One way for tribes to assert their sovereignty is by establishing tax-exempt public and charitable organizations under authority of tribal government and a little-known provision of the tax code.
In 1982, Congress passed the Indian Tribal Governmental Tax Status Act, codified in the Internal Revenue Code as Section 7871, treating tribal governments as state governments for a variety of specified tax purposes.
Under IRC Section 7871, tax-exempt tribal governmental organizations can maintain a greater degree of sovereignty than under Section 501(c)(3), which is the far more familiar designation. But organizations exempted from taxation under 501(c)(3) are generally chartered by states, thus subjecting tribes and their political subdivisions to the supervision of a state attorney general’s office, where jurisdiction over “expressly public and charitable purposes” is normally housed.
Let’s be clear: tribal sovereignty already exists apart from 7871, and there is value in simply exercising it. But a 7871 letter ruling from the Internal Revenue Service points the concerned donor to a law stating that his or her donation is tax-exempt. It also lightens the so-called compliance burdens of 501(c)(3) status, which requires that organizations fill out IRS form 1023 initially and file reporting form 990 annually with the IRS.
Neither form is required under 7871, permitting tribes to decide for themselves on reporting issues. And in the case of inter-tribal tax-exempt organizations, 7871 status dispenses with the often difficult politics of selecting one tribe as the lead agency for purposes of tax-related corporate structure.
These were major considerations recently, as the Columbia River Inter-Tribal Fish Commission explored setting up its Spirit of the
Salmon Fund as a political subdivision. Tribes in the Columbia River Basin are often engaged with the states of Washington, Idaho and Oregon over salmon conservation and restoration policy. The commission felt that if they formed a traditional 501(c)(3) organization, subject to state regulation, the line between Spirit of the Salmon Fund and CRITFC would blur and become a standing invitation to state interference.
In the view of Elizabeth Bradley Ferdig, development coordinator for the commission, if Spirit of the Salmon Fund could be accountable to its donors, CRITFC, and the IRS through Section 7871, it doesn’t need the supervision of Oregon state (where the commission is headquartered).
Another plus of Section 7871 for the commission: the lag time between filing papers and creating the fund was minimized, for the IRS had already ruled Columbia River Inter-Tribal Fish Commission eligible to receive tax-deductible contributions under Section 7871.
All the way back in 1987, the IRS had given lengthy consideration to the commission’s claim of being a “political subdivision” of tribal government.
Then as now, CRITFC was a consortium of four tribes: the Nez Perce, Umatilla, Warm Springs and Yakama. But the commission made its case that the founding tribes had delegated it one of three sovereign powers — the power to police, based on the commission’s purpose of enforcing tribal fishing regulations. (The other two sovereign powers that would also meet the “political subdivision” test are the power to tax and the power of eminent domain.) In July 1989, the commission received a letter ruling from the IRS confirming its tax treatment under Section 7871 and making it one of the few inter-tribal political subdivisions recognized by the IRS since 1982.
Let’s repeat that in several ways, if only because it still is not fully understood: 1) 7871 offers many of the same tax benefits as 501(c)(3) for practical tax purposes, meaning 2) all donations to a 7871 organization are tax deductible and 3) foundations can make grants to such organizations.
While Section 7871 confers some of the same tax benefits associated with 501(c)(3) organizations, certain requirements customary to 501(c)(3)s do not apply under 7871. But because they make good sense and are so familiar to funders, CRITFC has voluntarily adopted them for Spirit of the Salmon Fund. Bylaws state that every donor will receive a letter of acknowledgment — standard practice throughout philanthropy, though not strictly necessary under the terms of Section 7871. For grantmakers and other donors who value the information available on the form 990 that most 501(c)(3)s must file annually with the IRS, the same bylaws state that such data will be made publicly available, though again the terms of Section 7871 do not strictly require it. For good measure, a resolution forbids any form of political lobbying by Spirit of the Salmon Fund.
In such ways, through resolutions and bylaws, tribal 7871 organizations can mitigate the concerns of donors who are more comfortable with the established routines of 501(c)(3) grantees while retaining the advantages of self-regulated sovereignty.