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Individual Indian Tax Issues: Income Derived from the Land & Fishing Rights (Sep 7, 2016)
Individual Indian Tax Issues: Per Capita Payments (Sep 7, 2016)
Transcript PDF Slides PDF

Good day, ladies and gentlemen and welcome to your IRS webcast series Individual Tax Issues.

Today's webcast will cover income derived from the land and fishing treaty income.

At this time, it is my pleasure to turn the floor over to your host, Marc Wilson.

Sir, the floor is yours.

Thank you.

Before we begin, we have a few announcements.

I'm Marc Wilson, Indian Tribal Government specialist.

Joining me today is Doug Wellington.

He is also an Indian Tribal Government specialist.

I'm based out of Oklahoma City, Oklahoma and Doug is based out of Vancouver, Washington.

Doug and I are both CPAs.

I'm a member of the Delaware tribe of Oklahoma.

I've been with Indian Tribal Governments, or ITG, since 2000.

I work with numerous tribes in Oklahoma, Texas, Florida, Mississippi, Alabama, and Louisiana.

Both Doug and I have worked with tribes in almost all aspects of their relationships with the IRS.

The information contained in this presentation is current as of the date it was presented.

It should not be considered official guidance.

The webinar is designed to provide the user with the information required to respond to general inquiries.

Due to the uniqueness and complexities of Indian tax law and federal tax law, it is imperative to ensure a full understanding of the specific question presented and to perform the requisite research to ensure a correct response is provided.

Doug will now summarize the topics for today's presentation and then discuss the first topic.

Thank you.

Thank you, Marc.

Today we will discuss the following two topics.

Income derived from the land, and fishing treaty income.

We will begin with income derived from the land.

To give you a scope of the land we're talking about, approximately 56.2 million acres are held in trust by the United States for various Indian tribes and individuals.

There are approximately 326 Indian land areas in the United States administered as federal Indian reservations, i.e., reservations, pueblos, rancheros, missions, villages, communities, et cetera.

The largest is a 16 million acre Navajo nation reservation located in Arizona, New Mexico and Utah.

The smallest is a 1.2 acre parcel in California where the Pit River Tribe cemetery is located.

Many of the smaller reservations are less than 1000 acres.

Now that we've given you a general idea of the land involved, income derived from the land has 2 possible tax treatments.

Taxable, or non-taxable.

There are certain requirements that must be met if income is to be non-taxable.

The first requirement is at the land must be in trust to the individual, not the tribe.

The legal title to existing allotments is held by the United States and in trust with the entire beneficial interests being to individual allottees.

Under certain circumstances, per capita payments from funds held in trust held by the secretary of interior for a tribe may also be non-taxable.

Please refer to IRB 2015-41 and Notice 2016-67 for further information.

The land was allotted under various statues, particularly the Dawes Act of 1887 or the general allotment act of 1887.

This act required individual Indian lands to be allocated to individual Indians.

The second requirement is there must be congressional intent.

A statute treaty or other authority shows congressional intent to protect an individual Indian until he or she becomes competent.

The authority must contain language indicating a clear, congressional intent that the land until conveyed to the allottee is not subject to taxation.

The third requirement is the income from the land must be sourced or derived from the land itself.

Marc will not go over some examples to help clarify the meaning of derive from the land itself.

Thank you, Doug.

Examples of income sourced or derived from the land itself are: rentals, including crop rentals, royalties, sales of natural resources, sales of crops grown upon the land, use of the land for grazing purposes, sale or exchange of cattle or other livestock raised on the land, sale of restricted allotted land.

You can see the income is primarily derived from the land.

Not improvements or labor.

As stated another way, the primary value of a crop or livestock is in the crop or livestock itself.

It's not derived from labor or capital improvements a farmer or rancher provides.

Now let's discuss the instances where the income would be taxable.

If the income is derived from labor and or the use of capital improvements rather than directly from the land itself, it has been determined to be taxable.

Examples of instances where income would be taxable are income from operating a smoke shop that generates its self-income from sale of the merchandise.

Income from operating a motel.

Income is due to the capital improvements and staff labor, not the land itself.

Income from operating a gift shop, once again, the income generated from the sale of merchandise.

Income from gaming operations.

As you see, the common thread that makes the income taxable is that it isn't derived directly from the land.

It is due to capital improvements and or labor.

Doug will now talk to us about arts and crafts.

Doug, go ahead please.

Thank you, Marc.

An area that can either be taxable or nontaxable is arts and crafts.

It would be taxable as mentioned earlier if the value is derived from labor use to produce the art or craft.

An example could be jewelry.

If the value is created by the expertise of the labor used craft item versus the material used from the land.

On the nontaxable side would be if the jewelry value was created primarily from a gemstone taken from the land.

This concludes this portion of the presentation that covers income derived from the land.

Let's move on to fishing rights.

Internal Revenue Code IRC section 78-73 states that income from fishing related activities is exempt from federal and state income taxes, social security taxes, unemployment comp insurance taxes.

IRC section 78-73 is applicable to individual members of Indian tribes and to qualified Indian entity.

I believe a tribal member is self-explanatory but a qualified Indian entity is not.

Let's define or characterize a qualified Indian entity.

