The Blue Lake Rancheria Decision and Its Implications

Blue Lake Rancheria Econ. Dev. Corp. v. Commissioner, 152 T.C. No. 5 (Mar. 6, 2019). 

Holding: An IRA Section 17 corporation may validly create corporate subdivisions whose assets and liabilities are separate and distinct from those of the corporation, and, when done so properly, the IRS may not look to the corporation to collect delinquent tax liabilities owed by the subdivision.

Factual Background:  In 2003, the Blue Lake Rancheria (“Tribe”), a federally-recognized Indian tribe located in Northern California, submitted a tribal resolution and proposed charter of incorporation to the Department of the Interior (“DOI”), requesting approval of a federal charter of incorporation under Section 17 of the Indian Reorganization Act (“IRA”).  Important here, BLREDCo’s corporate charter authorized it, among other things, to “create subdivisions of the Corporation for the purpose of legally segregating the assets and liabilities of discrete business endeavors of the Corporation regardless of common directorship.”  The DOI approved the Tribe’s request and issued a federal charter. 

In 2003, the Tribe formed Mainstay Business Solutions (“MBS”), a wholly-owned economic enterprise of the Tribe.  In 2006, the Tribe converted MBA from an enterprise of the Tribe to a subdivision of BLREDCo, as permitted by its federal charter.  Subsequently, MBS failed to meet its state unemployment insurance obligations and pay its federal employment taxes.  As a result, the State of California levied MBS’s bank accounts and accounts receivable.  Shortly thereafter, the IRS filed federal tax liens against both BLREDCo and MBS.  BLREDCo and MBS timely filed petitions with the U.S. Tax Court challenging the IRS’s determination that it can pursue collection actions against BLREDCo for MBS’s tax liabilities.

Court Decision:  The primary issue before the Court was whether or not an IRA Section 17 corporation could validly create a distinct subdivision to protect the corporation’s assets against claims of the subdivision’s creditors.

The IRS first argued that IRA Section 17 only allowed tribal corporations to be vested with powers “incidental to the conduct of corporate business, not inconsistent with law”, which the IRS maintained must be limited to state law corporate powers.  The Court rejected this argument finding no express statutory language or congressional intent requiring IRA Section 17 to be limited by state law.  In the absence of clear intent to the contrary, the Court would not assume Congress intended to lessen its preemption in the field by allowing state law to control what powers may be held by an IRA Section 17 corporation.

The Court also rejected the IRS’ next argument that the power to create legally distinct corporate divisions is not an ordinary corporate power and, therefore, it is outside the scope of the IRA Section 17 for the DOI to grant a charter containing such a power.  The Court held the IRA Section 17 granted broad authority to the DOI and did not specify an exhaustive list of powers that the DOI could convey to an IRA Section 17 corporation.  Rather, Section 17 framed the kinds of power that DOI may grant through the issuance of a federal charter, and the power to create legally distinct corporate divisions was well within the broad authority granted to the DOI to issue federal charters to Indian tribes.

The IRS further argued that the power to create legally distinct corporate divisions was not “incidental to the conduct of corporate business” and, therefore, was outside the scope of the IRA Section 17 for the DOI to grant a charter containing such a power.  The Court again rejected this argument and held that the power to create legally distinct subdivisions was a “power incidental to the conduct of corporate business.”  Here, the creation of a legally distinct subdivision to protect the assets of the corporation – i.e., to promote the economic stability of the Tribe was indeed a power essential to protecting the economic security of the Tribe and furthering the purpose of BLREDCo.

In sum, the Court rejected all IRS arguments and held that BLREDCo’s IRA Section 17 charter properly allowed it to create corporate subdivisions whose assets and liabilities were distinct from those of the corporation.  The Court further held that MBS operated as a legally distinct division of BLREDCo at all relevant times and, consequently, the IRS could not look to BLREDCo to collect the employment tax liabilities owed by MBS.

Implications of BLREDCo v. Commissioner:

  1. New caselaw in Tax Court for IRA Section 17 Corporations. As noted in the decision, the United States Tax Court has only had one other occasion to issue a decision regarding the tax implications for IRA Section 17 corporations.  In Uniband, Inc. v. Commissioner, 140 T.C. 230 (2013), the Court held that a state-chartered corporation of an Indian tribe is subject to federal income tax even through an IRA Section 17 corporation is not.  This case provides the Tax Court’s second occasion to consider the IRA Section 17.
  2. Court affirms an IRA Section 17 Corporation’s power to create legally distinct subdivision whose assets and liabilities are separate from the Corporation.  The Court noted that as of 1998, federal charters had been issued to create at least 28 tribally owned corporations under IRA Section 17.  And, importantly, each of these 28 charters contained terms substantially similar to those found in BLUREDCo’s IRA Section 17 charter allowing for the creation of corporate divisions for the purpose of legally segregating assets and liabilities.  As such, this case directly affects other Section 17 corporations’ actions to cabin off assets and liabilities in subdivisions within the corporation.
  3. To properly segregate assets and liabilities, the subdivision must actually operate as a distinct entity.  The facts in this case clearly supported the claim that the subdivision and corporation did in fact operate separately and the Court did not need to extensively discuss this point.  However, the Court’s main holding—that IRA Section 17 corporations can validly create subdivisions with segregated assets and liabilities—is tempered by is point. Therefore, in terms of asset protection planning, care should be taken by IRA Section 17 corporations to keep the activities of each subdivision separate from the corporation and from other subdivisions in order to properly segregate assets and limit liability risks in tribal business structures.