Treatment of Income From Indian Fishing Rights-Related Activity as Compensation, 68780-68782 [2013-27331]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 78, Number 221 (Friday, November 15, 2013)]
[Proposed Rules]
[Pages 68780-68782]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-27331]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-120927-13]
RIN-1545-BL61


Treatment of Income From Indian Fishing Rights-Related Activity 
as Compensation

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that would clarify 
that amounts paid to an Indian tribe member as remuneration for 
services performed in a fishing rights-related activity may be treated 
as compensation for purposes of applying the limits on qualified plan 
benefits and contributions. These regulations would affect sponsors of, 
and participants in, employee benefit plans of Indian tribal 
governments.

DATES: Comments and requests for a public hearing must be received by 
February 13, 2014.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-120927-13), room 5205, 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
120927-13), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20224, or sent electronically via the 
Federal eRulemaking Portal at www.regulations.gov (IRS REG-120927-13).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Sarah Bolen or Pamela Kinard at (202) 622-6060 or (202) 317-6700; 
concerning the submission of comments or to request a public hearing, 
Oluwafunmilayo Taylor, (202) 622-7180 or (202) 317-6901 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

    Indian tribal governments (ITGs) and individual tribe members 
conduct fishing activities to generate revenue, protect critical 
habitats, and preserve tribal customs and traditions. Various treaties, 
federal statutes, and Presidential executive orders reserve to Indian 
tribe members the right to fish for subsistence and commercial purposes 
both on and off reservations. Because many of the treaties, statutes, 
and executive orders were adopted before passage of the Federal income 
tax, they often do not expressly address the question of whether income 
derived by Indians and ITGs from protected fishing activities is exempt 
from taxation. See H.R. Rep. 100-1104, at p. 77 (1988).
    Congress added section 7873 to the Internal Revenue Code as part of 
the Technical and Miscellaneous Revenue Act of 1988 (Pub. L. 100-647). 
Section 7873(a)(1) provides that no income tax shall be imposed on 
income derived from a fishing rights-related activity of an Indian 
tribe by (A) a member of the tribe directly or through a qualified 
Indian entity, or (B) a qualified Indian entity. Section 7873(a)(2) 
provides that no employment tax shall be imposed on remuneration paid 
for services performed in a fishing rights-related activity of an 
Indian tribe by a member of such tribe for another member of such tribe 
or for a qualified Indian entity. Thus, section 7873(a) exempts income 
derived from a fishing rights-related activity (``fishing rights-
related income'') from both income and employment taxes.
    Section 7873(b)(1) defines fishing rights-related activity with 
respect to an Indian tribe as any activity directly related to 
harvesting, processing, or transporting fish harvested in the exercise 
of a recognized fishing right of the tribe or to selling such fish but 
only if substantially all of such harvesting was performed by members 
of such tribe.
    Section 415(a)(1) provides that a trust that is part of a pension, 
profit-sharing, or stock bonus plan shall not constitute a qualified 
trust under section 401(a) if (A) in the case of a defined benefit 
plan, the plan provides for the payment of benefits with respect to a 
participant which exceed the limitation of section 415(b), or (B) in 
the case of a defined contribution plan, contributions and other 
additions under the plan with respect to any participant for any 
taxable year exceed the limitation of section 415(c).
    Section 415(b)(1) provides that benefits with respect to a 
participant exceed the annual limitation for defined benefit plans if, 
when expressed as an annual benefit (within the meaning of section 
415(b)(2)), the participant's annual benefit is greater than the lesser 
of $160,000 (as adjusted in accordance with section 415(d)(1)) or 100 
percent of the participant's average compensation for the participant's 
high 3 years.
    Section 415(b)(3) provides that, for purposes of section 415(b)(1), 
a participant's high 3 years will be the period of consecutive calendar 
years (not more than 3) during which the participant had the greatest 
aggregate compensation from the employer. In the case of an employee 
within the meaning of section 401(c)(1) (that is, a self-employed 
individual treated as an employee), the preceding sentence is applied 
by substituting for ``compensation from the employer'' the following: 
``the participant's earned income (within the meaning of section 
401(c)(2) but determined without regard to any exclusion under section 
911).''
    Section 415(c)(1) provides that contributions and other additions 
with respect to a participant exceed the annual limitation for defined 
contribution plans if, when expressed as an annual addition (within the 
meaning of section 415(c)(2)) to the participant's account, the 
participant's annual addition is greater than the lesser of $40,000 (as 
adjusted in accordance with section 415(d)(1)) or 100 percent of the 
participant's compensation. Section 415(c)(3) provides that the term 
``participant's compensation'' means the compensation of the 
participant from the employer for the year. Section 1.415(c)-2(a) of 
the Income Tax Regulations generally provides that compensation from 
the employer within the meaning of section 415(c)(3) includes all items 
of remuneration described in Sec.  1.415(c)-2(b), but excludes the 
items of remuneration described in Sec.  1.415(c)-2(c).
    Section 1.415(c)-2(b) generally provides that, for purposes of 
applying the limitations of section 415, the term compensation means 
remuneration for services. Specifically, under Sec.  1.415(c)-2(b)(1), 
compensation includes

