TRIBAL BUSINESS STRUCTURE HANDBOOK

2008 Edition

Karen J. Atkinson, President, Tribal Strategies, Inc.

and

Kathleen M. Nilles, Partner, Holland & Knight LLP

A Tribal Self-Governance Project of the Tulalip Tribes

Sponsored and Published by

The Office of the Assistant Secretary – Indian Affairs

Credit: This Handbook was funded by an economic development grant awarded by the

U.S. Department of the Interior’s Office of Indian Energy and Economic Development

(IEED) to the Tulalip Tribes of Washington for the development of a tribal biogas plant

in Snohomish County.

Disclaimer: Nothing in this Handbook should be construed or relied upon as legal

advice. Instead, this Handbook is intended to serve as general guidance and an

introduction to business structure from which better informed requests for legal advice

and tax advice can be formulated.

Published by:

The Office of the Assistant Secretary – Indian Affairs

U.S. Department of Interior

Foreword by the Sponsor and Publisher

The Office of Indian Energy and Economic Development (IEED) was established in

2006. IEED is responsible for expanding reservation business opportunities and Indian

employment with emphasis on the development of energy and mineral resources on Indian trust

lands; providing oversight of initiatives designed to assist tribes in developing stronger

reservation and/or tribal economies; developing policies and procedures for job placement and

training under the Indian Employment Training and Related Services Demonstration Act of 1992

(P.L. 102-477), as amended; and providing credit under the Indian Financing Act of 1974. The

office formulates policies and procedures to surmount barriers to reservation economic growth

and assists tribes in developing economic infrastructure, augmenting business knowledge,

increasing jobs, businesses, and capital investment, and developing energy and mineral

resources. IEED helps tribes develop their energy and mineral resources on trust lands and

manages special economic programs, grants, projects and initiatives to advance reservation

economies. In addition, the office is responsible for implementing P.L. 102-477, as amended;

the Indian Financing Act of 1974; and Title V of the Energy Policy Act of 2005. The office

consists of the Division of Energy and Mineral Development, the Division of Economic

Development, the Division of Workforce Development, the Division of Capital Investment, and

the Division of Indian Energy Resource Agreements.

We undertook this project to further our mission of developing economic infrastructure

and increasing business knowledge. We think tribal governments will find the Handbook filled

with many specifics that will help them and their business managers pinpoint issues for analysis

in the quest to select the best business structure.

For tribal governments starting to think about launching a business enterprise, the

Handbook will become a primary reference. The authors have taken care to streamline the

discussions about each of the business structures. This should enable tribal governments to make

informed decisions about which structure to discuss with tribal legal counsel and the tribal

accountant.

For tribal government officials who are unfamiliar with business structures, the

Handbook can also impart an understanding of how various Indian business enterprises function

by comparison. We hope that this will encourage tribal governments to consult with one another

regarding the success tribal businesses have achieved because of (and not in spite of) their

structures.

There will be a second edition of the Handbook in the next several years.

Robert W. Middleton, Ph.D.

Director, Office of Indian Energy and Economic Development

The Authors

Karen J. Atkinson is Mandan, Hidatsa, and Tsimshian and President of Tribal Strategies, Inc. in

Washington, D.C. Karen has extensive experience as a legal and policy advisor on federal

Indian law and tribal economic development. She has experience in energy planning and

development, business consulting for Indian tribal governments, and advising companies seeking

to work with tribes. Karen focuses on creating public/private partnerships that increase

economic development in tribal communities. She has provided advice on how to form tribal

business entities, on how to create tribal business partnerships, and on financing options and tax

incentives for projects in Indian Country.

Kathleen M. Nilles is a partner with Holland & Knight LLP (resident in its Washington, D.C.

office) and a member of the firm's Indian Law practice group. Kathleen has almost twenty years

of experience advising tribal governments on tax and corporate issues. In the course of her

practice as a tax attorney, she has assisted tribes in structuring numerous types of business

entities and has secured IRS rulings and determinations to confirm their tax treatment. Kathleen

has also provided legal advice on joint ventures, tax-exempt financing, energy tax incentives, and

employment tax issues. She is a member of the Board of Directors of the National Intertribal

Tax Alliance. Kathleen gratefully acknowledges the assistance, advice and contributions of her

colleagues at Holland & Knight, particularly Telly Meier, Jerry Levine, Allyson Saunders, Brian

Guth and Sam Kastner.

Table of Contents

Page

TABLE OF CONTENTS.................................................................................................i

I. INTRODUCTION..................................................................................................... I-1

A. W

HY CHOOSING A BUSINESS STRUCTURE IS IMPORTANT................................... I-2

B. SUCCESS FACTORS............................................................................................. I-2

C. OVERVIEW OF STRUCTURES ............................................................................... I-4

D. SUCCESS FACTORS............................................................................................. I-6

II. TRIBAL GOVERNMENT ENTITIES....................................................................II-1

A. UNINCORPORATED AGENCIES, DIVISIONS AND INSTRUMENTALITIES ...............II-1

B. POLITICAL SUBDIVISION OF TRIBAL GOVERNMENT ........................................II-13

III. TRIBAL CORPORATIONS................................................................................ III-1

A. TRIBALLY-CHARTERED CORPORATIONS........................................................ III-1

B. S

ECTION 17 CORPORATION—FEDERAL LAW CORPORATION ........................III-10

IV. STATE LAW ENTITIES..................................................................................... IV-1

A. STATE LAW CORPORATIONS ........................................................................... IV-1

B. SUBCHAPTER S CORPORATIONS ..................................................................... IV-6

C. STATE-LAW LIMITED LIABILITY COMPANIES .................................................. IV-7

D. ADVANTAGES AND DISADVANTAGES OF STATE-LAW BUSINESS ENTITIES .....IV-10

V. JOINT VENTURE ENTITIES................................................................................V-1

A. LIMITED LIABILITY COMPANIES .......................................................................V-2

B. GENERAL PARTNERSHIPS AND LIMITED PARTNERSHIPS ...................................V-3

C. C

ONSIDERATIONS COMMON TO LLCS AND LPS ................................................V-4

VI. EVALUATING YOUR OPTIONS ...................................................................... VI-1

A. C

OMPARISON OF EACH FORM ........................................................................ VI-1

B. KEY FACTORS TO CONSIDER .......................................................................... VI-4

CHART: STRUCTURES AT A GLANCE

APPENDIX A: SOVEREIGN IMMUNITY FACTORS IN RECENT JUDICIAL

DECISIONS......................................................................................A-1

APPENDIX B: KEY STEPS TO PROTECT THE CORPORATE VEIL AND

TO LIMIT LIABILITY .....................................................................B-1

ENDNOTES

I-1

INTRODUCTION

The late 20

century brought a new era of federal-tribal relationships and a policy of self-

determination to Indian country. Indian Tribes are increasingly asserting control over their land,

resources, and governance of their communities. Tribes are involved in a wide range of

economic activities from tourism, gaming, energy, agriculture, forestry, manufacturing, federal

contracting, and telecommunications. In many parts of the country, Tribes are becoming

regional economic and political power houses. They are the largest employer in many counties.

Tribal governments and tribal businesses engage in a wide range of business and financial

transactions.

The unique legal status of tribes is only now beginning to be used by Tribal governments

to contribute to their business and economic development efforts. This century marks a new era

for tribes using their sovereign status and governmental authority to achieve economic self-

sufficiency and cultural preservation. There are still high levels of poverty and unemployment in

Indian country and a lack of the basic infrastructure crucial to the building blocks of economic

success. There are, however, increasingly more examples of tribes breaking their dependence on

federal programs and creating the necessary legal infrastructure to build the foundations for

successful economic development.

As tribal business transactions become increasingly more sophisticated and involve non-

Indian partners, investors, and lenders, there is a need to understand the basic methods for doing

business in Indian country. In particular, in the energy industry, Indian tribes are shifting from

being passive owners of their energy resources by evaluating ways in which they can own,

develop, and produce their resources. Tribes are increasingly looking at ways to develop their

resources in a manner that gives them an active ownership interest in the development of the

project, often with a non-Indian business partner.

There are unique factors that a tribe should consider when deciding how to structure a

business transaction or how to partner with a non-Indian business. This Handbook will provide a

general guide to the key factors that an Indian tribe should consider when structuring a business

or project. It will look at the basic structures available to tribal governments when organizing for

economic development activities and will consider whether business formation should occur

under tribal, federal or state law. It will also consider the tax consequences of each type of

business structure. The Handbook will assist tribal managers in determining which structure will

work best to protect tribal assets, preserve tribal sovereignty, and maximize the use of tax and

other incentives available for tribal economic development. This guide is general in nature. You

should consult legal counsel and accountants to determine the best business structure for your

particular circumstances.

I-2

A. Why Choosing a Business Structure is Important

The choice of business structure will have long-term and far-reaching consequences for a

tribal government and tribal business. The business structure you choose will have a major

impact on how tribal assets are protected, how tribal sovereignty is preserved, and how potential

liability is minimized. Critical decisions regarding the tax status of the business entity and

whether or how sovereign immunity is waived must be made early in the decision making

process. The choice of business structure may also be determined by the requirements a lender

imposes as a financing condition or be determined by a business partner seeking certainty and

predictability in the legal framework chosen to organize for economic development. This

Handbook will help you to compare and analyze different structures and help determine which is

best for you.

B. Success Factors

In the last decade, a substantial amount of research has been done to determine what

impediments exist to creating long term sustainable economic development on Indian

reservations and to identify the factors that have lead to significant progress on some

reservations. Most tribes are committed to improving the economic welfare of its people and at

the same time are concerned that this not be done in a way that diminishes their sovereignty.

The Harvard Project on American Indian Economic Development (Harvard Project) has found

that a key factor to achieve economic self-determination is to have institutions in place which

promote self-governance and to provide a political environment in which investors will feel

secure.

Indian reservations have to compete with other venues to attract economic activities. To

be successful, tribes must offer investors the opportunity to earn economic returns commensurate

with the returns they might earn elsewhere. Investment dollars have to come from somewhere.

Investor risk is raised if there is uncertainty in tax and regulatory policies that apply to on-

reservation businesses or transactions. Risk is also raised if there is uncertainty regarding the

enforcement of contracts or agreements. Governmental policies requiring preference hiring or

policies that change frequently can also raise the risk and costs for investors or business partners.

The Harvard Project has identified a number of success factors geared to create a political

environment that promotes sustained economic growth by providing a safe environment for

investors. Such an environment helps investors--whether they be tribal members or outsiders--to

feel secure and willing to put their time, energy and capital into the tribal economy. The first

critical factor is for tribes to have a separation and allocation of governmental powers. This can

be accomplished through formal or informal governmental structures.

The second critical factor is the separation of tribal electoral politics from the day-to-day

management of business enterprises. This relates to the direct role that tribal governments often

have in development projects. Tribal governments should have a role in strategic decision-

making. However, tribal governments should not make the day-to-day business decisions of

tribal enterprises. Maintaining this separation can be difficult for tribal officials since enterprises

and its assets belong to all tribal members. However, not insulating tribal politics from tribal

I-3

businesses can create an uncertain and risky business environment for investors and business

partners. Political instability, the possibility of opportunism on the part of tribal officials, and the

difficulties in enforcing agreements can discourage investment. This can place tribes at a

competitive disadvantage for attracting capital as well as technical and management expertise.

Inserting politics into day-to-day business decisions can drain the resources of the entity,

and run a tribal enterprise into the ground. This type of governance will result in inefficiencies

and loss of productivity that is difficult to absorb in a highly competitive environment.

Successful businesses in Indian country are typically insulated and their day-to-day

business management is free from political interference. The Harvard Project found that tribally-

owned enterprises that are insulated from political interference are about four times as likely to

be profitable as those that are not.

The way tribes’ have insulated business from politics has

ranged from traditional culture-based separation of power to legal or tribal constitutional limits

to the establishment of separate tribal entities and manage businesses. Insulating tribal business

entities from political interference is accomplished by establishing a managing board of directors

and a corporate charter that is beyond the direct control of tribal council members.

Businesses require a stable operating environment while managers need to make

decisions in a business environment. The creation of a tribal business development corporation

or other business entity separated from tribal government can provide a number of advantages:

• Free the tribal council from micro-managing tribal businesses and allow the

council to focus on long-term development strategies and goals

• Assign responsibility to operate and manage tribal businesses to those who have

business skill and knowledge

• Provide a buffer between managers and tribal politics

• Provide continuity and stability to business management by promoting the

development of economic development and business policies that are less subject

to change by electoral politics.

This Handbook will describe a variety of options for tribes to consider when structuring

tribal businesses in a way that segregates business from politics.

Key factors to consider when trying determining the best structure for a particular activity

are:

Segregate politics from business--Free the tribal council from micro-managing tribal

businesses while allowing the council to focus on long-term development strategies and goals.

Assign responsibility to operate and manage tribal businesses to those who have business skill

and knowledge.

Organizational considerations--How the entity is formed, under what law is the entity

formed, and who manages the entity.

I-4

Sovereign Immunity--Tribes as governmental entities are not subject to suit unless they

clearly waive immunity or Congress has waived their immunity. This raises questions regarding

the ability of lenders, investors, and business partners to enforce agreements and to protect their

investment. Each entity has different sovereign immunity implications that must be considered.

Liability--Some business structures effectively shield business owners from liability for

the financial obligations and debts of the business. Others do not effectively separate owner

obligations from business entity obligations.

Tax considerations--Different federal income tax rules apply to different business types.

State tax liability frequently depends on whether the business activity is conducted on or off an

Indian reservation.

Financing--Money for a business comes in two forms: (1) debt--whereby the business

borrows and then owes money to others; and (2) equity--where investors provide funding and

then own part of the business. Lenders generally do not dictate choice of business entity, but

equity investors may specify what business structure you can choose.

C. Overview of Structures

Tribal governments are distinct political entities in our federal system of government.

They have the power of self-government and exercise sovereignty over their members and

territory. Their sovereignty pre-dates the Constitution and is derived from the fact that they

owned all the land that is now the United States. The U.S. Constitution acknowledges the

sovereign status of Indian tribes in the Treaty Clause, in the 14

Amendment as "Indians not

taxed," and in the Commerce Clause. The sovereign nature of Tribes has been recognized in the

Constitution, treaties, court decisions, and the course of dealing with tribes. As sovereign

Nations, Indian tribes have powers and capabilities not available to individuals. This Handbook

will assist you in evaluating the different forms available for organizing economic development

and to begin to take steps to achieve financial and economic independence.

