[Federal Register Volume 75, Number 132 (Monday, July 12, 2010)]
[Notices]
[Pages 39730-39733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16881]
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DEPARTMENT OF THE TREASURY
Tribal Economic Development Bonds
AGENCY: Department of the Treasury, Departmental Offices.
ACTION: Notice and request for comments.
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SUMMARY: The Department of the Treasury (``Treasury'') seeks comments
from Indian Tribal Governments regarding the Tribal Economic
Development Bond provision in Section 7871(f) of the Internal Revenue
Code. The purpose of this solicitation of comments is to assist
Treasury in developing recommendations regarding this bond provision
for a Congressionally-directed study under the American Recovery and
Reinvestment Act of 2009. This solicitation of comments is in
furtherance of the objectives of Executive Order 13175 under which
Treasury consults with tribal officials in the development of Federal
policies that have tribal implications, to reinforce the United States
government-to-government relationships with Indian tribes, and to
reduce the imposition of unfunded mandates upon Indian tribes.
Additional comments from the general public related to this matter are
also welcome.
DATES: Please submit comments on or before September 10, 2010.
FOR FURTHER INFORMATION CONTACT: John J. Cross III, Office of Tax
Policy, at (202) 622-1322.
SUPPLEMENTARY INFORMATION:
Introduction and Background
Section 1402 of Title I of Division B of the American Recovery and
Reinvestment Act of 2009, Public Law No. 111-5, 123 Stat. 115 (2009)
(``ARRA''), added a $2 billion bond authorization for a new temporary
category of tax-exempt bonds with lower borrowing costs for Indian
tribal governments, known as ``Tribal Economic Development Bonds,''
under Section 7871(f) of the Internal Revenue Code (``Code'') to
promote economic development on tribal lands. (Except as noted, section
references in this Notice are to the Code.) Section 1402(b) of ARRA
directs the Secretary of the Treasury or the Secretary's delegate to
conduct a study of the Tribal Economic Development Bond provision and
to report back to Congress with recommendations regarding this
provision. In a summary of this ARRA provision, the House Ways and
Means Committee and the Senate Finance Committee indicated that, in
particular, Treasury should study whether to repeal on a permanent
basis the existing more restrictive ``essential governmental function''
standard for tax-exempt governmental bond financing by Indian tribal
governments under Section 7871(c). See http://waysandmeans.house.gov/media/pdf/111/arra.pdf.
The more restrictive existing standard under Section 7871(c)
generally limits the use of tax-exempt bonds by Indian tribal
governments to the financing of certain activities that constitute
``essential governmental functions'' customarily performed by State and
local governments with general taxing powers and certain manufacturing
facilities. The essential governmental function standard under Section
7871(c) was enacted originally in 1982 as part of the Indian Tribal
Government Tax Status Act, Public Law No. 97-473 (1983), 96 Stat. 2605
(``Tribal Tax Act''). The legislative history to the Tribal Tax Act
indicated that essential governmental functions for this purpose
included activities such as schools, streets, or sewers, but did not
include activities financed with private activity bonds or other
commercial or industrial activities. See H.R. Rep. No. 97-982, 97th
Cong. 2d Sess. 17 (1982) and S. Rep. No. 97-646, 97th Cong. 2d. Sess.
at 13-14 (1982).
In 1987, Section 7871(e) was added to the Code to limit the
essential governmental functions standard further to provide that an
essential governmental function does not include any function which is
not customarily performed by State and local governments with general
taxing powers. See The Omnibus Budget Reconciliation Act of 1987,
Public Law No. 100-203, 101 Stat. 1330, Sec. 10632(a) (1987). Further,
in the legislative history to this provision, the House Ways and Means
Committee criticized 1984 Temporary Treasury Regulations under section
7871(c) for treating certain commercial and industrial activities
eligible for Federal funding as essential governmental functions and
indicated that these regulations were invalid to that extent. H.R. Rep.
No. 100-391, 100th Cong. 1st Sess. at 1139 (1987). However, in 1987,
Section 7871(c)(3) was added to the Code to allow Indian tribal
governments to use tax-exempt bond financing for manufacturing
facilities under certain parameters.
The custom-based essential governmental function standard under
Section 7871(e) has proven to be a difficult administrative standard
and has led to audit disputes, based on difficulties in determining
customs, the evolving nature of the functions customarily performed by
State and local governments, and increasing involvement of State and
local governments in quasi-commercial activities.