[[Page 68781]]

employee wages, salaries, fees for professional services, and other 
amounts received (without regard to whether or not an amount is paid in 
cash) for personal services actually rendered in the course of 
employment with the employer maintaining the plan, to the extent that 
the amounts are includible in gross income. In addition, Sec.  
1.415(c)-2(b)(2) provides that in the case of an employee within the 
meaning of section 401(c)(1) (a self-employed employee), compensation 
includes the employee's earned income (as described in section 
401(c)(2)) plus amounts deferred at the election of the employee that 
would be includible in gross income but for the rules of section 
402(e)(3), 402(h)(1)(B), 402(k), or 457(b).
    Section 1.415(c)-2(c) excludes certain items from the definition of 
compensation under section 415(c)(3). Specifically, Sec.  1.415(c)-
2(c)(1) excludes contributions (other than certain elective 
contributions) made by the employer to a plan of deferred compensation 
to the extent that the contributions are not includible in the gross 
income of the employee for the taxable year in which contributed. 
Likewise, distributions from plans (whether qualified or not) are 
generally not considered to be compensation for section 415 purposes. 
Section 1.415(c)-2(c)(2) excludes from compensation amounts realized 
from the exercise of nonstatutory options and amounts realized when 
restricted stock or other property held by an employee becomes freely 
transferable or is no longer subject to a substantial risk of 
forfeiture. Section 1.415(c)-2(c)(3) excludes from compensation amounts 
realized from the sale, exchange, or other disposition of stock 
acquired under a statutory stock option (as defined in Sec.  1.421-
1(b)). Finally, Sec.  1.415(c)-2(c)(4) excludes from compensation other 
amounts that receive special tax benefits, such as certain premiums for 
group-term life insurance.
    Section 1.415(c)-2(d) provides safe harbor definitions that a plan 
is permitted to use to define compensation in a manner that satisfies 
section 415(c)(3). Section 1.415(c)-2(d)(2) provides a safe harbor 
definition of compensation that includes only those items listed in 
Sec.  1.415(c)-2(b)(1) or (b)(2) and excludes all the items listed in 
Sec.  1.415(c)-2(c). Section 415(c)-2(d)(3) provides a separate safe 
harbor definition of compensation that includes wages within the 
meaning of section 3401(a), plus amounts that would be included in 
wages but for an election under section 125(a), 132(f)(4), 402(e)(3), 
402(h)(1)(b), 402(k), or 457(b).

Explanation of Provisions

    Because fishing rights-related income is not subject to income tax, 
an issue has been raised as to whether such income is included as 
compensation for purposes of section 415(c)(3) and Sec.  1.415(c)-2(b). 
The proposed regulations would clarify that certain fishing rights-
related income is included in the definition of compensation. 
Specifically, these regulations would provide that amounts paid to a 
member of an Indian tribe as remuneration for services performed in a 
fishing rights-related activity (as defined in section 7873(b)(1)) do 
not fail to be treated as compensation under Sec.  1.415(c)-2(b)(1) and 
(b)(2) (and are not excluded from the definition of compensation 
pursuant to Sec.  1.415(c)-2(c)(4)) merely because those amounts are 
not subject to income tax as a result of section 7873(a)(1). Thus, the 
determination of whether an amount constitutes wages, salaries, or 
earned income for purposes of Sec.  1.415(c)-2(b)(1) or (b)(2) is made 
without regard to the exemption from taxation under section 7873(b)(1) 
and (b)(2). In addition, by permitting fishing rights-related income to 
be treated as wages, salaries, or earned income under Sec.  1.415(c)-
2(b)(1) and (b)(2), plans that accept contributions of fishing rights-
related income would not be precluded from utilizing the safe harbor 
definitions of compensation under Sec.  1.415(c)-2(d)(2) and (d)(3) of 
the regulations.

