WASHINGTON — The Internal Revenue Service concluded that an Indian tribe's authority is a political subdivision that can issue tax-exempt bonds. The agency also granted a school district an extension to spend the proceeds of qualified school construction bonds it issued.
The IRS reached these conclusions in separate private letter rulings it agreed to in July but did not make available to the public until Friday. The names of those who requested the rulings were not disclosed. Bond lawyers said the IRS has issued similar rulings to both of the recent ones in the past.
One of the rulings relates to an authority that was created by an Indian tribe's council in 2008. The authority is an agency and instrumentality of the tribe whose purposes are to: promote the tribe's economic development; attract outside funding in support of the tribe's economic development; expand the tribe's resource base and economic development potential; establish, own and operate business enterprises in the tribe's jurisdiction; and provide revenues for the tribe to address public health, safety and welfare matters.
The authority is controlled by its code, which can be amended at any time by the tribe's council or business committee. It has the power of eminent domain over private property in the tribe's reservation to further public purpose, revenue-producing utility projects. The authority can also exercise its eminent domain power without seeking approval from the tribe, according to the ruling.
Section 103 of the Internal Revenue Code provides that the interest on bonds issued by states and their political subdivisions is generally tax-exempt.
Under another section of the code, Indian tribal governments can be treated as states for purposes of being able to issue certain types of tax-exempt bonds. But in order for subdivisions of tribal governments to be treated as political subdivisions of a state, they have to be recognized as political subdivisions by the IRS. The IRS looks to see if the tribal subdivision has the right to exercise one or more of the tribe's substantial governmental functions — the power to tax, the power of eminent domain, and the police power.
The IRS concluded that the authority mentioned in the ruling is a subdivision of a tribe because the tribe controls the authority through control of its code and because the authority has public purposes. Additionally, the IRS concluded that the authority has been delegated one of the substantial governmental functions of the tribal government, since it has the power of eminent domain. Therefore, the authority is a political subdivision of a state, the IRS said.
Under IRS guidance, a taxpayer who requests status as a political subdivision of a tribal government has to include with its letter-ruling request a letter from the Bureau of Indian Affairs that verifies that the subdivision has been delegated a substantial governmental function. The authority in this case had such a letter from BIA.
Townsend Hyatt — a partner at Orrick, Herrington & Sutcliffe LLP in Portland, Ore. — said that entities have been requesting rulings like this one for many years.
Last year, the IRS issued a controversial technical advice memorandum ruling that the Village Center Community Development District in Florida is not a political subdivision for purposes of issuing tax-exempt bonds because its board is, and always will be, controlled by the developer rather than publicly elected officials.
Perry Israel, who is representing the CDD, said that by discussing the tribe's control of the authority in the recent ruling, the IRS is "trying to do the same kind of analysis" that it did in the TAM. The difference is that in this case, the IRS said there was enough control of the authority by the tribe, while in the TAM, the IRS said it did not think the CDD was controlled enough by the state.
The other private-letter ruling pertains to a school district that issued QSCBs. All available project proceeds of the bonds were to be used to finance a school and to purchase the land where the school would be built.
The school district had expected to spend all of the proceeds within three years of issuing the QSCBs. However, the project schedule was significantly delayed because the school unexpectedly needed to be redesigned, the ruling said.
Soon after the bonds were issued, the district received bids for construction of the school that were all significantly higher than the original cost estimates. As a result, the district designed that the plans for the school needed to be redesigned to better fit the original budget expectations.
The district approved a redesigned construction plan and accepted a bid to construct the school. The construction has started and is heading toward completion. But because of the delays, the district now expects that it won't spend all of the bond proceeds until a date that is after three years from issuance.
Under federal tax law, 100% of available project proceeds for QSCBs must be spent within three years, and any proceeds unspent in that time period have to be used to redeem bonds.
However, issuers can submit requests to have their expenditure periods extended before the three-year period expires. The extensions can be granted if the issuer establishes that there's a reasonable reason why the proceeds won't be spent within the original time period and that "the expenditures for qualified purposes will continue to proceed with due diligence."
The IRS concluded in the ruling that the district met the criteria for an extension, and it granted the district a longer expenditure period.
"It's nice to see that the IRS is pretty generous in allowing extensions," Israel said.
"The result is consistent with what we've seen in the past," said Mike Larsen, a partner at Parker Poe Adams & Bernstein LLP in Charleston, S.C.
