434a5e6d445f5e034a425b">[email protected]</span></a> to 
receive the telephone number and access code for the hearing. The 
subject line of the email must contain the regulation number (REG-
113628-21) and the language ATTEND Hearing Telephonically. For example, 
the subject line may say: ``Request to ATTEND Hearing Telephonically 
for REG-113628-21.'' Requests to attend the public hearing must be 
received by 5 p.m. ET on January 15, 2025.
    The hearing will be made accessible to people with disabilities. To 
request special assistance during the hearing, contact the Publications 
and Regulations Branch of the Office of Associate Chief Counsel 
(Procedure and Administration) by sending an email to 
<a href="/cdn-cgi/l/email-protection#08787d6a64616b606d697a61666f7b48617a7b266f677e"><span class="__cf_email__" data-cfemail="512124333d383239343023383f3622113823227f363e27">[email protected]</span></a> (preferred) or by telephone at (202) 317-6901 
(not a toll-free number) by 5 p.m. ET on January 14, 2025.

Statement of Availability of IRS Documents

    Rev. Rul. 94-81, Rev. Rul. 94-65, Rev. Rul. 94-16, Rev. Rul. 67-
284, and Rev. Rul. 57-128 are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Drafting Information

    The principal authors of these proposed regulations are attorneys 
in the Office of Associate Chief Counsel (Passthroughs and Special 
Industries), Branch 1. However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and record keeping requirements.

26 CFR Part 301

    Procedure and Administration.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR parts 1 and 301 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * * *

0
Par. 2. Section 1.6417-1 is amended by:
0
1. Revising paragraph (c) introductory text;
0
2. Removing the semicolon from the end of paragraphs (c)(1)(ii) and 
(c)(2) through (5) and adding a period in their places;
0
3. Removing ``; and'' from the end of paragraph (c)(6) and adding the 
text a period in its place; and
0
4. Revising paragraphs (c)(7), (f), and (q).
    The revisions read as follows:


Sec.  1.6417-1  Elective payment election of applicable credits.

* * * * *
    (c) Applicable entity. The term applicable entity means any entity 
described in paragraph (c)(1) through (7) of this section.
* * * * *

[[Page 81877]]

    (7) An agency or instrumentality of any applicable entity described 
in paragraph (c)(1)(ii) or (c)(2) or (3) of this section. For purposes 
of making a section 6417 election (including determining eligibility 
for and the consequences of such election), an entity described in 
Sec.  301.7701-1(a)(4)(i) of this chapter is treated as an 
instrumentality of the Indian Tribal government(s) or subdivision(s) 
thereof that own(s) it.
* * * * *
    (f) Disregarded entity. The term disregarded entity means an entity 
that is disregarded as, or not recognized as, an entity separate from 
its owner for Federal income tax purposes under Sec.  301.7701-1(a)(3) 
or Sec. Sec.  301.7701-2 and 301.7701-3 of this chapter. See paragraph 
(c)(7) of this section regarding entities described in Sec.  301.7701-
1(a)(4)(i) of this chapter.
* * * * *
    (q) Applicability dates--(1) In general. Except as provided in 
paragraph (q)(2) of this section, this section applies to taxable years 
ending on or after March 11, 2024. For taxable years ending before 
March 11, 2024, taxpayers may choose to apply the rules of Sec. Sec.  
1.6417-1 through 1.6417-4 and 1.6417-6, provided the taxpayers apply 
the rules in their entirety and in a consistent manner.
    (2) Paragraphs (c)(7) and (f) of this section. Paragraphs (c)(7) 
and (f) of this section apply to taxable years ending after October 9, 
2024. For taxable years ending on or before October 9, 2024, an entity 
described in Sec.  301.7701-1(a)(4)(i) of this chapter may choose to 
apply paragraphs (c)(7) and (f) of this section as contained in 26 CFR 
part 1, revised October 9, 2024 by following the Federal tax reporting 
requirements in a manner consistent with those provisions for all such 
years, but only if the Indian Tribal government(s) that own the entity 
also apply paragraphs (c)(7) and (f) of this section consistently with 
such entity for all such taxable years.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 3. The authority citation for part 301 is amended by adding an 
entry for Sec.  301.7701-1(a)(4) in numerical order to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * * *
* * * * *
    Section 301.7701-1(a)(4) also issued under 26 U.S.C. 
7701(a)(40).
* * * * *
0
Par. 4. Section 301.7701-1 is amended by:
0
1. Revising paragraph (a)(3);
0
2. Redesignating paragraph (a)(4) as paragraph (a)(5);
0
3. Adding new paragraph (a)(4); and
0
4. Revising paragraph (f).
    The revisions and addition read as follows:


Sec.  301.7701-1  Classification of organizations for federal tax 
purposes.