Proposed Applicability Date

    These regulations are proposed to apply for taxable years ending on 
or after the date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register. Taxpayers, 
however, may rely on these proposed regulations for periods preceding 
the effective date, pending the issuance of final regulations. If, and 
to the extent, the final regulations are more restrictive than the 
rules in these proposed regulations, those provisions of the final 
regulations will be applied without retroactive effect.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. It has also been determined that 
5 U.S.C. 533(b) of the Administrative Procedure Act (5 U.S.C. chapter 
5) does not apply to these regulations. Because these regulations do 
not impose a collection of information on small entities, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply and a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, these 
regulations have been submitted to the Office of Chief Counsel for 
Advocacy of the Small Business Administration for comments on its 
impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ``ADDRESSES'' 
heading. In addition to general comments on the proposed regulations, 
the IRS and the Treasury Department request comments on the taxation of 
qualified plan distributions that are attributable to fishing rights-
related income, and the application of section 72(f)(2) (which treats 
certain amounts as basis for purposes of computing employee 
contributions if those amounts would have not been includible in income 
had they been paid directly to the employee). All comments are 
available at www.regulations.gov or upon request. A public hearing will 
be scheduled if requested in writing by any person who timely submits 
written comments. If a public hearing is scheduled, notice of the date, 
time, and place of the public hearing will be published in the Federal 
Register.

Consultation and Coordination With Indian Tribal Governments

    These proposed regulations take into account comments provided 
through a number of general consultation sessions held with the Indian 
tribal community in recent years. Consistent with Executive Order 
13175, the Treasury Department and the IRS expect to hold a telephone 
consultation on a date between November 15, 2013 and February 13, 2014. 
This telephone consultation session will focus principally on the 
contribution of section 7873 income to qualified retirement plans and 
the taxation of qualified plan distributions that are attributable to 
this income. Information relating to the consultation, including the 
date, time, registration requirements, and procedures for submitting 
written and oral comments, will be available on the IRS Web site 
relating to Indian tribal governments at: https://www.irs.gov/Government-Entities/Indian-Tribal-Governments.

[[Page 68782]]

Drafting Information

    The principal author of these regulations is Sarah R. Bolen, Office 
of Division Counsel/Associate Chief Counsel (Tax Exempt and Government 
Entities). However, other personnel from the IRS and the Treasury 
Department participated in the development of these regulations.

List of subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended 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 1.415(c)-2 is amended by adding paragraphs (g)(9) and 
(h) to read as follows:


Sec.  1.415(c)-2  Compensation.

* * * * *
    (g) * * *
    (9) Income derived by Indians from exercise of fishing rights. 
Amounts paid to a member of an Indian tribe directly or through a 
qualified Indian entity (within the meaning of section 7873(b)(3)) as 
compensation for services performed in a fishing rights-related 
activity (as defined in section 7873(b)(1)) of the tribe do not fail to 
constitute compensation under paragraphs (b)(1) and (b)(2) of this 
section and are not excluded from the definition of compensation 
pursuant to paragraph (c)(4) of this section merely because those 
amounts are not subject to income or employment taxes as a result of 
section 7873(a)(1) and (2). Thus, the determination of whether an 
amount constitutes wages, salaries, or earned income for purposes of 
paragraph (b)(1) or (a)(2) of this section is made without regard to 
the exemption from taxation under section 7873(a)(1) and (2).
    (h) Effective/applicability date. Section 1.415(c)-2(g)(9) shall 
apply for plan years ending on or after the date of publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register.

Heather C. Maloy,
 Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2013-27331 Filed 11-14-13; 8:45 am]
BILLING CODE 4830-01-P