The taxman cometh
If the Internal Revenue Service has ever singled you out for an audit, you know the feeling - the feeling that this could only be for the worst, that in fact it's so bad someone out there must be against you.
Indian country as a whole is becoming more familiar with this feeling, following a recent announcement that the IRS enforcement team on tax-exempt bond financing will include tribes in next year's investigative audits. We have, after all, better reasons than most to assume the worst whenever government looks our way.
Compounding our natural concerns are a few circumstances that have all the makings of a likely story. Though the auditors say they are working from a prior "work plan" targeting 22 market segments in tax-exempt bond financing, tribal tax-exempt bonds are among four bond categories that "appear to be new initiatives," in the words of Bond Buyer, a leading trade journal.
So why the new initiatives? It's easy to suspect under-the-table motivations for putting tribes on the audit list - perhaps too easy. But just to get them on the record - the Cabazon Band recently set precedent by asking the state of California for tax-exempt bonds on a tribally owned resort; Wall Street analysts have turned a spotlight on innovative tax-exempt bond financing for casino construction and expansion, and California and New York have become major gaming jurisdictions because of tribes. You can bet your last bingo card that every bit of this has lit up radar screens from Las Vegas to Atlantic City.
Without getting into a full refresher course on bond financing, let's consider what's at stake for tribes. Bond financing begins with a decision by a company, government or municipality to issue a bond for long-term, costly public purposes, such as roads and bridges; water, sewer, electricity and telecommunications lines; health and child care facilities; schools; housing; land acquisition; convention facilities, and economic development initiatives. When an investor decides to float the bond (as they say in the trade), that investor becomes a bond-holder. The bond issuer becomes obligated to pay the bond-holder an agreed interest rate at regular intervals and to retire the remaining loan principal at maturity. The issuer is selling an investment product known as a bond; the bond holder is investing in that product, lending to the project, in the expectation of getting the money back in full, on time and with interest.
For this to occur, the bond repayment arrangements are enforceably linked to the issuer's revenue sources. In Indian country, bonds are often secured with casino revenues.
Tax-exempt bonds are attractive to investors because they don't pay taxes on any profit they make; they are attractive to issuers, in this case tribes, because the exemption means the investor may settle for a lower interest rate. Because bond financing involves large borrowings, generally $5 million or more, over long periods of time, generally five years or more, that lower interest rate becomes a crucial factor in keeping the cost of money down.
Tribes are able to issue tax-exempt bonds only when the proceeds go to "essential government functions" such as those listed above - roads and bridges; water, sewer, electricity and telecommunications lines; health and child care facilities; schools; housing; land acquisition; convention facilities, and economic development initiatives. Otherwise, the proceeds would be supporting profitable activity, which is not tax exempt, and the government would be cheated of tax revenues. Hence the audit.
Fair enough so far. But the IRS does not have a firm ruling as to what constitutes "essential government functions."
Hence the concern that tribes could be penalized for not complying with a dodgy definition - for instance, a number of tribes consider the construction of casino parking lots as an essential government function. Their case is straightforward: revenue from casinos is essential to providing services for the tribal membership, and parking lots are essential to bringing clientele to the casinos. But a certain siege mentality is bound to develop under IRS audit conditions, so a few of us are bound to have our paranoid moments wondering, will the IRS see it that way? If not, then what? And if the IRS defines essential government functions in a way that cancels tax exemption for many casino-based bond-financed development activities, won't that "someone out there" have accomplished what all those statehouse lobbying dollars did not?
But it is far too early for panic or paranoia. The official in charge of the audits insists it's not a fishing expedition, and adds that he has no targeted finding in mind. The timing may pertain not so much to growing activity in tax-exempt tribal bond financing as to the Oct. 1 commencement of the 2003 fiscal year. Who knows? If a fair definition of "essential government functions" were to come forward in time to stabilize the growing use of tribal tax-exempt bond financing, at the end of the day we may even find something good to say for the taxman.
Rebecca Adamson is president of First Nations Development Institute and a columnist for Indian Country Today.