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TAX PLANNING Entity Structures to Take
Advantageof Tax-Favored Opportunities
PRESENTED BY:
WENDY S. PEARSONPEARSON LAW OFFICES
AND
KATHLEEN M. NILLESHOLLAND & KNIGHT LLP
NATIONAL INTER-TRIBAL TAX ALLIANCE
SEPTEMBER 17, 2015
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Options for Structuring Joint VenturesBefore 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 VenturesWhy 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 VenturesWhy 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 VenturesWhy 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 for-profit 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 tax-favored 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 relatedCompliance risks with penalties or
revocation of exempt status for violations
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Acquiring Existing BusinessesConsiderations• 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 BusinessesCase StudyTarget 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 BusinessesCase 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. [email protected]
202-955-3000
OR`
Wendy S. [email protected]
425-512-8850
