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Tribal Advocates Decry 'Unequal’ Treatment for Tax-Exempt Projects

The National Congress of American Indians is urging Treasury Secretary Tim Geithner to look into the Internal Revenue Service’s “unequal treatment of tribal government entities” for projects financed with tax-exempt bonds.

Jefferson Keel, the president of the group, told Geithner in a recent letter that IRS auditors have severely limited what projects tribal governments can finance with tax-exempt bonds by “creating the restrictive 'essential government function’ test that applies to no other government entity.”

The test has been the crux of a long-standing dispute between tribal issuers and the IRS over what types of projects tribes can finance with tax-exempt bonds. State and local governments, which do not have to pass the test, can issue tax-exempt debt to finance projects like municipal golf courses and hotels. But the IRS contends that some tribal governments are building high-end golf courses and other projects for commercial and nonessential government purposes. As a result, the bonds used to finance these projects cannot be tax-exempt, according to the service.

The debate reached a boiling point in 2005 when the IRS mistakenly released a field service advice memo pertaining to a 2002 audit of a bond-financed golf course built by the Las Vegas Paiute Tribe that suggested it might not be able to prevail if it were legally challenged over the issue.

Keel said in his Dec. 18 letter that the IRS is “engaged in a broad and unprecedented effort to audit tribal government programs that are providing for the welfare of their citizens.” He called for the Treasury to provide “clear policy guidance to the IRS that respects the sovereign status of tribal governments.”

Meanwhile, a Treasury official sent a recent letter to Sen. Herb Kohl, D-Wis., that said while the department will continue to monitor its methodology for setting the credit rate for tax-credit bonds, it cannot legally permit the market to set the rate.

“It should be recognized that structural constraints and the deep interest subsidy, as well as statutory provisions, limit Treasury’s ability to allow the market to set rates on tax-credit bonds,” wrote Kim Wallace, Treasury’s assistant secretary for legislative affairs. “Legislative structural reform would be required to allow for market rate-setting on tax-credit bonds.”

The Jan. 7 letter came in response to Kohl’s expressed concerns that the Treasury is hurting issuers by setting the rate below the market rate. In a Nov. 24 letter to the department, Kohl said several of his constituents had complained about the current rate-setting mechanism.

Specifically, he said single-A and double-A rated issuers trying to sell qualified school construction bonds — which are supposed to provide tax credits equal to 100% of interest costs — had to tack on supplemental interest coupons of 1.1% because the credit rates were set too low to attract buyers. Kohl’s constituents want the Treasury to consider actual sales results when setting credit rates.

The Treasury tweaked how it set rates last year, but many market participants still complain that rates fail to accurately mirror market conditions, often forcing the sale of supplemental coupons. Originally, the rate was based the daily rate on taxable bonds rated double-A, but the Treasury broadened the sample it uses to set the rate to taxable bonds with ratings ranging from single-A to triple-B from various market sectors.

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