Indian tribes can transfer federal tax benefits on projects the tribes own.
The IRS said in a private letter ruling made public in March that a tribe could transfer a 30% investment tax credit on a wind farm the tribe plans to own to a tax equity investor by leasing the project to the investor and electing to pass through the investment credit. This structure is called an “inverted lease.”
According to the ruling, the tax equity investor plans to operate the project and sell electricity back to the tribe or in the open market. The tax equity investor will pass most of the revenue it collects from use of the wind farm to the tribe as rent. It may also pay the tribe a share of the value of the investment credit as additional rent.
The reasoning the IRS used suggests that the tax equity transaction could also have been structured as a sale-leaseback, thereby allowing the tax equity investor to claim both an investment tax credit and depreciation on the project. The tribe would sell the project to the tax equity investor and lease it back. The tax equity investor, as the owner, could claim both benefits. However, the depreciation in that case would be straight-line depreciation over 12 years rather than front-loaded or accelerated depreciation over five years. The tax equity investor would also be limited to use of the depreciation as shelter for the rents that the tax equity investor receives from leasing the wind farm to the tribe, unless the lease is structured to stay within guidelines in section 470 of the US tax code.
Normally property owned by a tax-exempt entity or leased to such an entity does not qualify for any investment tax credit. However, the IRS said in the ruling that an Indian tribe is not a tax-exempt entity. Since the tribe is not subject to federal income taxes, the IRS said one never reaches the question whether the tribe is exempted from such taxes. Assets owned by or leased to government entities do not qualify for an investment tax credit either, but the IRS said the investment credit is lost only if the lease is to a federal, state or local government entity. An Indian tribe is considered a sovereign nation.
The ruling is Private Letter Ruling 201310001.