Marc will now tell us about qualified Indian entity.

Thank you, Doug.

To be a qualified Indian entity, the entity must engage in fishing rights related activities.

A fishing rights related activity means an activity directly related to harvesting, processing or transporting fish harvested in the exercise of recognized fishing rights.

A recognized fishing right must have been secured by March 18, 1988 by treaty, executive order, or an act of Congress.

To be a qualified Indian entity, the entity must be owned by qualified tribes or qualified tribal members.

There is a 90% rule for processors and transporters.

The rule is 90% of annual gross proceeds of the entity must be derived from exercised and protected fishing rights of tribes whose members own at least 10% of the equity interest in the entity.

Another requirement is management functions must be done by qualified members or tribes.

A consideration to keep in mind is both individual tribal members and qualified Indian entities are required to allocate income and expenses among fishing rights related activities and all other activities.

This will ensure that taxable income is properly reported and expenses and amounts otherwise deductible that are attributable to exempt income cannot be used to offset income from other taxable activities.

One question a qualified Indian entity or tribal member should keep in mind is what if a tribal member fishes in another tribe's fishing treaty area?

The answer is rather simple, but the execution may be more difficult.

If wages are paid to an entity jointly owned by several tribes, the wage is paid to a tribal member who is an employee would be exempt only to the extent the income was derived from the exercise of fishing rights of that employee's tribe.

In several slides, we will discuss employer's responsibility to allocate time of its employees.

Doug will now touch on some other tax related issues in relation to fishing income.

Go ahead, Doug.

Thank you, Marc.

I will briefly outline the tax treatment of IRA and 401k contribution, withdrawals and earnings.

The US tax court addressed the IRA issue in 1998 and stated IRA principle contribution amounts cannot be deducted at the time of contribution and are not taxable upon withdraw.

The amounts earned on the contributions, however, are subject to taxation upon withdrawal.

The IRS has proposed regulations clarify 401k contributions made from fishing rights related activities.

The proposed regulation states amounts paid to Indian tribal members as compensation for services performed and fishing rights related activity may be treated as compensation and can be contributed to a 401k plan.

Another area to touch on is the earned income tax credit, or EITC.

In general, the earned income tax credit, the EITC can only be computed based on reportable earned income.

Therefore, non-taxable, non-reportable fishing related income cannot be used for EITC purposes.

Now that we've discussed some of the tax issues effecting tribal members, we will move on to the fishing related activities from an employer's perspective that will affect tribal member employees.

An employer should verify its status as a qualified Indian entity.

This will safeguard the employee from finding out in the future some income has been reclassified as taxable due to the entity not qualifying.

The employer should verify each applicable employee's proof of tribal membership and the employee should allocate time to fishing versus non-fishing activity.

For example, consider a game warden that is responsible for protecting other wildlife and has other duties as well as patrolling the treaty waters of his tribe.

His employer should verify the percentage of time he engages in fishing rights related activities of his tribe.

Another example that we touched upon earlier under jointly owned entities is the tribal member exemption only applies to his or her fishing treaty area, so that allocation also needs to be made.

A very important step that should not be overlooked is to ensure the employer is maintaining records to support each employee's time allocation.

The employers should also maintain records to support the 90% gross receipts rules as discussed earlier.

An important point to emphasize is that employers should not include exempt wages on the form 941, the form 940, or the form W2.

The wages are exempt from reporting and taxation.

If you have a question about a W2 issued to you, please initially contact the tribal entity that issued you the W2 to resolve the questions.

They should be able to review the records to answer your questions.

The exemption may apply to a variety of employees or occupations that are connected to fishing activities.

The illustrate this point, the following is a list of potential employees who may have exempt wages as related to fishing activities: fishers, processors, including smoking, transporters, hatchery workers, environmental and conservation workers, enforcement staff and tribal court personnel, support staff, i.e.

secretaries, accounting, payroll, program director, executive director, fisheries biologist, a fisheries aid, fisheries and habitat policy analyst, a water quality biologist, habitat inventory and assessment technician, a legislative analyst, information and educational services, data analyst, policy analyst, and public information staff.

As you can see, there's a wide variety of positions that may have jobs related to fishing activities.

Remember that their time needs to be allocated and to keep those records.

This concludes the fishing treaties portion of today's webinar.

I will now turn it over to Marc for a summary.

Thank you so much, Doug.

Let's review what we learned today.

In general, income derived from land must be directly from the individual allotted land and income cannot be from the result of labor or capital improvement to be non-taxable.

Treaty fishing related income can be non-taxable for tribal members and qualified Indian entities as certain conditions are met.

Two primary conditions as stated in IRC section 78-73, a recognized fishing right must have been secured by March 18th, 1988 and tribal members must be fishing within their own tribe's treaty waters for the income to be non-taxable.

We're going to take a look here at our reference materials.

ITG website, irs.gov/tribes has many items covering today's topics.

You will find numerous frequently asked questions and you can obtain publication 4268 ITG Employment Tax Desk guide that has a section on fishing rights.

You can also email Indian tribal governments at tege.ask.itg@irs.gov.

This concludes today's presentation.

Thank you so much for attending.

Good bye.