These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Indian law and Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided.
Yes. Federally recognized Indian tribal governments can issue tax-exempt bonds for certain governmental and qualified purposes. Section 7871(a)(4) provides that, subject to additional requirements, tribal governments are treated as states for purposes of issuing valid debt obligations under Section 103. However, tribal governments that issue taxable bonds do not have to comply with the requirements applicable to the issuance of tax-exempt bonds.
Tribal governments must be federally recognized. The Bureau of Indian Affairs publishes an annual list of all federally recognized tribes in the Federal Register. For additional information about this, see Revenue Procedure 2008-55.
Section 7871(c) provides that tax-exempt bonds may be issued by tribal governments to finance both the provision of "essential governmental functions" and the construction of certain qualified manufacturing facilities. Section 7871(c)(1) states that "subsection (a) of section 103 shall apply to any obligation issued by an Indian tribal government (or subdivision thereof) only if such obligation is part of an issue substantially all of the proceeds of which are to be used in the exercise of any essential governmental function." Section 7871(c)(3)(B) provides that tax-exempt bonds can be issued to finance the acquisition, construction, reconstruction, or improvement of property which is of a character subject to the allowance for depreciation and which is part of a manufacturing facility (as defined in section 144(a)(12)(C) provided that certain use, location, ownership, and employment requirements are satisfied.
Internal Revenue Code section 7871(d) states that "for the purposes specified in subsection (a), a subdivision of an Indian tribal government shall be treated as a political subdivision of a State if (and only if) the Secretary determines (after consultation with the Secretary of the Interior) that such subdivision has been delegated the right to exercise one or more of the substantial governmental functions of the Indian tribal government".
Internal Revenue Code section 7871(e) states that "for the purposes of this section, the term 'essential governmental function' shall not include any function which is not customarily performed by State and local governments with general taxing powers". The financing of certain types of public projects such as roads, water and sewer facilities, government buildings, as well as police and emergency services clearly fall into this category.
Indian tribal governments generally cannot issue tax-exempt private activity bonds. However, tribal governments can issue tax-exempt bonds to finance the acquisition, construction, reconstruction, or improvement of property which is of a character subject to the allowance for depreciation and which is part of a manufacturing facility (as defined in section 144(a)(12)(C)) provided that certain use, location, ownership, and employment requirements are satisfied.
In order to qualify for tax-exempt status under Section 7871(c)(3)(B), at least 95 percent of the net bond proceeds of the issue must be used to finance the manufacturing facility. Moreover, a qualified manufacturing facility must satisfy the following requirements:
- The facility must be located on land which, throughout the 5 year period ending on the date of issuance of such issue, is part of the qualified Indian lands of the tribal government issuer;
- The facility must be owned and operated by the tribal government issuer;
- The facility must meet the employment requirements of Section 7871(c)(3)(D); and
- No principal user of the facility can be a person (or group of persons) described in Section 144(a)(6)(B).
Finally, because Section 7871(c)(3)(A)(ii) states that these types of bonds are to be treated as qualified small issue bonds, many of the requirements under Section 144(a) must also be satisfied.
Generally, at the close of each calendar year (beginning 2 years after the date of issuance), the aggregate face amount of all outstanding tax-exempt bonds issued to finance the facility cannot be more than 20 times greater than the aggregate wages paid during the preceding calendar year to enrolled members (or their spouses) of the tribe issuing the bonds for services rendered at that facility.
Yes. All tax-exempt bonds must satisfy the general rules found in Sections 148-150 of the Code. Additionally, tax-exempt bonds issued to finance qualified manufacturing facilities must also satisfy the general rules applicable to qualified private activity bonds found in Section 147.
Yes. Tribal governments issuing tax-exempt bonds to finance an essential governmental function must file either Form 8038-G, Information Return for Tax-Exempt Governmental Obligations PDF, or Form 8038-GC, Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales PDF. Tribal governments issuing tax-exempt bonds to finance qualified manufacturing facilities must file Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues PDF. Additionally, tribal governments may need to periodically file Form 8038-T, Arbitrage Rebate and Penalty in Lieu of Arbitrage Rebate PDF, and Form 8038-R, Request for Recovery of Overpayments Under Arbitrage Rebate Provisions PDF, for matters related to the arbitrage and rebate requirements under Section 148.
The interest income paid to the holders of tax-exempt bonds is not includable in their gross income for federal income tax purposes. Thus, by issuing tax-exempt bonds for qualified purposes, tribal governments are able to achieve a significant interest cost savings by taking advantage of the difference between the relative interest rates paid on taxable and tax-exempt debt.