[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]
BILLING CODE 4810-25-P