When developing a new tribal enterprise, an important consideration is the applicable law

and regulations governing its formation and operation. In Indian country, business entities can

be formed under tribal law, state law or federal law. Your choice of law and the entity that is

chosen will have consequences on issues relating to tax, financing, and sovereign immunity. It

will also determine how you can maximize risks and liability. An important consideration for

tribes is how to preserve tribal control and to protect tribal assets while providing a business

partner or lender with certainty.

A tribe, because it is a sovereign nation, can form a governmental entity to perform

business functions. This entity can be an instrumentality of tribal government, a political

subdivision of the tribe, or an agency or division of the tribe. A tribe can also form a separate

business entity formed under federal, tribal, or state law.

Below is a brief description of the main business structures.

I-5

1. Tribal Government

Many tribes conduct business through an economic development arm of the tribe. This is

often referred to as in unincorporated instrumentality of the tribe. The business operation is

generally overseen by the governing body of the tribe--sometimes by a business committee or a

separate board, but they generally do not have a separate legal structure. Therefore, the same

privileges and immunities of the tribe can apply to contractual agreements entered into by the

tribe and to business instrumentalities of the tribe. Tribes and its business instrumentalities

organized as an arm of the tribal government are not taxable entities for purposes of federal

income tax.

2. Section 17 Corporations

Many tribes conduct their commercial activities through federally-chartered corporations

formed under Section 17 of the Indian Reorganization Act (IRA).

To form a Section 17

Corporation, a tribe must petition the Secretary of the Interior for issuance of a corporate charter.

A Section 17 corporation provides a framework by which a tribe can segregate tribal business

assets and liabilities from the assets and liability of tribal governmental assets. It also preserves

the integrity of the decision-making process of tribal governmental officials by separating

business decisions. The charter defines the powers of the corporation which can include the

power to buy and sell real and personal property and to conduct such further powers as may be

incidental to the conduct of corporate business. Several courts have held that tribal sovereign

immunity applies to the business activities conducted by a Section 17 Corporation; other courts

have found a waiver of sovereign immunity in the "sue and be sued" clause of the corporate

charter. Tribal corporations formed under Section 17 of the IRA have the same tax status as the

tribe and are not subject to federal income taxes for income derived from on or off reservation

activities.

3. Tribally Chartered Corporations

Some tribes have adopted tribal laws that govern the formation of tribally chartered for-

profit corporations. These laws authorize the formation of tribal business entities owned by the

tribe. Several courts have held that sovereign immunity applies to activities of a tribally

chartered corporation owned by a tribe. The issue of whether tribally charted corporations are

subject to federal income taxes for income derived from on-reservation activities is up in the air.

The Internal Revenue Service has this issue under consideration and has indicated that it will

issue guidance, but has not yet done so.

4. State-law Corporation

A corporation is a legal entity that is formed under the laws of the state by filing a

certificate of incorporation or articles of incorporation with the jurisdiction in which it is formed.

Corporations are owned by shareholders and governed by a Board of Directors elected by the

shareholders. Corporations are governed by the terms and conditions contained in its articles of

incorporation. The main benefit of a corporation is that shareholders are not personally liable for

the debts, obligations, or liabilities of the corporation. Shareholders are liable only for the

I-6

amount of their investment in the corporation. This insulates tribal government assets from the

liabilities of a tribal corporation. However, a corporation is a separate taxpayer. Income is taxed

twice, once at the entity level and again when distributed to shareholders as dividends. A

corporation owned by a tribe, but chartered under state law is considered to have a different tax

status than the tribe and is likely subject to federal income tax.

5. Limited Liability Company

The limited liability company (LLC) is a relatively new form of business entity that rose

to prominence in the last ten years. Almost every state has enacted laws permitting the

formation of an LLC. LLCs are formed by filing articles of organization with the state in which it

is formed. It is a hybrid between a partnership and a corporation. It combines the primary

advantage of a partnership--ease of formation and maintenance, and favorable taxation--with the

key advantage of a corporation--limited liability protection for its owners. The owners of an

LLC are typically called members. Individuals, corporate entities, tribes and tribal entities can

be members of an LLC. Most states allow an LLC to have only one member. Like a

partnership, its income is only taxed once. The tax attributes are passed down from the entity to

its owners in proportion to their ownership interest--known as "pass through tax treatment."

Therefore, a tribe’s share of income from a LLC would not be subject to federal income tax.

D. Success Factors

When choosing a business structure, there are many things a tribe should consider

regarding business issues and tribal governmental issues. One of the key factors is how to

preserve tribal control while also insulating business decisions from tribal governmental

decisions or tribal politics. Another critical factor for tribes is how to preserve tribal assets and

limit exposure to business liabilities. Other factors are: how to effectively manage the entity,

how to maximize tax benefits, how to minimize financial risks, the location of business

operations--on or off the reservation, what assets will be pledged, how the business will be

capitalized, which structure enables the preferred method of equity or debt financing, and the

requirements of one’s business partner or lender.

This Handbook will look at key attributes to consider as you determine the ideal structure

for your business. These include:

• Organizational considerations

• Sovereign immunity

• Legal Liability

• Federal tax treatment

• Financing considerations.

As you learn about each entity and evaluate these factors, you will be able to see how

these factors all come together to create a business structure which best meets your needs. You

I-7

will see which businesses fit best with which entity type. You will have a working knowledge of

the impact each of these factors will have on your business. When looked at together, these

factors will point to the best entity choice for a particular tribal business enterprise.

II-1

II.

TRIBAL GOVERNMENT ENTITIES

A. Unincorporated Agencies, Divisions and Instrumentalities

1. Description and Examples

Tribes are self-governing sovereigns with traditions of self-government that pre-

date the Constitution. Accordingly, Tribal governments do not derive their powers or

sovereignty from the United States. The sovereignty of tribes is recognized in the

Commerce Clause and Treaty Clause of the U.S. Constitution. Tribes, generally exercise

powers of self-government that are derived from their status as separate and distinct

sovereigns.

Tribes exercise inherent rights of self-government including the power to engage

in business and commercial activities. Many tribes operate under traditional forms of

government, or by adopting constitutions or codes under tribal law allowing them the

power to engage in business and commercial activities.

In addition, in 1934, Congress enacted the Indian Reorganization Act (IRA) to

encourage economic and political self-determination by permitting tribes to organize their

tribal governments under constitutions adopted pursuant to Section 16 of the IRA. Tribes

had the option to accept or reject the IRA. Tribes that chose to organize their government

under Section 16 of the IRA adopted a Tribal Constitution that was reviewed and

approved by the Secretary of the Interior. Alaska and Oklahoma tribes were originally

excluded from the IRA, but the provisions were later extended to Alaska Natives and

similar provisions were extended to some Oklahoma tribes.

Tribal constitutions adopted under Section 16 of the IRA typically established a

system of centralized government with a chief executive, usually a Tribal Chairman or

President, a legislature, usually a Tribal Council, a Tribal Business Committee, or Board

of Directors that was vested with legislative and executive powers, and a weak judiciary.

Tribal governments often directly control or participate in business activities

through unincorporated instrumentalities of the tribe. These are often referred to as an

economic arms of the tribe. These instrumentalities or arms of tribal government are not

considered to be distinct legal entities. Examples are tribal casinos, tribal enterprises, and

tribal utilities.

2. Organizational Characteristics

Formation--Unincorporated instrumentalities of a tribal government are formed

under tribal law for commercial purposes and share the same legal characteristics of the

tribal government because they are not separate legal entities. A tribe’s constitution and

II-2

by-laws or codes may provide tribal governments with the power to create and operate

subordinate economic entities. These entities are generally established by tribal

resolution or by tribal ordinance.

Management--These entities are usually directly controlled by the tribal

government and its tribal council to serve as the development arm of the tribe.

Sometimes a tribal enterprise may have a board of directors, but it is usually comprised of

tribal council members. An unincorporated instrumentality often has a manager in

charge of its day-to-day operations.

General Characteristics--Tribes have operated ski resorts, farming ventures,

cigarette sales and gaming through unincorporated tribal entities. There is no separation

of the business entity from the tribal government body and such enterprises do not hold

assets or property separately from the tribe. Land and assets used by the unincorporated

enterprise are held by the tribal political body and are not specifically conveyed or set

aside. In some instances, there are no separate bank accounts, separate directors, or

assets.

The enterprise is wholly-owned by the tribe. The tribal council is typically

involved in day-to-day management decisions either directly or indirectly.

For example, the Navajo Nation formed the Navajo Forest Products Industries

(NFPI) which is wholly-owned and operated by the tribe on the Navajo Reservation.

NFPI is an instrumentality or arm of the tribal government. The enterprise manufactures

wood products. NFPI conducts day-to-day operations and is supervised by a general

manager who is appointed and responsible to a nine-member management board. The

board is appointed by the Navajo Tribe’s advisory committee which is ultimately

responsible for the operation of the business enterprise. The advisory committee is

comprised of the Navajo Tribal Council.

Researchers with the Harvard Project have described the unincorporated tribal

instrumentality as a Council-Run Model.

See adapted diagram below.

II-3

3. Sovereign Immunity and Liability Issues

Sovereign Immunity--As a matter of federal law, judicial relief to enforce contracts or

agreements against an Indian tribe in state or federal court is permitted only where

Congress has authorized the suit or the tribe has waived its immunity.

Sovereign

immunity protects the limited and irreplaceable tribal resources from large judgments and

safeguards tribal self-governance. The doctrine of sovereign immunity recognizes that a

tribe’s sovereign status is directly related to its ability to generate revenues through the

regulation of commercial activities on the reservation. The ability to contract impacts a

tribe’s fiscal resources by binding or obligating the funds and assets of the tribe.

Therefore, courts have found that corporate contractual provisions are economic matters

that directly affect a tribe’s right to self-government. From this perspective, a tribal

business entity under certain circumstances can be determined to be a tribe’s alter ego

and share the same attributes of tribal sovereignty as the tribe such as sovereign immunity

from suit in order to protect tribal assets and property.

Indian tribes possess the common-law sovereign immunity from suits similar to

that enjoyed by other sovereigns.

Tribal enterprises which serve as subordinate

economic tribal entities created by an Indian tribe possess attributes of sovereignty such

as sovereign immunity. Consequently, they cannot be sued absent a clear waiver of

sovereign immunity.

Indian tribes are generally immune from suits on contracts that

involve governmental or commercial activities on or off a reservation.

A business

entity that is an instrumentality or arm of the tribe or an unincorporated entity of a tribe

The Tribal Instrumentality Model

Council

Enterprise Board

CEO

Employees

• The Council sits on the Enterprise Board and is

involved in day to day management of the

business.

• The board (if it exists) advises the Council and the

CEO about strategy but generally has no power to

act on important corporate policy issues.

II-4

can share the same attributes of the tribe including sovereign immunity from suit. When a

tribe establishes an entity to conduct certain activities, the entity is immune from suit if it

is functioning as an arm of the tribe such that its activities are appropriately deemed to be

those of the tribe.

Courts have rejected attempts to limit sovereign immunity to the

governmental activities of a tribe and have found tribes to be immune from suit for

business activities if operating as an arm of the tribe.

A tribal instrumentality or

unincorporated enterprise of a tribal government, however, can not unilaterally act to

waive tribal sovereign immunity except in accordance with tribal law.

Tribal commercial enterprises cover a broad range of activities that include

gaming, smoke shops, convenient stores, business parks and other enterprises. Many

courts have found that subordinate economic entities of the tribe created for commercial

purposes share the same immunity as the tribe itself.

Tribal sovereign immunity can create uncertainty and risks for would-be investors

or business partners. For instance, agreements may not be enforceable where one party

(e.g., a tribe or tribal entity) is immune from suit.

In many disputes regarding tribal commercial activities, an issue is raised

regarding whether a tribe has waived sovereign immunity. An Indian tribe cannot be

sued unless there is a clear waiver of sovereign immunity by the tribe itself or a clear

abrogation of immunity by an Act of Congress.

A tribe may waive immunity by

contract or agreement, by tribal ordinance, by resolution, or by its corporate charter.

Such waiver must be in accordance with valid tribal law, such as a constitution and by-

laws, by tribal code, or other provision which authorizes the waiver and permits tribal

officials to execute contracts.

Tribes have granted limited waivers of sovereign immunity. Waivers can be

limited in a number of ways. A waiver can be limited to (1) a specific tribal asset or

enterprise revenue stream, (2) a specific type of legal relief sought by performance of the

contract and not money damages, (3) a claim limited to the amount borrowed, or (4) a

specific enforcement mechanism, such as court or arbitration.

The Supreme Court has recently construed an arbitration clause contained in a

contract executed by a tribe as constituting a clear waiver of sovereign immunity.

this instance, the tribe entered into a contract that did not contain an express waiver of

sovereign immunity or express consent to state court jurisdiction. Rather, the contract

contained an arbitration provision in which the tribe agreed to arbitrate claims under the

contract, agreed to the governance of state law, and agreed to the enforcement of the

arbitrator award in "any court having jurisdiction." The Court concluded that the tribe

waived immunity from suit and enforcement of the arbitration award with requisite

clarity.

When a tribe engages in commercial activities as an unincorporated arm of the

tribal government, it will need to address questions regarding tribal sovereign immunity.

When a tribe enters into a commercial endeavor it is investing its time, energy, and

II-5

resources, and its business partner is doing the same. It is a reasonable business practice

for all parties to want to protect their business investments. Tribal sovereign immunity

can prevent a lender or business partner from protecting its investment. Whenever a tribe

or an unincorporated instrumentality of the tribe enters into a contract or agreement,

sovereign immunity is implicated. A lender or business partner will likely seek a method

to protect its investment through a limited waiver of sovereign immunity. The decision

to waive immunity is a governmental decision.

