PLR 200029039: Tribal authority qualifies as a political subdivision

Plain-English summary

A federally recognized tribe created an authority to organize businesses, acquire property, and support tribal economic welfare. The tribe delegated portions of its eminent-domain and taxing powers to the authority. After consulting the Department of the Interior, the IRS concluded that these delegated powers were substantial governmental functions. It ruled that the authority would be treated as a political subdivision of a state for the purposes specified in section 7871(a). The ruling did not determine the tax treatment of particular bond transactions or other separate section 7871 requirements.

Ruling snapshot

• Question: Is the tribal authority a political subdivision for the specified federal tax purposes?
• Outcome: Approved under section 7871(d).
• Key authorities: IRC §§ 7701(a)(40) and 7871(a), (d); Rev. Procs. 84-36 and 84-37.

Full text (IRS public release)

Internal Revenue Service              Department of the Treasury
Number: 200029039
Release Date: 7/21/2000           Washington, D.C.
UIL: 7871.00-00                  Person to Contact:
                                  Telephone Number:
                                  Refer Reply to:
                                  CC:DOM:FI&P:1 - PLR-114656-99
                                  Date: April 20, 2000

LEGEND
Tribe     =
Authority =
Act       =
x         =

y         =


Dear:

     This is in reply to a letter dated August 27, 1999, and
subsequent correspondence, requesting a ruling that Authority is
a political subdivision of Tribe within the meaning of §§ 7871(d)
and 7701(a)(40) of the Internal Revenue Code.

                             FACTS

     Tribe is listed as an Indian tribal government in Rev. Proc.
83-87, 1983-2 C.B. 606, 608, modified, Rev. Proc. 86-17, 1986-1
C.B. 550, supplemented, Rev. Proc. 92-19, 1992-1, C.B. 685, which
lists Indian tribal governments that are to be treated as states
for certain federal tax purposes pursuant to §§ 7701(a)(40) and
7871(a). Also, it is recognized by the United States Department
of Interior as an Indian tribe with a government-to-government
relationship with the United States. See 63 Fed. Reg. 71941,
71943 (1998). Authority is not included in the list of political
subdivisions of an Indian tribal government published in Rev.
Proc. 84-36, 1984-1 C.B. 510, modified, Rev. Proc. 86-17.

     Tribe’s constitution provides for a tribal Business
Committee, which consists of the Chief, Second Chief, Secretary-
Treasurer, and two councilpersons. The Business Committee has
the power to transact business and otherwise speak and act for
Tribe in all matters that Tribe is empowered to act. On April
23, 1999, the Business Committee passed Resolution 99-28 adopting
Act establishing Authority. Act provides that Authority is a
public body corporate and politic, subordinate economic
enterprise, and a political subdivision of Tribe.

                              -2-
PLR-114656-99
     The purposes underlying the creation and operation of
Authority are to establish and organize tribal business
enterprises and to acquire property for the purposes of reducing
unemployment, raising revenues and promoting the economic welfare
of Tribe.

     Act provides a Board of Directors to manage Authority. The
seven directors are appointed by the Chief with the advice and
consent of the Business Committee. Directors serve a 10-year
term and can only be removed for misconduct or dereliction of
duty. The provisions of Act may not be amended, modified,
supplemented or rescinded without the prior approval of
Authority’s Board of Directors.
     Act provides that the Tribe has delegated to Authority the
power of eminent domain. Authority’s power of eminent domain
covers all of Tribe’s land. Tribe does not have a reservation.
Tribal land is held in trust by the federal government for the
benefit of Tribe. Currently, Tribe holds x acres of non-
reservation federal trust land under its jurisdiction. y acres
of this land is subject to a lease held by a private corporation
as part of a management contract under which the corporation
operates Tribe’s gaming facility. Authority can exercise its
power of eminent domain over the entire x acres of non-
reservation federal trust land, including the y acres of land
covered by the lease.

     Act also provides that Tribe has delegated to Authority the
power to assess, levy and collect sales taxes on any receipts
from the sale of products or services, with the same force and
effect as the Business Committee may levy and collect. Any tax
approved by Authority shall be dedicated to a limited purpose
specified in the ordinance levying the tax. Taxes collected
shall be expended only for the purposes specifically described in
the taxing ordinance enacted by Authority. Authority is
prohibited from proposing taxing ordinances more often than three
times in any calendar year, or twice in any six-month period.
     Authority has also been given the power to issue obligations
and other evidence of indebtedness, the payment of which is
secured by its revenues. Such obligations are not deemed to be
obligations of Tribe. Furthermore, the obligations are exempt
from taxes imposed by Tribe. It is contemplated that Authority
will issue obligations to finance infrastructure development and
other tribal government projects, as well as certain economic
activities. It is further contemplated that Authority will issue
both obligations that are exempt from federal taxes and
obligations not so exempt.

                              -3-
PLR-114656-99
     Authority must pay over yearly to Tribe a percentage of its
profits which, according to sound business practices, will be
available for general expenditure purposes other than business
development. Furthermore, Authority must submit quarterly and
annual reports of its activities to the Business Committee.