    (a) * * *
    (3) Certain State and local law entities not recognized. An entity 
formed under State or local law is not always recognized as a separate 
entity for Federal tax purposes. For example, an organization wholly 
owned by a State is not recognized as a separate entity for Federal tax 
purposes if it is an integral part of the State.
    (4) Certain Tribal entities--(i) In general. Except as provided in 
paragraph (a)(4)(ii) of this section, Tribes incorporated under section 
17 of the Indian Reorganization Act of 1934, as amended, 25 U.S.C. 5124 
(section 17 corporation), or under section 3 of the Oklahoma Indian 
Welfare Act, as amended, 25 U.S.C. 5203 (section 3 corporation), are 
not recognized as separate entities for Federal tax purposes. Also, 
except as provided in paragraph (a)(4)(ii) of this section, entities 
wholly owned by one or more Indian Tribal governments (within the 
meaning of section 7701(a)(40) of the Code) and organized or 
incorporated exclusively under the laws of the Indian Tribal 
government(s) that own them (wholly owned Tribal entity) are not 
recognized as separate entities for Federal tax purposes.
    (ii) Elections under section 6417. See Sec.  1.6417-1(c)(7) of this 
chapter for the treatment of section 17 corporations, section 3 
corporations, and wholly owned Tribal entities described in paragraph 
(a)(4)(i) of this section for the purposes of making an elective 
payment election under section 6417 of the Code (section 6417 
election), including determining eligibility for and the consequences 
of such election.
    (iii) Examples. The following examples illustrate the application 
of paragraph (a)(4)(i) and (ii) of this section. For purposes of these 
examples, all references to a Tribe are references to an Indian Tribal 
government within the meaning of section 7701(a)(40).
    (A) Example 1. Tribe B incorporates Corporation X pursuant to Tribe 
B's Corporations Ordinance, which governs the purpose, formation, and 
operation of commercial entities. Tribe B owns all the shares of 
Corporation X. Corporation X is therefore wholly owned by Tribe B and 
organized or incorporated exclusively under the laws of Tribe B. As a 
result, Corporation X is not recognized as a separate entity from Tribe 
B for Federal tax purposes, except for the purposes described in Sec.  
1.6417-1(c)(7) of this chapter. Accordingly, Corporation X is not 
subject to Federal income tax. Under Sec.  1.6417-1(c)(7) of this 
chapter, Corporation X is treated as an instrumentality of Tribe B for 
the purposes of making a section 6417 election (including determining 
eligibility for and the consequences of such election). Thus, 
Corporation X, rather than Tribe B, would be the applicable entity for 
purposes of making a section 6417 election for any applicable credit 
(as defined in section 6417(b)) relating to property held or activities 
conducted by Corporation X.
    (B) Example 2. Same facts as in paragraph (a)(4)(iii)(A) of this 
section (Example 1), except that the board of Corporation X, pursuant 
to Tribe B's Corporations Ordinance, organizes a subsidiary, 
Corporation Z, to pursue a limited line of new business. Corporation X 
owns all the shares of Corporation Z. Corporation Z is therefore wholly 
owned by Tribe B and organized or incorporated exclusively under the 
laws of Tribe B. As a result, neither Corporation X nor Corporation Z 
is recognized as an entity separate from Tribe B for Federal tax 
purposes, except for the purposes described in Sec.  1.6417-1(c)(7) of 
this chapter. Accordingly, Corporation Z is not subject to Federal 
income tax. Under Sec.  1.6417-1(c)(7) of this chapter, Corporation X 
and Corporation Z are each treated as an instrumentality of Tribe B for 
the purposes of making a section 6417 election (including determining 
eligibility for and the consequences of such election). Thus, 
Corporation Z, rather than Corporation X or Tribe B, would be the 
applicable entity for purposes of making a section 6417 election for 
any applicable credit relating to property held or activities conducted 
by Corporation Z. As in Example 1, Corporation X would continue to be 
the applicable entity for purposes of making a section 6417 election 
for any applicable credit relating to property held or activities 
conducted by Corporation X.
    (C) Example 3. Tribe B incorporates a section 17 corporation. The 
section 17 corporation subsequently incorporates Corporation J pursuant 
to Tribe B's Corporations Ordinance, which governs the purpose, 
formation, and operation of commercial entities. The section 17 
corporation owns all the shares of Corporation J. Corporation J is 
therefore treated as wholly owned by Tribe B and organized or 
incorporated exclusively under the laws of Tribe B. As a result, 
Corporation J is not recognized as a

