Skip to main content
Updated:
Original:

IRS guidance for tribes found wanting

WASHINGTON - America's tribes believe they are getting insufficient
guidance and unfair enforcement in matters ranging from tax-exempt bonds to
tribally chartered corporations, said a report unveiled at Internal Revenue
Service headquarters June 8.

"Current enforcement efforts by the IRS," said the report, "some of which
are viewed by tribes as unfair and at odds with how the IRS treats state
and local governments - coupled with a lack of progress on promulgation of
past promised guidance - threatens to undermine the positive work that has
been done."

The report, entitled "Survey and Review of Existing Information and
Guidance for Indian Tribal Governments," was one of four projects sponsored
this year by the Advisory Committee on Tax Exempt and Government Entities
(ACT), an IRS public forum devoted to contemporary tax issues. It
specifically cited the need for guidance on tribal businesses and tribal
trusts, and clarification on the nature of "essential government functions"
in Indian country.

"There's a great uncertainty in terms of what tribes can do generally,"
project co-leader Robert Gips said at the meeting. "The issuance of
tax-exempt bonds by tribes, for what tribes view to be essential
governmental functions, have been curtailed greatly, and we think that's
wrong. We think guidance would be helpful in clarifying that situation."

The tax code is often silent about the unique standing of tribes, a status
well-established in American law. Their limited tax base requires
development initiatives that are "hampered by inadequate guidelines," said
the report. Not least, tribal sovereignty is difficult for some officials
to grasp outside the federal/state/local triad.

Even when officials "get" sovereignty, one size doesn't fit all. "An Indian
is not just an Indian, and a tribe is not just a tribe," said Lenor
Scheffler, project co-leader and an enrolled member of the Lower Sioux
Indian Community in Morton, Minn. Resources among tribes vary, she noted,
and many are advised by non-specialists who depend on the IRS for guidance.

People perceive there are "a lot of rich Indians running around," Scheffler
told the forum, a stereotype based on a few successful gaming tribes that
obscure the financial reality in much of Indian country.

The report praised the work of the Office of Indian Tribal Governments
(ITG), established by the IRS in 2000 to serve and assist tribes with tax
compliance. Its staff has improved communication between the agency and
tribes - and created expectations in so doing.

"People thought it was a new day" when ITG was created, Scheffler said June
9 from her legal office in St. Paul. They were the "go-to people" for
tribes in the IRS and set high expectations, intended or not. She's no
longer entirely sure about their role, however, especially when they go out
to hold guidance meetings that "end up being ways to enforce compliance."

While guidance may originate in ITG, said Scheffler, head of the Native
American Law Practice Group for Best & Flanagan, ultimately "they don't
seem to have any power." The chief counsel's office in the Treasury
Department plays a major role in formulating policy, an influential force
that emanates from outside the IRS.

Underlying the report was a bedrock of dissatisfaction - even anger - among
many IRS tribal "customers," a term borrowed from the business world that
now pervades public agency-speak. Some customers have criticized the
agency's substitution of enforcement for guidance. And the guidance that is
given, they say, often misconstrues tribes as nonprofit entities instead of
sovereign governments.

Other tribal customers go further, said the report, maintaining the
consultation process is a "facade." They allege that compliance-check
meetings held by the ITG are thinly disguised enforcement raids intended to
discipline rather than advise.

IRS Commissioner Mark W. Everson responded in the forum that the pace of
conducting new guidance in the area is slowed by lack of resources. The
report cited as additional obstacles the agency's reluctance to create
precedent-setting rulings and the need to achieve consensus with other IRS
groups.

The lack of guidance has a chilling effect on tribal activity, said Gips,
an attorney who specializes in representing tribal governments and
businesses. Tribes have been waiting since 1996 for a ruling on whether
tribally chartered corporations are taxable, the report noted. The tax
consequences of forming a tribal trust are similarly unclear.

Conduit bonds - tax-exempt bonds issued by one public entity and loaned to
another - are also a gray area, said Gips. The IRS is currently auditing
$345 million of tax-exempt bonds issued on behalf of the Seminole Tribe of
Florida. In April, the agency made a preliminary adverse ruling against the
issuance of $145 million of bonds for the Cabazon Band of Cahuilla Mission
Indians of California.

"One of the problems in Indian country is the increased cost of doing
business," Gips said. Tribes pay increased transactional costs so that
"lawyers like me" can educate them about tribal law. The advantage of clear
guidance from government, he noted, is that "it means you don't spend so
much money on lawyers."

Scheffler emphasized the importance of the Internet as an educational tool
in tax matters, especially in rural communities. Recommendations for the
ITG Web site in the report include spelling out guidance principles in
plain English and developing a comprehensive listing of statutes and
regulations that can be accessed in hyperlinked formats. The ITG has been
quick to incorporate Web site suggestions to date, she said.

The ACT review, done on a volunteer basis, is limited to an advisory role.
The main recourse available to tribal customers, said Gips, is "to keep
asking for clarification."