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Highlights
- Under regulations issued in December 2025 by the U.S. Department of the Treasury and IRS, wholly owned, Tribally chartered entities – along with Section 3 and Section 17 Corporations – are not subject to federal income tax.
- The regulations confirm that these entities are treated, for purposes of making U.S. Internal Revenue Code Section 6417 elections, as instrumentalities of the Tribal governments that wholly own them. As such, those entities may make a direct pay election for certain energy tax credits. The regulations further confirm that these entities are treated as separate entities for federal employment and certain federal excise tax purposes.
- Tribal governments should review their existing entity structures to ensure compliance with the regulations and, if applicable, identify any tax refunds that may be requested through a retroactive application of the regulations. In addition, Tribal governments and their entities should consider how to maximize opportunities available through the regulations.
- Future guidance on the tax treatment of entities jointly owned by Tribal governments and non-Tribal partners is expected following further Tribal consultations.
The U.S. Department of the Treasury and IRS issued long-awaited regulations confirming the federal tax-exempt status of Section 3 and Section 17 Corporations and extending similar treatment to wholly owned, Tribally chartered entities. Overall, the regulations reduce administrative and compliance burdens on Tribes, offering much-needed clarity that has been sought for decades. The regulations also confirm that these entities are treated as separate entities for federal employment and certain federal excise tax purposes.
The regulations mark an important milestone for Tribes and support economic growth while acknowledging the importance of Tribal sovereignty. They reflect the hard work of Tribal leaders and the Treasury Department leadership over the years, as well as underscore the importance of Tribal consultation and contributions of the Treasury Tribal Advisory Committee (TTAC), whose engagement has helped shape federal tax guidance affecting Tribal governments.
A Brief History on Wholly Owned Tribal Entities
These regulations have been anticipated by Indian Country for more than 25 years. Although Tribes themselves are not subject to federal income tax and the federal government has long recognized Tribal sovereign immunity, the status of Tribes' wholly owned entities has been less certain.
Over time, there have been milestones leading up to this guidance, including:
- The Treasury Department and IRS published final regulations on December 18, 1996, under Section 7701, known as the entity classification regulations. These regulations provide that federally chartered Tribal corporations – i.e., those entities formed 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 not recognized as separate entities for federal tax purposes. Accordingly, they share their owning Tribe's federal tax-exempt status.
- Beginning in 2001, the Treasury Department and IRS included in their annual Priority Guidance Plan a project on guidance for Tribally chartered corporations.
- The Treasury Department and IRS have held Tribal consultations on Tribally chartered corporations over the years, including on October 8 and October 10, 2019, as well as on June 21 and June 22, 2023.
- The Inflation Reduction Act of 2022 (IRA) added Section 6417 to the U.S. Internal Revenue Code, which allows applicable entities (including Tribal governments) to elect to receive a direct payment in lieu of a tax credit for 12 of the IRA's energy-related tax credits.
- The Treasury Department and IRS issued proposed regulations on October 9, 2024, on wholly owned Tribal entities, but as discussed in a previous Holland & Knight alert, key questions remained. In particular, the proposed regulations did not clarify critical aspects of the rule, such as the treatment of Tribal entities for employment and excise purposes, and entities jointly owned by Tribal governments and non-Tribal partners.
- In December 2024, the Treasury Department and IRS engaged in Tribal consultation on the proposed regulations. They also accepted written comments on the proposed regulations.
What Is a Wholly Owned Tribal Entity?
A "Wholly Owned Tribal Entity" (also commonly known as a "wholly owned, Tribally chartered entity") is an entity that is 100 percent owned by at least one Tribal government directly or through other entities that are not recognized as separate entities for federal income tax purposes, and that is organized or incorporated exclusively under the laws of one or more of the owning Tribal governments. "Tribal governments," for purposes of this definition, are those defined under Section 7701(a) of the Internal Revenue Code, which are federally recognized Tribes. Thus, if an entity is wholly owned by a Tribe recognized by a state government but not the federal government, the regulations will not apply.
What Are Section 3 and Section 17 Corporations?
The regulations define a Section 3 Corporation to be a federally chartered corporation incorporated under Section 3 of the Oklahoma Indian Welfare Act, as amended (25 U.S.C. 5203), by the Bureau of Indian Affairs (BIA), as the authorized delegate of the U.S. Department of the Interior secretary.
