CHICAGO — Tribal tax-exempt financing is essentially “over” until Congress steps in, or an Internal Revenue Service enforcement action is challenged in court, attorneys at the National Association of Bond Lawyers’ Bond Attorneys’ Workshop here said last week. The IRS has “taken a dim view” of economic development activities such as golf courses, hotels, and facilities that are ancillary to a hotel or a casino, according to Orrick Herrington & Sutcliffe LLP’s Townsend Hyatt.And that “aggressive” approach has denied tribes access to tax-exempt financing, according to Bradley Waterman, a Washington, D.C.-based attorney who has his own practice.“As Yogi Berra might say, the statute says what it says,” Waterman said in a Thursday panel on tribal financing. “All it says is, 'essential government function,’ customarily performed by states with general taxing powers. These are the first things you bump up against when evaluating the service’s position.”Under current tax code rules, Indian tribes are permitted to issue tax-exempt bonds only to finance “essential government functions.” The IRS’ tax-exempt bond office has challenged some tribal financings based on the commercial nature of the facilities built with bonds.Waterman and other attorneys on the panel, moderated by Dorsey & Whitney LLP’s Mark Jarboe, argued that TEB has been applying harsher standards despite Congress’s unwillingness to wade into the historical dispute over whether activities are commercial in nature, and language in last year’s pension reform bill that stated that an essential government function can be a commercial activity.The IRS Office of Chief Counsel last August proposed rules that would define such a function as one financed by state and local governments with tax-exempt bonds for many years. The rules also specify that bond-financed activities cannot be commercial or industrial in nature.Later that year, chief counsel also issued a favorable private letter ruling that concluded that one tribe’s government office building, emergency services building, cultural center, museum, and infrastructure improvements qualified as essential government functions, though they were located near a casino.“It is sort of an amazing thing when you think about how small the tribal obligation problems are,” said panelist Timothy Jones, senior counsel in the IRS chief counsel’s tax-exempt bond branch. “There aren’t a lot of them around, and yet there are awful lot of resources” devoted to them.Jones said that when final regulations on tribal bonds are issued, the IRS might spell out that not all commercial enterprises are prohibited.“If you’ve got an enterprise by a tribe and that enterprise is focused on providing services to the tribe itself, even though it may be operated in a commercial manner, that may be okay,” he said. “It’s these enterprises where the product is deemed outside the tribe ... That, I think, is still something we will have to wrestle with.”The attorneys and Jones said they did not anticipate further guidance on tribal bonds coming out of Treasury and the IRS anytime soon. The practitioners argued that until Congress takes legislative action to clarify how tribes can use tax-exempt bonds, or until an enforcement case is challenged in court, very few tax-exempt tribal bonds would be issued.Issuers also could file ruling requests, and if they are denied, “go to tax court for a declaratory judgment ... If not those, it’s over. No one in their right mind is going to” issue a bond opinion for a tribal deal, Waterman said.“The fundamental point is that the Service’s test — 'thou shalt not be commercial’ — is not in the statute,” Jarboe said. “The longer it lasts; the longer the Service’s position is out there and they keep enforcing it ... It will start to build that thinking in.”Tax-exempt bond office director Clifford Gannett declined to comment.At a Friday session on post-issuance compliance, Gannett said TEB has received “a lot of quality comments” on how it should address concerns about the types of records issuers maintain over the life of tax-exempt bonds.Though IRS chief counsel did not include record retention guidance on its guidance plan for this year, the TEB office is “initial stages of taking what we’ve been given and coming up with something concrete,” Gannett said.“If we can get to the core kinds of documents that are needed [and] look at different ways that information can be compiled and presented over periods of time, that works to our benefit as well as yours,” he told attorneys.