One of the disadvantages of forming a tribal business entity as an unincorporated

instrumentality of a tribal government is that the sovereign status of the tribe may impede

a tribe’s ability to obtain credit and financing for its business transactions if agreements

are not enforceable through judicial action. Also, if a tribe does waive it’s immunity

from suit through a tribal instrumentality, it may subject the assets of the tribe to potential

liability for the obligations of the tribal instrumentality. Since there is no separate legal

entity conducting business, the assets and obligations of the tribe are intermingled with

the business.

4. Tax Treatment

Tax Treatment--There is no federal statutory provision that exempts Indian

tribes from federal income taxation. However, the Internal Revenue Service has

concluded that federally recognized tribes and their federally-chartered corporations are

not subject to federal income taxes.

With respect to tribal governments, the IRS in

Revenue Ruling 67-284 based its conclusion on the fact that tribes are political bodies

that Congress did not intend to include within the meaning of taxable entities subject to

the income tax provisions of the Internal Revenue Code regardless of whether the

business activity is inside or outside of Indian-owned lands. With respect to tribal

federally-chartered corporations, the IRS takes the view that no taxable entity separate

from the tribe exists. Any income earned by a tribe is not subject to federal income tax

regardless of whether a tribal business activity is on or off Indian-owned lands.

The

federal tax treatment of a tribal enterprise will depend on how a business is structured.

The IRS has generally treated an unincorporated instrumentality or business

operated directly by a federally recognized tribe as not subject to federal income tax,

again because it is not considered to be an entity separate from the tribe itself. As a note

of caution, there is no per se exemption from federal income taxation when a tribe

organizes as an "instrumentality." To be considered a nontaxable entity, the

instrumentality must be operating as an arm of the tribe, and not organized as a separate

legal entity. In determining whether an entity qualifies as a government instrumentality,

the IRS generally looks at the following six factors:

1) whether the organization is used for a governmental purpose and performs

a governmental function;

2) whether performance of its function is on behalf of one or more

governmental units (e.g., a state, a tribe or political subdivision);

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3) whether there are any private interests involved, or whether the

governmental unit has the power and interest of an owner;

4) whether control and supervision of the organization is vested in a public

authority or authorities;

5) whether express or implied statutory or other authority is necessary for the

creation and/or use of the organization, and whether this authority exists;

6) and the degree of financial autonomy of the entity and the source of its

operating expenses.

If it meets this multi-factor test, an instrumentality will qualify for tax benefits

reserved to governmental entities--such as the ability to receive charitable contributions

or to issue tax exempt bonds.

Recognizing that for some purposes tribal governments have similar qualities to

state governments, Congress passed the Indian Tribal Governmental Tax Status Act in

1982 to provide similar governmental tax treatment to tribes.

The Tribal Governmental

Tax Status Act, codified as section 7871 of the Internal Revenue Code, provides that

federally recognized tribes are treated like states for purposes of a number of tax benefits,

including:

• Charitable contributions are tax deductible

• Gifts and bequests are deductible

• Tax exempt bonding authority

• Exemption from certain excise taxes

• Treatment as a government under the private foundation excise tax rules.

Although Code Section 7871 did not codify the basic tax immunity of tribal

governments, the legislative history indicates that Congress was aware of the Internal

Revenue Service’s position and did not wish to alter it.

5. Financing Considerations

Two major considerations in obtaining credit through conventional lending are:

(1) the lenders need to be able to enforce an agreement, and (2) they need to protect their

investment in the event of a default. A tribe operating an enterprise as an arm of the

tribal government may have difficulty obtaining conventional financing.

Ability to enforce agreements--Lenders will be reluctant to provide credit if they

are not certain that they can enforce their contract against a tribal enterprise that is an arm

of the tribe because, like the tribe, it will be immune from suit. A tribe and lender can

address this in a number of ways. The tribe can waive sovereign immunity for a

particular transaction. Or, as addressed later in this Handbook, the tribe can form an

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entity separate from the tribal governing body that does not have sovereign immunity

from suit or which has been vested with limited sovereign immunity.

Collateral and Security Interest--In addition to sovereign immunity concerns, a

conventional lender will also want collateral or a security interest so that its investment is

protected if there is a default or the enterprise is not successful. An enterprise operating

as an unincorporated instrumentality of the tribe and its governing body will not have

separate assets or property to pledge as collateral. Rather, tribal assets would have to be

pledged and there will be no limitation of liability.

Loan Guarantee Programs:

U.S. Department of the Interior Capital Investment Program. The Department of the

Interior, Office of Indian Energy and Economic Development ("IEED") has an "Indian

Affairs Loan Guaranty, Insurance, and Interest Subsidy Program" with two key loan

programs. The first is a loan guaranty program in which a loan from a lender to a Tribe

or an Alaska Native group may be provided a guaranty of up to 90% of a loan if the

business activity will contribute to reservation economic development.

The IEED does not make direct loans. Loans may be made to finance Indian-owned

businesses organized for profit, provided that Indian ownership constitutes at least 51%

percent of the business. In 2006, the maximum loan amount that could be guaranteed for

tribes is $12 million dollars. Each year Congress determines the limit on the total amount

that IEED may guaranty. In 2006, the Office of IEED had $107 million dollars. In

recent years, the Office of IEED has exhausted its limit before the end of the fiscal year.

In some circumstances, IEED may subsidize the interest rate guaranty under the program

by paying the difference between the yield on outstanding obligations of the United

States of comparable maturity and the rate the bank is charging the Indian borrower.

The second is a new loan insurance program that may provide a more efficient

process for tribally-owned firms to obtain loans under the $250,000 amount and at a

lower cost than the IEED loan guaranty program. Under the insurance program, a bank

that has been certified for the program may issue loans up to $250,000 to tribal firms

without obtaining IEED approval. The IEED fees for this program are 1% less than the

guaranteed loan program. Under this program, IEED will insure the lesser of 90% of the

loan or 15% of the total dollar amount of the bank's loan portfolio issued under the

insurance program.

U.S. Department of Agriculture ("USDA") Business & Industry ("B&I")

Loan Guarantee Program. The Business & Industry Loan Guarantee Program is

intended to improve, develop, or finance business, industry, and employment, to improve

economic conditions in rural communities. The guarantee fee charged, which may be

passed on to the borrower, is two percent of the original loan amount. The fee may be

reduced to one percent if certain criteria are met. Eligible borrowers include Indian tribes

or federally recognized groups.

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Loan proceeds can be used for machinery and equipment, buildings and real

estate, working capital, and certain refinancing. Generally, the maximum amount

available to a borrower is $25 million; however, the maximum amount for rural

cooperatives processing value-added commodities is $40 million. The USDA will

guarantee up to 90 percent of the amount of the loan under $2 million, 80 percent of a

loan between $2 million and $5 million, 70 percent of a loan over $5 million, and 60

percent of a loan over $10 million.

Small Business Administration ("SBA") 7(a) Program. The SBA 7(a)

Program provides commercial loan guarantees to American small businesses for general

business purposes.

Loan proceeds may be used for working capital, machinery and

equipment, furniture and fixtures, land and buildings, leasehold improvements, and

certain refinancing. The loan term is up to 10 years for working capital, and up to 25

years for fixed assets.

7(a) loans are only available on a guaranty basis. This means they are provided by

lenders who choose to structure their own loans by SBA's requirements and who apply

and receive a guaranty from SBA on a portion of this loan. The SBA does not fully

guaranty 7(a) loans. The lender and SBA share the risk that a borrower will not be able to

repay the loan in full. The guaranty is a guaranty against payment default.

Tribally-owned businesses may be eligible to receive loan guarantees if they meet

other SBA requirements regarding size, nature of the business, use of proceeds, and lack

of available credit elsewhere. SBA regulations provide that businesses deriving more than

one-third of their gross annual revenue from "legal gambling activities" are ineligible to

for SBA loans.

Tax-exempt Bonding. Section 103 of the Tribal Governmental Tax Status Act

permits tribal governments to issue tax exempt bonds. When a tribe issues tax exempt

bonds, the investors in such bonds are able to earn interest free of tax. Thus, all other

factors being equal, such bonds should yield lower interest rates than taxable debt. Bond

financing (whether taxable or tax-exempt) also has the advantage of allowing the

borrower to spread repayment of principal and interest over a longer period.

Only Indian tribal governments and their political subdivisions are qualified

issuers of tax exempt debt. Furthermore, the IRS has ruled privately that certain entities

that qualify as "integral parts" of the tribe may also issue such debt.

In addition, the

IRS has ruled that Indian entities qualifying as an "instrumentality" of one or more

government units may use tax exempt financing, and such use will not constitute a

"private business" use.

In addition to meeting these tests, which focus on the identity of the person

issuing the bonds (or on whose behalf the bonds are issued), all tribal tax-exempt debt

must finance facilities that serve an "essential governmental function." Section 7871

does not define an essential government function, but Section 7871 states that it does not

include functions not customarily performed by state or local governments. The

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interpretation of the "essential governmental function" test has spawned a number of

controversies between the IRS and tribes. Recently, the IRS announced a proposed

rulemaking to bring more clarity to this area of the law.

Tax Credit Financing. The Energy Policy Act of 2005 includes authority for

nonprofit utilities and governmental entities, including tribal governments, to issue tax

credit bonds to finance the cost of renewable energy projects--known as Clean

Renewable Energy Bonds ("CREBs"). These entities may issue a total of up to $800

million in tax-credit bonds between January 2006 and the end of December 2007 to

finance solar, wind, biomass, landfill gas, geothermal, and small irrigation power

facilities that generate electricity. No more than $500 million of the CREBs can be

allocated for projects of government entities. The project must be owned by a

governmental entity or non-profit entity. Initial applications for allocation of these bonds

were due April 26, 2006.

H.R. 6408, the Tax Relief and Health Care Act of 2006, recently extended and

expanded the availability of CREBs. Section 202 of the bill authorizes an additional

$400 million of CREBs and extends the authority to issue such bonds through the

December 31, 2008. The bill is expected to be signed into law by President Bush.

Assuming that the bill is enacted, it is expected that there will be a new round of

applications that eligible issuers may submit.

Project Financing/Non-Recourse Debt Financing. Project financing involves

non-recourse financing of the development and construction of a particular project in

which a lender looks primarily to the revenues expected to be generated from the project

for the repayment of its loan and to the assets of the project as collateral for its loan rather

than the general credit of the project owner or developer. Capital-intensive projects

requiring large investment of funds such as power plants, pipelines, and power generation

facilities, are increasingly funded using project finance. Developers of these projects are

frequently not sufficiently creditworthy to obtain traditional financing or are unwilling to

take the risks and assume the debt obligations for traditional financing.

Project financing permits the risks associated with such projects to be allocated

among a number of parties at levels acceptable to each party. For example, for an

energy generation facility, there usually has to be a long-term off-take agreement or

power sales agreement and the purchaser has to have good credit.

A tribe developing

wind power generation may obtain a power sales agreement from a utility who agrees to

purchase the power generated by the project for a stated term. Any utility that agrees to

purchase the product must have good credit. The power sales agreement and the

anticipated revenues could be pledged as security to obtain a loan for the construction and

development of the project. The tribal developer would not have an obligation to make

payments on the project loan if the revenues generated by the project are insufficient to

cover the loan payments. This type of financing allows the developer to finance the

project on a highly leveraged basis. Often, projects are financed using 80 to 100 percent

debt financing. A developer’s funds are at less risk as it permits a developer to finance

the project without diluting its equity investment in the project.

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6. Advantages and Disadvantages

Advantages and Disadvantages--It can be challenging for a tribe that chooses to

operate and manage a commercial enterprise through an unincorporated arm of the tribe.

Since an unincorporated commercial enterprise of the tribe is acting as an extension of

the tribe it is not set up as a separate legal entity from the tribe itself. The tribe will enter

into a contract in its own name. The assets and property of unincorporated enterprise is

not conveyed to a separate legal entity and can not be separately pledged as collateral.

Thus it is more difficult to minimize the financial risks of the tribe by segregating the

assets of the unincorporated enterprise.

The advantages of operating a business as an unincorporated instrumentality of

the tribe include:

• Easy to form since it is formed as an arm of the tribal government--no

need to set up a separate legal entity

• Management is centralized through tribal governmental officials

• Entity will have the same privileges and immunities as the tribal

government including tribal sovereign immunity

• Not subject to federal income tax

• Section 81 approval by the Secretary of the Interior required if contracts or

agreements encumber Indian land for a term of 7 years or more.

Disadvantages include:

• Politics and business not separated

• Assets and liabilities of the enterprise are not segregated from

governmental assets

• Wholly-owned tribal entity--would preclude equity ownership in

enterprise by outside investors.

A major disadvantage of an unincorporated instrumentality of the tribe is that it

does not separate politics from the day-to-day business operation of the tribe and the tribe

assumes liability for all of the obligations and liabilities of the enterprise. This can result

in micro-managing of a business enterprise which may hinder the tribal council’s ability

to set overall strategic economic development objectives.

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Case Study—Mohegan Tribal Gaming Authority

In 1995, the Mohegan Tribe of Indians of Connecticut, a federally-recognized

tribe, adopted a tribal ordinance that established the Mohegan Tribal Gaming Authority

as an instrumentality of the tribal government. The Authority was created under an

ordinance established under tribal law.

The Authority is governed by a Management Board comprised of the same nine

members that serve on the Tribal Council. The nine-member Tribal Council serves

four-year staggered terms; any change to the Tribal Council results in a corresponding

change to the Management Board. The Authority is managed by a CEO who is hired

by the Management Board. The CEO makes the day-to-day business management

decisions for the Mohegan Sun.

The Authority has been granted the exclusive power to conduct and regulate

gaming activities on the existing reservation of the Tribe and non-exclusive authority

to conduct activities elsewhere. In 1996, the Authority opened the Mohegan Sun casino

and entertainment center on their reservation. In 2005, the Authority purchased a

racing facility and five off-track wagering facilities in Pennsylvania, and formed the

Mohegan Sun at Pocono Downs.

The Authority has wholly-owned subsidiaries: Mohegan Basketball Club LLC,

Mohegan Ventures-Northwest LLC, and Mohegan Commercial Ventures PA, LLC. As

part of its diversification efforts, Mohegan Ventures-NW owns a 54.15% in Salishan-

Mohegan LLC, formed with an unrelated third party to participate in the development

and management of a casino to be owned by the Cowlitz Indian Tribe in Washington.

