A tribal government's gas-fired combustion turbine electric generating project can be financed with tax-exempt bonds even though the borrower, a political subdivision of the tribe, charges residents for the power, the Internal Revenue Service determined in a recent private-letter ruling.
The ruling, which was dated Dec. 8 but not publicly released until yesterday, clarifies that the "ownership and operation of the borrower's interest in the project" qualifies as an "essential governmental function," a requirement tribal governments must meet for tax-exempt bond financings except those using $2 billion of economic development bonds authorized by the new stimulus law.
In the ruling, the IRS said the "ownership and operation of the [borrower] is not a commercial activity, and is indistinguishable from public works projects such as roads, schools, sewers, or governmental buildings, which lack a profit-making objective, focus on public benefits to local citizens, and are not in competition with other businesses."
Although private-letter rulings are supposed to be applicable only to the issuers who request them and their particular facts and circumstances, they are believed to provide insights into the IRS' thinking, particularly on tax matters where little guidance exists or market participants have questions. The issuer, borrower, project, and tribe were not identified in the ruling.
But the ruling said that the issuer, an electric district, wanted to issue tax-exempt bonds to finance a portion of the cost of a gas-fired combustion turbine electric generating facility.
The IRS pointed to the makeup and operation of the borrower - a political subdivision of the tribe changed with providing utility service to tribal members - as well as to Congress' legislative history on tribal governments in reaching its decision that the electric district could go ahead with the financing.
The borrower operates as a nonprofit in that the board, which is appointed by the tribal council, sets rates for electrical service to "assure the continued financial integrity and self-sufficiency of the borrower, rather than generating a financial return to the tribe," according to the ruling.
Any surpluses made by the provider have not gone to the tribe, but rather have been used to fund reserves, finance capital improvements, or subsidize other provider operations, the ruling stated.
Furthermore, Congress pointed to sewers as an example of projects that can be financed with tax-exempt bonds by tribes in its report on the Indian Tribal Government Tax Status Act of 1982, which established the requirement that tax-exempt bonds issued by tribal governments serve an "essential governmental function."
The IRS indicated in the ruling that the inclusion of sewers is "indicative of its intent that engaging in utility-type activities, under appropriate circumstances, may constitute an essential governmental function."
Mark Jarboe, a partner with Dorsey & Whitney LLP who specializes in tribal governments, said the ruling is helpful and consistent with previous IRS positions on what tribal governments can finance with tax-exempt bonds.
"The service is acknowledging that there are revenue charging operations of state and local governments, like electricity or other utility services, which are essential governmental functions," he said yesterday.
Meanwhile, a public magnet school also has the ability to issue tax-exempt debt, the IRS determined in a separate private-letter ruling that was dated Dec. 2 but not publicly released until yesterday.
The ruling did not identify the parties involved, but said that the school - whose mission is to provide "high-achieving high school students with a challenging education experience" - qualifies as an "on behalf of issuer" under the tax code.
The school is governed by a board of trustees consisting of or appointed by state officials, and the members are not compensated. The school was created by the state legislature. The IRS did not identify the school or the state, and it was not clear why the school sought the ruling.