Tuesday, January 21, 2025
The Bloody Island Massacre and Indian Tribal Tax Exemption
The Pomo and Wappo are peaceful indigenous folk who have lived on northern California lands since time immemorial. Andrew Kelsey, a white man, was born in Kentucky in 1819. He arrived in the California territory around 1847, along with his wife, his brother and some African slaves too, I bet. Almost immediately, he captured and enslaved Indians from the two tribes. Slavery is just an antiseptic word for trespassing, kidnapping, starvation, rape, theft, murder and genocide. That's what Kelsey and his gang did. California became a state in 1850 but by that time, the Indians had risen up and killed him and his criminal co-conspirators. In retaliation, the U.S. Army deployed the 1st Calvary Regiment – then known as the “Dragoons” -- to Clear Lake. The Dragoons slaughtered nearly 1000 Indians in what is today called the Bloody Island Massacre.
I attended elementary and secondary schools in California and other places, and I served with the 101st Airborne. But I never heard of this enslavement and massacre until I read comments to proposed regulations clarifying the tax-exempt status of tribal government-owned entities. The Bloody Island Massacre is never once mentioned in this historical telling of the 1st Calvary Regiment. I posted about the proposed regulations last year. The essential point is that a tribal-owned entity shall be disregarded and thus tax exempt just like state-owned entities. The rationale, of course, is that a government owned and operated entity necessarily operates for public benefit and without private inurement.
The Service held a public meeting on the proposed regs last Friday, at which two speakers offered friendly amendments. There were 18 sets of written comments and most of those were friendly too. A few comments fretted about entities owned by multiple tribes. Context is very important and one commentator tells the sad and tragic story of the Bloody Island Massacre. Not for sympathy – the letter reads more like an expression of anger that the issues were not addressed long ago. The writer, Danielle Cirelli, hardly seems in the mood to thank the government for something to which her tribe is entitled anyway:
By virtue of its modern history, the Tribe today remains in the early stages of its development. The Tribe traces its origins directly to the Pomo peoples who have lived in the area from the Pacific coast to the Clear Lake region in modern-day California since as early as 6000 B.C. Our ancestors flourished in this homeland until migration and settlement brought conflict and disease, and until they were violently driven off their lands in the early 19th century. The flawed federal policies that ensued subjected the Pomo tribes—including our tribal members’ ancestors—to enslavement, internment, horrific abuse, and slaughter. In 1850, the United States Cavalry nearly eradicated our ancestors—predominantly the elderly, women, and children—in a military operation known as the “Bloody Island Massacre.”
Cirelli implicitly asserts that the least the U.S. Government can do is facilitate tribal capital formation. The proposed regs do that, even if only belatedly. They could use some tweaking. For example, the regs require that to be tax exempt, an entity owned by multiple tribes be charted under each of the owners’ laws. That requirement is demonstrated in proposed example 4:
(D) Example 4. Pursuant to their respective Tribal laws, Tribe A, Tribe B, Tribe C, and Tribe D organize Corporation K via a resolution approved by their respective Indian Tribal governments. Each Tribe owns 25% of the shares of Corporation K. Corporation K is therefore wholly owned by Indian Tribal governments and organized or incorporated exclusively under the laws of each Indian Tribal government that owns it. As a result, Corporation K is not recognized as a separate entity from the Tribes for Federal tax purposes, except for the purposes described in § 1.6417-1(c)(7) of this chapter. Accordingly, Corporation K is not subject to Federal income tax. Under § 1.6417-1(c)(7) of this chapter, Corporation K is treated as an instrumentality of Tribe A, Tribe B, Tribe C, and Tribe D for the purposes of making a section 6417 election (including determining eligibility for and the consequences of such election). Thus, Corporation K, rather than Tribe A, Tribe B, Tribe C, or Tribe D, would be the applicable entity for purposes of making a section 6417 election for any applicable credit relating to property held or activities conducted by Corporation K.
Commenters appear to agree that requiring the entity to be charted by each tribal government owner generates unnecessary regulatory burdens and costs. “Having a corporation chartered under multiple tribes’ laws would create an unreasonable risk of duplicative or inconsistent requirements, e.g. the fiduciary responsibilities of officers, the requirements to amend of articles of corporation, or the steps required for dissolution.”
One supposes that the Service intends that only Indian chartered and owned be tax exempt, and that requiring that a single entity be chartered under each of the tribal owners’ laws is most consistent with treating the entity as any one of the tribes. If a wholly tribal-owned entity is chartered not exclusively under tribal law but under both tribal and state law (or under state law), the case isn’t so clear that it should is for public benefit and without private inurement. A wholly tribal owned entity chartered under state law might suggest that the entity is not operated purely for public benefit. Even that doesn’t sound too convincing a reason to require multiple charters. Maybe changing the rule to require the entity be chartered solely under at least one tribal law and entirely owned by tribal governments would respond to whatever concerns the Service has.
Other commenters discussed something familiar to tax exemption jurisprudence. They pointed out that tribal government sometimes enter joint ventures with private parties or state governments to achieve tribal public good. So called – “51/49” partnerships in which tribal governments maintain control of the sort required by Revenue Ruling 98-15. Those commentators think the restriction of ownership to tribal government restricts the ability to raise capital via joint ventures if the venture can’t be tax exempt. I think this misunderstands pass-thru taxation. A tribal government in a tax partnership should receive allocations taxable according to the tribal government’s status as a tax-exempt entity. This means the tribal government’s allocations should be tax exempt even if it does not have 51% control. I think the tribes are suggesting an unnecessary requirement that might preclude tax exemption when they hold less than 51%.
A state government partner will receive allocations taxable to the state according to its tax-exempt status even if it holds less than majority control. Tax consequences are determined at the partners’ level. So only private investors will be taxed on their allocations, as is appropriate. There is no need to make the entire partnership tax exempt, or impose a control requirement to preserve the tribal government’s tax exemption. Nor should a private taxable partner be tax exempt just because the other partners are tax exempt.
The comments raise a similar concern regarding the taxation of corporations owned by tribes and taxable persons. Except in this case, the corporate tax ought to apply so that private shareholders don’t get exemption from the corporate level tax. Dividends would be taxable to the private party in any case, but without the exclusive tribal owner requirement for corporations, private shareholders would be advantaged at the entity level, relative to other private shareholders, by their association with tribal government owners. But taxing the corporation itself will burden tribal and state shareholders with an entity tax they should not bear. One way to resolve this problem would be by implementing a rule making S corporation status the default classification under the check the box regs to which the proposed regs relate. The corporation should be presumed to be an S corporation without the necessity of an election. In this manner, the partially tribally owned entity will be subject to pass-thru taxation and tribal governments will maintain complete tax exemption undiminished by a corporate level tax that should only apply to the private shareholders.
Thanks for the history lesson. It's a shame that were I not a nonprofit tax nerd I would never have known it.
darryll k. jones
https://lawprofessors.typepad.com/nonprofit/2025/01/the-bloody-island-massacre-and-indian-tribal-government-tax-exemption.html