In the July 12, 2010 Federal Register, the Department of the Treasury (the “Department” or “Treasury”) published a notice and request for comments (the “Notice”), with respect to tribal economic development bonds (“TEDBs”). The Notice was issued pursuant to a directive in the American Recovery and Reinvestment Act of 2009 (“ARRA”) that Treasury conduct a study this year on TEDBs and report back to Congress with recommendations regarding the use of TEDBs.

As described in our earlier Alerts, TEDBs are a financing tool created by ARRA. 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” (other than for certain manufacturing facilities).

This Alert summarizes the key points set forth in the Notice, following up on our earlier Economic Stimulus Alerts dated February 24, 2009, March 12, 20, and June 26, 2009, describing TEDBs, the status of IRS guidance with respect to TEDBs, and IRS guidance on allocations of TEDBs issuance authority. This Alert also raises questions tribes may wish to consider in providing comments in response to the Notice. The deadline for submitting comments is September 10, 2010.

The Notice solicits comments from tribes on the following specific questions: (1) whether the state or local governmental standard for tax-exempt governmental bond status should replace the essential governmental function standard; (2) what types of projects and activities should be eligible for financing with private activity bonds; (3) whether and how to apply volume cap allocations to private activity bonds issued by tribes; (4) whether to modify the current restriction that projects funded by TEDBs must be located on reservations; and (5) whether to modify the current restriction against financing gaming facilities with TEDBs.

In addition, Treasury has requested tribes to comment on additional factors that should be considered in refining the statutory scope of tax-exempt financing for tribes or better address the special needs or unique circumstances of tribal governments.

One of the most significant points raised in the Notice is the Treasury’s request for comments on whether the existing essential governmental function test should be replaced by the governmental bond test generally applicable to state and local governments. This change would significantly enhance tax-exempt financing opportunities for tribes. On this point; the Treasury has also asked whether certain unique circumstances faced by tribes should be taken into account. These would include treating, for federal income tax purposes, certain revenue streams unique to tribes as “governmental” (rather than “private”) in nature, such as gaming revenues, income from certain trust funds, and certain oil and gas revenues. Such changes also would be beneficial to tribes.

In requesting comments on the unique circumstances faced by tribes, Treasury has not specifically requested comments on how tribal enterprises and other tribal entities should properly be characterized for federal income tax purposes in order for them to qualify as issuers of tax-exempt obligations or as users of facilities financed by tax-exempt obligations. Nevertheless, tribes may wish to seek clarification on this characterization to confirm the ability of properly organized enterprises and entities to take advantage of tax-exempt financing opportunities, free from characterization as “private activities.”

Treasury has asked whether section 17 corporations require special provisions to use private activity bonds. Such corporations have been held to be qualified governmental issuers of tax-exempt bonds, so it is not clear what Treasury is asking or what assumptions it is making. Tribes should consider requesting that this question be clarified. In any event, it is not clear that such corporations have a significant interest in issuing private activity bonds, so the benefits of such special provisions might not be significant.

Treasury has also requested comments on the potential elimination or modification of current restrictions limiting TEDB financings to projects located on reservations. The Notice asks whether projects should be allowed if located within some prescribed proximity to the reservation, or be allowed if located on land owned by the tribe but not put into trust as part of a reservation. It appears that these suggestions may not fully take into consideration existing tax law guidance defining Indian reservations and employing a nexus requirement to allow the financing of projects located outside the jurisdictional boundaries of an issuer. Tribes should consider requesting clarification on these points.

Tribes may also wish to make recommendations on how certain other TEDB restrictions or guidelines could be implemented or modified. A few examples follow.

Forfeiture of Allocations. If TEDBs 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 allocation 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.

With respect to these sunset provisions, tribes may wish to consider several questions. For example: (1) How should the IRS re-allocate volume cap awards previously made for meritorious projects that continue to be viable but need an extension of time? (2) Should volume cap awards for projects that are no longer considered viable be treated differently? (3) How can tribes work together to use allocations previously awarded for projects that continue to be viable in part but not viable in part?

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.

Should the insubstantial deviation rule be broadened to more clearly authorize projects that have changed or evolved (even if in a manner that is more than insubstantial) due to legitimate or unforseeable reasons?

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.

Should the joint projects rule be broadened to better accommodate, or retroactively confirm, the authority of tribes to work together on projects, including projects that were previously awarded separate volume cap allocations? Should this authority permit the assignment in certain circumstances of previous allocation awards from one tribe to another?

**Please call any of us if you have questions regarding the Notice or would like us to assist in the preparation of comments.