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Indian Tribal Corporation Not Liable for the Employment Taxes of Its Legally Distinct Division

(Parker Tax Publishing March 2019)

In a case of first impression, the Tax Court held that the IRS could not collect employment taxes from a corporation organized by an Indian Tribe under Sec. 17 of the Indian Reorganization Act of 1934 where the employment taxes were owed by a division of the corporation. The Tax Court found that the corporation's charter properly allowed it to create divisions whose assets and liabilities were distinct from those of the corporation, and the division that owed employment taxes was a legally distinct entity at all relevant times. Blue Lake Rancheria Economic Development Corp. v. Comm'r, 152 T.C. No. 5 (2019).


Blue Lake Rancheria (Tribe) is an Indian Tribe federally recognized by the U.S. Department of the Interior (DOI). In 2003, the Tribe requested DOI approval of a federal charter of incorporation under the Indian Reorganization Act of 1934 (IRA) for Blue Lake Rancheria Economic Development Corp. (BLREDCo). DOI approved the Tribe's request and issued a charter under Sec. 17 of the IRA (IRA Sec. 17) in 2004. BLREDCo's charter stated that BLREDCo was authorized to create corporate subdivisions to legally segregate the assets and liabilities of discrete business endeavors of BLREDCo.

IRA Sec. 17 describes the powers that can be granted to an IRA Sec. 17 corporation in its charter. Since 1998, DOI has issued federal charters to create at least 28 tribally-owned corporations under IRA Sec. 17. Each of these charters contained terms substantially similar to those found in BLREDCo's charter allowing for the creation of corporate divisions for the purpose of legally segregating assets and liabilities.

In 2003, the Tribe formed Mainstay Business Solutions (MBS) as an enterprise of the Tribe and obtained a unique federal employer identification number (FEIN) for it. The Tribe later converted MBS from an enterprise of the Tribe to a division of BLREDCo by passing a resolution which stated that on conversion, MBS would operate as a division of BLREDCo under the direction and control of the BLREDCo board of directors.

MBS provided various human resources services, including staffing and payroll. In 2009 and 2010, MBS had more than 20,000 employees and more than $100 million in revenue and expenses. MBS had its own bank accounts and paid employees from its payroll account. MBS also had its own employee benefit plans including a Code Sec. 401(k) retirement plan, health plan, dental plan, vision plan, and flexible benefits plan. MBS paid the employer's portions of the costs for the health, dental and vision plans. MBS leased equipment and automobiles in its own name and made the lease payments. BLREDCo had bank accounts and assets separate from those of MBS. BLREDCo also administered a general fund with cash from casino operations. The board of BLREDCo received informational updates on the operations of MBS but was not involved in the operations of MBS.

MBS occupied part of an office building referred to as the Coolidge property. Title to the building was taken in the name of BLREDCo doing business as (dba) MBS as required by the lender. MBS made the monthly mortgage payments and paid maintenance and repair costs, property taxes, utility bills, and insurance with respect to the Coolidge property.

In 2009, MBS entered into an accounts receivable financing agreement with Flexible Funding, LLC (FF). In 2010, an amended financing agreement was entered into between FF, BLREDCo, and MBS which identified MBS as a division of BLREDCo. Although the amended agreement included BLREDCo as a party, and clarified that BLREDCo was a party to the original agreement, it imposed obligations and provided benefits to FF and MBS and was completely silent as to BLREDCo. Following the amended FF agreement, MBS, no BLREDCo, continued to make payments to FF. In addition, as a condition of continuing the agreement, BLREDCo's board of directors granted a limited waiver of sovereign immunity in favor of FF, which was enforceable only against the assets of MBS. BLREDCo's charter delegated to its board of directors the authority to waive sovereign immunity for the divisions of BLREDCo, including MBS.