Both Mohegan Ventures-NW and Salishan Mohegan are designated as unrestricted

subsidiaries of the Authority and are not required to be guarantors of the Authority’s

debt obligations.

Source: Mohegan Sun Casino and Tribal Gaming Authority 2005 Annual

Report.

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Case Study—Eagle Tech Systems

Eagle-Tech Systems (ETS) is a wholly-tribally owned computer services

company. Originally started in 1972 as an internal information technology department

by the Warm Springs tribal government, it was renamed ETS in January 2004. The ETS

office is located on the Warm Springs Indian Reservation in North Central Oregon.

The Confederated Tribes of the Warm Springs Reservation is a confederation of

three Indian tribes organized pursuant to the Indian Reorganization Act of 1934 (IRA).

The Tribe has both a Constitution and Bylaws approved pursuant to Section 16 of the

Act and a federal corporate charter issued pursuant to Section 17 of the Act. In both

capacities it is governed by an 11 member tribal council. The Tribe has approximately

4,500 members. Its lands include 640,000 acres within the reservation boundaries, and

some thousands more acreage off reservation within its original lands ceded to the U.S.

Government in 1855. It has a variety of enterprises including a lumber mill, vacation

resort, casino, composite materials manufacturing plant, museum, construction

enterprise, credit enterprise, and hydroelectric power generation enterprise. Some of

these are formed under the federal corporate charter and others, like Eagle-Tech Systems

(ETS), are formed pursuant to provisions of the constitution.

Eagle-Tech Systems is not a corporation, partnership, LLC, LLP, sole

proprietorship or other form of legal organization commonly used off the reservation.

Rather, it is a unique entity formed under the Tribal Constitution that has many of the

attributes of the most common forms of business organizations. The Tribal Constitution

empowers the Tribal Council "to charter subordinate organizations for economic

purposes and to regulate the activities of all cooperative associations of members of the

Confederated Tribes." Pursuant to this provision the Tribal Council, by resolution, has

chartered Eagle-Tech Systems as a "subordinate organization for economic purposes."

Under the charter, it is governed by a board of directors appointed by the Tribal Council.

It is managed on a day-to-day basis by a General Manager selected by the board of

directors. As a legal entity, it can be described as a "subordinate organization of the

Warm Springs Tribe chartered for economic purposes by the Tribal Council of the

Confederated Tribes of the Warm Springs Reservation pursuant to the provisions of its

Constitution adopted pursuant to the provisions of Section 16 of the Indian

Reorganization Act of 1934".

Source: Eagle Tech Systems

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B. Political Subdivision of Tribal Government

Political subdivisions are increasingly utilized by Indian tribal governments as

quasi-business entities because of the close link between economic development (a

governmental function) and tribal ownership and conduct of businesses. In some cases,

such subdivisions are being formed as Economic Development Authorities that serve two

functions: (1) as holding companies for business entities owned by the tribe; and (2) as

regulatory bodies for business operations within the tribe's jurisdictional area. In other

cases, political subdivisions are utilized to own and operate a specific enterprise or

activity that has both a governmental and a business aspect to it, such as energy

development, gaming or housing.

1. Brief Description and Examples

A political subdivision of an Indian tribal government is a unit of the government

that:

• Is, to some degree, separate from the government itself

• Is created under tribal law to fulfill a substantial governmental

function of the government

• Has been delegated a sufficient amount of one or more recognized

sovereign powers of the tribe.

Recognized sovereign powers include, for the purpose: (1) the power to tax; (2)

the power of eminent domain; and (3) a police or regulatory power.

This past year, the IRS ruled that a tribal business development authority (the

"Authority") may constitute a political subdivision of a federally recognized Indian tribe

(the "Tribe"). In Private Letter Ruling ("PLR") 200635002, the Tribe, through its Tribal

Council, established the Authority as a political subdivision of the Tribe. Authority was

given the power to impose and collect (1) business income or franchise taxes, sales and

use taxes, and other business-related taxes on any persons (limited to business entities

chartered by the Tribe), transactions, or activities within Tribe's taxing jurisdiction, and

(2) service and licensing fees on business enterprises operating within Tribe's taxing

jurisdiction.

The Tribe retained significant control over the Authority even though it was a

separate entity. For example, it provided that all five members of Authority's governing

board could be removed by the Tribal Council at any time with or without cause.

Furthermore, the Authority's capital and operating budgets were subject to Tribal Council

approval before they became effective, while financial balance sheets and quarterly

reports were required to be filed with the Tribal Council.

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The IRS found the Tribe effectively delegated all the power to tax, and one or

more of the substantial governmental functions within the meaning of section 7871(d) of

the Code. Therefore, the IRS held Authority will be treated as a political subdivision of

Tribe under section 7871 of the Code.

Other examples of political subdivisions that have been recognized as such by the

IRS and the Bureau of Indian Affairs ("BIA") include the following:

• A reservation infrastructure development authority or entity

• Numerous tribal housing authorities, including an intertribal housing

authority

• An intertribal river protection and fish commission

• An industrial development commission charged with the administration

and development of economic activities within tribal jurisdiction.

In certain instances, the IRS has ruled that a tribal entity did not

qualify as a

political subdivision. For example, the IRS ruled in the late 1990s that a state-chartered

non-profit health entity was not a political subdivision of an Indian tribe because there

was no evidence tribe had delegated any sovereign powers to the entity. Conversely, the

IRS ruled in the mid-1980s that a tribal tax commission was not a political subdivision--

not because it lacked sovereign powers, but because it was an "integral part" of the

government itself.

2. Organizational Characteristics and Requirements

Most entities that qualify as political subdivisions of a tribal government are

created under tribal law (generally, through a special purpose ordinance or legislative act)

for a governmental purpose. Although political subdivisions are ultimately controlled by

the tribe and its governing body, such subdivisions generally have their own governing

body--whether it be a board of directors, a commission or other type of decision-making

body. As noted above, the hallmark of a political subdivision is its ability to exercise

sovereign powers delegated to it by the tribe.

Section 7871 of the Internal Revenue Code provides that a subdivision of an

Indian tribal government shall be treated as a political subdivision of a state if (and only

if) the IRS determines (after consultation with the Department of the Interior) that such

subdivision has been delegated the right to exercise one or more of the substantial

government functions of the Indian tribal government. The legislative history provides

that sovereign powers of an Indian tribal government include the power to tax, the power

of eminent domain, and police powers (such as control over zoning, police protection,

and fire protection).

Police powers generally include the power to promulgate and

enforce regulations within an entity's scope of authority.

Following passage of the Indian Tribal Government Tax Status Act in 1982, the

IRS promulgated two revenue procedures relevant to tribal political subdivisions. The

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first--Revenue Procedure 84-36--lists all of the tribal entities that the IRS determined to

be political subdivisions at that time. The second--Revenue Procedure 84-37--provides

specific procedures that must be followed by any tribe seeking to qualify an authority or

subordinate entity as a political subdivision.

Comment: Tribal political subdivisions are not required by the IRS or BIA to

obtain official recognition of their status for federal income tax purposes, but if a

tribal political subdivision intends to be treated like a political subdivision of a

state for all

of the enumerated federal tax benefits in Section 7871 (e.g., authority

to issue tax-exempt bonds, entitlement to various excise tax exemptions, ability to

receive tax-deductible charitable contributions), it must request an IRS ruling

following specific IRS procedures.

Under the procedures set forth in Revenue Procedure 84-37 as updated annually

by subsequent IRS revenue procedures,

the first step in obtaining an IRS ruling on the

political subdivision status of a tribal entity is to secure a letter from the Department of

the Interior ("DOI") verifying that the Tribe has delegated a substantial government

power to the entity. The DOI letter may be obtained from the Solicitor's Office at the

Department. There are no regulations or other administrative pronouncements on the

format for the DOI letter request, other than the substantive guidance found in the IRS

revenue procedures. The request should demonstrate that the subdivision has been

validly established under tribal law and that the tribe's governing body has delegated one

or more of the following three sovereign powers to the entity: (1) the power to tax; (2)

the power of eminent domain; and (3) a police power. There is no filing fee for

requesting the DOI determination letter, but such determinations generally take at least

90 days to obtain.

Once the DOI letter has been issued, the IRS ruling request may be filed. Even

though the IRS is not required to make a substantive determination of its own, the IRS

charges the normal private letter ruling "user fee" for political subdivisions

determinations. As of February 1, 2006, the user fee was $10,000. This type of private

letter ruling will normally be processed in 90 to 120 days if all of the technical

requirements are met.

3. Sovereign Immunity and Liability

Sovereign immunity generally extends to political subdivisions of Indian tribal

governments. Like an instrumentality, a tribal political subdivision shares the same

attributes of tribal sovereignty as the tribe. Sovereign immunity is essential in order to

protect tribal assets and to safeguard tribal self-governance.

When a political subdivision is utilized for economic development purposes, there

are likely to be occasions in which the subdivision finds it useful or necessary to execute

a limited waiver of sovereign immunity. Thus, the tribal ordinance establishing the

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subdivision should provide that the subdivision may execute any limited or transaction-

specific waiver of its sovereign immunity. Limitations on the subdivision's exercise of

such a right typically include (1) requiring advance approval of the Tribe's governing

body, and (2) clarifying that a subdivision's waiver of immunity does not in any way

waive the tribe's immunity. In addition, in establishing a subdivision, it is useful to

provide that the subordinate entity's immunity from suit does not extend to legal actions

against it or its officers or directors brought by the tribe itself.

4. Tax Treatment

The IRS has ruled that the income earned by a state, a political subdivision of a

state, or an integral part of a state or political subdivision "is generally not taxable in the

absence of specific statutory authorization for taxing such income."

As noted above,

the IRS has taken this same approach to the taxation of income earned by Indian tribes,

their unincorporated businesses, and their section 17 corporations.

The IRS has also

ruled privately that a political subdivision of an Indian tribe was not required to file

income tax returns.

Comment: Although the relative dearth of binding IRS authority on the income

tax treatment of tribal political subdivisions is troubling, the current practice of

the IRS is to treat political subdivisions the same as the tribe—so long as they

qualify as such by having been delegated substantial governmental powers.

Section 7871 treats Indian tribal governments and their political subdivisions like

state governments for specific tax purposes. The Internal Revenue Code provides a

relatively large number of tax benefits for state and local governments. Not all of these

benefits are extended to tribal governments. Under Section 7871, the following benefits

are available to tribal governments and their political subdivisions:

• Tax deductibility of charitable contributions for income, estate and gift tax

purposes

• Certain governmental exemptions from specific excise taxes levied on

fuels, manufactured goods, communications, and certain highway

vehicles (all contingent on the purchase or sales transaction involving the

exercise of an "essential governmental function")

• Tax deductibility of tribal taxes

• Authority to issue tax-exempt bonds for facilities that serve an "essential

governmental function"

• Certain health and retirement annuity plan purposes (but not the treatment

of tribal pension or retirement plans generally as "governmental" plans)

• Excise taxes rules related to excess lobbying expenditures and private

foundations.

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In addition, under section 7871(a)(5), Indian tribal governments or their

subdivisions that form colleges and universities are--like state colleges and universities--

subject to the unrelated business income tax or "UBIT" (even through state political

subdivisions would not generally be subject to the UBIT tax).

As noted above, in order to qualify for the tax benefits enumerated in Section

7871, a political subdivision of a tribe must be recognized by the Internal Revenue

Service as an entity that has been delegated one or more sovereign powers of an Indian

tribal government.

5. Financing Considerations

One of the major advantages of establishing a political subdivision for economic

development or business activities is that such an entity can be both the borrower and the

issuer in a tax-exempt financing. When the subdivision, and not the tribal government

itself, is the issuer/borrower, overly invasive disclosure of tribal financial records may be

avoided.

Where the facilities or operations to be financed do not meet the essential

governmental function test under section 7871 for tax-exempt bond financing, the

political subdivision may seek or arrange other types of financing, such as:

• Government-guaranteed loans

• Taxable bond issuances

• Private placements

• Commercial bank financing.

In addition, Indian tribes or their political subdivisions may seek specialized types

of tax-credit financing (such as the "clean renewable energy bonds" recently authorized

in the Energy Policy Act of 2005) and extended by the Tax Relief and Health Care Act of

2006.

These and other financing options are discussed in detail in Section II.A.5.

6. Advantages and Disadvantages

Advantages of conducting economic development and business activities through

a political subdivision include the following:

• Relative certainty of federal tax treatment

• Likely retention of state tax immunity

• Retention of sovereign immunity (except where waived or limited for

specific purposes)

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• Ability to form the equivalent of a corporate board with a governmental

focus

• Use of the subdivision as both a regulatory body and as a holding

company for subordinate and separately organized business entities.

Disadvantages of conducting economic and business activities through a political

subdivision include the following:

• Time and expense associated with the formation of the entity, including

the requisite federal agency approvals that must be obtained (first by BIA,

and then IRS)

• Political subdivisions do not have all of the flexibility associated with

ordinary business entities, such as corporations and LLCs

• Certain business partners may not be comfortable dealing with any

type of

governmental entity.

In sum, once an economic development or other authority is established as a

political subdivision, it makes an excellent platform for both conducting and overseeing

business operations. However, its formation is not likely to be quick and easy.

Implementing this option requires careful advance planning and a minimum of six

months to obtain the requisite agency approvals.

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III.

TRIBAL CORPORATIONS

A. Tribally-Chartered Corporations

Tribally chartered corporations have been utilized with increasing frequency by

Indian tribal governments to conduct various types of economic development and

business activities. One compelling reason for their use is that they are relatively easy to

establish compared to federally chartered corporations (e.g., corporations organized under

section 17 of the Indian Reorganization Act or section 3 of the Oklahoma Indian Welfare

Act). In addition, tribally chartered corporations, unlike state chartered entities, are

considered to be largely exempt from state regulation--depending, of course, on the locus

of their operations and whether they are wholly owned by the tribe. They are also more

likely to be immune from taxation than state-chartered corporations are. However, the

federal tax treatment of such corporations is currently the subject of a pending IRS

guidance project, and thus remains somewhat uncertain. In addition, the immunity from

suit of such corporations depends on the facts and circumstances of their creation,

ownership and operation, and can be difficult to predict.

