Tribe Permitted to Pass ITCs to Lessee in Master-Tenant Structure

19 March 2013 Energy Current Blog

In recently released Private Letter Ruling 2013-10-001, the IRS permitted a federally recognized Native American tribe (the “Tribe”) to pass the investment tax credit (the “ITC”) for Section 48 property to a taxable lessee. This taxpayer-favorable ruling is interesting because it sets forth the IRS’s interpretation of rules that are of concern when participating in a renewable energy transaction with a Native American tribe. However, the strength of the IRS’s reasoning is insufficient to remove all doubts that a tribe’s involvement in the transaction will not negatively impact an investor’s ability to claim the tax benefits otherwise available.


The PLR describes the Tribe’s plans to place in service renewable energy assets on reservation lands. The assets will constitute “Section 48 energy property” that qualifies for the ITC. The renewable assets will generate electricity that will be sold to third parties and used by the Tribe in its governmental activities. The Tribe will maintain ownership of the renewable assets at all times, but will lease the assets to a lessee, during which time the lessee will operate the assets and will be entitled to the net revenues derived from the operation of the assets, including the net revenue derived from the sale of electricity to third party utilities and the Tribe. At the conclusion of the lease, the Tribe will assume control over the renewable energy assets and will operate them directly.

The IRS was requested to rule under Section 50(d)(5) of the Tax Code that the Tribe may elect to pass through the ITC associated with the renewable energy assets to the lessee. While not stated in the PLR, it can be assumed that the Tribe and lessee were contemplating a standard “master-tenant” or “lease pass-through” structure, in which the lessor and lessee agree that the lessee will claim the ITC, with the lease terminating shortly after the five-year ITC recapture period.

IRS’s Analysis

The IRS ruled favorably after analyzing the issues that would be the cause of concern; that is, whether the Tribe should be considered a tax-exempt organization under Section 50(b)(3) of the Tax Code or a governmental unit under Section 50(b)(4) of the Tax Code. If the Tribe fell within the scope of these provisions, then no ITC would have been available to the lessee.  

Tribe not described under Section 50(b)(3): In finding that the Tribe was not a tax-exempt organization described in Section 50(b)(3), the IRS noted that, while no constitutional or other statutory provision expressly exempts Native American tribes from federal income taxation, Revenue Ruling 76-284 holds that income tax statutes do not tax tribes. The IRS reasoned that because a Native American tribe (like the Tribe) is not an organization requiring a statutory exemption from income tax, it is not a tax-exempt entity for purposes of Section 50(b)(3). In other words, the IRS determined that fact that the Tribe was never subject to income tax in the first place removed it from further analysis under Section 50(b)(3).

Tribe not described under Section 50(b)(4): In concluding that the Tribe did not fall within the scope of Section 50(b)(4), the IRS looked to Section 7871 of the Tax Code, which provides that Native American tribal governments (or subdivisions thereof) will be treated as governmental units for certain enumerated federal tax purposes. Because Section 7871 does not list Section 50 (or presumably, any other relevant ITC statutory provisions) as places in which a tribe is considered a governmental unit, the IRS concluded that the Tribe was not a governmental unit described in Section 50(b)(4).

Applying the PLR

Investors participating in renewable energy transactions with Native American tribes have typically structured their transactions similar to transactions involving other tax-exempt entities. Specifically, a transaction will ordinarily be structured as a sale to the equity investor of renewable energy assets followed by the investor entering into a power purchase agreement (a “PPA”) with the tribe. Structured properly, this sale-PPA structure permits the investor to claim the ITC and other income tax benefits associated with the renewable energy assets while avoiding the negative tax implications associated with tax-exempt use property.

The PLR suggests increased flexibility in structuring renewable energy transactions with Native American tribes. The ruling clearly supports utilizing the master-tenant or “pass-through” lease structure, as that structure was the subject of the PLR. Further, the ruling should also lend support to structuring a transaction with a Native American tribe as a standard sale-leaseback in which the tribe sells the renewable energy assets to an equity investor and then leases the assets back in a manner structured to permit the investor to be considered the owner of the assets and the beneficiary of the tax benefits associated with such ownership. That said, in this scenario, the investor would need to consider the impact of the tribe’s status as a lessee on the investor’s depreciation deductions, as the tax-exempt entity leasing rules contained in Section 168(g) of the Tax Code expressly include Native American tribes as tax-exempt entities for purposes of those rules.

That said, investors are cautioned against relying too heavily on the PLR or the reasoning contained therein. It is important to remember that private letter rulings are only binding on the IRS with respect to the taxpayer that obtained it and may not be used or cited as precedent for other taxpayers. Further, we question the strength of the IRS’s reasoning with respect to Section 50(b)(3) and whether the IRS will consistently interpret that section as inapplicable to Native American tribes.

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