On June 23, 2009, the IRS released Notice 2009-51 (the “Notice”), providing much awaited guidance on tribal economic development bonds (“TEDBs”) and soliciting applications for allocations of the $2 billion national volume cap for TEDBs.

This Alert summarizes the key points set forth in the Notice, following up on our earlier Economic Stimulus Alerts dated February 24, 2009 [click here], and March 12, 2009 [click here], describing TEDBs and the status of IRS guidance with respect to TEDBs. As described in our earlier Alerts, TEDBs are a new financing tool created by the American Recovery and Reinvestment Act of 2009. This financing tool allows tribes, for the first time, to issue tax-exempt bonds for the same purposes as states and local governments without regard to two existing limitations: the “essential governmental function” test, which the Internal Revenue Service (“IRS”) has interpreted to bar certain projects that it believes are “commercial” in nature, and the prohibition against the issuance of “private activity bonds.” TEDBs were effectively unavailable until issuance of the Notice, which now provides a mechanism for allocating issuance authority to qualifying projects.

The Notice provides guidance on the following: (1) eligibility requirements that a project must meet to be considered for a volume cap allocation, (2) application requirements, deadlines, and forms for requests for volume cap allocations, (3) the method that the IRS and the Department of the Treasury (“Treasury”) will use to allocate the volume cap, and (4) the validity of allocations generally and the effect on allocation awards of insubstantial deviations from the information submitted to the IRS in applications for allocations.

Much of the Notice addresses mundane, but important, procedural requirements. The substantive items that we learned from the Notice include:

· The IRS and Treasury will not pick and choose among applicants for allocation, and will not impose any test that a project must create jobs or have any identified economic effect. Instead, all projects which meet the statutory requirements (and for which a proper application is submitted) will receive allocation. If there are requests for more allocation than is available, the allocations will be reduced prorata.

· There is a limit of $30,000,000 in allocation that any one tribe (including all of its affiliated entities) can receive in the first allocation cycle.

· Refundings of prior taxable financings can qualify for allocation.

· The prohibition against using TEDBs for financing any portion of a building in which class II or class III gaming is conducted or housed or any other property actually used in the conduct of such gaming will be applied strictly; a building must have an independent foundation, outer walls and roof from any gaming facility.

Eligibility Requirements

In general, TEDBs are authorized for tribal economic development projects (excluding gaming facilities and projects located outside of an Indian reservation) or other activities for which states or local governments can issue tax-exempt bonds under the Internal Revenue Code. The “essential government function” test does not apply. In addition, qualifying projects include a variety of facilities that can be financed by private activity bonds, as described in our February 24 Economic Stimulus Alert. Finally, TEDBs may be issued to refund or refinance outstanding debt, subject to the same restrictions that apply to refunding bonds issued by states and local governments, including restrictions on “advance refundings.” As a result, TEDBs are available to refinance existing debt originally incurred for projects that the IRS believed did not previously qualify for tax-exempt financing, such as many hotels developed in conjunction with gaming operations. As further described below, these facilities must be housed in separate buildings from gaming facilities and must be located on the tribe’s reservation.

The requirement that qualifying facilities be housed in buildings separate from gaming facilities is interpreted in the Notice through a “safe harbor” provision. To meet the safe harbor, a structure will be treated as a separate building if it has an independent foundation, independent outer walls and an independent roof. Connections, such as doorways, covered walkways or other enclosed common area connections, may be disregarded, as long as such connections do not affect the structural independence of either wall.

The Notice defines “reservation” by reference to existing Internal Revenue Code section 168(j)(6). Through a number of cross-references it its clear that for this purpose “reservation” includes all of Indian country under 18 U.S.C. § 1151 and all tribal and individual trust lands and that a formal reservation proclamation is not required.

Finally, the Notice provides guidance on the requirement that TEDBs may only be issued in a face amount that does not exceed the amount of the national volume cap allocated to a tribal government in accordance with the requirements of the Notice. The Notice describes the manner in which volume cap allocations will be made by the IRS and the process by which applications for volume cap allocations may be submitted.