In 2006, Treasury and the Internal Revenue Service (``IRS'')
promulgated an Advance Notice of Proposed Rulemaking regarding the
essential governmental function standard for the issuance of tax-exempt
bonds by Indian
[[Page 39731]]
tribal governments under Section 7871. See 71 FR 45474 (August 9, 2006)
(the ``2006 Advance Notice''). In the 2006 Advance Notice, Treasury and
the IRS indicated that proposed regulations will treat an activity as
an essential governmental function that is customarily performed by
State and local governments under Section 7871(c) and Section 7871(e)
if: (1) There are numerous State and local governments with general
taxing powers that have been conducting the activity and financing it
with tax-exempt governmental bonds, (2) State and local governments
with general taxing powers have been conducting the activity and
financing it with tax-exempt governmental bonds for many years, and (3)
the activity is not a commercial or industrial activity. The 2006
Advance Notice further indicated that examples of activities
customarily performed by State and local governments will include, but
will not be limited to, public works projects such as roads, schools,
and government buildings.
In general, new Section 7871(f) regarding Tribal Economic
Development Bonds gives Indian tribal governments greater flexibility
to use tax-exempt bonds to finance economic development projects than
is allowable under the existing standard of Section 7871(c). The more
flexible standard under new Section 7871(f) generally allows Indian
tribal governments to use tax-exempt bonds under a new $2 billion
volume cap to finance economic development projects (excluding certain
gaming facilities and excluding projects located outside of Indian
reservations under Section 7871(f)(3)(B)) or other activities under
comparable standards for which State or local governments are eligible
to use tax-exempt bonds under Section 103.
State and local governments generally can use tax-exempt
``governmental'' bonds (as contrasted with ``private activity bonds,''
as further described herein) to finance an unspecified broad range of
projects and activities so long as private involvement is limited
sufficiently to avoid classification as private activity bonds. Bonds
are classified as private activity bonds if private involvement exceeds
both of the following thresholds: (1) More than 10 percent of the bond
proceeds are used for private business use; and (2) the debt service on
more than 10 percent of bond proceeds is payable or secured from
payments or property used for private business use. Thus, under this
general standard for State and local governments, bonds qualify as tax-
exempt governmental bonds if the bond proceeds are used predominantly
for State or local governmental use. Special rules under Sections
141(b)(3) and 141(c) further limit the use of tax-exempt governmental
bonds in certain circumstances involving disproportionate or unrelated
private business use and private loans.
By contrast, private business use generally arises from private
business ownership, leasing, or certain other arrangements involving
private business use of bond-financed facilities. Certain safe harbors
allow private businesses to manage governmental facilities under
management contracts with prescribed compensation arrangements without
resulting in private business use. See Rev. Proc. 97-13, 1997-1 C.B.
632.
Bonds also qualify as tax-exempt governmental bonds if, despite
private business use, the bonds are payable predominantly from State or
local governmental sources of payment, such as generally applicable
taxes.
State and local governments also are eligible to use tax-exempt
qualified private activity bonds under Section 141(e) and related
provisions without regard to private business use or the level of
private involvement to finance certain specified types of projects and
activities, including the following: (1) Airports, (2) docks and
wharves, (3) mass commuting facilities, (4) facilities for the
furnishing of water, (5) sewage facilities, (6) solid waste disposal
facilities, (7) qualified low-income residential rental multifamily
housing projects, (8) facilities for the local furnishing of electric
energy or gas, (9) local district heating or cooling facilities, (10)
qualified hazardous waste facilities, (11) high-speed intercity rail
facilities, (12) environmental enhancements of hydroelectric generating
facilities, (13) qualified public educational facilities, (14)
qualified green buildings and sustainable design projects, (15)
qualified highway or surface freight transfer facilities, (16)
qualified mortgage bonds or qualified veterans mortgage bonds for
certain single-family housing mortgage loans, (17) qualified small
issue bonds for certain manufacturing facilities, (18) qualified
student loan bonds, (19) qualified redevelopment bonds, and (20)
qualified 501(c)(3) bonds for exempt charitable and educational
activities of Section 501(c)(3) nonprofit organizations.
Subject to certain exceptions, most types of tax-exempt qualified
private activity bonds are subject to annual State bond volume caps
based on State populations, with adjustments for inflation and minimum
allocations for smaller States, and with three-year carryforward
periods for unused allocations. For 2010, each State's private activity
bond volume cap is equal to the greater of: (1) $90 multiplied by the
State population; or (2) $273,775,000. Exceptions to the State private
activity bond volume caps apply to certain governmentally-owned
projects (including airports, docks and wharves, environmental
enhancements of hydroelectric generating facilities, high-speed
intercity rail facilities, and solid waste disposal facilities),
qualified veterans mortgage bonds, and qualified 501(c)(3) bonds.