.                             LAW

     The Indian Tribal Governmental Tax Status Act of 1982 (Title
II of Pub. L. No. 97-473, 1983-1 C.B. 510, 511, as amended by
Pub. L. No. 98-21, 1983-2 C.B. 309, 315) added provisions to the
Internal Revenue Code that pertain to the tax status of Indian
tribal governments. For two years beginning in 1983, Indian
tribal governments were to be treated as states for some federal
tax purposes.
     Section 1065 of the Tax Reform Act of 1984, 1984-3 (Vol. 1)
C.B. 556, made permanent the rules treating Indian tribal
governments (or subdivisions thereof) as states (or political
subdivisions thereof) for specified federal tax purposes. See
Rev. Proc. 86-17.

     Section 7701(a)(40)(A) defines the term "Indian tribal
government" as the governing body of any tribe, band, community,
village, or group of Indians, or (if applicable) Alaska Natives,
which is determined by the Secretary, after consultation with the
Secretary of the Interior, to exercise governmental functions.

     Section 7871(a) treats an Indian tribal government as a
state for certain specified tax purposes. In the legislative
history to § 7871(a), Congress indicated that this provision of
the Code will not apply to any Indian tribal government unless it
is recognized by the Treasury Department, after consultation with
the Interior Department, as exercising sovereign powers. The
legislative history provides that sovereign powers include the
power to tax, the power of eminent domain, and police powers
(such as control over zoning, police protection, and fire
protection). H.R. Conf. Rep. No. 984, 97th Cong., 2d Sess. 15
(1982), 1983-1 C.B. 522.

     Indian tribes possess inherent sovereignty except where it
has been limited by treaty or statute, or by implication as a
necessary result of their dependent status. Indian tribes are
viewed as having certain inherent powers, including the power to
tax and administer justice, whether they choose to take actions
to exercise them or not. A written constitution or other
governing document is not a prerequisite for the exercise of
inherent sovereign powers. See United States v. Mazurie, 419
U.S. 544 (1975); Merrion v. Jicarilla Apache Tribe , 455 U.S. 130
(1982); United States v. Wheeler, 435 U.S. 313 (1978); Kerr-McGee

                              -4-
PLR-114656-99
Corp. v. Navajo Tribe of Indians , 471 U.S. 195 (1985); Washington
v. Confederated Tribes of Colville Indian Reservation , 447 U.S.
134 (1980); Iron Crow v. Oglala Sioux Tribe of the Pine Ridge
Reservation, South Dakota, 231 F.2d 89 (8th Cir. 1956); and
Powers of Indian Tribes, 55 I.D. 14 (1934), 1 Op. Sol. on Indian
Affairs, 445 (U.S.D.I. 1979).
     Section 7871(d) provides that for purposes of § 7871(a), a
subdivision of an Indian tribal government shall be treated as a
political subdivision of a state if (and only if) the Secretary
of the Treasury 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.

     Rev. Proc. 84-36 provides a list of subdivisions of Indian
tribal governments that are to be treated as political
subdivisions of a state for specified purposes of the Code.

     Rev. Proc. 84-37, 1984-1 C.B. 513, modified, Rev. Proc. 86-
17, provides procedures for a governmental unit of an Indian
tribe or a political subdivision of an Indian tribal government
not included on the list published in Rev. Proc. 84-36 to request
a ruling qualifying it for treatment as a state or a political
subdivision of a state as provided under § 7871 of the Code.

     Section 2.03 of Rev. Proc. 84-37 provides that a subdivision
of an Indian tribal government that has been delegated one of the
generally accepted sovereign powers may qualify as a political
subdivision of a state as provided under § 7871(d). Section 2.03
indicates that the generally accepted sovereign powers of states
are the power to tax, the power of eminent domain, and the police
power.

                            ANALYSIS

     Tribe is a federally recognized Indian tribe. Tribe created
Authority be adopting Act. Act provides that Authority is to be
a political subdivision of Tribe and specifically delegates to
Authority the power and authority to exercise a portion of the
Tribe’s inherent sovereign powers of eminent domain and the power
to tax. The portion of each power delegated to Authority is not
insubstantial.
     This office has consulted with the United States Department
of the Interior regarding Tribe and Authority. The United States
Department of the Interior has opined that Tribe has effectively
delegated to Authority the power of eminent domain and the power
to tax. Accordingly, after consultation with the Secretary of
the Interior, we conclude that within the meaning of § 7871(d),

                               -5-
PLR-114656-99
Authority has been delegated the power to exercise one or more of
the substantial governmental functions of Tribe. Therefore, for
purposes of § 7871, Authority will be treated as a political
subdivision of a state.

                           CONCLUSION

     Pursuant to § 7871(d), Authority will be treated as a
political subdivision of a Indian tribal government (Tribe).
Accordingly, Authority will be treated as a political subdivision
of a state for the purposes specified in § 7871(a).

     No opinion is expressed as to the federal tax consequences
to Authority under any other provision of the Code. For example,
no opinion is expressed as to the federal tax consequences to
Authority with respect to any specific transaction under § 103 or
§§ 141 through 150, or whether Authority satisfies the specific
requirements of § 7871(b) or § 7871(c).

     The ruling is directed only to the taxpayer who requested
it. Section 6110(k)(3) provides that this ruling may not be used
or cited as precedent.

     In accordance with a Power of Attorney on file, we are
sending a copy of this letter to your representative.

                               Sincerely,
                               Assistant Chief Counsel
                               (Financial Institutions & Products)


                               By:
                                     Alvin J. Kraft
                                     Chief, Branch 1

Enclosures:
    Copy of this letter
    Copy for § 6110 purposes