Native American Exempt Income
Noncompetent Indians who are wards of the U.S. government are exempt from tax on all income directly derived from restricted lands allotted to them or to an ancestor and held in trust by the government for their benefit under the General Allotment Act of 1887.
Heirs
Where land held under a trust patent is transferred from an original allottee by devise or inheritance to a noncompetent heir, the income directly derived from that land by the heir continues to be exempt. The exemption is lost, however, if the heir later receives a fee simple title. (TR FR-051, 4/9/57)
Exempt Income Tests
IRS will recognize the exempt status of income received by enrolled members of an Indian tribe where all of the following tests are met:
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The land is held in trust by the U.S. government;
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The land is restricted and allotted and is held for an individual noncompetent Indian, and not for a tribe;
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The income is “derived directly” from the land;
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The statute, treaty, or other authority involved evinces Congressional intent that the allotment be used as a means of protecting the Indian until such time as he becomes competent; and
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The statute in question contains language indicating clear Congressional intent that the land, until conveyed in fee simple to the allottee, is not subject to taxation.
Examples of Exempt Income
Income directly derived from the allotted lands held exempt under the rules described above includes:
• Rent (whether in crops or otherwise), royalties, and proceeds from the sale of natural resources or crops.
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Ground rent paid to Indians by their wholly-owned S corporation to lease their possessory interests in reservation land. Although the S corporations operated motels, the rent was for the bare land and the lease agreement was legitimate and provided for a fair rental value based on prior appraisals.
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Proceeds from the sale of standing timber.
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Proceeds from the sale of the allotted lands.
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Appreciation in value of the lands during the period of trust allotment, which is later realized on a sale.
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Farming income, grazing fees and oil lease bonuses.
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The proceeds of sale or exchange of livestock raised on the land.
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Income from farming and ranching.
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Government payments under agricultural conservation programs.