In general, the new $2 billion bond authorization for Tribal
Economic Development Bonds under Section 7871(f) allows Indian tribal
governments to use tax-exempt bonds to finance an unspecified broad
range of governmentally-used projects, including hotels or convention
centers, as well as projects involving certain qualified private
activities, to the same extent and subject to the same limitations
imposed on State and local governments under Section 103. In addition,
Tribal Economic Development Bonds may be issued as Build America Bonds
under Section 54AA upon satisfaction of the additional eligibility
requirements for Build America Bonds. See IRS Chief Counsel Advice No.
AM 2009-14 (October 26, 2009).
Section 7871(f)(3)(B) includes certain limitations on Tribal
Economic Development Bonds that prohibit the use of any proceeds of
these bonds to finance either of the following: (1) Any portion of a
building in which class II or class III gaming (as defined in section 4
of the Indian Gaming Regulatory Act) is conducted or housed or any
other property actually used in the conduct of such gaming; or (2) any
facility located outside the Indian reservation (as defined in Section
168(j)(6)).
Section 7871(f)(1) requires Treasury to allocate the $2 billion
national volume cap for Tribal Economic Development Bonds among Indian
tribal governments in such manner as Treasury, in consultation with the
Secretary of the Interior, determines to be appropriate.
Pursuant to Notice 2009-51, 2009-28 IRB 128 (July 13, 2009),
Treasury and the IRS solicited applications for allocation of the $2
billion in bond volume cap of Tribal Economic Development Bonds and
provided guidance on the application procedures, deadlines, forms, and
methodology for allocating this bond volume cap. Generally, Treasury
employed a pro rata allocation method to allocate this bond volume cap
in two separate $1 billion phases, subject to specified maximum
allocations for any particular Indian tribal government. Treasury and
the IRS
[[Page 39732]]
announced the results of the two phases of Tribal Economic Development
Bond allocations in IRS News Release 2009-81 (September 15, 2009) and
IRS News Release 2010-20 (February 11, 2010). For further information
regarding these bond allocations, see http://www.irs.gov under the
heading ``Tax-exempt Bond Community'' and subheading ``IRS Announces
Tribal Economic Development Bond Allocations.''
Request for Comment on Particular Questions
In order to assist Treasury in developing recommendations for its
study of the Tribal Economic Development Bond provision, Treasury seeks
public comment on the following particular questions.
Whether the State or Local Governmental Standard for Tax-Exempt
Governmental Bond Status Should Replace the Essential Governmental
Function Standard
A State or local governmental bond is treated as a tax-exempt
governmental bond (rather than a private activity bond) under Section
141 if either 90 percent or more of the bond proceeds are used for
governmental use (i.e., not private business use) or 90 percent or more
of the debt service on the bonds is payable or secured from
governmental payments or property, as previously described herein. In
treating Indian tribal government use of facilities financed with
Tribal Economic Development Bonds as governmental use under Section
141, the Tribal Economic Development Bond provision effectively applies
this standard.
1. In general, should consideration be given to changing the law
permanently to apply the standard described above, applicable to State
and local governments under Section 141, with respect to tax-exempt
bond financing for Indian tribal governments (rather than the existing
essential governmental function standard under Section 7871(c))?
2. Would focusing on Indian tribal governmental use of bond-
financed facilities (rather than essential governmental functions)
under the standard applicable to State and local governments provide
Indian tribal governments with a sufficiently workable and flexible
standard for tax-exempt governmental bond financing?
3. In determining qualified governmental sources of payment for
tax-exempt governmental bonds for Indian tribal governments, should
special consideration be given to any unique sources of revenue for
Indian tribal governments, including (i) income derived from tribal
lands held in trust by the Department of the Interior, (ii) state and
local government revenues from oil, gas, or other natural resources on
Indian tribal government lands, or (iii) revenue derived from gaming or
other tribally owned corporate interests, in comparison to the general
tax-based sources of revenue for State and local governments?
Types of Projects and Activities Eligible for Financing With Private
Activity Bonds
For State and local governments, Section 141 provides that certain
specific types of projects and activities may be financed with
qualified tax-exempt private activity bonds, as described previously
herein.
4. Should consideration be given to changing the law permanently to
authorize Indian tribal governments to use qualified tax-exempt private
activity bonds for the same types of projects and activities as are
allowed for State and local governments?