Economic conditions in the late 2000s and early 2010s caused MBS to miss several payments on its California unemployment insurance liability. MBS also failed to pay employment taxes for several quarters of 2009-2011. As a result of its unemployment insurance liabilities, the California Employment Development Department (EDD) levied on MBS's bank accounts and accounts receivable, making it impossible for MBS to pay its expenses, including payroll. MBS ceased operations the same day the levies were served. EDD did not levy the bank accounts of BLREDCo.

The IRS sent BLREDCo and MBS Letters 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing under Code Sec. 6320 (NFTLs) in 2012 and 2013. In 2017, the IRS sent notices of determination relating to the NFTLs and assessed unpaid employment taxes totaling approximately $11.5 million. BLREDCo and MBS challenged the notices in the Tax Court. Following concessions and stipulations, the sole remaining issue was whether BLREDCo was liable for the unpaid employment taxes of MBS.


The IRS argued that BLREDCo's charter exceeded the scope of IRA Sec. 17 and that DOI could not grant a corporation the power to create divisions with legally segregated assets and liabilities. According to the IRS, IRA Sec. 17 allows tribal corporations to be vested with powers "incidental to the conduct of corporate business, not inconsistent with the law," which the IRS argued was limited to state law corporate powers. The IRS reasoned that the power to create legally distinct corporate divisions is not an ordinary corporate power - i.e., it is not one possessed by corporations organized under state law. Thus, the IRS argued, it was outside the scope of IRA Sec. 17 for DOI to grant a charter containing such a power. The IRS also argued that even if MBS was validly organized as a legally distinct division, MBS was not in fact legally separate from BLREDCo. The IRS acknowledged that MBS was engaged in a separate and distinct business that generated the tax liability at issue, but it pointed to the Coolidge property titled in BLREDCo's name and the amended financing agreement with FF to which BLREDCo was a party as evidence that MBS assumed the identity of BLREDCo when it was beneficial to do so.

The Tax Court held that BLREDCo's charter properly allowed it to create subdivisions whose assets and liabilities were distinct from those of the corporation and that, because MBS was such a legally distinct division, the IRS could not collect the employment tax liabilities owed by MBS from BLREDCo. The Tax Court noted that the issue of whether an IRA Sec. 17 corporation could create divisions with legally segregated assets and liabilities was one of first impression for the Tax Court.

The Tax Court failed to see why state law should apply to BLREDCo, a tribal corporation created by a federal charter which was involved in a dispute over federal taxes. The court found no expression of Congress's intent for IRA Sec. 17 to be limited by state law and stated that it would expect a clear statement of such intent before assuming a desire to disrupt the well-settled notion of federalism and the principles of federal preemption and supremacy.

The Tax Court also found that it was not outside the scope of IRA Sec. 17 for DOI to grant a charter containing the power to create legally distinct corporate divisions. The court interpreted the phrase "powers incidental to the conduct of corporate business" in IRA Sec. 17 to allow for broad discretion in the powers granted to an IRA Sec. 17 corporation through its charter. In the court's view, it was within the scope of the statute to grant tribal corporations the power to create legally distinct subdivisions. The court also noted the canon of statutory construction unique to Indian law, providing that statutes are to be construed liberally in favor of Indians.

The court rejected the argument that MBS was not operated as a legally distinct division of BLREDCo. With respect to the Coolidge Property, the court found that, even though BLREDCo's name was on the title, MBS bore the benefits and burdens of ownership. As for the amended financing agreement, the court did not find this one instance enough to justify piercing the entirety of the relationship between BLREDCo and MBS as permitted by the DOI-authorized charter.

Most importantly to the Tax Court was the absence of any indication that the IRS was misled as to who owed the employment taxes. The court found that MBS, using its own FEIN, filed the quarterly employment tax returns. In the court's view, MBS was not seeking to disguise its employment tax obligations, and the IRS even admitted that it was MBS's separate and distinct business activities that generated the tax liabilities at issue, not the activities of BLREDCo.

For a discussion of employment taxes, see Parker Tax ¶210,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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