Initially, volume cap allocations will be made in two tranches. Up to $1 billion in volume cap allocations will be made in the first tranche (the “First Allocation”). The remaining volume cap will be allocated in a second allocation (the “Second Allocation”), and possibly in further allocations thereafter. This allocation methodology is summarized below under the caption “Allocation Methodology.”

Application Requirements for Volume Cap Applications

To apply for an allocation of volume cap, an application form must meet the following requirements.

Proper Form. The required form is attached to the Notice and also may be found on the IRS web site located at http://www.irs.gov/pub/irs-drop/n-09-51.doc.

Due Date. Applications for the First Allocation must be filed with the IRS by August 15, 2009. Applications for the Second Allocation must be filed with the IRS by January 1, 2010 (and after August 15, 2009).

Qualified Issuer. An application may only be submitted by an “Indian tribal government,” defined to include only: (1) an Indian tribal entity that appears on the most recent list published by the Department of the Interior in the Federal Register, or (2) a tribe that has been acknowledged as a federally recognized Indian tribe as stated in a letter from the Department of the Interior.

Signature. An application must be signed by an “authorized official” of the Indian tribal government, such as the tribal chairperson, chief executive officer or chief financial officer.

Contact Person. An application must designate a contact person “with knowledge of the project” who can discuss with the IRS any information relating to the application. If the designee is not an official or officer of the issuer, additional forms, including a Power of Attorney, must be submitted, authorizing the disclosure of taxpayer information specifically relating to the application.

Address, Manner of Submission. Applications must be submitted to the IRS at the address specified in the Notice and be in duplicate with an accompanying compact disc version.

Project Description. The application must contain the following information with respect to the project:

    (i) Qualified Project. The project must be described in reasonable detail, with the dates on which acquisition and construction is expected to commence and on which the project is expected to be placed in service.

    (ii) Location. The application must include a certification that the project is located on the Indian tribal government’s reservation.

    (iii) Not Used for Gaming Purposes. The application must include a certification that none of the proceeds of the TEDBs will be used for any portion of a building in which class II or class III gaming is conducted or housed, or any other property actually used in the conduct of such gaming.

    (iv) Regulatory Approvals. The application must state whether all necessary federal, state and local regulatory approvals for the project have been obtained and, if not yet obtained, the plan for obtaining them and associated time frame.

Plan of Financing. The application must contain: (1) a reasonably detailed plan of financing, including all reasonably expected sources (e.g., a public offering through a named underwriter or a private placement to a named institution) and uses, including sources of financing other than the TEDBs; (2) the status of all financing, including names and addresses of all entities expected to provide any financing; (3) the anticipated date of issuance of the TEDBs and any expected purchasers of the TEDBs (4) the sources of security and repayment of the TEDBs; (5) the aggregate face amount of the TEDBs expected to be issued, and (6) the issuer’s reasonably expected schedule for spending proceeds of the TEDBs. If the proceeds of the TEDBs are expected to reimburse qualifying costs, the application must demonstrate compliance with the requirements in section 1.150-2 of the Income Tax Regulations.

Dollar Amount Requested. The application must specify the dollar amount of the volume cap requested for the project.

Statement of Readiness to Issue. An application for the First Allocation must state that the issuer reasonably expects to issue the TEDBs on or before December 31, 2010. An application for the Second Allocation must state that the issuer reasonably expects to issue the TEDBs on or before December 31, 2011.

Consent to Disclosure. Each applicant is requested by the IRS to consent to disclosure by the IRS of: (1) the name of the issuer, (2) the type and location of the project, and (3) the amount of the allocation that is awarded. Applicants are not required to consent to such disclosure in order to receive an allocation. The IRS will not publish identifying information with respect to pending applications or applications that are not awarded an allocation.

Allocation Methodology

Allocations of volume cap will be made in at least two tranches.