1. Brief Description and Examples

A tribally chartered corporation is a corporation that is organized under a tribal

statute or code or pursuant to a resolution of an authorized tribal legislative body. A

corporation is a business entity that has the following characteristics: (1) limited liability

(i.e., the liabilities of the corporation do not automatically become liabilities of the

corporation's owners); (2) transferability of ownership interests; (3) centralized

management, generally in the form of a board of directors; and (4) continuity of life (i.e.,

it exists until formally dissolved). By definition, a corporation has separate legal

existence as an entity distinct from its owners or shareholders.

The tribe under whose laws a corporation is organized will typically issue a

charter or certificate of organization. Such a corporation may be organized as a for-profit

or nonprofit corporation. Ownership may be evidenced by shares (in the case of a stock

corporation) or simply by governance control (non-stock corporation). Although for

purposes of this chapter, we are focusing on tribally chartered corporations that are

wholly-owned by an Indian tribe, such corporations may be owned in whole or in part by

third parties so long the tribe's laws authorize the formation of such corporations.

The legal characteristics, capabilities and limitations of tribally-chartered

corporations are all determined under the law of the chartering tribe. In some cases, such

law may spell out the corporation's powers and limitations in great detail–especially

where the tribe has taken the time to draft and promulgate a corporation code. In other

instances, the tribal law merely establishes an entity for a specific purpose, and leaves the

details to the organization's articles and bylaws.

III-2

Examples of tribally chartered corporations include the following (drawn from

IRS rulings, reported cases and other sources):

• A tribally chartered college

• A tribal law corporation (or an instrumentality with corporate

characteristics) used to conduct the gaming operations of the tribe

• A nonprofit corporation chartered by a tribe to provide educational and

health programs for its members

• A tribally chartered corporation used as a holding company for a variety of

economic development and business entities.

Numerous tribes have established and utilized tribal corporations for a wide

variety of purposes.

2. Organizational Characteristics and Requirements

The organizational characteristics and requirements for a tribally chartered

corporation will vary according to the applicable law of the tribe. Several tribes have

adopted very detailed corporation codes (in some cases, with specific provisions for for-

profit and nonprofit corporations), while others provide for the organization of tribal

corporations on a more ad hoc basis. However, there are common characteristics and

organizational procedures for forming and managing corporations that are found in many

tribal statutes.

Formation--To form a tribally-chartered corporation, the incorporators must

generally select a name and draft articles of incorporation. Most corporate codes require

the following items to be included in articles of incorporation of any type of corporation:

1) the name of the corporation;

2) the term or period of existence of the corporation (which may be

perpetual);

3) the purpose(s) for which the corporation is organized (with an eye toward

consistency with whatever the tribe's corporation code define as lawful

corporate purposes);

4) laws regulating the governance of the corporation, including the election

of directors and rights of shareholders;

5) the address of the corporation's initials registered office and the name of

its initial registered agent at such address;

6) the number of persons constituting the initial board of directors and the

names and addresses of the persons who are to serve as directors;

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7) the name and address of each incorporator;

8) provisions regarding the issuance and classes of stock by the corporation;

9) provisions relating to the payment of dividends; and

10) liquidation and dissolution procedures.

If a tribal corporation is owned in whole or in part by the tribe itself, the tribe's

legislative body must formally approve its articles. If not, the articles are simply filed

with the tribal official who is the equivalent to a Secretary of State. Such an official will

review and approve the articles of the corporation, and then issue a "certificate of

incorporation" or charter to the incorporators. Unless otherwise specified, corporate

existence begins when the certificate of incorporation is issued by the government.

In the case of a wholly-owned tribally-chartered corporation, the corporation's

articles will generally spell out the role of the tribe (as represented by the tribe's

legislative body) in:

• Electing and removing the initial and successor directors

• Approving the initial articles of incorporation, and any amendments

thereto

• Approving the entity's capital and operating budgets

• Negotiating any dissolution, liquidation or merger of the entity.

Other issues to be resolved in the corporation's organizational documents include

the payment of earnings or corporate dividends to the tribe, and issues relating to

sovereign immunity.

Management--Tribal law corporations are managed and overseen by a corporate

Board of Directors who are elected by the corporation's shareholders. If the tribe is the

corporation's sole shareholder (whether or not the corporation formally issues shares), the

tribe's legislative body generally exercises the power to elect directors (and may remove

them under certain circumstances). Directors approve budgets, approve the hiring of and

set compensation for senior executive officers, establish the overall business strategy of

the corporation, and hold its officers accountable for executing such strategy. A CEO or

executive director is usually in charge of day-to-day operations.

3. Relationship to Tribal Government

When a tribe forms a wholly-owned corporation, it generally expects to retain

overall control of the corporation while, at the same time, segregate the corporation's

business affairs and assets from the operations of its government. Thus, while the tribe

may be the sole shareholder of the corporation, the corporation will likely be managed by

its own board of directors. The board of a tribal corporation will generally have some

degree of autonomy from the tribe's elected leadership.

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The extent to which a tribal law corporation has autonomy from the tribal

government may determine in large measure whether it can claim to share the same

immunity from suit as the government itself.

4. Sovereign Immunity and Liability Issues

One of the key characteristics of any corporation is limited liability. In the

corporate context, limited liability means that the shareholders of a corporation are

generally not personally liable for the debts of the corporation in which they own stock.

When a corporation is wholly owned by a tribe, the tribal corporation's organizing

documents or other law should make clear that the tribe is under no obligation to the

corporation or its creditors--other than to the extent of its contributed capital or other

consideration for the shares that it owns. However, if a corporation that is wholly owned

is not treated as a separate legal entity by its owner or if corporate formalities are ignored,

the creditors of the corporation could seek to "pierce the corporate veil" in order to access

tribal assets. See Appendix B, Steps to Protect Corporate Veil and Limit Liability.

Anticipating the possibility of corporate veil piercing, many tribal corporation statutes,

ordinances or organizing documents also make clear that by incorporating or operating a

corporation, the tribe should not be deemed to have waived its sovereign immunity from

suit or any other privileges of sovereignty.

In certain situations, corporations organized under tribal law may share the

organizing tribe's sovereign immunity from suit. Courts have developed various methods

of analysis for determining whether a particular tribally chartered corporation is immune.

These inquiries tend to be highly fact specific which makes advance planning a difficult

task. Still, several principles have emerged.

• Whether a judgment against the tribal corporation will reach the tribe's

assets

• Whether the tribal corporation has the power to bind the tribe's assets or

obligate tribal funds

• Whether the tribe and the tribal corporation are closely linked in

governing structure and other characteristics, including

• tribal control over appointment and removal of board members

• extent of board's power over the corporation

• Whether federal polices designed to promote tribal self-determination are

furthered by extending immunity to the corporation

• Whether the corporation is organized for governmental or commercial

purposes

• Whether the corporation holds title to property in its own name

• Whether the entity is legally separate and distinct from the tribe (e.g., as is

normally the case with a separately incorporated entity).

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As a general rule, the more inter-connected the tribe and the corporation, the more

likely a court will be to find that the corporation shares the tribe's immunity from suit. If

the entity operates in a manner that is largely independent of the government, it is not

likely to be able to cloak itself in governmental immunity. However, if the entity is a

mere agent or instrumentality of the tribal government created to carry out a

governmental purpose, it should be able to claim governmental immunity from suit.

Such immunity may be waived, however, without waiving the tribe's immunity. For

further detail. See Appendix A, Sovereign Immunity Factors in Recent Judicial

Decisions.

5. Tax Treatment

While the IRS has consistently ruled that federally recognized tribes and

federally-chartered tribal corporations (e.g., corporations organized by tribes under

section 17 of the IRA or section 3 of the OIWA) are not subject to federal income tax, it

has not charted a clear course with regard to the tax treatment of tribally-chartered

corporations. In fact, for the past several years, the Treasury Department and the IRS

have listed the federal tax treatment of corporations organized under tribal law as an

official "guidance priority," but no guidance has been forthcoming.

The uncertainty over the tax treatment of tribal law corporations dates back to the

issuance of Revenue Ruling 94-16 in 1994 and the subsequent issuance of regulations on

the classification of business entities two years later in 1996. In Revenue Ruling 94-16,

the IRS ruled that federally chartered tribal corporations should be treated the same as the

tribe for federal income tax purposes, but that state-chartered corporations should be

treated like ordinary corporations--taxable on their income and required to file federal

corporate income tax returns. Revenue Ruling 94-16 did not address the tax treatment of

corporations chartered under tribal law.

Following the issuance of Revenue Ruling 94-16, the IRS issued new regulations

on the classification of business entities for federal tax purposes. These so-called "check-

the box" regulations confirmed the tax-free status of Section 17 and Section 3

corporations. They did so by stating that such federally chartered entities, although

generally meeting the definition of a "corporation," will not be recognized as "separate

entities."

Thus, such corporations share the same tax status as the tribe. At the same

time, in the 1996 preamble to these regulations, the IRS acknowledged the tax treatment

of tribal law

corporations was "unclear" and noted that the Treasury Department and IRS

were studying the issue.

In 2001, Treasury/IRS formally agreed to resolve the uncertainty regarding tribal

law corporations in guidance to be issued by the IRS. Since then, the anticipated

"guidance on the income tax status of wholly-owned corporations chartered under tribal

law" has been an item listed on the annual Treasury-IRS Priority Guidance Plan. See

2006-2007 Priority Guidance Plan (August 15, 2006) at http://www.irs.gov/pub/irs-

utl/2006-2007gp.pdf. The uncertain tax treatment of tribal law corporations has also been

referenced in a recent addition to the Internal Revenue Manual, which reads as follows:

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In addition, many tribes form corporations utilizing

their own corporate code or resolution process. The tax

status of corporations chartered under tribal law and owned

100% by the tribe is not clear. A revenue ruling is

anticipated to address this issue.

The resolution of this issue is still highly uncertain.

In the view of some commentators, the central issue is whether wholly owned

tribal law corporations are exempt on a per

se basis or only to the extent that such entities

have been structured as "integral parts" of the tribe.

Prior to 2005, the IRS had issued

private letter rulings treating certain tribally chartered entities the same as the tribe for tax

purposes after determining that such entities functioned as an "integral part" of an Indian

tribe.

Over the past several years, case law and IRS rulings have cited the following

factors as relevant to the "integral part" determinations:

• Whether the government has the authority to terminate the existence of the

entity

• Whether the government or a governmental body elects members to the

entity's board

• Whether the government has the power to recall or remove the members

of the entity's board

• Whether the government has made a significant financial commitment (or

transferred significant property) to the entity

• Whether the government has a substantial right to the profits earned by the

entity

• Whether the government is liable for acts of the entity

• Whether the entity is essentially an operating unit or agency of the

government.

In recent guidance issued in the form of private letter rulings, the IRS has

highlighted two of these factors as being essential to establishing "integral part" status:

1) governance control; and

2) financial commitment.

Thus, if a tribal law corporation is utilized for economic development purposes,

the case for favorable tax treatment is strongest if the entity is structured to meet the

"integral part" test. While the determination as to whether an enterprise qualifies as an

integral part of the tribal government depends on all the facts and circumstances, it is

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critically important to establish (1) the tribe's degree of governance control over the

enterprise, and (2) the tribe's financial commitment to the enterprise.

It is difficult to predict whether the IRS revenue ruling that is expected to be

issued in the next few months will continue to reflect this approach or chart a new course

altogether.

The status of tribally chartered corporations under state tax law varies from state

to state. Their status also may vary according to the type of tax involved.

In California, the only

type of corporation that qualifies to be treated the same as

the tribe for sales and use tax purposes is one that is "organized under tribal authority"

and wholly owned by Indians or by the tribe itself; other types of corporations, even

though they may be wholly owned by the tribe, apparently do not qualify for the special

sales and use tax exemptions afforded to Indians, tribes and tribal organizations.

In Oklahoma, the Oklahoma Tax Commission has taken the position that the sales

tax exemption of Indian tribes does not extend to any "corporations, partnerships, or other

business or legal entities," but "only applies to transactions with a federally recognized

Indian tribe itself."

6. Financing Considerations

Since it is not clear whether a tribally chartered corporation will be treated as an

“integral part" of the tribe for federal income tax purposes, it is also unclear whether such

an entity can issue tax exempt bonds. Under the terms of the applicable statutory

provisions, only tribal governments and their political subdivisions can issue tax-exempt

debt

. Further, depending on the activities of a tribally-chartered corporation, its use of

tax-exempt bonds might be prohibited if they are issued to fund facilities or operations

not deemed to serve an essential governmental function.

Where the facilities or operations to be financed do not meet the essential

governmental function test under section 7871 for tax-exempt bond financing, a tribal

law corporation may seek or arrange other types of financing, such as:

• Government-guaranteed loans

• Taxable bond issuances

• Private placements

• Commercial bank financing.

Recently enacted tax-credit bonds, such as those provided for "clean renewable

energy facilities" ("CREBs") under the Energy Policy Act of 2005, are limited to Indian

tribal governments and their political subdivisions.

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The Small Business Administration ("SBA"), by contrast, generally favors the use

of corporations and other business entities, rather than the conduct of business by tribal

governments and their political subdivisions. To qualify for contracting preferences

under Section 8(a), the tribe must organize a separate and distinct legal entity, that is "for-

profit" and is capable of being sued. It may be organized under either state or tribal law.

Thus, under SBA 8(a) rules, a tribal law corporation would be a viable choice if SBA

preferences are being sought. If an SBA loan is sought, government-owned corporations

generally do not qualify, but there is an exception for tribal government-owned entities.

Under the Department of the Interior's Loan Guaranty, Insurance, and Interest

Subsidy Program (administered by the Office of Indian Energy and Economic

Development ("IEED")), any business entity that is at least 51 percent owned by a

federally recognized tribe may qualify for a government-guaranteed loan.

The IEED program and other financing options are discussed in detail in Chapter

II.A.5.

7. Advantages and Disadvantages

Advantages of conducting economic development and business activities through

a tribally chartered corporation include the following:

• Ease of formation

• Confirmation of tribal sovereignty and freedom from state corporate

regulation

• Flexibility (ability to design own governance structure and rules)

• Possible tax immunity

• Possible immunity from suit.

