TAX PLANNING
Entity Structures to Take
Advantage
of Tax-Favored Opportunities
PRESENTED BY:
WENDY S. PEARSON
PEARSON LAW OFFICES
AND
KATHLEEN M. NILLES
HOLLAND & KNIGHT LLP
NATIONAL INTER-TRIBAL TAX
ALLIANCE
SEPTEMBER 17, 2015
Options for Structuring Joint
Ventures
Before determining how to structure the joint venture
itself, an Tribal government will want to determine how
it wants to hold the joint venture.
Options for holding joint ventures include:

The Indian Tribal Government itself

A Political Subdivision of the Tribe

An Instrumentality of the Tribe

A Section 17 Corporation

A Single Member LLC wholly owned by one of the
above
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Options for Structuring Joint
Ventures
Why would a Tribe want to hold joint
ventures or other business entities through a
political subdivision?

Preserving sovereign immunity of holding company

A subdivision has governmental powers, including ability to
regulate and impose tribal taxes

Although separate from the tribe, a subdivision has ability to
issue tax-exempt debt (including Clean Renewable Energy
Bonds)

Recent example: Tulalip Tribes’ Quil Ceda Village
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Options for Structuring Joint
Ventures
Why would a Tribe want to hold joint ventures or
other business entities through a Section 17
Corporation?

Limited liability

Income Tax Status of parent on or off reservation is clear

Financing incentives available to parent
What to avoid?

Attempting to give private investors a stake in the Section 17
corporation itself. See PLR 201329003.
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Options for Structuring Joint
Ventures
Why would a Tribe decide to hold a joint venture or
other tribal business entities through a single
member Limited Liability Company (LLC)?

Ease of Formation

Business-Like Structure

Limited Liability

Tax Treatment
Caution: Be sure to use a Tribal Law LLC, and not a
State Law LLC
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Options for Structuring Joint
Ventures
Joint ventures may be formed by creating
one of the following business entities under
either tribal or state law:

General or limited partnership

Limited liability company

Corporation
Tax treatment of a corporation is
unfavorable when 1 or more of the partners
is exempt from or not subject to tax.
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Tax Incentives to Promote Indian
Country Investment


Recent federal action to extend (through 2015) temporary
tax benefits to individuals/entities doing business in Indian
Country

New Market Tax Credit

Low Income Housing Tax Credit

Accelerated Depreciation

Indian Employment Tax Credit
Recent federal legislation to promote economic
development in Indian Country by reducing state tax
Burden


BIA leasing regulations (25 CFR 162) pertaining to tribal/individual
trust land
Additional Tax Exempt Financing opportunities for Indian
Tribal Governments to reduce debt cost for certain joint
ventures
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Other Options for Joint
Ventures

Partnership Flip Structure—provides for a shifting profits
interest to the investor that starts high (e.g., 99%) and then
flips down to 5% or less when the investor reaches a
specified return. See Rev. Proc. 2007-65.

Sale-Leaseback—Tribe would initially place property in
service; it would then sell it to an investor and lease it back.
(Depreciation deductions may be limited.)

Inverted Lease—Tribe purchases renewable energy
property, and rents the assets to an investor in a transaction
that allows it to pass an investment tax credit to the lessee.
See PLR 20131000.
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Tax Incentives to Promote
Indian Country Investment


Accelerated Depreciation for Business Property on Indian
Reservations

incentive for private businesses to locate on Indian reservations
with capital-intensive projects that bring high skilled jobs

provides qualifying property and infrastructure investments with
a faster write-off
Indian Employment Tax Credit

Provides a 20-percent tax credit for the first $20,000 of wages
for any tribal member or spouse employed by a private
business operating on an Indian reservation. T

Not applicable to tribal government jobs, high-wage jobs
(defined as jobs paying more than $45,000 per year), or
gaming jobs.
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Tax Incentives to Promote
Indian Country Investment


New Markets Tax Credit

Promotes investment in in low-income communities.

Includes (1) access to financing not otherwise available in the
traditional credit market, (2) below market interest rates, and (3)
loan forgiveness of around 20% at the end of seven years.

Non-Indian businesses can benefit from the program by becoming
a CDE, investing in an already existing CDE, or creating a joint
venture with a tribal enterprise. A CDE applicant may be a forprofit or non-profit
Low Income Housing Tax Credit

Promotes investment in low-income housing to develop restricted
rent housing for a period of years in exchange for 30 to 70% tax
credit.