First Allocation. In the first tranche, up to $1 billion in volume cap will be awarded. If, by August 15, 2009 (the “First Allocation Deadline”), applications for volume cap do not exceed $1 billion, then each qualifying project will be allocated the amount of volume cap requested, and the remaining portion of the initial $1 billion will be available for allocation as part of the Second Allocation. If the total amount requested in the First Allocation exceeds $1 billion, then the allocation for each qualifying project will be reduced pro rata. Applicants receiving a reduced allocation may apply for a portion of the Second Allocation.

Second Allocation. The Second Allocation will allocate the second $1 billion of volume cap, plus any portion of the first $1 billion not allocated as part of the First Allocation (the “Second Allocation Amount”). If the total amount of volume cap requested by the Second Allocation Deadline does not exceed the Second Allocation Amount, each applicant will be awarded the amount of volume cap requested, and any remaining volume cap may be available as part of an allocation process to be announced by the IRS at a future date. If the amount of volume cap requested by the Second Allocation Deadline exceeds the Second Allocation Amount, then each requested allocation will be reduced pro rata.

Applicants for an allocation subsequent to the First Allocation must describe the project, or any related project, for which a prior allocation was made and the name of the applicant that received the allocation. Related projects include facilities that are owned by the same Indian tribal government, a political subdivision of the Indian tribal government, or an entity controlled by the Indian tribal government, which are (i) located at or near the same site, and (ii) are integrated, interconnected, or directly or indirectly dependent on each other based on all the facts and circumstances.

Limit on Allocations to any One Tribal Government. No Indian tribal government will be awarded allocations from the First Allocation for a total amount exceeding $30 million. For this purpose, an Indian tribal government includes political subdivisions of and other entities controlled by the Indian tribal government. Although the IRS expects a similar limitation to apply to amounts allocated as part of the Second Allocation, or any subsequent allocation, the IRS reserves the right to raise or lower the limitation or abolish it entirely.

Joint Projects. An Indian tribal government may submit an application for an allocation to finance the Indian tribal government’s share of a joint project all of which will be owned by Indian tribal governments or which will, in part, be owned by an entity that is not an Indian tribal government, provided that the joint project will be located entirely on one or more of the reservations of any of the Indian tribal governments receiving an allocation with respect to such project. For this purpose, the type of joint ownership of facilities to be financed with Tribal Economic Development Bonds include only those recognized under the private activity bond restrictions on tax-exempt bonds under section 141 of the Internal Revenue Code.

On Behalf of Issuers.

(1) An Indian tribal government that receives an allocation may designate an “on behalf of issuer,” within the rules applicable to bonds issued under section 103 of the Internal Revenue Code, to issue the TEDBs on its behalf.

(2) An Indian tribal government that receives an allocation may assign the allocation to a pool bond issuer who is otherwise an Indian tribal government for the purpose of issuing TEDBs the proceeds of which will be lent to the Indian tribal government who received the allocation. Pooled TEDBs will be subject to the provisions of section 149(f) of the Internal Revenue Code.

(3) The proceeds of any bonds issued by an “on behalf of” issuer or a pool issuer will be treated as if they were proceeds of bonds issued by the Indian tribal government that received the allocation.

Forfeiture of Allocation. If bonds are not issued by December 31, 2010, for any or all of the allocation received by an issuer pursuant to the First Allocation, then such allocated is treated as forfeited. If bonds are not issued by December 31, 2011, for any or all of the allocation received by an issuer pursuant to the Second Allocation, then such allocation is treated as forfeited. Any allocation amounts treated as forfeited may be available for allocation by the IRS as part of an allocation process to be announced by the IRS at some future date. Issuers must notify the IRS at least 30 days before the expiration of the period during which bonds may be issued pursuant to an allocation if they do not intend to issue bonds pursuant to such allocation.

Validity of Allocations and Effect of Insubstantial Deviations.  Generally, allocations of volume cap will be valid, notwithstanding insubstantial deviations from the information submitted in the application. Procedures are set forth in the Notice for applicants to seek IRS approval of specific insubstantial deviations.