November 5, 1998 | Read Time: 3 minutes
The Internal Revenue Service has given American Indian philanthropy a lift in two opinions that it issued to an organization that works with tribes.
In the first opinion, the I.R.S. said that an organization created by a tribe under the tribe’s law on corporations could qualify as a foundation or a charity under Section 501(c)(3) of the Internal Revenue Code. That has not always been clear, the I.R.S. noted. “The question was whether the tribal government had the authority to create a separate legal entity under the code,” the government said.
But the I.R.S. said that the issue was clarified in a recently issued Treasury Department regulation that defines a corporation to include an “entity created under the statute of a federally recognized Indian tribe.”
The government’s opinion is important to tribes that want to create foundations or charities, said Kathleen M. Nilles, a Washington lawyer who advised the charity that sought the opinion, First Nations Development Institute. The group helps tribes establish charitable programs and improve their economies, among other things.
“From the tribes’ perspective, the I.R.S.’s past reluctance to recognize tribal-law corporations as separate charitable entities raises serious tribal-sovereignty issues,” said Ms. Nilles.
“As a practical matter, if an organization is formed under state law, it is subject to the requirements of the state’s non-profit corporations act, common-law charitable-trust law, and, in most states, attorney-general oversight,” she said. These requirements could result in substantial restrictions being placed on the use of tribal assets, she said, no matter how closely the organization followed federal tax law.
For many tribes, added Ms. Nilles, “the prospect of having to submit tribal assets to state jurisdiction would be a deal-breaker in considering the formation of a separate charitable foundation.”
Rebecca Adamson, president of First Nations Development Institute, said that the new I.R.S. view that groups created under tribal corporation law may qualify for tax-exempt status has ramifications for many Indians. “The opinion opens the door for tribal philanthropy,” Ms. Adamson said. “It is extremely significant in viewing us for the first time as grant makers rather than just grant seekers.”
In its second opinion, the I.R.S. makes clear that private foundations can, without penalty, make grants directly to federally recognized Indian tribes rather than having to give the money to charities formed by the tribes to receive the funds.
The revenue service noted that foundations can provide money to state and local governments without paying a federal tax levied on expenditures that are not made for charitable purposes. “The question is whether these same rules apply to Indian tribal governments,” the I.R.S. said.
The service concluded that the same rules do apply as long as the tribes are officially recognized by the Interior Department and by the I.R.S. itself.
Ms. Nilles said that the government’s opinion would help tribes because many private foundations have been unsure how to treat grant applications from Indian governments. And she said tribes that seek grants may now be spared “both the initial expense and continuing compliance burdens associated with forming a separate organization to receive grant monies.”
The I.R.S. gave its opinions in “information letters,” which are statements that the revenue service uses to confirm an interpretation or principle of tax law without applying it to a specific set of facts. The letters cannot be cited as precedent in disputes with the I.R.S. but can be helpful in understanding an aspect of tax law and how the government interprets it.