5. Are there any specific additional types of projects or
activities beyond those allowed for State and local governments for
which Indian tribal governments should be authorized (or not
authorized) to use qualified tax-exempt private activity bonds (i.e.,
in which private business ownership, leasing, or other private business
use of the bond-financed projects would be permitted) in light of their
special needs or unique circumstances? For example, would federal
corporations chartered under Section 17 of the Indian Reorganization
Act of 1934 (25 U.S.C. 477) require special provisions to use qualified
tax-exempt private activity bonds?
Private Activity Bond Volume Cap Considerations
In the case of State and local governments, an annual State bond
volume cap applies to qualified tax-exempt private activity bonds based
on State populations. For 2010, each State's private activity bond
volume cap is equal to the greater of: (1) $90 multiplied by the State
population; or (2) $273,775,000. In the case of Indian tribal
governments, the new Tribal Economic Development Bond provision under
Section 7871(f) included a $2 billion total national bond volume cap on
these bonds.
6. If Congress were to determine that it was necessary to impose
some form of bond volume cap on the use of qualified tax-exempt private
activity bonds by Indian tribal governments similar to that imposed on
State and local governments, how specifically should such a bond volume
cap be structured to best promote fair, effective, and workable use?
One option would be to allocate the private activity bond volume cap
among Indian tribal governments based on population, coupled with some
minimum allocation for small Indian tribal governments. Another option,
similar to that used for the $2 billion Tribal Economic Development
Bond authorization, would be for Treasury (or another Federal agency,
such as the Department of the Interior's Bureau of Indian Affairs) to
allocate the volume cap using some prescribed method, such as a
population-based allocation method that incorporates an adjustment
factor to take into account holdings of land and other natural
resources in the case of tribes with small populations. Suggestions for
other alternative allocation methods are welcome.
Considerations Regarding the Restriction Against Financing Projects
Located Outside of Indian Reservations
Section 7871(f)(3)(B)(ii) includes a restriction that limits the
use of Tribal Economic Development Bonds to the financing of projects
that are located on Indian reservations (as defined in Section
168(j)(6)). Section 168(j)(6) provides that the term ``Indian
reservation'' means a reservation as defined in Sec. 3(d) of the
Indian Financing Act of 1974, 25 U.S.C. 1452(d), applied by treating
the term ``Indian reservations in Oklahoma'' as including only lands
that are within the jurisdictional area of an Oklahoma Indian tribe (as
determined by the Secretary of the Interior) and which are recognized
by the Secretary of the Interior as eligible for trust land status
under 25 CFR part 151 (as in effect on August 5, 1997 or a reservation
defined in Sec. 4(10) of the Indian Child Welfare Act of 1978, 25
U.S.C. 1903(10).
7. Should the limitation on use of Tribal Economic Development
Bonds to finance projects that are located outside of Indian
reservations be modified to address special needs or unique
circumstances of Indian tribal governments? For example, should
consideration be given to allowing the use of Tribal Economic
Development Bonds to finance projects within some prescribed reasonable
proximity to Indian reservations or projects located on land owned by
Indian tribal governments which has not formally been designated in
trust as part of an Indian reservation?
[[Page 39733]]
Considerations Regarding the Restriction Against Financing Gaming
Facilities
Section 7871(f)(3)(B)(i) prohibits the use of Tribal Economic
Development Bonds to finance any portion of a building in which class
II or class III gaming (as defined in section 4 of the Indian Gaming
Regulatory Act) is conducted or housed or any other property actually
used in the conduct of such gaming.
8. Should the prohibition on the use of Tribal Economic Development
Bonds to finance gaming facilities be modified to address special needs
or unique circumstances of Indian tribal governments?
Additional General Comments on Special Needs or Unique Circumstances of
Indian Tribal Governments
9. Are there additional factors that should be considered in
refining the statutory scope of tax-exempt bond financing for Indian
tribal governments to better address the special needs or unique
circumstances of Indian tribal governments? Such factors might include,
for example, special sources of revenue, priority government-like
activities, geographic distribution and legal status of land associated
with Indian tribal governments, or credit market access considerations.
Certain Identifying Information
When submitting comments, please include your name, affiliation,
address, e-mail address, and telephone number.
Comments are Public Information
All comments received, including attachments and other supporting
materials, are part of the public record and are subject to public
disclosure. Commentators should submit only information that they wish
to make available publicly.
ADDRESSES: Please submit comments electronically through
[email protected]. Alternatively, comments may be mailed to:
Tribal Economic Development Bond Comments, Department of the Treasury,
1500 Pennsylvania Avenue, NW., Room 3454, Washington, DC 20220.
Dated: July 6, 2010.
Michael F. Mundaca,
Assistant Secretary for Tax Policy, U.S. Department of the Treasury.
[FR Doc. 2010-16881 Filed 7-9-10; 8:45 am]
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