Conduit Indian tribal bonds cannot finance any activity that is not an "essential government function" because Congress did not intend to give tribes such access to tax-exempt financing, the Internal Revenue Service indicated late Friday.
In a technical advice memorandum dated Oct. 11, 2005, that was published by the IRS Friday, the Office of Chief Counsel told tax-exempt bond enforcement officials that an unidentified tribal government could not be treated as a state for issuance purposes unless its conduit bond proceeds were used in exercise of an "essential government function."
The memo does not set a precedent but only responds to a request for advice from the tribe, which borrowed bond proceeds from an undisclosed issuer and, via an authority that was a division of the tribe, used them to finance hotel and convention facilities located on its reservation.
The tax code treats tribes as states for purposes of tax-exempt bond issuance only if the bonds are used in the exercise of an "essential government function."
While muni market practitioners and tribes have long been at odds with the IRS over the meaning of that phrase, even more uncertainty has clouded conduit tribal bond deals because states and municipal issuers are not subject to the same "essential government function" requirement.
In the memo, chief counsel staff outlined existing laws and noted that they acted "in keeping with Congressional intent" to allow tribes to benefit from tax-exempt financing only when their bonds, issued as conduits or self-issued, are used for essential government purposes.
"The TAM seems to [use] a results-oriented approach to creating an ambiguity because of what they think Congress meant rather than what Congress said [in the statute]," Mark A. Jarboe of Dorsey & Whitney LLP said Friday.
Sources who wished to remain unidentified suggested Friday that the tribe referenced in the memo was the Seminole Tribe of Florida, which has been under a lengthy investigation over whether it was eligible to use borrowed bond proceeds to construct hotels near casino complexes.
Jim Shore, general counsel for the tribe, was unavailable for comment Friday.