Disadvantages of conducting such activities through a tribally-chartered

corporation include the following:

• Uncertainty of federal tax treatment

• Certain business partners may not be comfortable lending to or investing

in an entity that is not incorporated under the law of one of the 50 states

• Uncertainty whether the entity would qualify as an issuer in a tax-exempt

financing

• Uncertainty whether the tribal corporation will be recognized as sharing

the tribe's sovereign immunity.

In sum, a tribally chartered corporation is a flexible entity form that works well in

many situations--e.g., where it is intended to operate principally on-reservation as an arm

of the tribal government. It would not be the entity of choice for extensive off-

reservation activities or as a joint venture entity involving non-tribal parties. The

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continuing uncertainty surrounding its treatment for federal income tax purposes has

diminished its attractiveness for many tribes.

Case Study—Ho-Chunk, Inc.

Ho-Chunk, Inc. is chartered under the laws of the Winnebago Tribe and is wholly-

owned by the Tribe. The Winnebago Tribe is organized under Section 16 of the Indian

Reorganization Act (IRA). Ho-Chunk, Inc. was formed in 1994 to diversify the Tribe’s

business interests while maintaining a separation between business activities and the tribal

government. Pursuant to its Section 16 IRA constitution, the Winnebago Tribe adopted a

Winnebago Business Code that permits the formation of wholly-owned tribal corporations.

Incorporating under tribal law gives the tribe more control over determining the powers and

authority of the corporation and which privileges and immunities of the tribe to confer on a

tribal corporate entity. The Winnebago Business Code gives the Tribe the option of

conferring all the privileges and immunities of the Tribe on tribally-owned corporations.

The Tribe formed Ho-Chunk, Inc. as a general purpose holding company that

promotes economic self-sufficiency and creates jobs through its enterprises, joint ventures

and investments. Operating subsidiaries can be formed under the tribal business code. The

company has a five-member Board of Directors who is responsible for providing an annual

report, audited financial statements and an annual development plan to the Tribal Council.

Two of the board members are required to be tribal council members. The two tribal council

members ensure that tribal governmental interests are maintained and they keep an informal

channel of communication open with the Tribal Council. The Tribal Council appoints board

members, formulates the long-term development plan for the corporation, and approves the

annual operating plans. The Board of Directors selects the Chief Executive Officer who

oversees day-to-day management and strategic decisions for the company. This structure

preserves the autonomy of the corporation and permits the corporation and its Board to make

business decisions and minimizes political interference by the Tribal Council. This permits

the Tribal Council to focus on governance issues and enables business experts to focus on

maximizing the profitability of the corporation. Ho-Chunk, Inc. operates 15 subsidiaries in

six major business areas, both on and off the reservation.

Source: Ho-Chunk, Inc. and Harvard Project on American Indian Economic

Development: Innovations Award.

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B. Section 17 Corporation—Federal Law Corporation

1. Description and Examples

In passing the Indian Reorganization Act of 1934 (IRA), Congress intended to

provide tribes with the ability to compete in the private business world. Section 17 of

the IRA gives tribes the power to incorporate and enables them to waive sovereign

immunity to facilitate business transactions, thereby fostering tribal economic

development and independence.

Congress realized that the perception, if not the

reality, of tribal sovereign immunity could impede a tribe’s economic growth and

participation in the business world. Therefore, to address this issue, Congress authorized

tribes to organize two separate entities: (1) a political governing body to exercise powers

of self-government pursuant to Section 16 of the IRA, and (2) a federally-chartered tribal

corporation to engage in business transactions pursuant to Section 17.

Pursuant to the IRA, a Section 16 governmental unit and a Section 17 tribal

corporation are distinct legal entities. By forming two legal entities (one with sovereign

immunity, the other with the possibility of waiver of sovereign immunity), tribes could

maximize the use of their property and assets. Under the two-part scheme, the property

of the corporation may be placed at risk, but only to the extent necessary to satisfy the

needs of lenders and developers; however, tribal assets held by the tribal political body

organized pursuant to Section 16 of the IRA would remain fully protected by sovereign

immunity.

2. Organizational Characteristics

Formation--Establishment of a Section 17 corporation is governed by a Section

17 of the IRA and by its implementing regulations.

However, neither the statute nor its

regulations contain detailed procedures for forming a Section 17 corporation. Therefore,

there is significant flexibility in how the procedural requirements are met and there is

wide variation in the contents of tribal Section 17 corporate charters. Additionally, staff

at the BIA Central, regional and local offices may have differing interpretations of the

formation requirements particularly with respect to whether a tribe is required to submit a

petition for a charter. Recently, the BIA Central Office has delegated more approval

power to the Regional offices.

Traditionally, Indian tribes were required to take the following five steps in order

to secure final approval of a federally-chartered Section 17 corporation.

Step 1--Tribal Resolution or Petition

. The regulations provide that a tribe may

initiate the Section 17 corporation formation process by submitting a petition to the

Secretary of the Department of the Interior to issue a corporate charter. Prior to the 1990

amendments to Section 17, some agency personnel and attorneys interpreted the

petitioning requirement to apply only to tribes with constitutions. Pursuant to recent BIA

practice, the formation process may be initiated by tribes with or without constitutions--

III-11

simply by passing a tribal resolution for the issuance of a charter--without submitting a

formal petition.

Step 2--Draft Charter. The next step is to draft the corporate charter, which is a

document similar in form and scope to Articles of Incorporation, but generally with more

detail. The charter describes the organizational framework for the entity that the tribe is

seeking BIA approval. The corporation must be structured as a legal entity that is wholly

owned by the tribe, but separate and distinct from the tribal government.

Step 3--Approval by the Tribe. Once drafted, the charter must be submitted to the

tribe for approval. According to the BIA, the procedure for obtaining tribal approval is

set by the law of the tribe, and not by federal law. If the tribe's constitution (or other

organic documents) allows the Tribal Council to form corporations, a Council resolution

is generally sufficient; if not, a vote of the general membership must be scheduled.

Step 4--Filing of Petition/Resolution. After the tribe signs the resolution or

petition and approves the charter, both documents should be submitted to the local BIA

office having administrative jurisdiction over the Tribe. Once received by the local BIA

office, the documents will be reviewed to ensure that the submission is complete. If

complete, the charter documents will be forwarded to the regional BIA office for further

review and approval. (Under a recent delegation of authority, only if the regional BIA

office proposes to disapprove the documents will they be forwarded to the Central or

national BIA office for further review.) Upon a determination that the resolutions and

proposed charter are consistent with tribal and federal law, and properly approved by the

tribe, the Regional BIA office will issue an approved charter of incorporation.

Step 5--Ratification of Corporate Charter. Once the charter is approved, it will be

returned to the Tribe for ratification. The Section 17 statutory provisions require that the

corporate charter be ratified by the governing body of the tribe before it becomes

effective. Once the charter is ratified by the Tribe, the statutory requirements are met and

the charter becomes operable.

When Section 17 was first enacted, tribes were required to first organize a

governing body under Section 16 in order to be eligible to organize a corporate entity

under Section 17. The IRA was amended in 1990, and now tribes can form a Section 17

corporation regardless of whether they have formed their governing body pursuant to

Section 16 of the IRA or pursuant to tribal law. Originally, the IRA did not apply to

Alaska Natives or to Oklahoma tribes; it has subsequently been amended to extend to

Alaska Natives and a similar provision was enacted for Oklahoma tribes.

The

Oklahoma Indian Welfare Act (OIWA) authorizes the formation of tribal corporations in

a manner similar to the IRA and extends to tribes organized under the OIWA any other

rights or privileges secured to an organized Indian tribe under the IRA.

The 1990

amendments also extended the ability to form Section 17 corporations to tribes that voted

to reject the IRA.

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Neither the Section 17 statutory provisions nor the regulations provide guidance

on how to amend a Section 17 corporate charter once it has been issued. For this reason,

tribes frequently draft the corporate purposes section of the charter as broadly as possible

to accommodate prospective changes in the Section 17 corporation's business activities

and operation. In drafting the corporate charter, some tribes have vested tribal governing

body (e.g., the Tribal Council) with authority to seek BIA approval of amendments as

well as the authority to ratify such amendments. Once issued, a Section 17 corporate

charter can not be revoked or surrendered, except by an Act of Congress.

Management--Section 17 corporations are managed and controlled by a

Corporate Board of Directors appointed by the tribal government. The Board of

Directors manages and operates the Corporation in accordance with its federal corporate

charter. A CEO or a manager is usually in charge of its day-to-day operations.

General Characteristics--Section 17 corporations are tribal in character, they

must be wholly-owned by the tribe and are essentially alter egos of the tribal government.

They share the same privileges and immunities as the tribal government. The corporate

charters may convey the following powers to the incorporated entity:

• Power to buy and sell real and personal property; including the power to

purchase restricted Indian lands

• To enter into leases or mortgages of tribal land for a term of 25 years

without Section 81 approval by the Secretary of the Interior

• To enter into contracts or agreements without Section 81 approval by the

Secretary of the Interior

• Further powers "as may be necessary to the conduct of corporate

business."

A federal corporate charter often permits the corporation to establish and manage

subsidiary corporations. Tribes have operated construction, manufacturing, gaming, and

government contracting companies through Section 17 corporations. Section 17

incorporation provides a separation of the business entity from the tribal government

body. A Section 17 corporation holds assets or property separately from the tribal

governing body. Land and assets used by corporation are specifically conveyed or set

aside for the corporation. A Section 17 corporation will typically have separate bank

accounts, separate directors, and separate assets. Although the enterprise is wholly-

owned by the tribe, the tribal council is typically not involved in day-to-day management

decisions either directly or indirectly.

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Section 17 Corporation

• The Board of Directors of the Corporation has control over the direction

and business activities of the Corporation

• The Tribal Council is not involved in the day-to-day activities of the

Corporation, but rather sets strategic economic policies for the tribe.

3. Sovereign Immunity and Liability Issues

Sovereign Immunity--The Indian Reorganization Act (IRA) was intended to

allow tribes to enter and compete in the business world. Understanding that sovereign

immunity could be an impediment to enabling tribal governments to successfully

compete in the business world by hampering the ability of tribes to obtain credit or attract

investors, Congress authorized tribes to form a separate legal entity to engage in business

activities: Under the IRA, a tribe may form a constitutional governing body pursuant to

Section 16 and a tribal corporation to engage in business transactions pursuant to Section

17. Typically, a Section 17 corporate charter will vest the corporation with the same

privileges and immunities of the tribe, including the tribe’s immunity from suit. The

charter will describe the authorized purpose of the corporation and whether the

corporation is permitted to borrow money, encumber corporate assets, and whether it can

waive sovereign immunity for certain transactions. The corporate charter usually

describes the corporation’s power to act, who can act on the corporation’s behalf, the

Section 17

Corporation

Wholly-owned by

Tribe

Section 17 Subsidiary Tribal Corporation

Subsidiary

Tribal LLC

Subsidiary

Section 17

Corporation Board of

Directors

III-14

ability of the corporation to waive sovereign immunity, to what extent corporate assets

can be encumbered and what corporate actions can be undertaken without the approval of

the tribe.

Section 17 corporate charters often contain a "sue and be sued clause." This

clause usually permits the corporation to be sued in its corporate name. Some courts

have held that this language constitutes a waiver of sovereign immunity of the

corporation.

However, other courts have indicated that the inclusion of a "sue and be

sued clause" does not constitute a waiver unless it is both unrestricted in scope and

explicit in its intent to waive immunity.

The execution of a judgment against the

corporation is limited to the business activities of the corporation and to "assets

specifically pledged or assigned" to the corporation.

The BIA has drafted a model corporate Section 17 charter which provides that the

"sue and be sued clause" of the charter is subject to limitations contained in the charter

which restrict the scope of the waiver that can be granted pursuant to the "sue and be sued

clause." Waivers of sovereign immunity pursuant to the "sue and be sue clause" in the

corporate charter should be limited to a waiver of only the corporation’s sovereign

immunity and transactions of the corporation. These limitations include restricting the

waiver to specific transactions or claims or classes of claims for which the waiver is

granted, and that the waiver extends only to the property and income of the corporation

and not to the tribe itself.

Even where there is a limited waiver, the IRA protects the assets of the tribal

government from execution to satisfy a money judgment. Control over tribal assets is

retained by the tribal governing body except where the tribal government specifically

transfers assets or property to the Section 17 corporation.

A Section 17 Corporation has

authority to convey or lease tribal lands that are assigned to the corporation for a period

of 25 years. This permits the tribal government to pledge or assign specific assets to the

corporation. This limitation allows a Section 17 corporation to enter into business

transactions and to pledge a security interest in corporate assets. The property of the

corporation is at risk in the amount necessary to satisfy creditors and developers.

However, property owned by the tribal governmental body is still protected by sovereign

immunity and is safe from the execution of a judgment against the corporation.

There are several court decisions concerning waiver of tribal sovereign immunity

of a Section 17 corporation. Many of these decisions arise from the confusion created

when a tribe has not clearly separated the business activities of its Section 16 governing

body from the business activities of its Section 17 corporation. In these instances, the

court is usually trying to determine in which capacity a tribe is acting. The court will

look at who controls the decisions of the business, if the corporation has a separate bank

account and its own liabilities, and if assets or property have been assigned to the

corporation. If a court determines that tribe is acting in its governmental capacity, then

the activities will likely be found to be beyond the scope of the Section 17 "sue and sued"

waiver.

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4. Tax Treatment

The Internal Revenue Service has concluded that federally recognized tribes are

not subject to federal income taxes.

As noted earlier, the IRS has ruled that the income

earned by a state, a political subdivision of a state, or an integral part of a state or political

subdivision "is generally not taxable in the absence of specific statutory authorization for

taxing such income."

The IRS has taken this same approach to the taxation of income

earned by Indian tribes, their unincorporated businesses and their federally chartered

corporations because they share the same tax status as the tribe and as such are not

taxable entities.

In Revenue Ruling 81-295 and Revenue Ruling 94-16, the IRS ruled that any

income earned by a federal corporation organized under Section 17 of the Indian

Reorganization Act shares the same tax status as the tribe and is therefore not subject to

federal income tax regardless of the location of the activities that generated the income.