In addition, a Section 17 Corporation means a federally chartered corporation incorporated under Section 17 of the Indian Reorganization Act of 1934, as amended (25 U.S.C. 5124), by the BIA, as the authorized delegate of the Interior secretary .
How Does Section 6417 Apply to Tribal Governments and Tribally Chartered Entities?
Prior to the IRA, Tribal governments could not easily access energy tax credits because they do not have a federal income tax liability to offset with a credit. Under Section 6417, passed as part of the IRA, certain "applicable entities" – which include Tribes – can now elect to be treated as if they made a payment of tax equal to the amount of an "applicable credit." Section 6417 allows Tribes to ask the IRS for a cash refund in the amount of the tax credit to which they are entitled – i.e., they can ask the IRS for a direct payment.
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. Prior to the issuance of the regulations, Section 3 and Section 17 Corporations were treated as "disregarded entities" for Section 6417 purposes. For example, prior to the regulations, though a federally chartered Tribal corporation may own the applicable credit property, the Tribe would be considered the owner and, therefore, responsible for making the Section 6417 election. However, this would be administratively burdensome for Tribes and particularly complex in instances where two or more Tribes own an entity making a Section 6417 election. Accordingly, as discussed below, the regulations instead confirm that Section 3 and Section 17 Corporations and Wholly Owned Tribal Entities would be the "applicable entity" for Section 6417 purposes.
What Are the Key Features of the Final Regulations?
- Wholly Owned Tribal Entities Are Exempt From Federal Income Tax. The Regulations expressly state that, with limited exceptions, Section 3 and Section 17 Corporations and wholly owned, Tribally chartered entities are not recognized as separate entities for federal tax purposes and, as such, are not subject to federal income tax. They further confirm that the same analysis applies to a single-member limited liability company (LLC) wholly owned by a Tribal government under the Tribe's business code. The final regulations also eliminate the IRS' former "integral part" test by adopting a straightforward ownership‑and‑organization rule for determining the federal tax status of Tribally chartered entities.
- Subsidiaries in a Tiered Entity Structure of Wholly Owned Tribal Entities Are Not Subject to Federal Income Tax. In response to commenters requesting guidance on the tax treatment of Tribal subsidiary entities, the regulations clarify in the definition of a Wholly Owned Tribal Entity that the "wholly owned" requirement can be met through ownership by other entities not recognized as separate.
- Tribal Entities Wholly Owned by More Than One Tribe Have the Tax Status of Owning Tribes. The regulations provide that an inter-Tribal entity is not recognized as a separate entity when organized or incorporated exclusively under the laws of one or more of the Indian Tribal governments that own it. This marks a change from the proposed regulations that would have required such entities to be organized under the laws of each of the Tribal government owners.
- Tribal Entities Owe Federal Employment and Excise Taxes. The regulations confirm that these entities are treated as separate entities for purposes of excise and employment taxes. Accordingly, they owe their own federal employment and excise taxes. Although many Tribal entities have operated this way in practice, the regulations' confirmation offers much-needed clarity that a Tribal government is not subject to liability for employment and excise taxes owed by one of its wholly owned entities. These clarifications reflect feedback provided during Tribal consultation, where Tribes emphasized the importance of treating these entities as separate employers to ensure that tax liabilities remain at the entity level rather than flowing up to the Tribal government.
- Simplified Section 6417 Elections. The regulations provide that these entities are treated as instrumentalities of Tribal governments. Thus, under the regulations, each of these entities satisfies the definition of an "applicable entity" under the IRA and, as such, may qualify for, register for and make the Section 6417 election for certain direct pay energy tax credits under the IRA. This simplifies the availability of the tax credit because now a Tribal entity that directly owns applicable credit property, rather than the entity's owner or owners, would make the Section 6417 election.
In addition, the preamble to the regulations confirms that certain wholly owned Tribal entities may seek refunds for federal income taxes that were paid for previous years. Although the regulations apply to periods beginning on or after January 1, 2026, the regulations confirm that Tribal governments may apply the regulations retroactively to periods before January 1, 2026. The preamble to the regulations explains that Tribal entities that choose to apply the regulations retroactively may seek income tax refunds for any federal income taxes that were paid to the extent the applicable period of limitations remains open. Generally, a taxpayer may claim a federal income tax refund by the later of two dates: 1) three years from the date the taxpayer filed its federal income tax return for a given year or 2) two years from the date the tax was paid. For most calendar year taxpayers, the deadline to claim a refund for the 2022 tax year will remain open until April 15, 2026.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
