IRS Ruling Provides Good News For Tribal Energy Bonds

Reservation Energy Projects - Oneida Tribe of Indians

A recent Private Letter Ruling by the IRS has held that for certain purposes related to government finance, Native American Tribes are to be treated like states. This allows Tribes to issue financially-attractive tax exempt bonds to finance projects related to “essential government functions”. Normally, commercial or industrial activity by Tribes is not considered an “essential” function of Tribal government, thereby precluding the issuance of tax exempt bonds for such activities. However, the IRS ruling states that an exemption to this rule exists for utilities “if the activity provides substantially all of its service on (a) tribe’s reservation. A utility-type activity includes the furnishing or sale of electrical energy, gas, water, or sewage disposal services.”

Stating that “we find the ownership, operation, and financing with proceeds of tax-exempt bonds of the facilities of municipal power utilities to be both sufficiently prevalent and sufficiently longstanding among state and local governments to be considered customarily performed by state and local governments.” Since Tribes and states are treated the same by the IRS in this context, the IRS held that Tribal utility projects may be financed with tax-exempt bonds when they are “not a commercial activity, (are) indistinguishable from public works projects...focus on benefits to local citizens, and are not in competition with other businesses.” The ruling also allows for some energy generated by Tribal projects to be sold to off-reservation users, so long as “the electrical power generated by (the Tribe) will be used to service the local population with only minimal amounts of power sold to customers in the immediate vicinity of the Reservation that are not adequately served by other power providers.”

At a time when interest in and opportunities for generating renewable energy on Tribal Lands are beginning to soar, the ability of Tribes to finance such projects with desirable tax-exempt investment vehicles will help raise necessary capital even in the current economic climate.
 

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