[[Page 81878]]

separate entity from Tribe B for Federal tax purposes, except for the 
purposes described in Sec.  1.6417-1(c)(7) of this chapter. 
Accordingly, neither the section 17 corporation nor Corporation J is 
subject to Federal income tax. Under Sec.  1.6417-1(c)(7) of this 
chapter, the section 17 corporation and Corporation J are each treated 
as an instrumentality of Tribe B for the purposes of making a section 
6417 election (including determining eligibility for and the 
consequences of such election). Thus, the section 17 corporation, 
rather than Tribe B, would be the applicable entity for purposes of 
making a section 6417 election for any applicable credit relating to 
property held or activities conducted by the section 17 corporation. In 
addition, Corporation J, rather than Tribe B or the section 17 
corporation, would be the applicable entity for purposes of making a 
section 6417 election for any applicable credit relating to property 
held or activities conducted by Corporation J. The analysis would be 
the same if Tribe B had organized its business as a single member 
limited liability company pursuant to the Tribe's business code instead 
of incorporating Corporation J.
    (D) Example 4. Pursuant to their respective Tribal laws, Tribe A, 
Tribe B, Tribe C, and Tribe D organize Corporation K via a resolution 
approved by their respective Indian Tribal governments. Each Tribe owns 
25% of the shares of Corporation K. Corporation K is therefore wholly 
owned by Indian Tribal governments and organized or incorporated 
exclusively under the laws of each Indian Tribal government that owns 
it. As a result, Corporation K is not recognized as a separate entity 
from the Tribes for Federal tax purposes, except for the purposes 
described in Sec.  1.6417-1(c)(7) of this chapter. Accordingly, 
Corporation K is not subject to Federal income tax. Under Sec.  1.6417-
1(c)(7) of this chapter, Corporation K is treated as an instrumentality 
of Tribe A, Tribe B, Tribe C, and Tribe D for the purposes of making a 
section 6417 election (including determining eligibility for and the 
consequences of such election). Thus, Corporation K, rather than Tribe 
A, Tribe B, Tribe C, or Tribe D, would be the applicable entity for 
purposes of making a section 6417 election for any applicable credit 
relating to property held or activities conducted by Corporation K.
* * * * *
    (f) Applicability dates--(1) In general. Except as provided in 
paragraph (f)(2) of this section, the rules of this section are 
applicable as of January 1, 1997.
    (2) Exceptions--(i) Paragraph (a)(4) of this section. The rules of 
paragraph (a)(4) of this section apply to taxable years ending after 
October 9, 2024. In general, an entity may choose to apply paragraph 
(a)(4) of this section to taxable years ending on or before October 9, 
2024 if the Indian Tribal government(s) that own the entity also apply 
paragraph (a)(4) of this section consistently with such entity for all 
such taxable years. However, an entity may not choose to apply 
paragraph (a)(4) of this section to any taxable period for a Federal 
excise tax or Federal employment tax with respect to which the entity 
was, as of October 9, 2024, a party to any administrative or judicial 
proceeding.
    (ii) Paragraph (c) of this section. The rules of paragraph (c) of 
this section are applicable on January 5, 2009.

Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-23142 Filed 10-7-24; 4:15 pm]
BILLING CODE 4830-01-P


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