Using tribal corporations in NMTC transactions

(Editors note: Darryl Jacobs is the guest author of this post. Darryl, attorney and member for Ginsberg Jacobs LLC, has more than twenty years of experience in tax and corporate law.  His practice focuses on international, state and federal tax matters, with a primary concentration on tax credit financing transactions. In this blog post, Darryl will explain why Indian Country is a prime candidate for New Markets Tax Credit transactions and the reasons why tribal corporations can be used.)

The Community Development Financial Institutions (CDFI) Fund increasingly has pushed New Markets Tax Credit (NMTC) allocatees to use NMTC allocation in rural areas. Allocatees and NMTC investors looking for rural transactions should consider projects in Indian Country.

Rural locations and greatest need

A significant portion of the Native American population resides on tribal trust lands located in highly distressed rural census tracts. This population is characterized by extreme poverty rates and the highest unemployment of any ethnic group in America. According to the Census Bureau, the median income of Native American households is only $35,310 and 29.1 percent of Native Americans live in poverty. In addition, the current unemployment rate for Native Americans is 11.3 percent, and 27.4 percent of Native Americans are without health insurance. The figures for persons residing on rural trust lands are even bleaker. For example, on the Pine Ridge Indian Reservation in South Dakota, the unemployment rate is 89 percent.

The needs of Native American communities are not limited to economic development. On many reservations, basic infrastructure needs are paramount. For example, simple utility services such as electricity and water are not available for residents on many reservations. In addition, tribal government facilities and community centers in rural areas often are antiquated and in need of replacement. Thus, perhaps more than any other subsection of the country, Indian Country is a prime candidate for NMTC transactions.

QALICB defined

To date, the typical structure for an NMTC transaction in Indian Country involves the tribe forming a taxable state law corporation to serve as a Qualified Low-Income Community Business (QALICB); rather than an exempt tribal corporation.

Internal Revenue Code (IRC) Section 45D and Treasury Regulation §1.45D-1(d)(4)(i) provide that “the term qualified active low-income community business means, with respect to any taxable year, a corporation (including a nonprofit corporation) or a partnership” engaged in the active conduct of a trade or business.

Neither Section 45D nor the regulation defines the term “corporation” nor “nonprofit corporation.” Consequently, some practitioners have argued that it is unclear whether a tribal corporation can serve as a qualified active low-income community business (QALICB) in a NMTC transaction.

Tax status of tribal corporations

Native American tribes are considered sovereign political entities exempt from federal income tax. Furthermore, a tribal corporation has the same tax status as its parent tribe. Essentially, a tribal corporation is disregarded as an entity separate from its parent tribe. Since the tax-exempt status of a tribal corporation stems from the status of the parent tribe as a sovereign political entity, many practitioners have concluded that such tribal corporations are not “corporations” for NMTC purposes.

The practitioners reason that a nonprofit corporation’s exempt status stems from Code Section 501. Thus, they conclude that an exempt tribal corporation is not a nonprofit corporation since it is not exempt from tax under Section 501.

Definition of tribal corporation under the code and U.S. Treasury regulations

The interpretation that a tribal corporation is not a “corporation” for NMTC purposes flies in the face of the plain language of the U.S. Treasury regulations defining the term “corporation.” Treasury Regulation §301.7701-2(b)(1) specifically provides that for federal tax purposes, the term “corporation” includes “a business entity organized under a Federal or State statute, or under a statute of a federally recognized Indian tribe, if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic.”

That the definition of QALICB includes the parenthetical “including a nonprofit corporation” does not change the plain meaning of Treasury Regulation §301.7701-2(b)(1) — that for federal tax purposes, the term “corporation” includes a tribal corporation. Rather, a more reasonable interpretation for the inclusion of the parenthetical in the code is to clarify that a nonprofit corporation can still qualify as a QALICB even though it is not involved in the active conduct of a trade or business.

If Congress had intended on excluding tribal corporations as QALICBs, the legislation would have included a specific prohibition. That IRC Section 45D does not include such a specific prohibition clearly indicates that Congress had no such intent. In fact, excluding tribal corporations seems wholly inconsistent with Congress’ intent in amending Internal Revenue Code Section 45D to include the “targeted populations” provision in Section 45D(e)(2). Targeted Populations are defined by referencing section 103(20) of the Reigle Community Development and Regulatory Act of 1994, which specifically includes Indian tribes as a potential targeted population.

Conclusion

There is no evidence that Congress intended on excluding tribal corporations from the definition of QALICB. Consequently, practitioners, NMTC allocatees and NMTC investors should have no concerns with using tribal corporations as QALICBs for NMTC transactions in Indian Country.