Similarly, in Revenue Ruling 94-65, the IRS has ruled that a tribal corporation organized

under Section 3 of the Oklahoma Welfare Act is not subject to federal income tax on

income earned in the conduct of commercial business on or off the tribe’s reservation.

5. Financing Considerations

One of the major advantages of establishing a Section 17 corporation for business

activities is that such an entity can arrange for financing without subjecting the tribal

governmental assets to the risks and liability associated with borrowing money and can

limit financial disclosure of records to those of the corporation and not the tribe.

Additionally, in a 1998 Private Letter Ruling, the IRS has held that a Section 17

corporation can be both the borrower and the issuer in a tax-exempt financing if other

requirements for tax exempt financing are met.

When the Section 17 corporation, and

not the tribal government, is the issuer/borrower, overly invasive disclosure of tribal

financial records may be avoided.

Where the facilities or operations to be financed do not meet the essential

governmental function test under section 7871 for tax-exempt bond financing, the Section

17 corporation may seek or arrange other types of financing--such as:

• Government-guaranteed loans

• Tax-credit financing

• Taxable bond issuances

• Private placements

• Commercial bank financing.

These options are discussed in detail in Section II.A.5.

6. Advantages and Disadvantages

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Advantages and Disadvantages--A Section 17 corporation can provide an

attractive business structure for tribes because it establishes a legal entity to conduct and

manage business activities separate from the tribe itself. It also segregates tribal

governmental assets and liabilities from those of tribal businesses, minimizing the

financial risks of the tribe. The assets and property of the business are conveyed to a

separate legal entity and can be separately pledged as collateral. Thereby by limiting the

liability of Section 17 corporation. It permits a tribe to tailor a waiver of sovereign

immunity to fit the specific business activities that will be conducted by the corporation.

It also safeguards the decision-making authority of the tribal government governments

and assigns the responsibility for operating and managing business activities with the

Board of Directors of the corporation and a business manager.

The advantages of operating a business as a Section 17 corporation include:

• Entity will have the same privileges and immunity as the tribal

government including tribal sovereign immunity

• Segregates the assets and liability of the corporation from tribal assets

• Not subject to federal income tax

• Has 25 year leasing authority for tribal reservation lands and Section 81

approval by the Secretary of the Interior is not required

• Contracts and agreements of the corporation are not subject to Section 81

approval by the Secretary of the Interior.

Disadvantages include:

• The time to obtain a corporate charter issued by the Department of the

Interior can be lengthy because of the various steps involved

• Once issued, the charter can only be revoked by an act of Congress

• A Section 17 corporation must be wholly-owned by the tribe--precluding

equity ownership in the enterprise by outside investors.

III-17

# 4466727_v1

Case Study—S&K Technologies, Inc.

In 2006, the Confederated Salish and Kootenai Tribes formed S&K Technologies

as a Section 17 Corporation. The tribal council passed a resolution approving the draft

Charter and then submitted the draft Charter and petition to the Secretary of Interior to

issue a charter. The corporate charter was then ratified by the tribe.

The Section 17 charter confers all the privileges and immunities of the tribe to

S&K Technologies and permits the tribe to confer all privileges and immunity to tribally-

owned subsidiaries chartered under the holding company. The S&K Technologies is a

general purpose company and its corporate charter permits the corporation to charter

subsidiaries under either the tribe's Tribal Corporation Code or under its newly adopted

tribal Limited Liability Company Code. S&K Technologies is headquartered on the

Flathead Indian Reservation in Montana. S&K Technologies plans to charter subsidiaries

under the tribal LLC Code to operate its aerospace and information technology

companies that are participating in the Small Business Administration 8(a) business

development program. These tribal 8(a) LLCs will operate in Alaska, Georgia, Ohio, and

the Pacific Northwest. The corporate charter is broadly drafted so that the corporation

could also create other non-8(a) business entities.

S&K Technologies will be governed by a seven-member Board of Directors

appointed by the Tribal Council to four year staggered terms and who are responsible for

providing an annual report to the Tribal Council. The corporate charter does not restrict

board appointments to tribal members or require that tribal council members be appointed

to the board. The S&K Technologies Board of Directors will be responsible for hiring a

CEO for each of the subsidiaries created under the holding company who will be

responsible for day-to-day operations of the company. There will not be separate boards

of directors for each of the subsidiaries; rather each CEO will report to the Board o

Directors of S&K Technologies Corporation. This safeguards the decision-making

authority of the Tribal Council and assigns the responsibility for operating and managing

the business activities of the Section 17 Corporation to the business managers they hire.

It permits business experts to focus on maximizing the profitability of S&K

Technologies.

Source: S&K Technolo

ies

Inc.

IV-1

IV.

STATE LAW ENTITIES

Business entities organized under state law include corporations, partnerships and

limited liability companies. This chapter focuses on state law corporations and state law

limited liability companies (LLCs) that have a single member, reserving discussion of

partnerships and multiple-member LLCs to the Handbook chapter on Joint Ventures.

This chapter also discusses a special election available to entities that qualify as

corporations under federal tax law called the "S election." It should be noted at the outset

that a governmental entity, such as an Indian tribe, is not a qualified "S corporation"

shareholder.

A. State Law Corporations

State-law corporations are relatively easy to organize and offer certain

advantages. Virtually every state has a statute that permits persons to organize a

corporation for business or nonprofit purposes. Distinguishing characteristics of the

corporate form of doing business include limited liability for the owners of the

corporation, centralized management, transferability of ownership interests (generally in

the form of shares of stock), and continuity of life. Since 1994, the IRS has taken the

position that a State law corporation, even if wholly owned by a federally recognized

tribe, does not share the same federal tax status as the tribe. Because of this unfavorable

treatment, many tribes avoid forming state-law corporations--even though they are easily

organized and widely recognized by potential business partners and lenders. A state law

corporation is also more likely to be viewed as separate from the tribe, and thus not as an

entity that shares in the tribe's sovereign immunity from suit.

1. Brief Description

a) Powers of business corporation defined by charter and state

law

The powers of a business corporation are generally defined by its charter (or

articles of incorporation) as limited by state law. Typical powers for state law corporations

include the powers to do the following:

• Sue and be sued, complain and defend in the corporation's own name

• Purchase, receive, lease, own, hold, improve and otherwise deal in or with

real or personal property

• Sell, convey, mortgage, pledge, exchange or otherwise dispose of property

• Lend money

• Acquire interest in another enterprise or entity

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• Enter into contract and guarantees

• Incur liabilities, including through the borrowing of money or issuing of

bonds

• Transact any lawful business.

b) Separate legal entity

The essence of a corporation is that it is a legal entity from its owners. Courts are

generally reticent to "pierce the corporate veil" (i.e., to disregard the legal separateness of a

corporation vis-à-vis its owners) unless certain factors are present. Some of the key steps

that can be taken to avoid veil piercing include:

• Adequate capitalization

• Compliance with legal requirements for issuance of stock

• Maintenance of corporate records

• Maintenance of separate financial records and bank accounts

• Avoidance of inter-corporate loans

• No guarantees by tribe of subsidiary's debt

• No assignment of contracts between tribe and subsidiary

• No representation the entity's primary purpose is to limit liabilities

• Maintenance of adequate insurance

• No interlocking or identical boards.

These same key steps should also be taken to protect the separate status of other

limited liability entities, whether such entities are formed under state law or tribal law. See

Appendix B, Key Steps to Protect the Corporate Veil and Limit Liability.

c) Power to sue and be sued

In virtually all states, corporations have the power to sue and be sued. How this power

is interpreted varies from state to state. State law (including judicial interpretations of this

power) should be reviewed to determine whether or not it is consistent with corporation's claim

to tribal sovereign immunity where the corporation is wholly owned by the tribe.

2. Organizational Requirements

The organizational characteristics and requirements for a state law corporation

will vary according to the applicable law of the state under which it is formed. Most

states have very detailed corporate codes--in most cases, with separate provisions for

stock and nonstock (i.e., not-for-profit) corporations. There are some common

characteristics and procedures for forming and managing corporations.

IV-3

To form a corporation, the incorporators must generally select a name and draft

articles of incorporation. Most states' corporate codes require the following items to be

included in the articles of incorporation of any type of corporation:

• The name of the corporation

• The term or period of existence of the corporation (which may be

perpetual)

• The purpose(s) for which the corporation is organized (with an eye to

consistency with lawful corporate purposes under the state's corporation

code or statute);

• Procedures relevant to the governance of the corporation, including the

election of directors and rights of shareholders;

• The address of the corporation's initial registered office and the name of

its initial registered agent at such address;

• The number of persons constituting the initial board of directors and the

names and addresses of the persons who are to serve as directors;

• The name and address of each incorporator;

• Provisions regarding the issuance and classes of stock by the corporation;

• Provisions relating to the payment of dividends; and

• Liquidation and dissolution procedures.

After filing articles of corporation with the state, a newly formed corporation will

generally have an organizational meeting to elect its officers and directors, adopt its

bylaws, set up its bank account, adopt a fiscal year, and establish a corporate records

book to hold its key documents, including the minutes of every board meeting.

3. Relationship to Tribal Government

A state law corporation may be wholly owned and controlled by a tribal

government, or it may be owned in part by the tribe and in part by other entities or

individuals. A state law corporation will be regulated by the state for corporate law

purposes (e.g., compliance with the state's corporate code, fiduciary duty rules,

shareholder rights issues).

By incorporating under state law, a tribe does not subject the corporation to state

regulation for all purposes--particularly with respect to its on-reservation operations.

However, a state law corporation going beyond reservation boundaries will be more

likely to find itself subject to state regulation than an unincorporated division of the tribe.

4. Sovereign Immunity and Other Liability Issues

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State law corporations are unlikely to be able to assert the organizing tribe's

sovereign immunity. While state chartered corporations do not appear to be absolutely

precluded from sharing in the tribe's sovereign immunity under appropriate

circumstances, it is likely that the corporation asserting immunity would need to be

primarily, if not exclusively, involved in on-reservation governmental projects. In such

situations, under the law of certain jurisdictions, a tribally-owned state chartered

corporation might be viewed as an arm of or alter ego of a tribe. But, it appears that as

more courts face the issue, organization under state law may be fatal to a finding of

entity-level sovereign immunity, particularly for corporations that are structured to limit

shareholder liability.

The factors relevant to a sovereign immunity analysis of a state law corporation

are similar, if not identical to those pertaining to such an analysis of tribal corporation.

These factors include:

• Whether the tribe as owner or sole shareholder of the corporation is

financially liable for the corporation's legal obligations;

• Whether the corporation's purpose is governmental or commercial;

• The extent and nature of the tribe's control over the corporation; and

• Whether federal policies would be furthered by finding that the

corporation shares the tribe's immunity.

See Appendix A, Sovereign Immunity Factors in Recent Judicial Decisions.

One court has found that a tribal corporation organized under the District of

Columbia Nonprofit Corporation Act could exercise the tribe's sovereign immunity based

on the court's analysis of the above factors and their application to the unique facts of the

case.

• The corporation's purpose was governmental in nature--i.e., to provide

housing and health and welfare services to tribal members.

• The corporation's governing body was comprised mainly of tribal

officials, and thus the tribe controlled the entity.

• The tribe's funds were vulnerable to suits against the corporation.

Given the close connection between the entity and the tribe, the court found

sovereign immunity was appropriate, even though the entity was incorporated by the tribe

under state law.

Some courts distinguish between entities organized by the tribe in the first

instance and those purchased by the tribe subsequent to their incorporation. A Wisconsin

court held that a tribe's purchase of a corporation's stock does not normally confer tribal

immunity on the corporation.

In that case, even one hundred percent tribal ownership

did not serve to extend the tribe's immunity to the acquired state-chartered corporation.

IV-5

In sum, incorporation under state law lessens the chances that a court will treat the

tribally-owned business entity as a sovereign "arm of the tribe." While the multi-factor

test approach of current law does not preclude treating a state-chartered corporation like a

tribal instrumentality with respect to sovereign immunity, the trend cuts against extending

immunity to state-incorporated entities. In most cases, organization under tribal law

provides a more flexible framework if the tribe wishes to extend its sovereign immunity

to a wholly-owned corporation.

5. Tax Considerations

Since 1994, the IRS has taken the position that a state-chartered corporation, even

one that is wholly owned by an Indian tribal government and engaged in exclusively on-

reservation activities, does not share the same tax status of the tribe. Revenue Ruling 94-

16 represents a significant reversal of a position that the IRS had taken in a series of

private letter rulings in the late 1980s. Those rulings held that state law corporations

wholly owned by an Indian tribe were not subject to tax if their business activities were

conducted on the tribe's reservation. However, Revenue Ruling 94-16 determined that "a

corporation organized by an Indian tribe under state law is not the same as an Indian

tribal corporation organized under Section 17 of the IRS and does not share the same tax

status as the Indian tribe for federal income tax purposes." Citing the Supreme Court's

decision in Moline Properties v. Commissioner,

Revenue Ruling 94-16 states that

"[g]enerally, the choice of corporate form will not be ignored."

Thus, unless there is

some other basis for the corporation's exemption from federal income tax (such as an IRS

determination that it qualifies as a Section 501(c)(3) organization), a state-law

corporation is subject to tax and required to file annual corporate income tax returns (IRS

Form 1120).

One unresolved issue is whether a tribally owned state-law corporation is subject

to tax on all of its income or only on income derived from its business activities.

Corporations are generally taxable not only on their business income, but also on income

from investments and other sources. Revenue Ruling 94-16 states that a state-chartered

corporation owned by an Indian tribe "is a taxable entity and is subject to federal income

tax on all income earned from its business activities." It does not address the tax

treatment of such a corporation's investment or other income.

When Revenue Ruling 94-16 was promulgated in early 1994, the IRS provided a

period of several months before its new position on the taxability of state law

corporations went into effect. This was intended to allow tribes to convert existing state

law corporations into some other type of business entity that was not subject to corporate

income tax.

As a general rule, a state law corporation that the tribe has formed or acquired

cannot be "converted" to another form of entity without significant tax consequences.

Section 337(d) and related IRS regulations provide for the imposition of tax on the "built-

in gain" of a taxable corporation that converts to a tax-exempt corporation. See generally

Treas. Reg. § 1.337(d)-4.

