Is unearned income a tribal member living on the reservation receives from the tribe exempt from Kansas income tax, or does the exemption only cover earned income?

Plain-English summary

A tax preparer was completing a return for a Native American Indian who lives on a reservation and received money from the tribe. The Kansas K-40 instructions say income "earned" on a reservation by a tribal member who lives there is exempt — but here the money was "unearned." The preparer asked for a definite yes or no: is unearned tribal income exempt too? The Department answered yes.

The imposition and the definitions. Kansas income tax is imposed by K.S.A. 79-32,110 on the "Kansas taxable income" of resident and nonresident individuals. "Kansas taxable income" is Kansas adjusted gross income less deductions and exemptions (K.S.A. 79-32,116). And "Kansas adjusted gross income" starts from federal adjusted gross income (K.S.A. 79-32,117), then applies modifications — including a subtraction for "[a]ny amounts received which are included in federal adjusted gross income but which are specifically exempt from Kansas income taxation under the laws of the state of Kansas." That subtraction is the mechanism that removes exempt reservation income from the Kansas tax base.

The controlling case. In McClanahan v. Arizona State Tax Commission, 411 U.S. 164 (1973), the U.S. Supreme Court held that a tribal member who lived on the tribe's reservation and derived all of her income from sources within the reservation was not subject to state income tax. Because Supreme Court decisions are "the law of the land," the Department applies McClanahan in Kansas.

Earned or unearned — same result. "Kansas has adopted the position that income earned on a reservation by a Native American Indian who resides on his or her reservation is exempt from Kansas tax. The exemption applies to earned or unearned income which is derived from sources within the reservation." So the "earned" wording in the K-40 instructions does not narrow the exemption; what matters is that the income comes from sources within the reservation and the recipient is a tribal member residing there.

Bottom line: for a Native American Indian living on his or her own reservation, income from sources within the reservation — whether wages or unearned amounts like a distribution from the tribe — is exempt from Kansas income tax.

What this means for you

Tribal members living on their own reservation

If you are a member of the tribe, live on that tribe's reservation, and the income comes from sources within the reservation, Kansas does not tax it — and this holds for unearned income (such as tribal distributions), not just wages. On the Kansas return, the exempt amount is removed through the K.S.A. 79-32,117 subtraction modification for income specifically exempt under Kansas law.

Tax preparers

Don't read the K-40 instructions' word "earned" as excluding unearned reservation income. The Department confirmed the exemption reaches earned and unearned income alike, so long as it is derived from sources within the reservation and the recipient is a tribal member residing on the reservation. Confirm those facts (membership, residence on the reservation, on-reservation source) before excluding the income.

The exemption is fact-specific

McClanahan's protection depends on the combination of tribal membership, residence on the reservation, and income sourced within the reservation. Income sourced off-reservation, or income of someone who does not live on the reservation, is a different question this ruling did not address.

Common questions

Q: Is unearned tribal income taxable in Kansas if the recipient lives on the reservation?
A: No. The Department ruled that unearned income received from the tribe by a tribal member residing on his or her reservation is exempt from Kansas income tax, the same as earned income.

Q: Why does the K-40 instruction only mention "earned" income?
A: The Department clarified that the exemption is not limited to earned income. It applies to earned or unearned income derived from sources within the reservation for a tribal member who lives there.

Q: What is the legal basis?
A: McClanahan v. Arizona State Tax Commission, 411 U.S. 164 (1973), which Kansas follows; the exempt income is subtracted from Kansas adjusted gross income under K.S.A. 79-32,117 as income specifically exempt under Kansas law.

Citations and references

• K.S.A. 79-32,110 — imposes the Kansas income tax on the Kansas taxable income of resident and nonresident individuals.
• K.S.A. 79-32,116 — defines "Kansas taxable income" as Kansas adjusted gross income less Kansas deductions and personal exemptions.
• K.S.A. 79-32,117 — defines "Kansas adjusted gross income" starting from federal adjusted gross income, with modifications including a subtraction for amounts included in federal AGI but specifically exempt from Kansas income tax under Kansas law — the provision that removes exempt reservation income from the Kansas tax base.
• McClanahan v. Arizona State Tax Commission, 411 U.S. 164 (1973) — U.S. Supreme Court decision, followed by Kansas, holding that a tribal member living on the reservation whose income is derived from sources within the reservation is not subject to state income tax.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2000-042

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 29, 2000

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Re: Kansas Income Tax

Dear XXXXX:

Your correspondence of July 26, 2000 has been referred to me for response. Thank you for your inquiry.

Your letter notes you are preparing a return for a Native American Indian who lives on a reservation and received money from the tribe which is included in her federal adjusted gross income. The K-40 instructions state that income earned on a reservation by a Native American Indian who resides on his or her reservation is exempt from Kansas tax. You note that in this situation the income is “unearned” rather than “earned”, even though the money comes from the tribe.

In your letter you indicate you would like a definite yes or no answer to the question: Is unearned income received from a tribal council (or tribe), by a Native American Indian residing on his or her tribal reservation, exempt from Kansas income tax? Please be advise our response is “yes”. The basis for our position is set forth below.

The particular statute which imposes the Kansas income tax is K.S.A. 79-32,110. Subsections (a) and (b) of the statute provides:

(a) Resident Individuals. Except as otherwise provided by subsection (a) of K.S.A. 79-3220, and amendments thereto, a tax is hereby imposed upon the Kansas taxable income of every resident individual, which tax shall be computed in accordance with the following tax schedules: [Schedules omitted.]

(b) Nonresident Individuals. A tax is hereby imposed upon the Kansas taxable income of every nonresident individual, which tax shall be an amount equal to the tax computed under subsection (a) as if the nonresident were a resident multiplied by the ratio of modified Kansas source income to Kansas adjusted gross income.

The term "Kansas taxable income" is defined by K.S.A. 79-32,116. This statute provides, (in its entirety), that:

The Kansas taxable income of an individual shall be his or her Kansas adjusted gross income less his or her Kansas deductions and Kansas personal exemptions.

The term "Kansas adjusted gross income" is defined by K.S.A. 79-32,117. This statute provides, in part, that:

(a) The Kansas adjusted gross income of an individual means such individual's federal adjusted gross income for the taxable year, [after certain addition and subtraction modifications, including specifically a subtraction modification for]:

(c)(ii) Any amounts received which are included in federal adjusted gross income but which are specifically exempt from Kansas income taxation under the laws of the state of Kansas.

In the case of McClanahan v. Arizona State Tax Commission, 411 U.S. 164 (1973), the United States Supreme Court held that a member of a tribe who lived on the tribe’s reservation and derived all of her income from sources within the reservation was not subject to state income tax. Since decisions of the United States Supreme Court are the law of the land, this decision has relevance for Kansas. As a result, Kansas has adopted the position that income earned on a reservation by a Native American Indian who resides on his or her reservation is exempt from Kansas tax. The exemption applies to earned or unearned income which is derived from sources within the reservation.

Therefore, in answer to your question: Is unearned income received from a tribal council (or tribe), by a Native American Indian residing on his or her tribal reservation, exempt from Kansas Income Tax? The answer is “yes”.

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

Sincerely,

Jim Weisgerber
Attorney
Tax Specialist

JW:jw

Date Composed: 09/13/2000 Date Modified: 10/10/2001

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