In 2024, significant legal developments created positive changes for tribal entities and operations. In this article, we highlight the impact of these shifts.
Key Takeaways
- Tribal sovereign immunity can include state law entities that operate as tribal consortiums.
- Wholly owned tribal entities would not be recognized as separate entities from their tribes for federal tax purposes, meaning such entities are not subject to federal income tax.
- Wholly owned tribal entities can claim Clean Energy Tax Credits directly, opening new avenues for investors to support sustainable projects that align with clean energy goals.
- U.S. Supreme Court held that the federal government was underfunding tribal healthcare programs.
Sovereign Immunity for Tribal Consortiums
In May 2024, the Alaska Supreme Court ruled in the case of Ito v. Copper River Native Association, overturning a decades’ old precedent. CRNA is an Alaska nonprofit corporation formed and controlled by federally recognized Alaska Native tribes to provide services for members, including tribal healthcare. Under federal law, CRNA is defined as an inter-tribal consortium and member tribes have authorized CRNA to receive healthcare funds from the federal government that otherwise would have flowed to the tribes.
The case has its origins as an employment discrimination dispute, but was ultimately decided on sovereign immunity grounds. The Alaska Supreme Court acknowledged that the legal landscape defining the contours of sovereign immunity has shifted nationally since its 2004 decision in Runyon ex rel. B.R. v. Association of Village Council Presidents. As a result, the court adopted a multi-factor inquiry to determine whether an entity is entitled to “arm-of-the-tribe” immunity. We highly recommend reading the decision — it is a fascinating walk through the legal evolution of sovereign immunity over the past 20 years.
Tax-Exempt Status of Tribal-Owned Tribal-Chartered Entities
In October 2024, the Department of the Treasury and Internal Revenue Service (IRS) released a Notice of Proposed Rulemaking to address long-standing questions about the federal tax status of certain tribally owned entities. The proposed regulations provide that those entities that are (1) wholly owned by one or more tribes and (2) organized under or incorporated exclusively under the laws of tribe(s) that own them will not be treated as separate entities from the tribe(s) that own them for federal income tax purposes. Under the proposed regulations, this treatment would also extend to the subsidiaries of a Section 17 corporation. The proposed regulations also provide that an entity wholly owned by multiple tribes will not be treated as separate entities from those respective tribes that own them for federal income tax purposes as long as the entity is organized or incorporated exclusively under the laws of each respective tribal government. The proposed regulations provide useful confirmation about the federal income tax treatment of tribal-owned corporations.
While providing clarity on the federal income tax status of wholly owned tribally chartered entities, the proposed treasury regulations do not consider other ways that tribes may structure entities. The proposed regulations do not address the federal tax status of tribal-owned entities chartered under state law. State-chartered entities owned by tribes are subject to federal taxation (see Revenue Ruling 94-16). Further, the proposed regulations do not address the federal tax status of entities that are only partially owned by tribes.
As opposed to entities formed under federal law (Section 17 and Section 3 corporations), which subjects tribes to burdensome compliance requirements, tribally chartered entities are easier to form and manage administratively. However, lack of clarity on tax-exempt status may have prevented tribes from forming tribally chartered entities. Confirmation that wholly owned tribally chartered entities are exempt from federal income tax provides another avenue for tribes to form entities. Such confirmation allows tribes to use tribally chartered entities, which in turn promotes tribal sovereignty, self-governance, and self-determination.
Clean Energy Tax Credits
The Inflation Reduction Act enables tribal governments and Alaska Native Corporations to claim Clean Energy Tax Credits directly, via elective pay, monetizing the credit amount and refunding it directly to them. However, it was unclear whether the provisions of the IRA extended to the types of tribally owned entities described above.
The proposed regulations also clarify the eligibility for wholly owned tribal entities to access Clean Energy Tax Credits directly through elective pay, which was introduced under the Inflation Reduction Act. The proposed regulations provide that solely for purposes of the elective pay provisions of the IRA, those entities that are (1) wholly owned by one or more tribes and (2) organized under or incorporated exclusively under the laws of tribe(s) that own them will be treated as instrumentalities of the tribe(s) that own them. This treatment makes the tribally owned tribally chartered entity the applicability entity for making a Section 6417 election for any applicable credit relating to property held or activities conducted by such corporation.
The proposed regulations extend this further by allowing federally chartered tribal corporations (Section 17 and Section 3 corporations) to claim energy tax credits directly, meaning such entities that own credit-eligible property directly would make the elective pay election themselves, rather than the tribal owners. This simplifies the process by shifting the processes such as prefiling-registration and filing tax form obligations from the tribes to their owned entities that are conducting the relevant activities.
Tribal Healthcare Administration
The Indian Health Service (a component of the U.S. Department of Health and Human Services) provides healthcare services directly to more than 2 million Native Americans. Under the Indian Self-Determination Act, tribes can administer their own healthcare programs under contracts with HIS. These contracts require IHS to provide the same amount of funding it would provide if it were running the program directly (program income) and cover administrative expenses (contract support costs) incurred by the tribe. These amounts are in addition to any Medicare, Medicaid, or private insurance payments received by the tribe. In 2019 and 2021 respectively, the San Carlos Apache Tribe (Arizona) and the Northern Arapahoe Tribe (Wyoming) sued HHS for underpayment of administrative expenses related to Medicare, Medicaid, and private insurance in these programs.
In a June 2024 decision, the U.S. Supreme Court ruled 5–4 that HHS had been underpaying the tribes. In an opinion delivered by Chief Justice Roberts, the Court confirmed that the revenues received from Medicare, Medicaid, and private insurance are program income. As a result, the Court ruled that HIS contract support costs obligation extended to the administrative costs incurred by the tribes in connection with Medicare, Medicaid, and private insurance. In the wake of the Supreme Court’s ruling, other tribes have sued HHS for underpayment of contract support costs.
For more information on the content of this alert, please contact your Nixon Peabody attorney or the authors of this article.