Tribal developers of affordable housing can sell the credits to
investors to raise capital for their housing projects, which
substantially reduces debt.
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Tax Incentives to Promote
Indian Country Investment


Tax Exempt Financing Opportunities

CREBS (Clean Renewable Energy Bonds) - Receive $ for
$ tax credit from feds in lieu of interest paid by issuer

New TEDBs not limited to “Essential governmental
function”
State Tax exemption

New BIA Leasing Regulations encourage tribes or
individual Indians to lease trust land to for-profit entities
for all types of commercial activity.
 Provides
no state tax on permanent improvements,
activities of lessee, possessory interest of lessee
 Streamlines
BIA approval process of leases or tribes
can opt out of BIA review with their own regulations
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Mutual Goals Met Through
Joint Venture With Nonprofit

Expanding Market and Outreach



NPFs: access to expertise in private sector, way to
expand services to beneficiaries, new ways to incentivize
investment in the community by offering ROI
For-profits: access to NPF’s knowledge of market
conditions and demographics, opportunity to increase
market exposure, accreditation and/or added
credibility, exploit specific assets of NPF such as
intellectual property, acquire community or political
support
ITGs – access to expertise in private sector, way to
increase opportunity to create jobs and promote Indian
preference, way to access markets or create demand
outside of Indian Country, way to increase capacity,
separate tribal business from tribe for liability or
management reasons.
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Mutual Goals Met Through
Joint Venture With Nonprofit

Expanding Funding Sources

NPFs: access to capital outside of donations/grants
through a commercial enterprise that has ROI incentives,
incentivize broader donor base

For-profits: access to NPF funding sources; access to ITG
tax-exempt financing, as well as BIA Indian Loan
Guaranty, Insurance, and Interest Subsidy Program
(available to all non-Indian businesses that partner with a
tribe where the tribal ownership is at least 51%. The
borrower’s business must be located on or near an Indian
reservation and contribute to the economy of the
reservation).

ITGs: access to private and industrial capital, way to
monetize tax benefits available in Indian Country
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Mutual Goals Met Through
Joint Venture With Nonprofit

Increasing Opportunity with Tax Advantages

ITGs: entice private investment with federal tax credits
to achieve economic development goals; new BIA
leasing regulations present opportunity for tribal
governments to lease trust land to taxable enterprises for
commercial ventures and eliminate state tax burden,
promote native preference

NPF’s: shelter ancillary activity from unrelated business
income tax and protect tax exemption

For-profits: reduce debt costs and tax burden by
accessing tax benefits available only through ITGs or
NPFs
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Challenges to Joint Ventures

Challenges to ITG joint ventures in general

Credit allocations are not reaching Indian country (e.g.,
New Markets Tax Credits, LIHTC)

IRS regulations and tax code provisions prevent efficient
use of tax credits and accelerated depreciation in some
contexts

Generally, joint ventures relying on tax credits or taxfavored financing involve complicated deal structures
with high transaction costs making small deals non-viable

Compliance risks associated with onerous recapture of tax
credits for violations

Sovereignty waiver concerns

BIA Leasing Regs under challenge by 3 states
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Challenges to Joint Ventures

Challenges of joint ventures with NPFs
 May
have to cede control so NPF can
protect exempt status
 Activity
must be NPF mission related
 Compliance
risks with penalties or
revocation of exempt status for
violations
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Acquiring Existing Businesses
Considerations
•
Structure of Acquiring Entity – ITG, Existing Corp or LLC,
newly created entity and whether tribal, federal (§17) or
state entity?

Structure of Target - Keep existing structure, dissolve or
reorganize?

Structure of Acquisition: Asset purchase, stock/equity
interest purchase; hold as subsidiary, related or separate

Answers depend largely on time frame, tax ramifications,
regulatory or licensing limits, operation and governing
preferences, limiting third-party liability exposure and
retaining sovereignty
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Acquiring Existing Businesses
Case Study
Target is S corporation service company holding special state
license and contracts, §17 Corp wants to be the acquiring
company, business is located off-rez.
1. Structural Limits

Tribal government, Section 17 corporation, tribal
enterprise are not qualifying shareholders – results in
termination of S status

Single–owner, disregarded LLC can be qualified
shareholder-PLR 200107025, may need to request
ruling
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Acquiring Existing Businesses
Case Study (cont’d)
2. Reorganization Considerations


S corp to state LLC. Is state law “statutory conversion” an
option? This could be better for retaining contracts and
special license

may require new EIN per IRC §6109, Rev. Rul 73-526 – unless
“mere change in legal status under state law”

New EIN will require new licensing and may impact contracts
S Corp asset sale or equity sale to §17 Corp or Newco

Limitations on merger options if using tribally chartered
acquiring corp

sellers generally motivated to do equity sale, but asset sale is
better for acquiring corp UNLESS, as in this case, continuation
of company is important to maintain licensing/contracts
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Acquiring Existing Businesses
Case Study (cont’d)
3. Fed and State Tax Considerations


unknown federal tax status if acquiring company is:

LLC wholly owned by §17 Corp or tribe - treated as tribe or
state corp?

tribally chartered entity
State tax on income/profits of any entity treated as
separate from Tribe


can location of business be moved to rez?
fed and state tax may be triggered on built-in gain of
assets
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Questions?
Please contact:
Kathleen M. Nilles
[email protected]
202-955-3000
OR`
Wendy S. Pearson
[email protected]
425-512-8850
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