IV-6

When tribes are in the process of acquiring an existing business in corporate form,

they often find that shareholders would prefer to sell them the stock of their corporation,

rather than dissolve the business and sell the assets to the tribe. Tribes need to be aware

in such situations that they may be assuming various types of liabilities, including federal

tax liabilities. Because of the "liquidation tax" on the built-in gain of a corporation, tribes

should avoid buying the stock of a corporation to ease the sellers' tax burden unless they

are prepared to undertake a process of due diligence to accurately quantify any past or

prospective tax liabilities thereby assumed.

6. Financing Considerations

A state-chartered corporation wholly owned by an Indian tribe will not qualify as

an issuer of tax-exempt bonds. In a 1998 private letter ruling, the IRS addressed the issue

of whether a nonprofit state-law corporation formed by a tribe to provide various health

care services could issue tax-exempt bonds to finance additions to its health center,

including an emergency medical services building and a nursing home, all of which were

located on the Tribe's reservation. Citing Revenue Ruling 94-16, the IRS suggested that

where a tribe incorporates an entity is under the laws of a state, such an entity is not

integral part of the tribe. Thus, such an entity would not meet the requirement of Section

7871(c), which permits only an Indian tribal government or a subdivision thereof to issue

tax-exempt bonds.

An additional question in the tax-exempt financing area is whether a tribe's state-

chartered corporation could be the recipient of tax-exempt financing as a borrower. If

such a corporation is wholly-owned and the facilities to be financed constitute essential

governmental functions, it would appear that a tribe could issue bonds on a tax-exempt

basis and re-lend the proceeds to a state-chartered corporation, particularly one that is

wholly owned by the tribe. However, the issue has not been definitively addressed in any

IRS guidance issued to date.

Other forms of financing discussed elsewhere in this Handbook may be available

for state-law corporations and LLCs that are wholly-owned by an Indian tribe. Such

other options include:

• Government-guaranteed loans

• SBA loans

• Taxable bonds

• Private debt placements

• Commercial bank financing.

B. Subchapter S Corporations

Subchapter S of the Internal Revenue Code treats an "S corporation" as a pass-

through entity similar to a partnership. An S corporation must pass through income and

IV-7

loss items separately to its shareholders and thus, as a general rule, the corporation is not

subject to a corporate level tax on those items. Subchapter S is only applicable to a

"small business corporation," defined as a domestic corporation that does not have more

than 75 shareholders.

S corporations are not viable options for tribal ownership. Section 1361 of the

Code restricts S corporation ownership to individuals, estates, certain types of trusts,

entities described in Section 401(a) (pension plans) and Section 501(c)(3) (charitable

organizations). Governmental entities are not listed as qualified S corporation

shareholders. Moreover, a recent IRS revenue ruling specifically addresses the question

of tribal government ownership of S Corporations, and concludes that tribal governments

are not qualified S Corporation shareholders under current tax law.

C. State-Law Limited Liability Companies

An increasingly popular choice of business entity is the limited liability company

("LLC"). An LLC has the advantage of limited liability like a corporation. However, it

is generally taxed like a partnership or other "flow-through" entity. If wholly-owned

(i.e., an LLC with a single member), the LLC may be disregarded as a separate entity for

tax purposes. However, a state-chartered LLC--even one that is wholly-owned by a tribe-

-would likely be treated as a separate legal entity for purposes of legal liability purposes.

Thus, it might be difficult (but not impossible) for such an entity to assert tribal sovereign

immunity

1. General Description of Limited Liability Companies

The LLC is a type of organization that provides its owners with limited liability

just like a corporation, but LLCs are not subject to double taxation like corporations are.

LLCs have become the preferred investment vehicle for investors

who want to participate

the management of the entity's business and still limit their personal liability. Under

the LLC structure, all of the members obtain the tax advantages of a pass-through entity,

but unlike the limited partnership structure, members can limit their personal liability

regardless of whether or not they participate in the management of the LLC's business

Thus, a closely held business that is structured as LLC is generally

able to benefit from

certain corporate advantages without jeopardizing its favorable tax.

2. Organizational Requirements

An LLC can be quickly and easily organized under the laws of most states. All

that is required is that the organizers select a name and file a document similar to a

corporation's Articles of Incorporation. In the case of an LLC, this document is generally

referred to as the LLC's Articles of Organization. The key issues required to be

addressed in the Articles of Organization are:

• Name of the organization

IV-8

• Street address of the registered office of the LLC and the name of the

registered agent at that office

• Brief description of the type of management structure of the LLC

• Name and address of each person organizing the LLC

• A statement that the LLC is organized under the LLC act or Code.

All other details about how the LLC is organized, managed, and owned can be

reserved to the Operating Agreement, which does not need be filed with the State or made

public.

Most LLCs supplement their Articles of Organization with a fairly detailed

Operating Agreement, that spells out how they will be managed. From a management

perspective, LLCs fall into one of two types: (1) member-managed; and (2) manager-

managed. A "member-managed" LLC is subject to more control by its legal owners than

a "manager-managed" LLC.

3. Liability and Sovereign Immunity

A chief characteristic of any state-law LLC is its ability to limit liability to the

assets of the company, thereby protecting the LLC's owners or members from any

personal or individual liability for the company's debts. State LLC statues typically

provide that the debts, obligations, and liabilities of an LLC will be solely those of the

LLC, and no member or manager of the LLC will be personally obligated for such

liability.

At the same time, such statue laws generally permit LLC managers or

members to agree

to assume personal liability for any debts of the entity.

It is highly unlikely that state or federal courts would recognize a state-law LLC

formed to engage in business as sharing in the sovereign immunity of a tribal

government--even if the LLC's sole member is an Indian tribal government. One major

hurdle is the fact that state law shields the owner of an LLC from its liabilities, but clearly

contemplates that the LLC itself can be sued.

While no reported cases have explicitly held that formation of a state-law LLC

eliminates tribal immunity for the LLC, at least two cases have suggested that such is the

case. First, a Connecticut state court in an unreported opinion

stated that taking

ownership of an off-reservation hotel in LLC form removed any immunity with respect to

the LLC's conduct of hotel operations.

The Mashantucket Pequot Tribal Nation took

ownership of the hotel through a newly-formed LLC of which it was the sole shareholder.

Members of the hotel management team sued the LLC on various tort claims. The tribe

did not assert sovereign immunity as a defense, and the jury returned a multi-million

dollar verdict against the LLC.

Second, a California case contains language implying that a tribe, as sole

shareholder of the LLC, might be liable under common law "alter ego" liability.

The

case involved breach of contract claims against an LLC of which the tribe was originally

IV-9

a 51% owner (and then later, a 100% owner). The plaintiff alleged that the LLC was an

alter ego of the tribe and the court allowed discovery on the alter ego and sovereign

immunity issues to proceed. In doing so, the court refused to accept the tribe's sovereign

immunity as a basis for precluding litigation of the controversy.

Comment: Tribal law LLC codes are frequently more flexible in this regard. For

example, the Ho-Chunk Nation's LLC Code states that "if the Nation is the sole

member of a LLC formed under this Act, that LLC shall possess the Nation's

sovereign immunity from suit except to the extent otherwise provided in its Articles of

Operation."

4. Tax Considerations

The federal tax treatment of LLCs is provided for under sections 301.7701-1

through 301.7701-3 of Treasury Regulations governing the federal tax classification of

business entities (sometimes referred to as the "check-the-box" regulations). The check-

the-box regulations allow certain entities to choose classification as either a partnership

or a corporation, or to be treated as a disregarded entity for federal tax purposes. The

check-the-box regulations also provide default classifications for certain business entities.

Elections (on IRS Form 8832) are necessary only when an entity chooses initially to be

classified as other than the default classification or when an entity chooses to change its

classification.

Under the IRS check-the-box regulations, an LLC with a single owner is

generally treated as a disregarded entity. As such, it is treated in the same manner as a

branch or division of the owner. An LLC with two or more owners is generally treated

like a partnership for tax purposes.

IRS regulations set forth a number of entities that are per se classified as

corporations for federal income tax purposes. This list includes entities referred to as

"incorporated" or as a "corporation," "body corporate," or "body politic" under a federal,

state or tribal law or statute. This list of per se corporations does not include domestic

limited liability companies (LLCs)--other than LLCs wholly owned by a state or foreign

government. See Treas. Reg. §301.7701-2(b)(6).

The check-the-box regulations treat LLCs that are wholly owned by a state or

foreign government as per se corporations. At the same time, they fail to specific how a

tribal government-owned LLC will be treated.

Comment: In the absence of a rule deeming tribal LLCs to be corporations, most

advisers believe that tribal government-owned LLCs should be treated as a division

of the tribal government for tax purposes. The IRS has specifically ruled that an LLC

with a tax-exempt organization as its single member should be disregarded as a

separate legal entity and treated as a division of the single member.

IV-10

D. Advantages and Disadvantages of State-Law Business Entities

The primary advantages of using a state-law business entity includes the following:

• State-law corporations and LLCs are easily and quickly organized

• State-law entities are familiar to lenders and potential business partners

• State-law entities can be effectively used to acquire or merge with an

existing state-law entity.

In addition, state-law LLC are disregarded for federal income tax purposes when

owned by a single member, such as a tribe.

Disadvantages include the following:

• State-law corporations are subject to federal income tax

• State-law entities are not qualified issuer in a tax-exempt financing

• State-law entities are not likely to be regarded as government

instrumentalities that are immune from unconsented suit.

For off-reservation ventures, state-law LLCs still have a number of advantages and,

from a tax perspective, very few disadvantages.

V-1

JOINT VENTURE ENTITIES

There are several different types of entities that can be utilized for purposes of

establishing a joint venture between an Indian tribe and a business partner other than the

tribe:

• A Limited Liability Company ("LLC")

• A General Partnership ("GP") or a Limited Partnership ("LP")

• A Corporation.

In each case, the equity interests in the joint venture entity will most likely be owned

in part by the tribe and in part by another party.

Each of these entities has certain advantages and disadvantages. However, in this

chapter of the Handbook, we will focus the discussion on the two entity types that are the

most advantageous for tribes to utilize--LLCs and LPs.

Although there may be occasions in which the parties to a joint venture prefer or

are required to operate in corporate form, the tax consequences to an Indian tribe of

operating a joint venture through a corporation are generally not as favorable as operating

the joint venture through a non-taxable or flow-through entity. A corporation that is not

wholly owned by a tribe is subject to corporate income tax on all of its income.

Moreover, the corporation's taxable owners may also be subject to a second level of tax

when they receive distributions from the corporation in the form of dividends. The two

levels of tax on the income of a corporation can be reduced if the corporation's income is

decreased by deductible fees paid to the equity owners for services rendered.

Nevertheless, because LLCs and partnerships are generally more favorable to use for

joint ventures than corporations, this chapter does not discuss in detail the use of

corporations for joint ventures, but instead focuses on the use of LLCs and partnerships.

Although there is one type of corporation, an S corporation, which is taxed as a flow-

through entity, because tribes are not eligible shareholders of an S corporation, this

chapter also does not discuss S corporations.

When a tribe forms an LLC or a partnership to engage in a joint venture with

another party, tax considerations are not the only considerations. It is important at the

outset to make sure that each party's role in the venture is appropriately spelled out in the

organizational documents. Care should be taken that the terms of the transaction fairly

compensate each party for what it brings to the table. Another key consideration is the

inclusion of terms to accommodate a desire on the part of either party to terminate its

participation in the venture.

V-2

A. Limited Liability Companies

1. Brief Description and Examples

The LLC is a type of organization that provides its owners with limited personal

liability just like a corporation, but it is not subject to double taxation as regular

corporations are.

The LLC has become the preferred investment vehicle for investors

who want to participate in the management of the entity's business and still limit their

personal liability. Under the LLC structure, all of the members obtain the tax advantages

of a pass-through entity, but unlike the partnership structure, members can limit their

personal liability regardless of whether or not they participate in the management of the

LLC's business. Thus, a closely held business that is structured as an LLC is generally

able to benefit from certain corporate advantages without jeopardizing its treatment as a

partnership for federal income tax purposes.

As noted above, an LLC is a business entity in which limited personal liability

may be achieved for the owners--similar to a corporation--while achieving flow-through

taxation that is characteristic of a partnership. In addition, unlike a partnership, an LLC

may be formed with a single member or owner, as well as by multiple members. The

flexibility of the LLC as a business entity is what has lead to its increasing popularity--

particularly in the situation where the business starts out with a single owner, but intends

to admit additional owners or partners at a later stage.

Tribes are beginning to use LLCs to partner with non-tribal business entities for a

variety of purposes:

• To acquire specialized knowledge in fields such as energy or government

contracts

• To create the proper incentives for those playing a critical role in a tribally-

owned business

• To be able to efficiently allocate certain tax benefits (e.g., low income

housing tax credits).

In addition to using LLCs to partner with non-Indian individuals or businesses,

tribes are also using LLCs to partner with other tribes. Four Fires, LLC, a economic

development entity organized by the Oneida Tribe of Indians of Wisconsin, San Manuel

Band of Mission Indians, the Forest County Potawatomi Community of Wisconsin and

Viejas Band of Kumeyaay Indians, is a good example of an inter-tribal LLC. It owns a

hotel near the United States Capitol building in Washington, D.C.

2. Organizational Requirements

An LLC can be quickly and easily organized under the laws of most states. All

that is required is that the organizers select a name and file a document similar to a

corporation's Articles of Incorporation. In the case of an LLC, this document is generally

V-3

referred to as the LLC's Articles of Organization (although Delaware, perhaps the most

popular state for forming LLCs, refers to them as a Certificate of Formation). The key

issues required to be addressed in the Articles of Organization are:

• Name of the LLC

• Street address of the registered office of the LLC in the state where the LLC

is being formed and the name of the registered agent at that office

• Description of the purpose for which the LLC is being formed

• Description of the type of management structure of the LLC (e.g., whether

the LLC will be managed by its members or by a manager or managing

member)

• Name and address of each person organizing the LLC

• A statement that the LLC is organized under the LLC Act or Code of the state

where the LLC is being formed.

All other details about how the LLC is organized, managed, and owned can be