Proposed regulations disregard wholly owned Tribal entities as separate entities

Executive summary

Proposed regulations clarify federal tax treatment of wholly owned Tribal entities

The Treasury Department and IRS recently published proposed regulations on the treatment of wholly owned Indian tribal entities. Specifically, such organizations would not be separately recognized for federal tax purposes. In addition, these entities and certain Tribal corporations chartered by the Department of the Interior are instrumentalities for purposes of section 6417 elective payments.

Background

The section 7701 regulations, commonly known as the entity classification regulations, provide that entities formed under local laws are not always recognized as separate entities for federal tax purposes. The regulations provide examples of organizations wholly owned and integral parts of states and certain Tribal corporations chartered by the Department of the Interior. However, neither the IRS nor Treasury previously provided guidance specific to entities wholly owned by Tribal governments.

The enactment of the Inflation Reduction Act of 2022 (Pub. L. 177-169, Aug. 16, 2022) increased the importance of clarity around the treatment of these entities. Because the law provides expanded access to capital and new economic opportunities, Tribal governments have reiterated their requests for guidance because the existing Department of the Interior chartered corporations are not sufficient to meet their needs.

Existing regulations under section 6417 provide that an applicable entity that is the owner (directly or indirectly) of a disregarded entity that holds applicable credit property is the applicable entity that is eligible for the elective payment, not the disregarded entity.

Elective payments: An overview

The Inflation Reduction Act of 2022 (IRA) added new section 6417 to allow Tribal governments (and certain other applicable entities) to elect to receive a refundable payment equal to the value of certain energy credits. This provision provided two significant changes to pre-IRA law for such entities: (1) expanding eligibility of certain credits to previously ineligible entities; and (2) providing a monetary benefit to entities that do not otherwise have a tax liability.

Because Tribal governments or subdivisions thereof are applicable entities, there are 12 clean energy credits eligible for elective payments. These credits are generally available for investment in certain clean energy properties (e.g., solar, wind, battery storage technology, clean vehicles, etc.), for the production and sale of components used in energy projects, and for the production and sale of fuels or electricity from renewable sources. Before making an elective payment on a tax return, an applicable entity must register the applicable credit with the IRS in a pre-filing registration process.

Proposed regulations

The proposed regulations would update both the entity classification regulations and the elective payment regulations:

1. Entity classification regulations: Entities wholly owned by Tribal governments, including through a multi-Tribe ownership structure, would not be separately recognized for federal tax purposes (except as noted below).
2. Elective payment regulations: Entities wholly owned by Tribal governments and certain Tribal corporations chartered by the Department of the Interior would be treated as instrumentalities, not disregarded entities, solely for purposes of making an elective payment under section 6417.

RSM US LLP takeaways

These proposed regulations provide much needed clarity to the federal tax treatment of wholly owned Tribal entities. In addition, the proposal to treat wholly owned Tribal entities, including certain Tribal corporations chartered by the Department of the Interior, as instrumentalities rather than disregarded entities for purposes of section 6417 streamlines the elective payment procedures. Without the proposed changes to the section 6417 regulations, the Tribal government that owns the entity would be responsible for the administrative process for computing the credit, registering the credit, and reporting the credit on a tax return. Instead, these proposed regulations would allow the wholly owned Tribal entity to determine and make an elective payment for its own applicable credit.